The ousted founder and former CEO of Orion Energy Systems, Inc., cannot prevail in his federal whistleblowing claim against the company because his complaints to the board did not amount to whistleblowing under the Sarbanes-Oxley Act, the Seventh Circuit recently ruled in considering his appeal.
Neal V. founded Orion in 1996 and took the company public in 2007. His tenure became bumpy in 2012 when Neal asked Orion’s board to help cover the costs of his divorce.
Soon after, Neal and the board began to clash over multiple managerial and other issues, with Neal objecting to everything from excessive legal bills to unauthorized alcohol consumption by the board. The board refused his request to disclose these matters to shareholders, and Neal failed to report them in Orion’s quarterly and annual statements filed with the SEC.
As the conflict between Neal and the board over the running of the company escalated, the board discovered that about one-third of the $170,000 it had reimbursed him for his divorce expenses was unaccounted for. Neal blamed this on a fee dispute with his divorce attorney.
Consequently, the board removed Neal as CEO in September 2012 and renamed him “chairman emeritus.” Among the reasons it cited was high senior management turnover which it attributed to Neal’s “intimidating leadership style.”
Unhappy with his demotion, Neal announced his resignation, which triggered new disagreements over his severance package. Shortly before a board meeting convened to discuss Neal’s termination, he sent an email to the board reiterating his managerial complaints against them and accusing them of conspiring against him. Although he later characterized this email as a “complaint” pursuant to Orion’s whistleblower policy as well as Sarbanes-Oxley, it did not reference any official complaint filed with the SEC or other government entity, nor did it provide the board with new information or do anything except “simply rehash the numerous personal and professional grievances about which he had been complaining over the course of the past year,” in the words of the court.
Orion’s board then terminated Neal for, among other things, misappropriation of company funds, disparaging the new CEO and attempting to form a dissident shareholders group. In 2014, Neal sued the company for whistleblower protection violations under the Sarbanes-Oxley and Dodd-Frank acts, in addition to state-law tort and contract claims.
The district court dismissed or rejected all the claims, including the two federal claims which Neal appealed to the Seventh Circuit.
To succeed on a Sarbanes‐Oxley claim, a plaintiff must prove he engaged in protected whistleblowing and his employer retaliated against him for it. While Sarbanes-Oxley defines a whistleblower as someone who provides information to any federal regulatory or law enforcement agency or to his supervisor, the Dodd‐Frank Act defines it more narrowly, as an “individual who provides … information relating to a violation of the securities laws to [SEC].”
In rejecting Neal’s “meritless” case, the Seventh Circuit panel found that Sarbanes-Oxley did not protect his conduct because the company activities about which he complained did not meet the definition of “fraud” under the statute.
“An executive who advises board members to disclose a fact that the board already knows about has not ‘provide[d] information’ about fraud,” Judge Diane Wood wrote for the panel. “At most, he has provided an opinion. Nothing in Sarbanes‐Oxley … prevents a company from firing its executives over differences of opinion.
“The securities laws do not require companies to notify shareholders about every managerial hiccup or internal policy disagreement.”
The court noted no record of any complaint received by SEC from Neal, and in any event, it would only be relevant if Orion knew of it and terminated him as a result. Moreover, the court concluded, if the challenged conduct amounted to securities fraud then Neal participated in the fraud by failing to disclose it to shareholders in his SEC filings as CEO.
“Adopting [Neal’s] interpretation of Sarbanes‐Oxley would mean that any otherwise‐at‐will employee who gives his boss advice about a security disclosure is a ‘whistleblower’ entitled to the vast protections of federal law,” the court concluded.
The consumer and tax payer rights law firm of Lubin Austermuehle represents whistleblowers who are pursuing qui tam lawsuits at any level of government or for violations of the securities laws and IRS code, including claims under the Illinois Whistleblower Act, the Chicago whistleblower ordinance, the Dodd-Frank Act and the federal False Claims Act. Based in Chicago and Oak Brook, Ill., our Evanston and Naperville area qui tam and False Claims Act lawyers stand ready to represent whistleblowers throughout the United States — regardless of whether prosecutors have decided to join the lawsuit. If you know about fraud against a government agency and you’re ready to speak up, you can learn more about whistleblower lawsuits at a free, confidential consultation. To set one up, please contact Lubin Austermuehle online or call 630-333-0333 today.
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