Ninth Circuit rules for SOX whistleblower

The Ninth Circuit U.S. Court of Appeals reinstated a Sarbanes-Oxley case and made some helpful comments about SOX. In a decision issued last month, the Court reversed a dismissal by a Nevada magistrate judge and sent the case back so Lena and Shawn Van Asdale can have their day in court. "The success, or failure, of the Van Asdales’ lawsuit does not depend on their ability to show any actual fraud, only that they reasonably believed that fraud had occurred," the Court says.  Here, here. "An employee need not cite a code section he believes was violated," the opinion adds. The case is Van Asdale v. Int’l Game Technology, ___ F.3d. ___, No. 07-16597 (9th Cir. Aug. 13, 2009).

The Van Asdales were former in-house attorneys at International Game Technology (IGT). IGT began merger discussions with Anchor Gaming. The Van Asdales expressed concerns that communications made in connection with the merger were fraudulent and might be costly to shareholders who relied on them.  IGT fired the Van Asdales.

The district court granted IGT’s motion for summary judgment, concluding that the attorneys did not engage in protected conduct in that they "hadn’t reached a conclusion" that IGT engaged in actual shareholder fraud. The Ninth Circuit reversed, holding that "[r]equiring an employee to essentially prove the existence of fraud before suggesting the need for an investigation would hardly be consistent with Congress’s goal of encouraging disclosure." Noting that the legislative history of SOX makes clear that it protects "all good faith and reasonable reporting of fraud," the court held that plaintiffs’ "subjective belief that the conduct that they were reporting violated a listed law" sufficed to demonstrate protected conduct. Moreover, the court concluded that merely requesting an investigation of potential shareholder fraud constitutes protected conduct.

The Ninth Circuit also held that in-house counsel may proceed with a retaliation claim that may require the disclosure of attorney-client privileged information. According to the Ninth Circuit, "confidentiality concerns alone do not warrant dismissal of Van Asdales’ claims." The Court adds that "Congress plainly considered the role [in-house] attorneys might play in reporting possible securities fraud," and thus, to the extent that a suit may implicate confidentiality-related concerns, a court must use "equitable measures at its disposal to minimize the possibility of harmful disclosures, not dismiss the suit altogether."

This decision finally points in the right direction of giving corporate fraud whistleblowers the same broad interpretation of protected activity that environmental, nuclear and safety whistleblowers have had for years.

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