2d Circuit affirms dismissal of Sarbanes-Oxley retaliation claim

It's been a while since we've seen a Sarbanes-Oxley case in the Second Circuit. This case was dismissed because the plaintiff was unable to show his whistleblowing was protected under this statute, intended to protect against Wall Street financial abuses.

The case is Katzel v. American International Group, a summary order issued on June 21. 

As head of the Legal Operations Center at AIG, plaintiff suggested the LOC spin-off into its own consulting firm, which would continue working with AIG while contracting with other companies to help them reduce their external legal costs. Plaintiff would be president and CEO of this independent LOC. AIG decided against implementing this proposal. 

In December 2016, plaintiff told the compliance department that AIG's evaluation of his proposed LOC spin-off plan were inadequate, and there might be a potential conflict of interest by a consulting firm involved in evaluating the spin-off plan. While plaintiff told the compliance department that he did not have knowledge of any alleged or suspected fraud, "he still thought it would be worthwhile to 'evaluate the advisability of review and testing on the robustness of conflict of interest protections in the processes followed by certain functions responsible for significant transactions at the company' to ensure the company made decisions that 'maximize shareholder value.'” The compliance department determined that while these were valid concerns about AIG's practices of sharing confidential documents with consulting firms, there was not actual conflict.

Plaintiff was fired a few months later after the compliance department wound up its investigation. The stated reason was that he was unwilling and unable to make changes that Solmssen viewed as necessary at the LOC, including cutting its costs and reducing its headcount.

Plaintiff loses in the district court and on appeal, the Second Circuit holds, because he did not engage in protected activity under Sarbanes-Oxley. Plaintiff had to show he reasonably believed he was reporting a violation of Securities and Exchange Commission rules. "While Katzel proffered facts that suggest he legitimately believed AIG was making a poor business decision in declining to proceed with his proposed LOC spin-off, these facts do not suggest he believed this bad business decision reached the level of illegal conduct." The Court reasons as follows:

The notes from Katzel’s initial conversation with the Compliance Department, as well as two separate certifications he signed in 2016, suggest  that he did not believe the conduct he was reporting violated federal law. During Katzel’s initial conversation with the Compliance Department, he stated that he had “[c]oncerns/questions about whether the process was fair & robust,” that he thought the team reviewing the spin-off proposal did not “let[] facts speak for themselves,” and that he thought a “vigorous process need[ed] to be in place” for potential transactions like the spin-off to ensure AIG got the “right price” and the “right buyers.” Absent from the conversation notes, however, is any suggestion that Katzel thought this failure to conduct a “vigorous process” was fraudulent in any way.

Sarbanes-Oxley (known as SOX) is an important law, but you can see the difficulties in bringing such a case. Unfortunately for plaintiff, his case fails at the outset, as the Court of Appeals (Parker, Perez and Jacobs) finds he cannot make out a prima facie case of whistleblowing retaliation.