Fifth Circuit Affirms Dismissal of Former VP’s SOX Claim as Unreasonable
In Wallace v. Andeavor Corp., the U.S. Fifth Circuit Court of Appeals affirmed the grant of summary judgment to an employer on a former vice president’s Sarbanes-Oxley Act (SOX) whistleblower claim, finding that he could not have reasonably believed that the employer was misreporting its revenue in its 10-K filings with the Securities and Exchange Commission (SEC).
Plaintiff was the Vice President of Pricing and Commercial Analysis of Andeavor, an operator of petroleum refineries. He suspected that the Company was erroneously booking certain sales and excise taxes it collected from customers and remitted to federal and state governments as revenue in internal reports. However, he represented in e-mails that he believed external reporting was proper, and certified Company 10-K reports and financial statements. The 10-K report explicitly disclosed that excise and other taxes were recognized in both the “revenue” and “costs of sales and operating expenses” categories, but its disclosures were arguably ambiguous as to whether it included sales taxes.
At the same time, Plaintiff was the subject of a human resources investigation, which found that he had fostered a hostile work environment and engaged in other unacceptable behavior. As a result of this investigation, his employment was terminated. Plaintiff filed suit under SOX’s anti-retaliation provision, claiming that he was terminated because he reported the alleged problems with the tax and revenue recognition. The district court granted summary judgment to the employer on his SOX claim, finding that Plaintiff had not engaged in SOX protected activity because he did not report conduct that he believed to constitute shareholder fraud.
The Fifth Circuit assessed the evidence presented to the district court on whether Plaintiff’s purported belief that his employer was misreporting its revenue was objectively reasonable. SOX requires not only that the employee have reported certain types of misconduct, but also that they both subjectively and objectively believed that misconduct actually occurred. In this case, the Fifth Circuit focused on evidence that Plaintiff had considerable training and experience in business and accounting, and also noted his specific expertise in SEC financial reporting practices.
Based on this background, the court reasoned that Plaintiff “should be capable of understanding disclosures in SEC filings.” The court also pointed to evidence that Plaintiff was one of the employees who certified the Company’s financial statements, and stated Plaintiff should have conducted an investigation to ensure that his claim that the public disclosures contained a reporting violation was reasonable. The court found that, if such an investigation had occurred, he would have determined that the Company consistently disclosed its treatment of sales and other taxes to its shareholders. Accordingly, the Fifth Circuit affirmed the grant of summary judgment to the employer.
This decision makes clear that a SOX retaliation claimant must have a reasonable basis for reporting wrongdoing, considering the claimant’s education, background, and experience.Employees with business and accounting experience will likely be held to a higher standard regarding the basis for their allegations when seeking to invoke SOX’s retaliation protections.Publicly traded companies would do well to clearly identify in the job descriptions of employees with accounting, finance and compliance roles their compliance, reporting, investigation and certification responsibilities.