Are SOX whistleblowers required to show that their disclosures relate “definitively and specifically” to a federal securities law?

SOX Whistleblowers are not required to show that their disclosures relate “definitively and specifically” to a federal securities law

To be protected under the SOX whistleblower protection law, an employee’s report “need not ‘definitively and specifically’ relate to one of the listed categories of fraud or securities violations in § 1514A.”[i]

SOX whistleblowers are protected if they show that they reasonably believed that the conduct they complained of violated one of the enumerated violations in Section 806. Whistleblowers are not required, however, to tell management or the authorities why their beliefs are reasonable. Nor must their disclosures allege, prove, or approximate the elements of fraud. The employee “need not cite a code section he believes was violated in his communication to his employer, but [his]communication must identify the specific conduct that [he] believes to be illegal.” Starkey v. J.P. Morgan Chase & Co., 805 F.Supp. 2d 45, 57 (S.D.N.Y. 2011).

All that SOX requires an employee to do is prove that they “reasonably believed” that their employer violated or is about to violate federal law.[ii] The focus here is “on the plaintiff’s state of mind rather than on the defendant’s conduct.”[iii] This rule is informed by the court’s recognition that, because “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers,” an employee’s “belief” in their employer’s wrongdoing is “central” to the analysis of SOX-protected conduct.[iv]

A Sixth Circuit opinion in a SOX case demonstrates the importance of broadly construing SOX-protected conduct. In Rhinehimer v. U.S. Bancorp Investments, Inc,.[v] the plaintiff Michael Rhinehimer alerted one of his superiors to unsuitable trades that a coworker made to the detriment of an elderly client. In response, Mr. Rhinehimer’s manager gave him a written warning. The manager admitted that the warning was motivated by the fact that Mr. Rhinehimer’s complaint “prompted a FINRA investigation . . . and anybody associated with this was really feeling the heat.” According to Mr. Rhinehimer, the manager then admonished Mr. Rhinehimer that if he sued the bank, then his career in the city would be over. U.S. Bancorp Investments (“USBII”) placed Mr. Rhinehimer on a performance-improvement plan requiring him to increase his monthly revenue to $40,000. Shortly thereafter, the bank fired him.

At trial, a jury found that USBII disciplined and fired Mr. Rhinehimer in deliberate retaliation for raising his concerns about the unsuitable trades. On appeal, USBII argued, that Mr. Rhinehimer was required to establish facts from which a reasonable person could infer each of the elements of an unsuitability-fraud claim. These elements include the misrepresentation or omission of material facts, and that the broker acted with intent or reckless disregard for the client’s needs.

The Sixth Circuit, however, held that SOX protects “all good faith and reasonable reporting of fraud,” with a focus on “employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Therefore, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines this purpose and conflicts with the statutory design.” The Sixth Circuit affirmed the jury verdict because there was sufficient evidence to sustain the jury’s finding that Mr. Rhinehimer reasonably believed that certain trades constituted unsuitability fraud. A contrary result would have resulted in employees—due to lack of tangible evidence—refraining from reporting fraud until after investors have already been harmed.

In Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013), the Third Circuit confirmed that a SOX whistleblower need not be an expert in securities law to engage in SOX protected conduct: “[An]t employee should not be unprotected from reprisal because she did not have access to information sufficient to form an objectively reasonable belief that there was an intent to defraud or the information communicated to her supervisor was material to a shareholder’s investment decision. “Congress chose statutory language which ensures that ‘an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories [set forth in § 806] is protected.’ ” Van Asdale, 577 F.3d at 1001 (quoting Allen, 514 F.3d at 477). An employee’s lack of knowledge of certain facts that pertain to an element of one of the anti-fraud laws would be relevant to, but not dispositive of, whether the employee did have an objectively reasonable belief that a listed anti-fraud law had been violated. Indeed, whether an employee has an objectively reasonable belief may not always be decided as a matter of law. See Allen, 514 F.3d at 477–78.”

[i] Katzel v. American International Group, Inc., 2024 WL 3063461 (2d Cir. 2024; Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 224 (2d Cir. 2014)

[ii] Murray, 2017 WL 1498051, at *10.

[iii] Id., at *10 (quoting Guyden v. Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008), superseded on other grounds by statute).

[iv] Id., at *9 (quoting Nielsen, 762 F.3d at 221 (alterations in original)).

[v] Rhinehimer v. U.S. Bancorp Invs., Inc., 787 F.3d 797 (6th Cir. 2015).

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Matt Stock is a Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor. As an auditor, Mr. Stock developed an expertise in financial statement analysis, internal controls testing and fraud recognition, and he uses his auditing experience to help whistleblowers investigate and disclose complex financial frauds to the government and obtain damages for retaliation. He is lead author of SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
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