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From Securities Regulation Daily, October 29, 2014

Court split saves one whistleblower claim, time’s up for another

By Mark S. Nelson, J.D.

A would-be whistleblower who alleged constructive discharge after disputing her boss’s characterization of a potential violation of the Financial Industry Regulatory Authority’s (FINRA’s) rules has won a split decision on her federal whistleblower claims. The plaintiff’s Dodd-Frank Act claims survived a motion to dismiss owing to tensions among federal courts over how to apply the law, but related Sarbanes-Oxley Act (SOX) claims had to be dropped on limitations grounds. The court reached mixed results on a variety of allied claims (Connolly v. Remkes, et al., October 28, 2014, Koh, L.).

File with checks. Karen Connolly relocated to California in July 2012 to take a job with WHJR Associates (WHJR), a sole proprietorship owned by Wolfgang Remkes that is involved in the securities industry, and which had business ties to another firm, Royal Alliance Associates, Inc. (Royal). Remkes hired Connolly to work 36-40 hours per week (the lower end of the range was to be most likely) at $44,000 annually with regular business hours set for 10 a.m. and 7 p.m., with a one-hour lunch break.

Just six months later, Connolly would resign and then sue Remkes, WHJR, and multiple, unnamed defendants for constructive discharge after she disputed Remke’s alleged characterization of what she believed was a violation of FINRA Rule 3240’s ban on broker payments into client accounts.

In mid-December 2012, while reviewing another financial advisor’s work, Connolly said she saw checks inside a file used by the advisor. Remkes initially told Connolly there was no problem with the file, but to call Royal’s compliance officer, who told Connolly it was a violation. The ensuing explanations for the checks in the file varied: Remkes told Connolly she should have pitched the issue to Royal as a hypothetical; the advisor under review told Remkes the file was part of a “charitable donation”; Remkes told Connolly to copy the file just for him and to send the original back to the advisor because the matter was over.

A few days later, Remkes allegedly told Connolly to reply to a Royal email inquiry about the matter by saying the file and checks did not exist; Remkes also said he would “shred his file.” The next day, Connolly resigned and left voice mail with Royal saying the file did contain checks. That same day, she spoke by phone with a person at Royal whom she asked to protect her licenses and to help her to stay at Royal. The pleadings did not say if Connolly remained at Royal.

Split authorities, split decision. Connolly’s law suit said she was a whistleblower under both the Dodd-Frank Act and SOX. But lawyers for Remkes and the other defendants asked the court to dismiss both sets of claims because Connolly never reported directly to the SEC (as required by the Dodd-Frank Act), nor did she engage in protected activity under SOX. Remkes also urged the court to find that Connolly’s SOX claims were filed too late or that WHJR was not a public company.

As for the Dodd-Frank Act claim, the court noted the split of authority among federal courts, with the Fifth Circuit’s Asadi opinion being the only appellate case to deal with the reporting requirement. There, the court said the Dodd-Frank Act’s plain meaning required a whistleblower to report to the SEC.

But Asadi is still the minority view (one of the three district courts to agree with Asadi is in the Northern District of California), while many other district courts have taken a lenient view of the Dodd-Frank Act and the SEC’s related rule in light of textual ambiguities between the reporting requirement and other provisions that imply alternative ways to become a Dodd-Frank Act whistleblower. The SEC defended the lenient view earlier this year in its amicus brief in a Second Circuit case.

The court here sided with the majority of courts that have found the SEC’s interpretation of the Dodd-Frank Act to be reasonable under Chevron analysis. As a result, the court let Connolly’s Dodd-Frank Act claims continue.

But Connolly fared less well in arguing that her SOX whistleblower claims should continue. Here, Remkes and the other defendants made three arguments, but the court focused exclusively on the limitations one, which said that Connolly failed to file a complaint with the Labor Department within 180 days of her resignation.

In dismissing Connolly’s SOX claims, the court also rejected her lawyer’s theories about the optional nature of the exhaustion of administrative remedies requirement and a related theory that the limitations period had not started (or may never start) to run because of the lack of a discriminatory decision. But the court said Connolly might jumpstart her SOX claims if she can successfully plead facts that justify equitable tolling in a future amended complaint.

The case is No. 5:14-CV-01344-LHK.

Attorneys: Peter B. O'Brien (Peter B. O'Brien Law Offices) for Karen Connolly. Alice Emily Choy (White & Woods LLP) for Wolfgang Remkes and WHJR Associates.

Companies: WHJR Associates; Royal Alliance Associates, Inc.; Financial Industry Regulatory Authority

MainStory: TopStory CaliforniaNews BrokerDealers DoddFrankAct SarbanesOxleyAct

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