LAWRENCE E. KAHN, District Judge.
Plaintiff Mary Anthony ("Plaintiff") commenced this action on November 21, 2014, asserting claims for retaliation, pursuant to Section 806 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), 18 U.S.C. § 1514A, and breach of contract, relating to the termination of her employment by Defendants. Dkt. No. 1 ("Complaint"). Presently before the Court are Motions to dismiss filed by Defendants Northwestern Mutual Life Insurance Company, Northwestern Mutual Investment Services, LLC, Northwestern Mutual Wealth Management Company (together, the "Northwestern Defendants") and by Defendants Alexander J. Tronco ("Tronco") and the Tronco Financial Group ("Tronco Financial") (together, the "Tronco Defendants") (collectively, "Defendants"). Dkt. Nos. 5 ("Northwestern Motion"); 5-1 ("Northwestern Memorandum"); 6 ("Tronco Motion"); 6-2 ("Tronco Memorandum"). For the following reasons, Defendants' Motions to dismiss are granted.
Plaintiff was an employee of Tronco Financial for a period of twenty-five years.
In addition to marketing and selling the Northwestern Mutual Funds, Tronco Financial "provided compliance services to ensure that the marketing and sale of the [Northwestern Mutual Funds] complied with all State and Federal Securities law, and the rules and regulations of the Securities and Exchange Commission." Id. ¶ 25. In particular, Plaintiff's responsibilities — her last position with Tronco Financial was "Director of Network Office Supervision," id. ¶ 26 — required her "to ensure that all financial representatives, associates and staff maintained compliance with ethical business practices; and the rules, regulations, policies, and procedures of the Defendants' regulatory bodies and governmental agencies, including the Securities and Exchange Commission [("SEC")] and FINRA, and State and Federal Securities Laws." Id. ¶ 27.
Beginning in the summer of 2012, Plaintiff brought numerous compliance issues regarding the conduct of Tronco Financial representatives to the attention of Tronco. Id. ¶¶ 33, 35. Plaintiff believed these issues represented violations of SEC rules and regulations. Id. ¶ 35. Conduct reported by Plaintiff included representatives accepting trades and soliciting sales without being properly registered or qualified, representatives maintaining pre-completed paperwork, a representative making trades on a client account without speaking to the client, an assistant accepting trades on behalf of a representative, and use of unapproved marketing materials and advertising. Id.
Plaintiff had "ongoing and continuous communications" with Tronco concerning noncompliant practices by Tronco Financial representatives, but no action was taken. Id. ¶ 36. Plaintiff also reported these practices to the Northwestern Defendants. Id. Tronco expressed frustration with Plaintiff reporting these practices. Id. ¶ 37. On February 6, 2013, Plaintiff was verbally terminated by Tronco, who allegedly admitted that the termination was due to Plaintiff's persistence in reporting non-compliant practices. Id. ¶ 38. Plaintiff had an employment contract with Tronco Financial, which provided that,
Plaintiff commenced the present action on November 21, 2014.
To survive a motion to dismiss pursuant to Rule 12(b)(6), a "complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 663, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)); see also FED.R.CIV.P. 12(b)(6). A court must accept as true the factual allegations contained in a complaint and draw all inferences in the plaintiff's favor. See Allaire Corp. v. Okumus, 433 F.3d 248, 249-50 (2d Cir.2006). A complaint may be dismissed pursuant to Rule 12(b)(6) only where it appears that there are not "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570, 127 S.Ct. 1955. Plausibility requires "enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the alleged misconduct]." Id. at 556, 127 S.Ct. 1955. The plausibility standard "asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).
Defendants move to dismiss Plaintiff's § 1514A claim because she has not pled that any of the Defendants are publicly traded companies covered by the provision. Northwestern Mem. at 1-2; Tronco Mem. at 3-4. The Northwestern Defendants further argue that Plaintiff has not pled that she engaged in protected conduct under § 1514A. Northwestern Mem. at 13-15.
Section 1514A of Sarbanes-Oxley creates whistleblower protection for employees of publicly traded companies, as follows:
18 U.S.C. 1514A(a). Thus, a company is covered by § 1514A where it: (1) has issued securities that are registered under section 12 of the Exchange Act; or (2) is required to file reports under section 15(d) of the Exchange Act. 18 U.S.C. § 1514A(a). In the present case, Plaintiff does not allege that any of the Defendants are publicly traded entities within the meaning of § 1514A. See Compl. ¶¶ 79, 11-12. The Complaint refers to Defendants as "broker-dealer[s]" subject to SEC rules and regulations. Id. ¶ 29. The Complaint does not allege that Defendants have issued publicly traded securities registered under section 12 of the Exchange Act or that Defendants are required to file reports under section 15(d) of the Exchange Act.
However, § 1514A also prohibits retaliation by "any ... contractor, subcontractor, or agent" of a company registered under section 12 or required to file reports under section 15(d) of the Exchange Act. 18 U.S.C. § 1514A(a). The Supreme Court, in Lawson v. FMR LLC, ___ U.S. ___, 134 S.Ct. 1158, 188 L.Ed.2d 158 (2014), held that this language means that § 1514A "shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors." Id. at 1161.
In the present case, Plaintiff alleges that the Northwestern Mutual Funds are required to file reports under § 15(d) of the Exchange Act, Compl. ¶ 22, and that Defendants are contractors or subcontractors of the Northwestern Mutual Funds, id. ¶ 44. Plaintiff accordingly argues that she was employed by a contractor that provided services to entities that are within the scope of § 1514A, and, as such, is subject to the provision's protections under Lawson. Opp'n at 7-10. Defendants argue that Plaintiff's allegations do not place her among the contractor employees that Lawson recognized as protected under § 1514A. Northwestern Mem. at 7-13; Tronco Mem. at 7-9. Section 1514A's coverage of employees of private contractors under Lawson is an apparent issue of first impression in the Second Circuit.
The Lawson plaintiffs were two former employees of private companies that provided advisory and management services to Fidelity mutual funds. 134 S.Ct. at 1164. The Fidelity funds had no employees themselves, but instead contracted with private investment advisors to handle all of their operations, including making investment decisions, preparing reports for shareholders, and filing reports with the SEC. Id. This is a common structure in the mutual fund industry. Id. Both plaintiffs suffered adverse employment actions when they raised concerns regarding compliance issues with the funds. Id. One employee reported that certain accounting methodologies overstated expenses for operating the funds; the other reported concerns regarding inaccuracies in an SEC draft registration statement. Id. The plaintiffs commenced suit under § 1514A. Id. The defendant companies argued that § 1514A only protected employees of public companies, and therefore had no application to them, as privately held companies. Id. The Supreme Court held, "based on the text of § 1514A, the mischief to which Congress was responding, and earlier legislation Congress drew upon, that
The Supreme Court stated the relevant text of § 1514A as follows: "no ... contractor... may discharge ... an employee." Id. at 1165. In that context, the Court found that "[t]he ordinary meaning of `an employee' ... is the contractor's own employee." Id. The Court rejected the defendant companies' proposed interpretation that "an employee" only refers to employees of the public company because the statutory structure suggested that the prohibited retaliatory measures "are commonly actions an employer takes against its own employees." Id. at 1166. Furthermore, "[c]ontractors are not ordinarily positioned to take adverse actions against employees of the public company with whom they contract." Id. Thus, the Court concluded that the most logical reading of § 1514A prohibited contractors from taking retaliatory measures against their own employees.
The Court next noted that extending § 1514A's protections to employees of contractors was consistent with the purposes of Sarbanes-Oxley. Id. at 1169. The Court observed that "[i]t is common ground that Congress installed whistleblower protection in the Sarbanes-Oxley Act as one means to ward off another Enron debacle." Id. (citing S.Rep. No. 107-146 at 2-11 (2002)). There was "abundant evidence that Enron succeeded in perpetuating its massive shareholder fraud in large part due to a `corporate code of silence.'" Id. at 1162. Employees who "attempted to report corporate misconduct... faced retaliation, including discharge." Id. "The lack of whistleblower protection [was] `a significant deficiency' in the law, for in complex securities fraud investigations, employees `are [often] the only firsthand witnesses to the fraud.'" Id. at 1162-63 (quoting S.Rep. No. 107-146 at 10).
Significantly, "contractors and subcontractors, including the accounting firm Arthur Andersen, participated in Enron's fraud and its coverup." Id. at 1162. The legislative history demonstrated to the Court that "Congress was as focused on the role of Enron's outside contractors in facilitating the fraud as it was on the actions of Enron's own officers." Id. at 1169. Congress understood "that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that the fear of retaliation was the primary deterrent to such reporting by the employees of Enron's contractors." Id. at 1170. The Court therefore could "safely conclude that Congress enacted § 1514A aiming to encourage whistleblowing by contractor employees who suspect fraud involving the public companies with whom they work." Id.
The Court further noted that its reading of § 1514A was essential to avoid a "huge hole" in the coverage of § 1514A; otherwise contractors' employees "would be vulnerable to retaliation by their employers for blowing the whistle on a scheme to defraud the public company's investors, even a scheme engineered entirely by the contractor." Id. at 1168. This gap in coverage was particularly significant for the mutual fund industry which is structured so that "[v]irtually all mutual funds... have no employees of their own ... [and] are managed, instead by independent investment advisers." Id. at 1171.
A plurality of the Court responded to concerns that its reading would extend whistleblower protection to all employees of private contractors, including those who had "no exposure to investor-related activities and thus could not possibly assist in
Plaintiff's allegations require the Court to determine the boundaries of the Supreme Court's holding in Lawson. Plaintiff argues that she "alleged that she worked for a contractor that provided compliance services on behalf of the [Northwestern Mutual Funds]," and is accordingly within the scope of § 1514A. Opp'n at 7. Defendants argue that Plaintiff is not covered by § 1514A, as interpreted by Lawson, because she does not allege that she provided services to the Northwestern Mutual Funds, or that she reported wrongdoing committed either by the Funds or on their behalf. For the following reasons, the Court agrees with Defendants.
In order to determine the scope of § 1514A's coverage of contractor employees, the Court begins with the examples discussed in Lawson. The Lawson Court found significant evidence for its interpretation of § 1514A in the Enron scandal and the role of accounting and law firms in facilitating it. See Lawson, 134 S.Ct. at 1169. Because accounting and law firms were integral in the scandal, and Congress found that "fear of retaliation" deterred their employees from reporting fraudulent practices, the Lawson Court concluded that Congress intended § 1514A to cover accountants, lawyers, and other outside professionals who are involved in a company's business operations and thus positioned to be firsthand witnesses to corporate fraud. Id. at 1170. The Lawson plaintiffs similarly alleged a "mainstream" case of § 1514A. Id. at 1173. The investment advisory firms that employed the plaintiffs handled all day-to-day operations of the Fidelity mutual funds and therefore, the employees of those firms were positioned to be firsthand witnesses to shareholder fraud. Id. at 1164. Each of the plaintiffs alleged retaliation for reporting practices that directly implicated the mutual funds' shareholders. Id. at 1173.
Conversely, in Gibney v. Evolution Mktg. Research, LLC, 25 F.Supp.3d 741 (E.D.Pa.2014), the court, in considering a § 1514A action, found that a contractor employee was not within the scope of the
Analyzing the facts of Lawson, Gibney, and the Enron scandal, the Court concludes that there are two main limitations on the scope of § 1514A. First, the whistleblowing must relate to the contractor's provision of services to the public company. See Lawson, 134 S.Ct. at 1173. Thus, § 1514A only covers contractors insofar as they are firsthand witnesses to corporate fraud at a public company — for example, the lawyers and accountants in the Enron scandal who facilitated and contributed to the fraud. It does not cover contractor employees who experience retaliation that is unrelated to the provision of services to a public company. The second limitation is that § 1514A is concerned with public company fraud, whether committed by the public company itself or through its contractors. Gibney, 25 F.Supp.3d at 747; see also Lawson, 134 S.Ct. at 1173 ("[T]he contractor ... fulfilling its role as a contractor for the public company, not the contractor in some other capacity." (emphasis added)). A private company's fraudulent practices do not become subject to § 1514A merely because that company incidentally has a contract with a public company. See Fleszar v. U.S. Dep't of Labor, 598 F.3d 912, 915 (7th Cir.2010) ("Nothing in § 1514A implies that, if [a privately held company] buys a box of rubber bands from Wal-Mart, a company with traded securities, the [privately held company] becomes covered by § 1514A."). The effect of these limitations is to restrict § 1514A to situations where a contractor employee is functionally acting as an employee of a public company, and in that capacity, is a witness to fraud by the public company.
Under these limiting principles, Plaintiff's allegations fail to state a claim under § 1514A because she has neither alleged that she was providing services to the Northwestern Mutual Funds, nor that she reported any wrongdoing committed either by the Mutual Funds or on their behalf.
Plaintiff's allegations appear superficially similar to the Lawson plaintiffs' allegations insofar as they also involve the unique structure of the mutual fund industry. However, unlike the Lawson plaintiffs, who were providing advisory and management services directly to mutual funds, Plaintiff nowhere alleges that she was providing services to the Northwestern Mutual Funds. Plaintiff alleges that she was Director of Network Office Supervision, Compl. ¶ 26, and was responsible for ensuring that Tronco Financial representatives and staff complied with applicable rules and regulations, including federal securities law, id. ¶ 27. Plaintiff further
Plaintiff also fails to state a claim under § 1514A because she does not allege that she reported any wrongdoing by the Northwestern Mutual Funds. Plaintiff pleads that she reported violations by Tronco Financial representatives. Compl. ¶ 35. However, there is no allegation of wrongdoing by the Mutual Funds for the reasons described supra: because neither Plaintiff nor Tronco Financial were providing services to the Mutual Funds, there was no possibility for the Mutual Funds to be acting either through Plaintiff or Tronco Financial. The compliance issues raised by Plaintiff only implicated Tronco Financial, a private company. Although Plaintiff alleges that she provided services "on behalf of" the Mutual Funds, id. ¶ 45, like Gibney, the case "does not implicate the peculiar structure of the mutual fund industry," because Plaintiff was not providing services to the Mutual Funds, 25 F.Supp.3d at 747.
In summary, the Court finds that Plaintiff's allegations do not state a claim under § 1514A.
Having dismissed Plaintiff's § 1514A claim, the Court no longer has
Accordingly, it is hereby:
