No Exception to “At Will” Rule For Hedge Fund Compliance Officer’s Internal Complaint

On May 8, 2012, the New York Court of Appeals held, in Sullivan v. Harnisch, that a hedge fund compliance officer who claimed he was fired for internally objecting to allegedly improper sales of stock by the company’s CEO did not have a cause of action for wrongful termination.  Specifically, the plaintiff alleged that he was fired because he “spoke out” about “manipulative and deceptive trading practices” and that his termination violated an unspecified “company policy to prohibit retaliation” for such conduct.

The court agreed that plaintiff’s claim should have been dismissed, since there was no basis for an exception to the well-established principle that “New York common law does not recognize a cause of action for the wrongful discharge of an at-will employee”.  Thus, “absent violation of a constitutional requirement, statute or contract, an employer’s right at any time to terminate an employment at will remains unimpaired.”

The court noted that it had recognized an exception to this rule only once, in a case (Wieder v Skala, 80 NY2d 628 (1992)) involving a lawyer who claimed to have been fired by his law firm “because of his insistence that the firm comply with the governing disciplinary rules by reporting professional misconduct” committed by one of the plaintiff’s colleagues.”  The Wieder court allowed the claim to continue in an opinion that 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” and observed, inter alia, that “plaintiff’s duties and responsibilities as a lawyer and as an associate of the firm were so closely linked as to be incapable of separation”.

The court rejected plaintiff Sullivan’s attempt to analogize his case to Wieder:

Assuming that there are some employment relationships, other than those between a lawyer and a law firm, that might fit within the Wieder exception, the relationship in this case is not one of them.

Sullivan stresses the importance of compliance officers in the overall scheme of federal securities regulation to which … registered investment advisers[] are subject. The [SEC] … requires each registered adviser to designate a chief compliance officer who will be responsible for administering policies and procedures designed to prevent violations of federal law and regulations[]. From this, Sullivan reasons that compliance with securities laws was central to his relationship with Peconic in the same way that ethical behavior as a lawyer was central in Wieder to the plaintiff’s employment at a law firm. But the analogy fails.

Important as regulatory compliance is, it cannot be said of Sullivan, as we said of the plaintiff in Wieder, that his regulatory and ethical obligations and his duties as an employee “were so closely linked as to be incapable of separation”. … Sullivan was not associated with other compliance officers in a firm where all were subject to self-regulation as members of a common profession. Indeed, Sullivan was not even a full-time compliance officer. He had four other titles at Peconic, including Executive Vice President and Chief Operating Officer, and was, according to his claim, a 15% partner in the business. It is simply not true that regulatory compliance, in the words of Wieder, “was at the very core and, indeed, the only purpose” of Sullivan’s employment.

The court also refused to create a remedy under state law where no such remedy existed under federal law:

It is beyond dispute that compliance with extensive federal regulations—overseen, at firms like Peconic, by compliance officers—is an integral part of the securities business. But the existence of federal regulation furnishes no reason to make state common law governing the employer-employee relationship more intrusive. Congress can regulate that relationship itself, to the extent that it thinks the objectives of federal law require it. Indeed, after the events involved in this case, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act … which provides whistle blower protection, including a private right of action for double back pay, for employees who are fired for furnishing information about violations of the securities laws to the SEC[.]  That statute seems not to apply to conduct like that alleged in Sullivan’s complaint; Sullivan does not claim to have blown a whistle—i.e., to have told the SEC or anyone else outside Peconic about Harnisch’s alleged misconduct—but only to have confronted Harnisch himself. Nothing in federal law persuades us that we should change our own law to create a remedy where Congress did not.

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