The U.S. Supreme Court expanded the reach of a federal law enacted in response to the 2001 Enron Corp. collapse, saying it protects people who work for a public company’s contractors, including law firms and auditors.
The justices, voting 6-3, allowed whistleblower claims by two former employees of a privately held company that provides investment advice and management services to the Fidelity mutual funds.
The case centered on protections that watchdog groups and President Barack Obama’s administration say are important to prevent another Enron-like catastrophe. The disputed provision is part of the 2002 Sarbanes-Oxley Act.
“Congress installed whistleblower protection in the Sarbanes-Oxley Act as one means to ward off another Enron debacle,” Justice Ruth Bader Ginsburg said in her opinion for the court. “Congress was as focused on the role of Enron’s outside contractors in facilitating the fraud as it was on the actions of Enron’s own officers.”
Enron, once the world’s largest energy trader, collapsed after using off-books partnerships to hide billions of dollars in losses and debt. The fraud also brought down Arthur Andersen, Enron’s auditing firm.
The 2002 law bars publicly traded companies and their contractors and subcontractors from discriminating against an “employee” who reports fraud or a violation of securities regulations. The central question was whether that provision allows retaliation lawsuits only by the employees of the public company, or by those of its contractors as well.
The case was significant for the mutual fund industry. While the funds themselves are publicly traded, they typically have few if any employees, instead using privately held companies to conduct day-to-day activities.
Ginsburg said the court’s interpretation of the law “avoids insulating the entire mutual fund industry” from the whistleblower provision.
Justices Sonia Sotomayor, Anthony Kennedy and Samuel Alito dissented.
The suing employees, Jackie Hosang Lawson and Jonathan M. Zang, worked for units of privately held FMR LLC. The units provide investment advice and management services to publicly traded Fidelity mutual funds.
The workers say they lost their jobs after reporting fraud. Lawson complained that expenses were being inflated and, ultimately, passed on to fund shareholders. Zang contended that a Fidelity statement filed with the Securities and Exchange Commission misrepresented how portfolio managers were compensated.
FMR denies the allegations and says both employees had performance problems. Zang was fired in 2005 and Lawson resigned in 2007.
The case is Lawson v. FMR LLC, 12-3.