In the recent case Lawson v. FMR, the Supreme Court found that a fund adviser can be held liable if it retaliates against one of its employees for reporting a fraud occurring at the mutual fund.
The case involved two separate incidents. In one, an employee of the adviser alleged the she was constructively discharged for reporting concerns about cost accounting methodologies she believed resulted in various funds being overcharged; in the other an employee alleged that he was fired in retaliation for raising concerns about inaccuracies in a draft registration statement. Both employees sued the adviser under a provision of the Sarbanes-Oxley Act that prohibits a public company “or any officer, employee, contractor, subcontractor or agent of such company” from retaliating against “an employee” for whistleblowing.
The adviser, here a privately-held entity, argued that its employees were not protected under the statute as the statute only protected employees of the public company – in this case, the mutual fund. While the grammar of statute in question might be read this way (and, indeed, the Court of Appeals had ruled in favor of the adviser), the Court rejected this conclusion. Instead, noting that the provision had been adopted in the wake of the Enron scandal, in which numerous employees of Enron contractors had suffered retaliation for attempting to expose problems at Enron, the Court concluded that Congress also intended to protect employees of contractors who expose frauds at public companies.
This case is of importance in the mutual fund industry since, as the Court noted, funds typically have no employees, and must rely on the services provided by contractors for virtually all of their functions. As a result of this case, employees of advisers and other fund service providers will presumably be protected from retaliation when they report frauds at or affecting the funds they serve. The case has much broader application, however – as the Court’s reliance on the enactment of the statute in the wake of Enron demonstrates, lawyers, accountants and other service providers to mutual funds and other public companies will also clearly fall within the ambit of the statute’s protection.
We previously blogged about this case when the trial court first ruled in favor of the employees.