District Court Requires SOX Plaintiff To Assert Shareholder Fraud, Consistent with Statute's Purpose

The U.S. District Court for the District of North Carolina recently dismissed a plaintiff's Sarbanes-Oxley whistleblower complaint on the ground that the plaintiff had not alleged shareholder fraud. Gauthier v. Shaw Group, Inc., No. 12-cv-00274, 2012 WL 6043012 (W.D.N.C. Dec. 4, 2012). This decision is significant because it followed the Fourth Circuit's seminal decision in Livingston v. Wyeth, Inc., 520 F.3d 344 (4th Cir. 2008), notwithstanding the contrary Obama administration Administrative Review Board (ARB) decisions in Brown v. Lockheed Martin Corp., ARB Case No. 10-050 (Feb. 28, 2011) and Sylvester v. Parexel Int'l LLC, ARB Case No. 07-123 (May 25, 2011). It is also an important decision because its interpretation of the statute is one that is consistent with the overall purpose of Sarbanes-Oxley, i.e., the protection of the investing public.

Background

Gauthier was part of a team performing an audit of a nuclear steel supplier, and discovered that the supplier had shipped defective steel to two nuclear reactor sites and two fuel fabrication facilities. Gauthier informed several directors and managers of the defective shipment and related safety concerns. On their face, none of these complaints had anything to do with shareholder fraud. His supervisor directed him to inform personnel at two nuclear facilities that they had received nonconforming steel and to forward part of his report on the matter to one of the fuel fabrication facilities.

Gauthier alleged that the Shaw Group tried to cover up the audit report by changing the report's conclusions and that the Shaw Group management harassed him and excluded him from meetings as soon as he reported his concerns. Gauthier was terminated almost immediately after the Shaw Group's management learned that he had sent the audit information to the fuel fabrication facility.

The Court's Ruling

In analyzing Gauthier's SOX retaliation claim, the court considered whether Gauthier had engaged in protected activity. According to the court, a plaintiff must show that he had both a subjective belief and an objectively reasonable belief that the conduct he complained of constituted a violation of relevant law. The relevant laws listed in Section 1415A relate to mail fraud, wire fraud, bank fraud, securities fraud, violations of SEC regulations and fraud on shareholders. Gauthier argued that a complaint regarding any of these laws constitutes...