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March 13, 2014

California Jury Awards $6 Million in Sarbanes-Oxley Act Whistleblower Lawsuit

A California jury recently awarded Catherine Zulfer, a former accounting executive at Playboy Enterprises, $6 million after finding that Playboy violated the whistle-blower provisions of the Sarbanes-Oxley Act of 2002 (SOX) when it fired her for refusing to improperly set aside company funds for executive bonuses. The case is Zulfer v. Playboy Enterprises, Inc. et al., No. CV 12-08263 (March 5, 2014, C.D. Cal.). The jury’s special verdict can be viewed here. Section 806 of SOX provides whistleblower protection for employees of publicly traded companies who are discharged, demoted, suspended, threatened, harassed or discriminated against for lawfully providing information regarding conduct the employee reasonably believes is a violation of federal fraud statutes, SEC rules and regulations or any federal laws relating to shareholder fraud. 18 U.S.C. ยง 1514A(a)(1).

Zulfer alleged that she was fired for repeatedly refusing Playboy’s CFO’s instruction to accrue $1 million in executive bonuses, largely destined for Playboy’s CFO and CEO, without first receiving approval from Playboy’s board of directors. Zulfer alleged that during her 30 years with Playboy, the company’s Board always approved executive bonuses before being accrued or paid. Zulfer reported the CFO’s requests to Playboy’s General Counsel and outside SEC counsel in January 2011. Zulfer alleged that the CFO then began to retaliate against her in various ways, and eventually fired her in December 2011.

Playboy filed a motion to dismiss Zulfer’s first and second causes of action and to strike various allegations. Playboy’s primary argument was that Zulfer’s retaliation claim under Section 806 of SOX should have been dismissed because a plaintiff must have a reasonable belief that a violation of a law identified in Section 806 is occurring or has occurred. Zulfer did not allege that any bonuses actually were accrued or paid out prior to Board approval. Playboy argued that a whistleblower complaint regarding anticipated conduct is not protected under SOX.

The court first noted that the Ninth Circuit Court of Appeals had not addressed the issue, nor had any of its sister district courts within the circuit. The district court then analyzed competing authority from various U.S. district courts outside the Ninth Circuit and an opinion issued by the Fourth Circuit, and concluded that Section 806 exists not only to expose existing fraud, i.e. conduct satisfying the elements of a fraud claim, but also to prevent fraud at its earliest stages. The court also concluded that a plaintiff’s belief that an attempt to violate a law listed in SOX itself constitutes a violation of that law, and is not objectively unreasonable. The court then denied in part and granted in part Playboy’s motions, and the case proceeded to trial. The court’s order can be viewed here.

Zulfer v. Playboy Enterprises is notable because the $6 million award (before punitive damages) it is perhaps one of the largest jury verdicts on record for a whistleblower lawsuit filed under Section 806 of SOX. The jury also decided that Playboy acted with “malice, fraud or oppression”, potentially exposing Playboy to a to-be-determined punitive damages award to Zulfer in addition to the $6 million already awarded. Publically traded company employers, directors, their in-house general counsel and outside securities counsel should take note. The case is also notable because it appears to be the only published authority within the Ninth Circuit on whether attempted wrongful conduct is contemplated by Section 806 of SOX. Finally, if Zulfer is appealed, it should provide the Ninth Circuit an excellent opportunity to weigh in on an unsettled topic among federal courts.





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