Filed: March 16, 2010
Opinion by Judge Catherine C. Blake
Held: The Plaintiff, the general counsel of the defendant's predecessor, Fieldstone, did not suffer retaliation under the Sarbanes-Oxley Act of 2002 because her activities failed to qualify as protected activity under the Act because of (i) her limited research regarding violations of the Act and (ii) her failure to specify which federal securities laws or regulations were violated by the corporation.
Opinion by Judge Catherine C. Blake
Held: The Plaintiff, the general counsel of the defendant's predecessor, Fieldstone, did not suffer retaliation under the Sarbanes-Oxley Act of 2002 because her activities failed to qualify as protected activity under the Act because of (i) her limited research regarding violations of the Act and (ii) her failure to specify which federal securities laws or regulations were violated by the corporation.
Facts and Analysis: On March 1, 2004, at the invitation of the company's CEO, Michael Sonnenfeld, Cynthia Harkness began working as general gounsel to manage the company's s legal department as the company moved from being a private company to a publicly-traded company. Harkness' duties were extended by Sonnenfeld a few months later to include the management of Fieldstone's Quality Control and Human Resources Departments. Harkness subsequently hired Sally LaFond, an attorney that previously worked for the law firm that served as the company's outside securities counsel, to serve as Assistant General Counsel.
In April of 2004, Fieldstone submitted its application to become a publicly-traded company with the Securities and Exchange Commission ("SEC") and adopted an internal Code of Business Conduct that closely followed the rules and regulations to which publicly-traded companies are subject in anticipation of the approval of its application to be a publicly-traded company. The adopted Code of Business Conduct required that Fieldstone create an Audit Committee that would be comprised of independent directors and prohibited Fieldstone employees from disclosing material, non-public information about the corporation to third parties.
In April of 2004, Fieldstone submitted its application to become a publicly-traded company with the Securities and Exchange Commission ("SEC") and adopted an internal Code of Business Conduct that closely followed the rules and regulations to which publicly-traded companies are subject in anticipation of the approval of its application to be a publicly-traded company. The adopted Code of Business Conduct required that Fieldstone create an Audit Committee that would be comprised of independent directors and prohibited Fieldstone employees from disclosing material, non-public information about the corporation to third parties.
Prior to the SEC's approval of the company's application, LaFond informed Harkness that she had received reports that Sonnenfeld disclosed to an outside investor material, non-public information regarding the company's restatement of its earnings and that the informants believed the disclosures would constitute a violation of Regulation FD if the company were a publicly-traded company. Following further discussions with the informants, Harkness informed the Chair of the company's Audit Committee of Sonnenfeld's disclosure and stated that it might constitute a violation of Regulation FD.
In response to Harkness' report, the Chair of the Audit Committee requested that Harkness interview Sonnenfeld and then provide the Audit Committee with her legal opinion regarding the violation of Regulation FD. In the interview, Sonnenfeld confirmed his disclosure to the outside investor and stated that he told the investor that he could not trade based on the information. Prior to Harkness delivering her legal opinion, the Chair of the Audit Committee informed her that it was the opinion of the outside securities counsel that Sonnenfeld's disclosure did not violate Regulation FD because the company was not yet a publicly-traded company and because Sonnenfeld told the outside investor that he could not trade based on the disclosed information and asked Harkness to prepare a report for the Audit Committee regarding whether the company's Code of Business Conduct or Regulation FD had been violated by Sonnenfeld. After asking LaFond to review Regulation FD in preparation for the report, Harkness reported to the Audit Committee that Sonnenfeld's disclosure would likely be deemed a violation of Regulation FD if the company was subject to Regulation FD due to its shares being publicly registered. (Emphasis added.)
In response to Harkness' report, the Chair of the Audit Committee requested that Harkness interview Sonnenfeld and then provide the Audit Committee with her legal opinion regarding the violation of Regulation FD. In the interview, Sonnenfeld confirmed his disclosure to the outside investor and stated that he told the investor that he could not trade based on the information. Prior to Harkness delivering her legal opinion, the Chair of the Audit Committee informed her that it was the opinion of the outside securities counsel that Sonnenfeld's disclosure did not violate Regulation FD because the company was not yet a publicly-traded company and because Sonnenfeld told the outside investor that he could not trade based on the disclosed information and asked Harkness to prepare a report for the Audit Committee regarding whether the company's Code of Business Conduct or Regulation FD had been violated by Sonnenfeld. After asking LaFond to review Regulation FD in preparation for the report, Harkness reported to the Audit Committee that Sonnenfeld's disclosure would likely be deemed a violation of Regulation FD if the company was subject to Regulation FD due to its shares being publicly registered. (Emphasis added.)
Following Harkness' report to the Audit Committee, the relationship between Sonnenfeld and Harkness deteriorated. As evidence of the deterioration, Harkness alleged that Sonnenfeld removed her from leading the Quality Control and Human Resource Departments, markedly changed the tone of his comments in her annual review, prohibited her from attending senior management meetings, and refused to inform her of Fieldstone's significant transactions. In response to her routine exclusion from Fieldstone's important meetings and events, Harkness reported to external auditors, and later to Fieldstone's Audit Committee, that she could not ensure Fieldstone's legal compliance with SEC laws and regulations due to her isolation within the corporation.
Harkness later met with Fieldstone executives to discuss the possibility of her resignation and to negotiate a severance package and then took a planned vacation. Upon Harkness' return, Fieldstone presented her with a termination letter and a proposed severance package that Harkness believed to be insufficient. Prior to leaving Fieldstone, Harkness completed a disclosure questionnaire in which she stated that she believed Fieldstone to have violated Title VII and the Sarbanes-Oxley Act of 2002 (the "Act") by terminating her based on sex discrimination or retaliation.
Harkness later met with Fieldstone executives to discuss the possibility of her resignation and to negotiate a severance package and then took a planned vacation. Upon Harkness' return, Fieldstone presented her with a termination letter and a proposed severance package that Harkness believed to be insufficient. Prior to leaving Fieldstone, Harkness completed a disclosure questionnaire in which she stated that she believed Fieldstone to have violated Title VII and the Sarbanes-Oxley Act of 2002 (the "Act") by terminating her based on sex discrimination or retaliation.
Following her separation from Fieldstone, Harkness filed a complaint against Fieldstone with the Department of Labor, Occupational Safety and Health Administration which alleged retaliation by Fieldstone under the Act. After waiting 180 days for the Secretary of the Department of Labor, Occupational Safety and Health Administration to issue a final decision, Harkness filed suit with the United States District Court for the District of Maryland against C-Bass Diamond, LLC, the named defendant and successor of Fieldstone. C-Bass immediately moved for summary judgment arguing that Harkness failed to establish a prima facie case of retaliation under the Act because she did not engage in protected activity under the Act and can not prove causation.
Noting that the Act does provide protection against retaliation to whistle-blowing employees of publicly-traded companies that report potentially unlawful conduct if the employee is able to establish that "(1) the employee engaged in protected activity; (2) the employer knew, actually or constructively, of the protected activity; (3) the employee suffered an unfavorable personnel action; and (4) the circumstances raise an inference that the protected activity was a contributing factor in the personnel action," the Court first examined Harkness' first report to the Audit Committee to determine whether Harkness' first report represented a protected activity under the Act. Acknowledging precedent, the Court stated that in order for Harkness to establish that her report regarding Sonnenfeld's disclosure was protected activity, she must demonstrate that she had a subjective and objectively reasonable belief that Sonnenfeld's disclosure constituted a violation of Regulation FD.
After reviewing all steps taken by Harkness in connection with the investigation and research of Sonnenfeld's disclosure and its possible violation of Regulation FD, the Court found that Harkness failed to demonstrate that she had an objectively reasonable belief that Sonnenfeld's disclosure constituted a violation of Regulation FD because, prior to talking with the Chair of the Audit Committee, she failed to do any research on whether Regulation FD even applied to Sonnenfeld's disclosure, to request that LaFond, who was experienced in securities laws, do any research, or seek the opinion of the corporation's outside securities counsel with respect to the possible violation of Regulation FD and only requested that LaFond research Regulation FD upon the Chair of the Audit Committee's statement that outside securities counsel did not believe Sonnenfeld's actions to violate Regulation FD. With Harkness having over 20 years of legal experience, the Court found that such routes of investigation and research should have been readily ascertainable when Harkness was deciding the applicability of Regulation FD to Sonnenfeld's disclosure and that because of her failure to utilize the resources that were available to her to determine whether Regulation FD was applicable, she failed to establish that a reasonable person in her position would have believed that Sonnenfeld's disclosure violated Regulation FD.
After reviewing all steps taken by Harkness in connection with the investigation and research of Sonnenfeld's disclosure and its possible violation of Regulation FD, the Court found that Harkness failed to demonstrate that she had an objectively reasonable belief that Sonnenfeld's disclosure constituted a violation of Regulation FD because, prior to talking with the Chair of the Audit Committee, she failed to do any research on whether Regulation FD even applied to Sonnenfeld's disclosure, to request that LaFond, who was experienced in securities laws, do any research, or seek the opinion of the corporation's outside securities counsel with respect to the possible violation of Regulation FD and only requested that LaFond research Regulation FD upon the Chair of the Audit Committee's statement that outside securities counsel did not believe Sonnenfeld's actions to violate Regulation FD. With Harkness having over 20 years of legal experience, the Court found that such routes of investigation and research should have been readily ascertainable when Harkness was deciding the applicability of Regulation FD to Sonnenfeld's disclosure and that because of her failure to utilize the resources that were available to her to determine whether Regulation FD was applicable, she failed to establish that a reasonable person in her position would have believed that Sonnenfeld's disclosure violated Regulation FD.
The Court next went on to determine whether Harkness' second report to the Audit Committee regarding her inability to ensure Fieldstone's compliance with SEC laws and regulations because of her continued exclusion from Fieldstone's important meetings and events was actionable protected activity under the Act. Citing precedent again, the Court found that Harkness' second report to the Audit Committee would need to identify the specific conduct that Harkness believed to be a violation of the law to qualify as protected activity under the Act. Because Harkness failed to specifically allege which SEC laws or regulations she believed Fieldstone to have violated by excluding her from important meetings and events, but only alleged that her exclusion put Fieldstone at an increased risk of legal violations of SEC laws, the Court concluded that Harkness' second report to the Audit Committee did not constitute protected activity. Finding that Harkness failed to meet her burden of establishing that either of her acts were protected activity under the Act, the Court granted C-Bass' motion for summary judgment.
The full opinion is available in PDF. This opinion has not been recommended for publication.
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