Alert April 29, 2008

Department of Labor Administrative Law Judge Rules That Sarbanes-Oxley’s Whistleblower Provisions Do Not Apply to Research Analysts of Privately Held Investment Adviser and Dismisses Suit

A Department of Labor Administrative Law Judge (the “Court”) rendered an important decision holding that the whistleblower provisions of Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) do not apply to the employees of a privately held company providing investment advisory services to mutual funds, absent proof that the mutual funds’ independent trustees or directors were involved in the employment decision at issue.

Plaintiff, a former research analyst, was fired for unsatisfactory performance.  Two months later, he filed a SOX whistleblower complaint with the U.S. Department of Labor, claiming that his termination was due to his alleged whistleblowing activity.  Plaintiff’s former employer asserted several defenses, including that Section 806 of SOX does not apply to Plaintiff because he was employed by the privately held investment adviser, not by the publicly traded mutual funds to which the adviser provided advisory services. 

Plaintiff argued that Section 806 of SOX covers the contractors and agents of publicly traded companies, and further that a privately held investment adviser and a mutual fund it advises should be considered an integrated enterprise/single employer.  The Court permitted Plaintiff to engage in discovery on the SOX coverage issue and, following post-discovery briefing, which included extensive analysis of the legislative history of SOX and the history of the Investment Company Act of 1940 and the Investment Advisers Act of 1940, the Court agreed that SOX’s whistleblower provisions do not apply to the employment decisions of privately owned contractors or agents of publicly traded companies (including mutual funds) unless they are acting at the direction or behest of such companies.  The Court also declined to find that an investment adviser and a mutual fund it advises are an integrated enterprise/single employer because the board of trustees of the mutual fund is controlled by a super-majority of independent trustees who have no affiliation with the investment adviser.  Goodwin Procter LLP represented the investment adviser and the mutual funds in this matter.