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Court Extends SOX Whistleblower Protections to Fund Advisers' Employees

In March, a ruling by U.S. District Judge Douglas Woodlock in the U.S. District Court for the District of Massachusetts applied to mutual fund companies the provisions of the Sarbanes-Oxley Act protecting whistle-blowers. The ruling covers two cases filed by former Fidelity Management and Research (FMR) employees alleging retaliation FMR. The cases, Jackie Hosang Lawson vs. FMR LLC, FMR Corp and Fidelity Brokerage Services and Jonathan Zang vs. Fidelity Management & Research Co, FMR Co and FMR LLC were combined in U.S. District Court for the District of Massachusetts as case No. 08-10759. Fidelity filed a motion to dismiss the cases, arguing that Sarbanes-Oxley does not apply to FMR because FMR is not a public company but a privately held company. Judge Woodlock's ruling rejects Fidelity's argument. The ruling does not deal with the substance of the retaliation claims, but merely rules that Section 806 of the Sarbanes-Oxley Act, the provisions prohibiting whistleblowers from retaliation by their employees, encompasses not only employees of public companies but also employees of private companies, particularly those that act as investment advisers to public investment companies. According to the legislative history of the Sarbanes-Oxley Act, its purpose was “to prevent and punish corporate fraud, protect the victims of such fraud, preserve evidence of such fraud and crime, and hold wrongdoers accountable for their actions.” The legislative history clearly indicates that "Congress was concerned with failures to report instances of fraud against shareholders, failures not only on the part of public company employees, but also employees of those institutions working with the public company." Consequently, the judge ruled that "protecting employees of a public company’s related entities would not result in an overly broad application of the statute that would be counter to the statute’s purpose." Judge Woodlock then applied his reasoning to mutual funds, noting the special relationship between mutual funds and their advisers.

For the goals of [Sarbanes-Oxley] to be met, contractors and subcontractors, when performing tasks essential to insuring that no fraud is committed against shareholders, must not be permitted to retaliate against whistleblowers. These concerns are especially strong for mutual funds, which have no employees and implement the funds’ management through contractual arrangements with investment advisers. If Section 806 [whistleblower protections] only protected employees of public companies, then any reporting of fraud involving a mutual fund’s shareholders would go unprotected, for the very simple reason that no “employee” exists for this particular type of public company.

This case applies the full whistleblower protections of the Sarbanes-Oxley act to employees of mutual fund advisers, whether the adviser be public or privately held companies. Fidelity stated that the company plans to appeal this decision. The full text of Judge Lawson's Memorandum and Order is available at: