In Nazif v. Computer Sciences Corporation, No. 13-cv-5498 (N.D. Cal. June 17, 2015), the Northern District of California granted Defendant Computer Sciences Corp. (Company) summary judgment on Plaintiff Nazif’s Dodd-Frank whistleblower retaliation claim, concluding there was no evidence that his purported belief that the Company violated securities laws was objectively reasonable under Section 806 of SOX. This case illustrates the intersection between the SOX and Dodd-Frank whistleblower provisions and constructs a high hurdle to whistleblowers raising issues of securities fraud.
Background
Plaintiff, a CPA who was employed by the Company, allegedly complained to his managers about various purported errors in the Company’s accounting practices. His employment was subsequently terminated as part of a company-wide reorganization, and he filed suit claiming, among other things, that his termination constituted retaliation in violation of the whistleblower protection provision in Dodd-Frank. In support, he argued that his disclosures were protected under Section 806 of SOX.
Ruling
The Company moved for summary judgment on Plaintiff’s Dodd-Frank claim on two grounds. First, it argued that Plaintiff did not qualify as a “whistleblower” as a matter of law because he failed to complain to the SEC. The court rejected that argument, relying on the ruling in Somers v. Digital Realty Trust Inc., No. 14-cv-5180 (N.D. Cal. May 15, 2015), that an internal complaint is sufficient. (Here is our post on that decision.)
Second, the Company argued that Plaintiff failed to engage in protected activity because his belief that the Company violated securities laws was not objectively reasonable under Section 806 of SOX. In considering this argument, the court relied on Ninth Circuit precedent for the proposition that to have an objectively reasonable belief of there has been shareholder fraud, the complainant’s theory of such fraud must at least approximate the basic elements of a claim of securities fraud. According to the court, this means that the plaintiff must have had an objectively reasonable belief that violations involved a material misrepresentation or omission, among other things.
Against this standard, the court reviewed Plaintiff’s purported belief that the aggregate effect of the various alleged accounting irregularities would have at most resulted in approximately $15 million in misstatements. It ultimately concluded that no objectively reasonable accountant could have believed that a revenue misstatement of this size was sufficiently material to a company as large as the Company, which reported annual revenue of over $14 billion. Moreover, the court indicated that Plaintiff:
(1) presented no evidence that any of the alleged GAAP violations he reported were widespread accounting problems at CSC as opposed to isolated incidents; (2) admits that he had no knowledge at the time he was terminated whether any of the alleged accounting issues were widespread; and (3) conceded at his deposition that at least some of the GAAP ‘violations’ that he identified to Sweeney and Hand are not clear-cut violations of GAAP – rather they would only be considered ‘violations’ by someone who agreed with Nazif’s interpretation of what GAAP requires.
Accordingly, the court granted the Company summary judgment on the Dodd-Frank claim.
Implications
This case is an example of a plaintiff trying to shoehorn a SOX whistleblower claim into a claim under Dodd-Frank; i.e., the plaintiff here argued that the employer violated Dodd-Frank by retaliating against him in violation of the SOX whistleblower provision. Though the anomalous nature of this dynamic was not tackled in this case, it remains to be seen whether other courts will allow similar claims to proceed, as such claims may be viewed as eviscerating the exhaustion of administrative remedies requirement and other components of Section 806 of SOX.