Corporate Governance

SOX Whistleblower Protections Extend Beyond the Employer-Employee Relationship

By Christina Huszcza

In Sharkey v. J.P. Morgan Chase & Co., No. 10 Civ. 3824, 2011 WL 135026 (S.D.N.Y. Jan. 14, 2011), the Southern District of New York held the Sarbanes-Oxley Act of 2002 ('SOX') protects not only whistleblowers who report the illegal conduct of their employers, but also those who report the illegal conduct of their clients.  

In March of 2010, Plaintiff Jennifer Sharkey ('Sharkey') filed a complaint against J.P. Morgan Chase & Co. ('JPMC') alleging an assortment of claims, including one for breach of contract and another for violation of the whistleblower protection provision in SOX.  According to the complaint, Sharkey worked as a vice president and wealth manager in JPMC's Private Wealth Management Department.  There, she managed more than 75 'high net worth client' relationships and was the second highest producer in her department.  In January 2009, management assigned Sharkey to a long-term client of JPMC.  The client had been with JPMC for more than 20 years and brought in approximately $150,000 in quarterly returns for the company.

Soon thereafter, JPMC's compliance and risk management team contacted Sharkey to express concern regarding the client's involvement in illegal activities.  Sharkey conducted her own investigation, ultimately concluding that the client was engaged in illegal activities and recommended that JPMC terminate the client relationship. 

When Sharkey conveyed these concerns to the individual defendants, they dismissed the concerns both because they disagreed and because they potentially exposed weakness in JPMC's risk processing procedures.  When Sharkey refused to condone the client's behavior, the individual defendants allegedly began to retaliate against her by removing her from several client accounts, excluding her from important meetings with her own clients, refusing to pay her a bonus for 2009, and ultimately terminating her employment with JPMC in August of 2009.

To state a claim under the SOX whistleblower provision, the plaintiff must make a prima facie showing that: (a) she engaged in a protected activity; (b) JPMC or the individual defendants knew or suspected that plaintiff engaged in a protected activity; (c) plaintiff suffered an unfavorable employment action; and (d) the circumstances are sufficient to raise an inference that the protected activity contributed to the unfavorable employment action.

The defendants first claimed that because Sharkey reported the illegal activities of a JPMC client, rather than the illegal activities of JPMC, her actions do not constitute 'protected activity' under SOX. Put another way, JPMC claimed that SOX protects Sharkey only if it was JPMC engaging in the illegal conduct. The court disagreed, however, holding that because SOX promotes corporate ethics by protecting whistleblowers from retaliation, it should not be read narrowly.  Specifically, the court stated that the statute did not require that fraudulent conduct be committed directly by the employer that took the retaliatory action.  The court, therefore, held Sharkey properly pled that she engaged in protected conduct under SOX.

The court, however, found the complaint inadequate because it failed to state specifically or definitively how the client allegedly violated SOX.  Specifically, in order for SOX to protect a whistleblower, the reported information must have a certain degree of specificity and must state particular concerns that reasonably identify a respondent's purportedly illegal conduct.  Because Sharkey failed to identify the allegedly illegal conduct that formed the basis of her whistleblower complaint, the court dismissed the claim, granting Sharkey leave to re-plead within 20 days.

Finally, the court dismissed Sharkey's breach of contract claim with prejudice. Sharkey claimed JPMC's Code of Conduct, which included an anti-retaliation policy, created an implied contract of employment.  The court held that the complaint contained no allegation that Sharkey relied on the anti-retaliation provision in deciding to report unspecified illegal activities of the JPMC client.  Further, the court stated that even if the Plaintiff properly alleged the elements of a breach of an implied contract claim, she cannot negate the express disclaimer of contractual rights contained on the first page and in the first section of the Code of Conduct.

The primary materials for this case may be found on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on March 18, 2011 (boomark / email).