Top Judge Furious at Silencing Whistle-Blowers, Unless It's About Court Corruption

At-Will Doctrine Denies Protection for Compliance Head
The New York Law Journal by John Caher  -  May 9, 2012

ALBANY, NY - A hedge fund compliance officer who was fired shortly after confronting his boss about allegedly improper trades is an at-will employee with no common law protection against wrongful termination, a fractured Court of Appeals held yesterday.  In a 5-2 decision, the court declined to extend to compliance officers an exception to the at-will doctrine that it previously recognized in a case—Wieder v. Skala, 80 NY2d 628 (1992)—involving an attorney who was fired after reporting the unethical conduct of another associate at their firm.  "Assuming that there are some employment relationships, other than those between a lawyer and a law firm, that might fall within the Wieder exception, the relationship in this case is not one of them," Judge Robert Smith wrote for the majority in Sullivan v. Harnisch, 82.  Unlike the plaintiff in Wieder, the compliance officer's "regulatory and ethical obligations and his duties as an employee" were not so intertwined "as to be incapable of separation," Smith said, quoting from Wieder.  Chief Judge Jonathan Lippman responded with a blistering dissent.  He said the majority decision that the company has "every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the [Bernard] Madoff debacle, runs counter to the letter and spirit of this Court's precedent, and facilitates the perpetration of frauds on the public."  "In the wake of the devastation caused by fraudulent financial schemes—such as the Madoff ponzi operation…the courts can ill afford to turn a blind eye to the potential for abuses that may be committed by unscrupulous financial service companies in violation of the public trust and law," Lippman said in a dissent joined by Judge Carmen Beauchamp Ciparick.

The at-will employment case involves Joseph Sullivan, the former chief compliance officer and COO for Peconic Partners and Peconic Asset Managers.  In 2008, Sullivan questioned a series of stock trades in which his boss, William Harnisch, had sold personal shares in a fertilizer company days before the firm started selling clients' shares, a practice known as "front-running." The share price dropped 15 percent by the time the client shares were sold, records show.  Harnisch fired Sullivan within days of the confrontation, and Sullivan responded with a lawsuit alleging, among other things, breach of implied contract. The First Department dismissed the claim, noting that the Court of Appeals had never extended the Wieder exception beyond the practice of law.  Yesterday, the Court of Appeals declined the invitation to extend Wieder and affirmed.  The majority said Sullivan's role as chief compliance officer was only one of several of his duties and found "no reason to make state common law governing the employer-employee relationship more intrusive."  Smith noted that Congress in 2010 passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which protects whistle-blowers who inform the Securities and Exchange Commission about violations in their firms. He said the statute apparently would not apply to Sullivan because he did not go to the SEC before he was fired and merely confronted Harnisch.  "Nothing in federal law persuades us that we should change our own law to create a remedy where Congress did not," Smith said in an opinion joined by Judges Susan Phillips Read, Victoria Graffeo, Eugene Pigott Jr. and Theodore Jones.  Lippman and Ciparick said the holding sends the wrong signal to corporate wrongdoers and to those who would turn them in.  "The message that will be taken from the majority's decision is self-evident: if compliance officers (and others similarly situated) wish to keep their jobs, they should keep their heads down and ignore good-faith suspicions or evidence they may have that their employers have engaged in illegal and unethical behavior, even where such violations could cause or have caused staggering losses to their employees' clients," Lippman wrote.  Y. David Scharf, a partner at Morrison Cohen who represented Harnisch and Peconic, said Sullivan was fired for misconduct and sub-par performance, not because he confronted his boss. Scharf said Harnisch did nothing wrong.  "Our client denies the allegation that there was any correlation in terms of what Mr. Harnisch was doing in his personal account relative to what was happening in the client account," Scharf said. "The client accounts were only sold because the market turned and had nothing to do with any advance knowledge [Harnisch] had."  Scharf said several claims remain, including one in which Peconic alleges that Sullivan disclosed confidential information to the press to "prop up" his allegations.  Sullivan's attorney, Daniel Felber of Manhattan, said that as a result of this decision, corporate compliance officers who do their jobs risk losing their positions.  "We were hoping that the at-will employment exception in the state of New York would be expanded to recognize the burgeoning problems on Wall Street and that a chief compliance officer of a hedge fund should not be terminated for doing the very job he was hired to do," Felber said. "The concept that you can blow the whistle but have no job security for doing it doesn't resonate in the 21st century."  Felber said he is hopeful that Lippman's dissent will provide impetus for a legislative exception to the at-will rule for financial industry compliance officers. He said the Dodd-Frank measure only applies to publicly traded companies, which excludes most hedge funds.  "This might be a great time for the Legislature to act and provide the protection that employees like Joseph Sullivan clearly lack," Felber said. "In the absence of protection by the Legislature, chief compliance officers and other internal regulators are going to, as Judge Lippman said, turn a blind eye." John Caher can be contacted at jcaher@alm.com.