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District court applied disavowed SOX standard; discharged exec’s retaliation claim revived

By Lisa Milam-Perez, J.D.

A discharged executive who ostensibly suspected misconduct on the part of the company’s board of directors will have another go at his Sarbanes-Oxley Act (SOX) retaliation claim. A divided Tenth Circuit panel found there was a disputed question of fact as to whether the executive had genuinely believed that the board was violating SEC Rule 14, despite his failure to specifically identify, at the time, what rule was being violated. In holding him to this requirement and awarding summary judgment to the defendant, the district court imposed an obsolete “definitive and specific” evidentiary standard that the DOL’s Administrative Review Board had “explicitly disavowed,” a position that warranted Chevron deference. Judge Hartz dissented on the majority’s decision to reinstate his SOX claim, incredulous that the plaintiff, a seasoned securities lawyer, would decline to state the rule in question if he truly believed an SEC violation was afoot. But he concurred in the panel’s refusal to reinstate the plaintiff’s defamation claim against the CEO (Genberg v. Porter, February 22, 2018, Bacharach, R.).

Merger. In 2005, the plaintiff’s employer was merged into a company that became Ceragenix Corporation. More than 12 million shares went into escrow and Ceragenix’s board of directors was given a proxy to exercise voting rights for those shares. The initial plan was for the shares to be distributed within a year; five years later, though, they still had not been distributed, much to the displeasure of the plaintiff. So the plaintiff drafted an email under the name of one of the largest shareholders, a friend, who was part of a group looking to take control of the company. The email urged the board to abandon the proxy and allow the shareholders to exercise their own voting rights. The board members met the next day to discuss the email and the plaintiff, whom they immediately suspected was the true author. They saw his email as a disloyal attempt to aid the group trying to seize control of the company. Several board members wanted to fire him but the CEO urged restraint, suggesting they hold off for now, as the plaintiff was knee-deep in critical fundraising activities. Meanwhile, the board ordered the plaintiff to cease and desist communicating with the shareholder for whom he had ghostwritten the email.

The next day, the plaintiff sent a second email, this one to a member of the board of directors, alleging that the company CEO was engaged in insider trading. The company launched an investigation into both the insider trading allegation and the plaintiff’s involvement with the dissident shareholder group. The investigating attorney found no evidence of insider trading, but did conclude the plaintiff was involved in the shareholder group. The board fired him, and the CEO reported the firing to a public relations consultant, making a number of statements that the plaintiff deemed defamatory. He sued the CEO for retaliation under the Sarbanes-Oxley Act and defamation under Nevada law. The district court granted summary judgment in the CEO’s favor on both claims.

Incorrect SOX standard. The appeals court reversed summary judgment on the SOX retaliation claim, concluding a reasonable factfinder could find the plaintiff engaged in SOX-protected activity by writing the emails, and that those emails contributed to his firing. The district court had gone astray by requiring that, to state a SOX claim, the plaintiff must have specifically identified the rule he asserts was being violated. But this “definitive and specific” standard was incorrect; the Administrative Review Board had expressly disavowed it. Moreover, this disavowal was entitled to deference, since it was based on a permissible construction of the ambiguous statutory text. (Incidentally, the National Whistleblower Center had weighed in on the standard in an amicus brief, seeking to ensure that the disfavored standard was not resurrected here.).

The proper standard required a showing only that a plaintiff “reasonably believes” that the complained-of conduct violates the laws listed in the statute. The only four circuits to have addressed the issue so far have followed this articulation of the standard. And, applying the correct standard to the case at hand, a factfinder could reasonably conclude that the plaintiff’s initial email amounted to protected activity.

Veracity of plaintiff’s belief. The defendant did not challenge whether the plaintiff satisfied the objective requirement that his belief was reasonable. Rather, the defendant questioned whether the plaintiff satisfied the subjective requirement because he doubted the veracity of his after-the-fact assertion, made under oath, that he believed the board was violating SEC Rule 14 by continuing to rely on the initial proxy.

The district court, considering the plaintiff’s sophistication in the industry, appeared skeptical that he really believed the board was violating this rule. Why wouldn’t he have expressly referenced it in the email? On this point, Hartz agreed with the court below. But the majority held the credibility of his assertion was not to be resolved on summary judgment. “A reasonable factfinder could conclude that he was telling the truth when he stated under oath that he had regarded retention of the proxy as a violation of Rule 14,” according to the majority. A factfinder also might reasonably conclude there was no need for the plaintiff to cite the rule in his email, since “it seems to clearly bar use of a proxy for shareholder votes after the next annual meeting,” the appeals court added. Consequently, summary judgment was improper.

Causation. A reasonable factfinder also could find the plaintiff’s emails contributed to his termination. It took less than a month after his email for the board to launch and conclude its investigation and fire the plaintiff. Indeed, the board would have cut him loose the very next day had the CEO not urged they hold off temporarily, while the plaintiff went about his efforts to secure capital for the company. On appeal, the defendant asserted the “same action” defense, but he did not preserve reliance on this theory, having hung his hat solely on the “contributing factor” defense in the court below. Nonetheless, the same-action defense would not have helped his cause, since a reasonable factfinder “could have gone either way” on the question whether the plaintiff would have been fired even in the absence of a protected activity.

The defendant argued the plaintiff was fired not for the contents of the email, but for his having concealed his role in drafting it. However, the factfinder was free to conclude otherwise. The defendant also cited the “legitimate intervening event” of the investigator having found he breached his fiduciary duty to the company. But the defendant could not rely on this event because it was inextricably intertwined with the plaintiff’s SOX-protected activity. Had the plaintiff not written the two emails—which, the appeals court already concluded, was protected conduct—the company would have had no reason to investigate him. As such, the investigation could not be an “independent” intervening cause for termination. Therefore, the appeals court reversed summary judgment on the plaintiff’s SOX retaliation claim.

Defamation claim. However, the plaintiff’s defamation claim failed as a matter of Nevada law, the panel found, affirming the district court on this issue. The CEO’s allegedly defamatory statements were made in good faith, and the CEO shared a common interest in the content of the statements with the recipients of those statements. As such, the common interest privilege applied. And, because the plaintiff presented no evidence showing the defendant believed the statements were false, and that he nonetheless disregarded their falsity, the appeals court rejected the plaintiff’s contention that the defendant had abused this privilege.