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U.S. Supreme Court extends whistleblower protection to employees of a public company’s private contractors

In a 6-3 decision, the U.S. Supreme Court decided earlier this week that whistleblower protection under the Sarbanes-Oxley Act of 2002 includes employees of a public company’s private contractors and subcontractors. In Lawson v. FMR LLC, the court, in a majority opinion written by Justice Ginsburg, concluded that extending protection to employees of a contractor was consistent with the purpose and intent of Sarbanes-Oxley: to protect investors and restore trust in financial markets.

As background, plaintiffs Lawson and Zang separately initiated lawsuits against their former employer, a privately held company that provided advisory management services to the Fidelity family of mutual funds. The mutual funds were not parties to the action because, as is common in the mutual fund industry, the Fidelity funds had no employees. Instead, the funds contracted with investment advisors like FMR to handle the day-to-day operations of the funds. After they were terminated, Lawson and Zang alleged that they were fired in retaliation for raising concerns about cost accounting methodologies and inaccuracies in SEC registration statements for the funds. FMR sought to have the actions dismissed, but those motions were rejected by the trial court.

In a 2-1 decision, the U.S. First Circuit Court of Appeals reversed the trial court and found that the whistleblower protections of Sarbanes-Oxley were available only to employees of the public companies, and did not cover a contractor’s employees.

In deciding that whistleblower protection extended to contractors of public companies, the Supreme Court focused on a narrow provision of Section …

SEC Files SOX Clawback Case Against Former CEO and CFO of Surgical Products Manufacturer

On Monday, April 2, 2012, the SEC announced that it has filed suit in federal court in Austin, Texas against Michael A. Baker, the former CEO of ArthroCare Corporation, and Michael Gluk, the former CFO, to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. As the SEC pointed out in its press release, the two men "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008."…

First Circuit Rules That SOX Whistleblower Protections Do Not Apply to Employees of a Contractor or Subcontractor of a Public Company

In a February 3, 2012 Opinion, the First Circuit Court of Appeals reversed a Massachusetts federal court decision and held that, while the whistleblower protections of the Sarbanes-Oxley Act apply to employees of "public companies" (i.e., a company with registered securities or one that files reports under Section 15(d) of the Exchange Act), they do not apply to an employee of a contractor or subcontractor of such a public company.…

SEC v. Koss Corporation: SEC’s Explanation Regarding Settlement Language “Satisfies” Judge Randa

In a letter dated February 1, 2012 to the parties, Judge Rudolph Randa stated that the SEC’s Brief responding to certain questions the Court had raised regarding the language of the proposed settlement with Koss Corporation ("Koss") and Michael Koss "largely satisfies the Court’s concerns." As a result, the SEC will avoid the issues it has faced in the Citigroup litigation, where Judge Jed Rakoff rejected the proposed settlement between the parties and the SEC has appealed. Judge Randa Court accepted the SEC’s offer to revise the judgments to specifically include language from the consent order, and said that, while he continued to question whether the judgments will be final judgments, he "will not withhold … approval based on that concern."…

SEC Brings Case Against Indiana Manufacturer and Eight Executives and Accountants for Accounting Fraud at English Subsidiary

On Monday, January 30, 2012, the SEC filed two lawsuits in federal court in Indiana and commenced two administrative proceedings stemming from an accounting fraud scheme at the Thornton Precision Components ("TPC"), which is the Sheffield, England subsidiary of Symmetry Medical Inc. ("Symmetry"), an Indiana-based manufacturer of medical devices and aerospace products. According to the Commission, the accounting fraud at TPC "was so pervasive that it distorted the financial statements of the parent company." In those proceedings, the Commission settled charges with Symmetry and eight individuals, including the parent company’s CEO and the subsidiaries’ outside accountants.…

SEC v. Koss Corporation: The Commission Responds to Judge Randa’s Questions Regarding the Whether the Proposed Settlement is Fair, Reasonable and Adequate

On Tuesday, January 24, 2012, the SEC filed a Memorandum which defended the proposed settlement with Koss Corporation ("Koss") and its CEO. The Commission’s Memorandum was filed after a Wisconsin federal judge, Rudolph Randa, issued a letter order on December 20, 2011, directing the Commission to "provide a written factual predicate for why it believes the Court should find that the proposed final judgments are fair, reasonable, adequate, and in the public interest," citing Judge Rakoff’s November 28, 2011 order in SEC v. Citigroup Global Markets, Inc. (discussed here). The issues in the Koss Corporation litigation do not include the "neither-admit-nor-deny" policy at the hear of Citigroup Global Markets, but focus on specific language in the proposed Judgments. The SEC’s Memorandum defends the provisions, while arguing that the language (which is similar to that used in other judgments) should not be changed.…

The Top 10 Most Intriguing Federal Securities Litigation Stories in 2011 (Part 1 of 2)

Today and tomorrow, the Federal Securities Litigation Blog will take a break from discussing the most recent events and, with a larger-than-usual entry, examine the Top 10 securities litigation stories that were the most intriguing in 2011. Undoubtedly, others will be preparing similar lists and this is not intended to be a definitive or complete version. Instead, these are the stories that piqued my interest. Half of the list will be discussed today and the other half tomorrow.

Here’s a quick headline look at the bottom half of the Top 10:

10. The D.C. Circuit Vacates SEC Exchange Rule 14a-11 Regarding Shareholders’ Rights to Include Board Nominee on Proxy Materials.

9. The Jenkins Litigation: Settlement Negotiations in Clawback Case Collapse, But Are Ultimately Resolved.

8. The SEC’s Director of the Division of Enforcement Now Has Authority To Issue Witness Immunity Orders.

7. Where is That File? The SEC Addresses Issues Related to the Destruction of Documents and Discovery Issues Relating to their Notes.

6. The FCPA Sting Case: One Hung Jury, One On-Going Trial, A Conspiracy Count Dismissed and More to Come.

These five stories are discussed in greater detail after the jump.…

SEC Settles Clawback Case Against Former CSK Auto Executive at the Second Attempt

On Tuesday, November 15, 2011, the SEC announced that it had reached a settlement with Maynard L. Jenkins, the former chief executive officer of CSK Auto Corporation, who agreed to re-pay approximately $2.8 million of the over $4 million in bonus compensation and stock profits that he received while the company was committing accounting fraud. This settlement, which still most be approved by the Court, comes almost four months after the SEC rejected a previous settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint (as previously discussed here).…

Justice Department Announces Settlement With CSK Auto: $20.9 Million Fine and a Non-Prosecution Agreement In Earnings Manipulation Case

On Friday, September 9, the Department of Justice announced that it had entered into a Non-Prosecution Agreement with CSK Auto Corporation, a retailer of automotive parts and accessories which used to be publicly traded, to settle a criminal investigation into alleged securities law violations stemming from a corporate earnings manipulation and double-billing scheme. Under the terms of the agreement, CSK Auto will pay a $20.9 million penalty. The resolution of this matter is the latest in a series of matters being handled by both DOJ and the SEC regarding the events at CSK Auto.…

SEC Settles Clawback Case With the Former CFO of Beazer Homes USA

On August 30, 2011, the SEC announced it had settled a case with James O’Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304’s "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O’Leary’s case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.…

Negotiations in SEC Clawback Case Collapse When Commission Rejects Settlement Proposal From Its Own Staff

The SEC’s Commissioners have rejected a proposed settlement to "claw back" a portion of the bonuses and stock sale profits a former CEO received during a period of accounting fraud. The SEC had previously described the case as the first clawback case under the Sarbanes-Oxley Act against an individual who was not alleged to have otherwise violated the securities laws. The negotiations failed when, according to a report in the Washington Post (available here), the SEC rejected the settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint.…

SEC Completes Its Study Regarding Reducing the Costs to Smaller Issuers For Complying with §404(b) of the Sarbanes-Oxley Act

On Friday, April 22, 2011, the SEC released its study and recommendations regarding how the Commission could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act for companies whose market capitalization is between $75 and $250 million, while maintaining investor protections for such companies. The SEC recommended leaving the Section 404 requirements in place, but stated that further guidance regarding compliance should be provided. The 113-page Study, which was mandated by Section 989G(b) of the Dodd-Frank Act, was prepared by the Staff of the Office of the Chief Accountant of the SEC. A copy of it is available here.…

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