Court ruling lays mutual funds open to whistle-blowers

District judge rejects Fidelity's argument, says fund company employees are covered by Sarbanes-Oxley; ruling ‘will increase transparency'

Apr 1, 2010 @ 4:15 pm

By Jessica Toonkel Marquez

A Boston court's ruling earlier this week may well expose fund companies to a slew of whistle-blower complaints.

On Tuesday, U.S. District Judge Douglas Woodlock ruled that employees at fund companies are protected under whistle-blower laws just as employees of all publicly traded companies are covered under the provision of the Sarbanes-Oxley Act. Historically, fund companies have argued that they were exempt from the law because the funds themselves don't have employees outside of the boards of directors.

According to the case, plaintiff Jackie Hosang Lawson — a former senior director at Fidelity Brokerage Services — claimed she was passed over for a promotion and threatened with punishment for alerting supervisors to concerns she had about the firm. Those concerns included the alleged improper retention of $10 million of fees,

A second plaintiff, Jonathan Zang, a former portfolio manager with Fidelity Investments, claimed he received poor reviews and was fired in retaliation for claiming that the firm's new compensation program for portfolio managers illegally described how pay was calculated.

Fidelity's attorneys argued that since Ms. Lawson and Mr. Zang technically worked for affiliates, such as the firm's Fidelity Management and Research arm, they were not covered by Sarbanes Oxley.

But in his decision, the judge rejected Fidelity's attempt to dismiss the case, stating the fund firm's interpretation “would result in an excessively forced and formulistic reading” of the law.

And while the case hasn't yet been decided, experts say the court's opinion exposes all mutual fund companies to more whistle-blower complaints.

“In light of the collapse of various financial institutions in the past few years, more employees in this industry understand the importance of speaking out when they become aware of fraudulent practices because the consequences for the economy can be quite severe,” said Jason Zuckerman, a principal at The Employment Law Group. For advisers and their clients, this is a good thing, Mr. Zuckerman said. “This will increase transparency and the likelihood that disclosures made by the firms are accurate.”

Mutual fund companies need to make sure they have the processes in place to enable whistle-blowers to have their voices heard, said Roy Snell, chief executive of the Society of Corporate Compliance and Ethics, a Minneapolis-based association that represents more than 1,300 corporate-compliance professionals “Too often financial services companies only have the compliance programs that they are required to have,” he said.

Fidelity does have extensive legal and regulatory compliance programs and offers employees a number of channels to report issues, Vin Loporchio, a spokesman for the company, said. “It is important to note that there has been no determination of the merits of these claims,” he said. “Further, we stated we believe these former employees' claims are without merit and we intend to defend against them vigorously.”

While the court's ruling may open the way for mutual fund employees to blow the whistle on their bosses, it's no certainty they will. “I represent a lot of corporate whistle-blowers,” Mr. Zuckerman said. “And I don't know anyone who is eager to be a plaintiff in a lawsuit.”


What do you think?

View comments

Recommended for you

Featured video

Consuelo Mack WealthTrack

Robert Kleinschmidt: How the markets have changed in the age of Trump

When Donald J. Trump was elected president, it changed investors' outlook and generated new market momentum, according to Robert Kleinschmidt, president and CEO of Tocqueville Asset Management. But can the market continue to go up?

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale.

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print