New York Court of Appeals: Compliance Officer’s Whistle Blowing Not Protected

by Mike Mintz on June 5, 2012 · 0 comments

in Ethics,Labor and Employment Law,Litigation

Recently, the Court of Appeals issued a controversial decision in which it held that an at-will employee cannot sustain a claim for wrongful termination.  The Court based its decision on the controlling case Murphy v. American Home Products Corp., 58 N.Y.2d 293 (1983) which held that absent a violation of a constitutional requirement, statute or contract, an employer is free to terminate the employment of an at-will employee.

The case, Sullivan v. Harnisch, Slip Op. 03574 ( May 8, 2012) arose out of the termination of a hedge fund officer after he confronted his boss about a series of improper trades.  The Court of Appeals had previously recognized an exception to the at-will doctrine in Wieder v. Skala, 80 N.Y. 2d 628 (1992) which involved an attorney who was fired after reporting the unethical conduct of another lawyer at the firm.

The plaintiff’s claim in Wieder was sustained by the court because of the ethical obligations imposed upon members of the bar and the importance of those obligations to the employment relationship between an attorney and a law firm.  The Wieder Court also took note of “the unique function of self-regulation belonging to the legal profession.”

The Sullivan Court then distinguished the instant case from Wieder, opining that the relationship between a compliance officer and his employer would not fall within the exception enunciated in Wieder because, unlike attorneys, the compliance officer’s obligations from an ethical and regulatory standpoint and his duties as an employee were not so intertwined that they could not be separated.

If Congress had wanted to regulate this relationship, it could have done so. Indeed after the facts giving rise to the Sullivan case transpired, Congress passed the Dodd-Frank Act which does provide whistle blower protection, including a private right of action, but it only applies to employees who are fired for providing information about securities law violations to the SEC. In other words, the facts giving rise to Sullivan’s complaint would not be covered by Dodd Frank because he never went to the SEC with his information.  He merely went to his employer.

The Chief Judge, Jonathan Lippman, dissented.  He noted that according to the majority decision, a company can fire its compliance officer for doing his job.  He raised the specter of the Bernard Madoff scandal and noted that it not only contradicts the spirit of Wieder but it would make the perpetration of fraud upon the public that much easier.

In the wake of the devastation caused by fraudulent financial schemes—such as the Madoff ponzi operation…the courts can ill afford to turn a blind eye to the potential for abuses that may be committed by unscrupulous financial service companies in violation of the public trust and law.

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