We know that Sarbanes-Oxley offers
protections to employees at public companies, but does it also protect
employees at mutual fund companies?
Yes. At least according to Judge
Woodcock of the Massachusetts U.S. District Court.
The decision is for two cases that
were combined because of the common defendant. According to the decision,
Jackie Hosang Lawson worked at Fidelity for more than a decade, before she
questioned (1) an expense for "Guidance Interactions", (2) the improper
retention of 12b-1 fees, (3) the methodology that affected fund profitability
models, (4) issues with a new source system, (5) allocations of internet
expenses, and (6) errors in a back office group. She claims to have received
poor job performance ratings, missed a promotion and other bad acts as a result
of her raising the issues. She filed four separate whistleblower complaints
with OSHA that ended up as this federal district court case.
Jonathan M. Zang started at Fidelity
in 1997 as an equity research analyst and eventually became a portfolio
manager. Zang objected to what he saw as inaccurate disclosure of portfolio
manager compensation in an SEC filing for one of his funds. Zang contended that
Fidelity retaliated by giving him poor performance ratings and ultimately fired
The Mutual Funds
The Fidelity mutual funds are
publicly traded, but do not have any employees. The mutual funds hired FMR LLC
and other Fidelity affiliates to act as advisers to the funds and those
advisers have the employees. (This is the typical arrangement for mutual
The fund company took the position
that Lawson and Zang were employees of a private company (FMR is private) and
are not covered by the SOX whistleblower protection. Lawson and Zang argue that
SOX protections are not only for employees of public companies but also for
employees of private companies, particularly those that act as investment
advisers to public investment companies.
The statutory provision in question
[18 U.S.C. §1514A(a)]provides:
No company with a class of
securities registered under section 12 of the Securities Exchange Act of 1934 ...
or any officer, employee, contractor, subcontractor, or agent of such
company, may discharge, demote, suspend, threaten, harass, or in any other
manner discriminate against an employee in the terms and conditions of
employment because of any lawful act done by the employee ....
If Zang or Lawson were direct
employees of the mutual fund there is little question that they would be
Judge Woodlock looked at the broader
provision of Sarbanes-Oxley and found that the intent was to address the
problems of shareholder fraud in the public markets. The judge feels that
the protections applies to employees of "any related entity of a public
The Lawson and Zang are either
contractors, subcontractors, or agents of publicly held investment companies.
"If the Funds did not
have investment advisers as their agents, the only activity that could take
place on the Funds' behalf would be actions taken by the Board of Trustees."
Judge Woodlock did not rule on the
substance of the plaintiffs' claims. He did side with Fidelity and dismissed
wrongful discharge claims under state law.
I expect we will hear more about
this case on appeal.
For additional commentary on developments
in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.