On May 28, 2015, the Sixth Circuit in Rhinehimer v. U.S. Bancorp Investments, Inc. affirmed a $250,000 jury verdict in favor of a former financial advisor for U.S. Bancorp Investments (“USBII”) who alleged that he had been terminated in violation of the Sarbanes-Oxley Act (“SOX”) whistleblower provisions. In doing so, the Sixth Circuit rejected the “definitively and specifically” standard for proving protected activity under SOX and abrogated its prior SOX decision in Riddle v. First Tennessee Bank Nat’l Assoc., 497 F. App’x 588 (6th Cir. 2012) to the extent it relied upon the standard.
Michael Rhinehimer, a certified financial planner and former financial advisor for USBII, alleged that a co-worker had made trades on behalf of one of his elderly clients that were unsuitable while Rhinehimer was on a disability leave. Rhinehimer asserted that, when he complained to a superior about the unsuitable trades, management threatened the loss of his job, placed him on an aggressive performance improvement plan, and terminated him when he failed to meet the plan’s goals.
Rhinehimer sued under SOX, and a jury awarded Rhinehimer $250,000 in economic loss and emotional distress damages. USBII appealed, arguing that Rhinehimer failed to prove that he had engaged in protected activity as a matter of law.
The Sixth Circuit analyzed whether Rhinehimer demonstrated a reasonable belief that his co-worker engaged in unsuitability fraud and held that the evidence submitted in the case was “more than sufficient” to sustain the judgment. According to the court, the evidence demonstrated that Rhinehimer (1) knew the structure of the client’s long-held estate plans; and (2) learned of trades that a reasonable investment professional would recognize as inconsistent with those plans. Rhinehimer was also aware of the client’s diminished faculties due to his age and was familiar with his co-worker’s incentives to place the trades. Viewing the evidence in the light most favorable to Rhinehimer, the court also assumed that the co-worker placed the trades after Rhinehimer warned him of the client’s diminished capacity and asked the co-worker not to make any trades for him.
The court recognized that Rhinehimer had no specific knowledge of whether his co-worker omitted or misrepresented material information from the client, or that he did so intentionally or with reckless disregard, but these facts did not change the court’s conclusion. Rather, the court stated that SOX “protects employees who reasonably but mistakenly believe that the conduct at issue constitutes a violation of relevant law.” The court did not require Rhinehimer to establish a reasonable belief of each element of a fraud to establish a reasonable belief that his co-worker committed unsuitability fraud.
The Sixth Circuit’s holding in Rhinehimer is just the latest in a string of circuit court decisions since 2011 (including the Second, Third, and Tenth Circuits) to reject the “definitively and specifically” standard. In light of these cases, employers should operate under the assumption that employee complaints may be protected under SOX even if they do not “definitively and specifically” relate to one of the six enumerated violations under SOX (i.e., mail fraud, wire fraud, bank fraud, securities fraud, violation of rule or regulation of the SEC, or violation of federal law relating to fraud against shareholders). In addition, although a $250,000 jury verdict may not seem very high, prevailing plaintiffs are also entitled to attorneys’ fees under SOX, so Rhineminer’s actual recovery could be significantly higher.