U.S. Mutual Fund Workers Denied Whistleblower Cover

By Terry Baynes | February 6, 2012

A U.S. law protecting whistleblowers at publicly traded companies does not cover employees of mutual funds, a federal appeals court ruled on Friday in a case involving two former Fidelity Investments employees.

The U.S. Court of Appeals for the 1st Circuit overturned a Boston federal judge’s decision to apply the provisions of the Sarbanes-Oxley Act to private companies serving under contract as advisers to public companies. The ruling marks the first time an appeals court has weighed in on the issue.

Applying the act to employees of private contractors would be an “impermissible end run” around Congress’s choice to limit whistleblower protection to employees of publicly traded companies, Chief Judge Sandra Lynch wrote for the majority.

Congress adopted Sarbanes-Oxley in 2002 after accounting problems brought down energy company Enron Corp and communications provider WorldCom Inc. Mutual fund companies have argued they should be exempt from the law because the funds themselves technically have no workers apart from their boards of directors and instead hire private management companies to invest their money.

In the Boston case, plaintiff Jackie Hosang Lawson, who worked at Fidelity from 1993 until 2007, complained she alerted supervisors to problems, including the alleged improper retention of $10 million of fees, only to be passed over for a promotion and threatened with punishment for insubordination.

The other plaintiff, Jonathan Zang, who ran several mutual funds from 1998 to 2005, alleged Fidelity gave him poor reviews and fired him in retaliation for his complaint that a new pay plan for Fidelity portfolio managers inaccurately and illegally described how pay was calculated.

Fidelity argued that Lawson and Zang worked for affiliates such as its Fidelity Management & Research arm, rather than a public company that Sarbanes-Oxley was meant to cover.

The 1st Circuit sided with Fidelity, after analyzing the text of the statute and its legislative history. The court also noted that other whistleblower statutes in the Energy Reorganization Act and the Pipeline Safety Improvement Act specifically extend coverage to contractors, unlike Sarbanes-Oxley.

“We are bound by what Congress has written,” the court said, adding that if Congress intended the term “employee” to have broader meaning, it could amend the statute.

Both the Securities and Exchange Commission and the Department of Labor rallied behind Lawson and Zang, submitting briefs on appeal that supported the extension of whistleblower protections to mutual fund employees. But the 1st Circuit refused to defer to the agencies’ interpretation.

Indira Talwani, a lawyer for Lawson, did not immediately respond to a request for comment. Zang, who represented himself in the case, was not immediately available for comment.

Judge O. Rogeriee Thompson dissented from the opinion, criticizing her colleagues for depriving a significant class of potential securities-fraud whistleblowers any legal protection.

Paul Nemser, a lawyer for Fidelity, praised the opinion as “very thoughtful and definitive.” Fidelity was not immediately available for comment.

The appeal is Lawson et al v. FMR et al, U.S. Court of Appeals for the 1st Circuit, No. 10-2240.

Was this article valuable?

Here are more articles you may enjoy.