SOX Whistleblower Scores Victory Before the Fifth Circuit

On July 31, 2015, a three-judge panel with the United States Court of Appeals for the Fifth Circuit partially reversed a lower court’s decision dismissing a retaliation claim filed under the Sarbanes-Oxley Act of 2002 (“SOX”) against Tesoro Corporation, a petroleum products refiner and marketer. Kevin Wallace, a former vice president of Tesoro, filed a SOX complaint with the Occupational Safety and Health Administration (“OSHA”) of the Department of Labor alleging that the Company engaged in unlawful activity with respect to its accounting practices, booking taxes as revenues on certain financial forms, including the company’s Forms 10-K and 10-Q filings.  Wallace alleged that this accounting practice caused some areas of the company to appear more profitable than they in fact were.  Wallace also alleged that the company engaged in other unlawful activity, including violations of antitrust laws and wire fraud by providing some customers advance notice of price changes and by giving after-the-fact discounts to certain customers. Wallace alleged that he began investigating and making internal reports about possible SOX violations when he noted a seeming disparity between the company’s cash performance and its financial prognostications, leading him to discover the tax-as-revenue distortion.  He alleged that he was terminated in March 2010, in retaliation for this protected activity.  After OSHA dismissed the complaint, but before the Department of Labor’s Administrative Review Board issued a decision within 180 days of his filing of the case, Wallace availed himself of SOX’s “kick out” provision and filed suit in the United Stated District Court for the Western District of Texas. In dismissing the Complaint for failure to state a claim, the district court held that his complaints were “outside the scope of the OSHA complaint or any investigation it would reasonably prompt.”  In reversing the District Court’s decision, the Fifth Circuit concluded that the issue Wallace raised -- about the tax-as-revenue distortion -- constituted protected activity under SOX.  The Appeals court also held that the District Court had committed legal error in finding that Wallace had not pled an objectively reasonable belief of a SOX violation.  Rejecting Tesoro’s argument that Wallace could not have reasonably believed that the booking of taxes as revenue was fraud or violated SEC rules, the Court of Appeals concluded that Wallace had plausibly alleged that he reasonably believed his investigation and reporting of tax-accounting practices were not properly disclosed on the SEC forms. With the trial court’s decision reversed, Wallace may now continue his attempt to seek redress for his retaliation claim against Tesoro.