A U.S. law protecting whistle-blowers at publicly traded companies also covers mutual fund firms, a federal judge ruled in a case involving two former Fidelity Investments employees. The ruling late on Tuesday by U.S. District Judge Douglas Woodlock in Boston marked the first time a federal court has applied the provisions of the Sarbanes-Oxley Act to fund companies, a lawyer for one of the employees said.
In a statement, Fidelity did not discuss the decision in detail, but said the former employees’ claims are without merit and that it will defend itself against them scale effects in mutual fund performance the role of trading costs. Congress adopted Sarbanes-Oxley in 2002 after accounting problems brought down energy company Enron Corp and communications provider WorldCom Inc. Mutual fund companies have argued they should be exempt from the law because the funds themselves technically have no workers apart from their boards of directors and instead hire management companies to invest their money.
In the Boston case, plaintiff Jackie Hosang Lawson, who worked at Fidelity from 1993 until 2007, complained she alerted supervisors to problems, including the alleged improper retention of $10 million of fees, only to be passed over for a promotion and threatened with punishment for insubordination.
The other plaintiff, Jonathan Zang, who ran several mutual funds from 1998 to 2005, alleged Fidelity gave him poor reviews and fired him in retaliation for his complaint that a new pay plan for Fidelity portfolio managers inaccurately and illegally described how pay was calculated. Fidelity argued that Lawson and Zang worked for affiliates such as its Fidelity Management & Research arm, rather than the type of entity that Sarbanes-Oxley was meant to cover.
But Woodlock rejected Fidelity’s effort to dismiss the case, saying its reading of Sarbanes-Oxley “would result in an excessively forced and formulistic reading” of the law. Indira Talwani, a lawyer for Lawson, called the decision an important reading of the law.
“This is a critical case because Sarbanes-Oxley was designed to protect investors,” she said. “Mutual funds are the major way that Americans invest their money.”
Zang could not immediately be reached for comment.
Fidelity Investments oversaw $1.5 trillion in assets under management at the end of 2009, making it one of the world’s biggest mutual fund companies. Woodlock did not rule on the substance of the plaintiffs’ claims. He also sided with Fidelity and dismissed wrongful discharge claims under state law.
In its statement Fidelity noted the limits of Woodlock’s ruling and said it will defend itself “vigorously” against the former employees’ allegations. It also said it has various compliance programs to meet its regulatory obligations and it offers employees channels such as a confidential hotline to report problems scale effects in mutual fund performance the role of trading costs.
The cases are Jackie Hosang Lawson vs. FMR LLC, FMR Corp and Fidelity Brokerage Services; and Jonathan Zang vs. Fidelity Management & Research Co, FMR Co and FMR LLC. They were combined in U.S. District Court for the District of Massachusetts as case No. 08-10758.
(Reporting by Ross Kerber; editing by Andre Grenon) newsdaily dot com
