Richard Trusz, the former head of valuation at a subsidiary of UBS, has defeated a motion for summary judgment in Trusz v. UBS Realty and UBS.  The decision underscores the broad scope of protected whistleblowing under SOX and is consistent with a trend of federal courts deferring to the DOL’s broad construction of SOX whistleblowing in Sylvester v. Parexel International LLC, ARB Case No. 07-123 (ARB May 25, 2011).

Trusz’s SOX Whistleblower Case

Trusz alleges that he disclosed to his supervisor and the CFO of UBS Realty, a registered investment adviser and an indirect subsidiary of UBS AG, that the valuation unit of Realty was understaffed and that the risk of valuation errors would increase without changes.  In addition, Trusz identified overvaluations that totaled approximately $27 million over three different accounts.  Trusz demanded that the company notify clients of the errors and return management fees.

The chief compliance officer investigated these valuation discrepancies and concluded that in light of the company’s internal materiality standards and other industry benchmarks, Realty did not need to disclose the errors to clients.  KPMG also reviewed the valuation errors and concluded that they were not material.

Based on a benchmarking report prepared by PwC concluding that most of Realty’s competitors already outsourced a significant portion of their valuation review functions, Realty decided to outsource a significant portion of its valuation review functions to PwC.  Realty informed Trusz and two junior members of the valuation review team that their positions were being eliminated, but Realty permitted the two junior members to keep working until the outsourcing actually happened while terminating Trusz immediately.

Trusz brought claims under SOX and Connecticut law.  In a motion for summary judgment, Realty contended that Trusz could not have reasonably believed that Realty was violating any securities laws.

Sarbanes-Oxley Protected Conduct

In its motion for summary judgment, UBS contended that SOX protected whistleblowing is limited to definitive and specific disclosures of shareholder fraud and that a SOX whistleblower must have reasonably believed that all the elements of shareholder fraud were present.  Relying on the Second Circuit’s decision in Nielsen v. AECOM Tech. Corp., 2014 WL 3882488, at *5-7 (2d Cir. Aug. 8, 2014), Judge Meyer rejected UBS’ construction of SOX protected conduct and instead held that “[t] he conduct must concern a rule or regulation of the SEC—regardless of whether it has to do with shareholder fraud—or any other federal law that is related to shareholder fraud.”

In particular, Judge Meyer found that Trusz’s allegations could have given rise to liability under the Investment Advisers Act of 1940 in that the overvaluations could violate the fiduciary duty “of utmost good faith, and full and fair disclosure of all material facts.”

Implication for SOX Whistleblowers

The broad interpretation of SOX protected conduct in Trusz is consistent with a trend of federal courts adopting or deferring to the ARB’s Sylvester decision.  See, e.g., Rhinehimer v. U.S. Bancorp Investments, Inc., No. 13-6641 (6th Cir. May 28, 2015); Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 220-21 (2d Cir. 2014) (granting Skidmore deference to Sylvester); Wiest v. Lynch, 710 F.3d 121 (3d Cir. 2013) (according Chevron deference to Sylvester); Stewart v. Doral Fin. Corp., 997 F. Supp. 2d 129, 135-36 (D.P.R. 2014) (adopting the Sylvester standard); Leshinsky v. Telvent GIT, S.A., 942 F. Supp. 2d 432, 443 (S.D.N.Y. 2013); Stewart v. Doral Fin. Corp., CIV. 13-1349 DRD, 2014 WL 661587 (D.P.R. Feb. 21, 2014).