Tuesday, August 30, 2016

No SOX shield for ex-CEO complaining about disclosures he certified

By Anne Sherry, J.D.

The ousted founder and CEO of Orion Energy failed to persuade the Eastern District of Wisconsin that he was fired for blowing the whistle on disclosure shortcomings. The plaintiff unsuccessfully attempted to characterize his warnings about corporate waste and fiduciary duties as whistleblowing about fraudulent activity protected under SOX. The CEO's own certifications of the company's disclosures demonstrated that he did not subjectively believe there was fraud at the company (Verfuerth v. Orion Energy Systems, Inc., August 25, 2016, Griesbach, W.).

As the district court put it, the case "presents the unusual scenario in which a CEO claims to have been a 'whistleblower' about his company’s failure to disclose material facts to shareholders during the same period he himself was certifying that his company’s disclosures were complete." The plaintiff did not provide any information to the SEC or other agency, but argued that the board retaliated by firing him after he aired his concerns about the company's disclosures. Sarbanes-Oxley's whistleblower provision required him to prove, among other things, that he reported fraudulent conduct "to a person with investigatory authority," that he subjectively believed his employer was acting unlawfully, and that that belief was objectively reasonable.

The conduct the CEO complained about—corporate waste, fiduciary duty breaches, violations of codes of conduct or the attorney-client privilege—did not fall under SOX's umbrella of protected reporting. Under the plaintiff's theory, his disclosures were not just complaints about the underlying activity, but were simultaneously alerting the board that the failure to disclose the issues would constitute securities fraud. The court, however, identified a number of problems with this theory. First, the plaintiff's complaints to the board about the board's own alleged misconduct did not constitute whistleblowing, which requires disclosure to some other party.

Relatedly, Sarbanes-Oxley protects a whistleblower who provides information or assists in an investigation; a CEO's opinions about the company's reporting obligations are not covered. Accepting the plaintiff's theory "would mean that thousands of corporate executives, compliance officers and lawyers are 'whistleblowing' every time they give advice about information they believe should be disclosed. There is no indication the statute intended to protect such activity."

Furthermore, the board already knew about some of the plaintiff's complaints, such as stock manipulation that had allegedly occurred four years prior. Even if the failure-to-disclose theory itself held water, the plaintiff failed to explain why the undisclosed information was material and why he reasonably believed shareholders would lose value from its omission. Finally, the CEO's own certifications of the company's annual and quarterly reports meant that he could not establish his subjective belief that fraud was occurring.

The case is No. 14-C-352.

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