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Exec’s belief Oracle was defrauding investors was ‘objectively unreasonable’ under SOX standard

By Brandi O. Brown, J.D.

A vice president’s belief that a $10 million discrepancy in projected revenues of a multi-billion dollar business was fraudulent was “objectively unreasonable,” the Eighth Circuit ruled, denying the employee’s appeal after a federal district court granted summary judgment in favor of his employer. The appeals court also adopted the standard announced in Sylvester v. Parexel Int’l LLC for determining whether a Sarbanes-Oxley whistleblower’s belief is objectively reasonable (Beacom v. Oracle America, Inc., June 6, 2016, Benton, W.).

New forecasting method has higher projections. As the Vice President of Sales in the Americas division of the Retail Global Business Unit of Oracle America, the employee was involved in his employer’s projection of revenues on a quarterly basis. The approach used by the employer historically had been a “bottom-up forecasting” approach in which sales representatives provided forecasts at the bottom about potential deals, which were adjusted by the regional managers and eventually compiled by the employer to create projections through an automated program. When a new general manager took over in February 2011, however, the sales revenue projections were changed from “bottom-up” to “top-down.” The new forecasting method resulted in higher projections than the method used previously.

Employee voices concerns, is fired. Therefore, in 2012, the first three quarters’ projections for RGBU Americas overshot the mark by $3.4 million, $7 million, and $10 million respectively. According to the employee, the missed projections and the discrepancies resulted in salespeople being told to record deals that would not normally meet the criteria. He contended that he repeatedly raised concerns about this to the general manager and that he was concerned that false expectations were being sent up through the management ranks, which would in turn infect Wall Street’s expectations and ultimately make the stock value decline.

At a conference in January 2012, the employee “challenged’ the general manager on his practices, accusing him of “intentionally forecasting false revenue commitments.” He repeated his concerns to HR. Fired in March, he sued the employer under the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, contending he was terminated in retaliation for his complaints. The lower court granted the employer’s motions for summary judgment and the employee appealed.

New Sylvester standard. Under Sarbanes-Oxley publicly traded companies, such as Oracle, are prohibited from discharging employees in retaliation for providing information to supervisors about conduct the employee “reasonably believes” amounts to fraud. “The reasonable belief standard has both an objective and a subjective component,” the court explained, and the issue in this case was whether the employee’s belief was objectively reasonable. In its 2011 Sylvester decision, the Department of Labor’s Administrative Review Board, which adjudicates SOX whistleblower claims, rejected the standard it had formerly used in favor of holding that to satisfy the objective element of the standard, the employee has to “simply prove that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws.” The appeals court explicitly adopted that standard, joining the Second, Third, and Sixth Circuits in doing so.

Objectively unreasonable. Applying the Sylvester standard, the court found the facts compelled the conclusion that the employee’s belief was objectively unreasonable. Normally, the court explained, this “fact-dependent inquiry” would be inappropriate for summary judgment. However, this case involved a company that generated billions of dollars on an annual basis. Therefore, it was objectively unreasonable to believe that a projection that was missed by no more than $10 million amounted to defrauding investors. Because the employee’s disclosure what not protected under Sarbanes-Oxley, his Dodd-Frank claim also failed.