The Employment Law Group, PC Wins Whistleblower Client’s SOX Case And Holds Privately-Held Company Liable Under Sarbanes-Oxley’s Whistleblower Provisions.

In Kalkunte v. DVI Financial Services, Inc., DOL ALJ, No. 2004-SOX-0056, 7/18/05, an Administrative Law Judge (“ALJ”) with the United States Department of Labor (“DOL”) held that a privately-held company acting as a contractor, subcontractor, or agent of a publicly-traded company may be held liable for violating the whistleblower provisions of the Sarbanes-Oxley Act (“SOX” or “Act”).

In Kalkunte, the Employment Law Group, PC’s client, Sheila Kalkunte, was hired by the respondent, DVI Financial Services, Inc. (“DVI”), on a contract basis in June 2001 to serve as an attorney in its legal department.  After nineteen months of working for DVI on a contract basis, Kalkunte was offered a full-time, in-house position as Associate General Counsel, which she accepted.  Approximately six months later, in May 2003, Kalkunte’s title changed to Assistant General Counsel, although her salary remained the same.  During the summer of 2003, Kalkunte learned of alleged financial improprieties at DVI  from various co-workers.

In early August 2003, DVI’s Board of Directors hired AP Services, LLC (“AP”), to serve as “bankruptcy specialists” and “turn around consultants” in order to assist DVI with the financial distress it was experiencing.   Mark Toney, of AP, served as a restructuring advisor for DVI and assisted DVI with its bankruptcy.  Toney brought a team of several other AP principals and associates to assist him.  In addition to retaining AP, DVI retained outside legal counsel prior to and during the bankruptcy.

In early to mid-August 2003, Kalkunte sought independent legal advice regarding her ethical obligations under the Sarbanes-Oxley Act with respect to the allegations of financial impropriety that she had learned.   Legal counsel recommended that she report the improprieties to the company.  Shortly thereafter, Kalkunte drafted and transmitted a memorandum to DVI’s Board of Directors regarding the financial improprieties and also telephoned two members of the Board of Directors to discuss with them the improprieties described in her memorandum.  The Board members told Kalkunte that they would hire independent counsel immediately.  The law firm of Arnold & Porter was hired to investigate the allegations.  Mr. Toney was told that he should facilitate a meeting between Arnold & Porter and Ms. Kalkunte.  On August 22, 2003, Arnold & Porter met with Kalkunte at DVI’s offices to discuss the allegations she reported to the Board.  Three days later, DVI filed for bankruptcy and Toney became DVI’s new CEO.

On August 27, 2003, there was a significant reduction in force (“RIF”) at DVI.  Over ninety employees were notified that their positions were being eliminated.  Kalkunte, however, was not laid-off.  Around this time, however, Kalkunte made several inquiries as to the status of the Arnold & Porter investigation, including an e-mail inquiry on September 10, 2003.  A few days later, Kalkunte met with Toney and Christine Clay, another AP principal, who had become the Chief Administrative Officer of DVI.  During this meeting, the status of the Arnold & Porter investigation was raised.  Toney testified that he had advised Kalkunte that the bankruptcy court had not yet approved the retention of Arnold & Porter.

On September 18, 2003, Kalkunte’s employment was terminated.   The purported reason for terminating her employment was that her position was no longer necessary; it had “nothing to do with performance” but was “part of the continuing risk” as a result of the bankruptcy.

After her employment was terminated, Kalkunte filed a claim under the Corporate and Criminal Fraud Accountability Act, Section 806 of SOX, 18 U.S.C. § 1514A.  The Employment Law Group, PC argued that Kalkunte suffered retaliation for engaging in activity protected by the Act and that her employer, DVI, a publicly traded subsidiary, as well as AP, a non-publicly traded company, were responsible for the retaliatory conduct.  After a hearing on the merits of her case, AP filed a motion for dismissal on the ground that the DOL lacked subject matter jurisdiction over AP.  It claimed that it could not be liable under SOX because it was a privately-held company that had never employed Kalkunte and because the Act’s plain language extends jurisdiction only to companies that either (1) had securities registered under section 12 of the Securities and Exchange Act of 1934 or (2) were required to file reports under section 15(d) of the same act.  The ALJ denied AP’s motion.  In doing so, he emphasized that the Act’s whistleblower provisions state that:

No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 . . . or that is required to file reports under section 15(d) of [that Act], or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote suspend, threaten, harass, or in any other manor discriminate against an employee because the employee provides information regarding a violation of any SEC rule or regulation or any federal law relating to fraud against shareholders.

(emphasis added). 

The ALJ found that “the clear and unambiguous text of the statute prescribes that SOX obligations extend beyond just those companies with registered securities.”  Thus, the ALJ found that employees of non-publicly traded companies is protected by SOX’s whistleblower provisions, and thus he kept AP in the case.

In his determination in favor of Kalkunte and against AP and DVI, the ALJ found that the privately-held AP was, by virtue of its contract with DVI, a “contractor, subcontractor, or agent” of DVI.  DVI entered into a contract with AP in which AP agreed to provide employees to DVI to assist with its bankruptcy and financial crisis.  These employees controlled the flow of work for DVI employees.  Moreover, AP’s employees, including Toney, who became DVI’s temporary President and CEO, made decisions that affected Kalkunte’s access to employment opportunities.  Based on these and other facts concerning the nature of the relationship between DVI and AP, the ALJ concluded that AP was a “joint employer” with DVI.  A “joint employer” for SOX purposes is “a company that is unrelated to the employer-in-fact but which exercises sufficient day-to-day control over a [complainant’s] work to be treated as a co-employer of the [complainant].”  The ALJ concluded that, as a “joint employer,” AP was an agent under the Act and, thus, it could be held liable under SOX’s whistleblower provision for retaliation against Kalkunte.

The ALJ noted that other arguments further supported his conclusion about AP.  First, DOL regulations under SOX define “employee” as “an individual presently or formerly working for a company or company representative, or an individual whose employment could be affected by a company or company representative.”  “A company representative” is defined as “any officer, employee, contractor, subcontractor, or agent of a company.”  As explained above, the ALJ found that AP was DVI’s contractor, subcontractor or agent.  Thus, AP satisfied the definition of “a company representative” and Kalkunte could be considered an employee of AP.  Second, the ALJ also found that Kalkunte may be viewed as a third party beneficiary to the agreement between DVI and AP in the event that liability is assessed and, thus, Kalkunte could be protected from retaliatory conduct by AP.

The ALJ also found that Mr. Toney’s remarks, tone and demeanor at the September 12, 2003, meeting with Kalkunte constituted direct evidence of retaliation.  The ALJ also found that Kalkunte set forth circumstantial evidence of retaliation.  According to the ALJ, Kalkunte reasonably believed that the allegations she brought forward to the respondents constituted a violation of the Act and the respondents were put on notice of her protected activity several times.  In addition, the record demonstrated, and DVI stipulated, that Kalkunte suffered an adverse employment action when her employment was terminated by DVI.  Finally, the ALJ found that “the short span of time between [Kalkunte’s] protected activities in August and September 2003, and her termination on September 18, 2003, is circumstantial proof of [a] nexus” between her whistleblowing and her termination.  Based on this evidence, the ALJ found that Kalkunte proved by a preponderance of the evidence that: (1) she engaged in protected activity; (2) her employer knew of the protected activity; (3) she suffered an unfavorable personnel action; and (4) circumstances exist to suggest that the protected activity was a contributing factor to the unfavorable action.   

In finding that AP and DVI engaged in retaliation against Kalkunte in violation of SOX, the ALJ recommended that the respondents pay Kalkunte back pay, interest on back pay, front pay, compensatory damages, and all costs and expenses, including the Employment Law Group, PC’s attorneys’ fees and costs.

In Kalkunte the Employment Law Group, PC made important law protecting whistleblowers.  The Kalkunte decision sends a clear message to privately-held companies working with publicly-traded companies as contractors, subcontractors or agents that they may face potential liability under the SOX whistleblower protections.  Accordingly, such private companies should weigh carefully the risks associated with taking any adverse employment actions against whistleblowing employees of public companies.