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Does Sarbanes-Oxley protected conduct require a showing of materiality?

Recent DOL and federal court precedent declines to require SOX whistleblowers to prove they disclosed actual securities fraud. Consistent with this trend, the U.S. District Court for the District of Maryland held in late 2015 that there is no independent materiality element to establish protected whistleblowing under Section 806 of SOX. Donaldson v. Severn Sav. Bank, F.S.B., No. JKB-15-901, 2015 WL 7294362, at *3 (D. Md. Nov. 18, 2015).

Vanessa L. Donaldson brought a SOX whistleblower action against her former employer, Severn Savings Bank (“Severn”), claiming she was unlawfully terminated after she reported to her supervisor her suspicions about an inaccurate bank report. In particular, Donaldson alleged that she informed her supervisor that the commercial/retail manager for Donaldson’s branch falsified the retail production report for the third quarter of 2013 in a scheme to collect unearned bonus pay.

Severn argued that Donaldson failed to allege she engaged in protected activity because she failed “to allege any facts whatsoever that would indicate any material misrepresentations (or omissions) were reported to Severn’s shareholders,” and so she lacked an objectively reasonable belief that she was disclosing shareholder fraud. Id. at *2. The court rejected Severn’s narrow construction of SOX:

[T]he federal criminal fraud statutes . . . prohibit the scheme to defraud, not a completed fraud. . . .

Materiality of falsehood . . . was a common-law element of actionable fraud at the time these fraud statutes were enacted and is an incorporated element of the mail fraud, wire fraud, and bank fraud statutes. . . . But § 1514A carries no independent materiality element. Consequently, Donaldson’s objective belief need not be about a material matter, as Severn has argued. Rather, her objective belief must be based on facts permitting an inference that [the manager’s] allegedly false representation was material to Severn’s course of conduct.

Id. at *3 (citations omitted). The court found that Donaldson met this standard because the manager’s alleged inflation of the retail production figures was intended to, and likely would, affect how large of a bonus Severn would award him. Therefore, the court concluded, “it may be inferred from Donaldson’s complaint that she had an objectively reasonable belief that [the manager was] engaged in a scheme to defraud Severn.” Id.

Donaldson is consistent with the ARB’s holding in Sylvester that a SOX complainant need not allege shareholder fraud to receive SOX’s protection. See Sylvester, ARB Case No. 07-123, at 20.

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Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.