The New York State Court of Appeals declined this week to recognize an exception to the at-will employment doctrine for a hedge fund’s Chief Compliance Officer who alleged that he was fired for objecting to his employer’s unlawful trading practices.  In Sullivan v. Harnisch, Plaintiff Joseph Sullivan was an employee and minority owner of Defendants Peconic Partners LLC and Peconic Asset Managers LLC (collectively, “Peconic”), holding various titles including Chief Compliance Officer.  Defendant William Harnisch was the majority owner, President and Chief Executive Officer.  Sullivan filed a lawsuit for wrongful discharge, alleging that Peconic fired him for objecting, in his capacity as Chief Compliance Officer, to Harnisch’s “manipulative and deceptive trading practices.”  The trial court denied Defendants’ motion for summary judgment seeking to dismiss the claim.  The Appellate Division, First Department, reversed and Sullivan appealed.

According to the Court of Appeals, the “gist of Sullivan’s claim is that the legal and ethical duties of a securities firm and its compliance officer justify recognizing a cause of action for damages when the compliance officer is fired for objecting to misconduct.”  The Court reiterated the at-will employment doctrine, explaining that, “absent violation of a constitutional requirement, statute or contract,” an employer has the right to terminate employment at will.  The Court indicated that it has “recognized an exception” to this doctrine “only once.”

That exception arose in Wieder v. Skala, in which a law firm had allegedly fired a lawyer for insisting that it comply with the profession’s ethical obligations.  According to the Court, that decision “stressed both the ethical obligations of members of the bar and the importance of those obligations to the employment relationship between a lawyer and a law firm.”  Moreover, the decision focused on the legal profession’s “unique function of self-regulation.”

In Sullivan, the Court emphasized the narrow scope of the Wieder decision.  Although the Court left open the possibility that “there are some employment relationships, other than those between a lawyer and a law firm, that might fit within the Wieder exception,” the Court concluded that “the relationship in this case is not one of them.”  Distinguishing Wieder, the Court explained that Sullivan’s regulatory and ethical obligations were not inextricably tied to his duties as an employee.  Indeed, the Court observed, Sullivan “was not even a full-time compliance officer.”  The Court also stated that regulatory compliance was not at the “very core” and the “only purpose” of Sullivan’s employment. 

The Court affirmed the Appellate Division’s decision.  In a strongly-worded dissent, Chief Judge Lippman charged that the “majority’s conclusion that an investment adviser like defendant Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court’s precedent, and facilitates the perpetration of frauds on the public.”

Notwithstanding the dissent’s alarm that New York employers are now free to fire employees who allege wrongdoing, prudent employers – particularly in highly regulated fields like the securities industry – take such allegations seriously and investigate them, and are careful to avoid allegations of retaliation.