Advocate’s View: No employment at-will exception for compliance officer

Paul L. Leclair

The employment at-will doctrine withstood another challenge. Last week on May 8, the New York Court of Appeals affirmed the First Department and rendered a decision refusing to create an employment at-will exception for a corporate compliance officer who complained of security trade irregularities to the security firm’s principal, Sullivan v. Harnisch, 2012 NY Lexis 984, 2012 NY Slip Op 3574 (May 8).

In so ruling, the Court of Appeals reaffirmed its 1983 holding in Murphy v. American Home Products Corp. (58 NY2d 293) that New York does not recognize a claim for wrongful discharge of an at-will employee, Sullivan, at p. 1.

Plaintiff John Sullivan was the chief compliance officer and executive vice president of Peconic Asset Managers, LLC, an investment management firm known as a hedge fund. He also claimed that he was a 15 percent partner in the hedge fund.

The majority owner and CEO of the hedge fund was the defendant, William Harnisch. Sullivan was terminated from his employment with the hedge fund within days after Sullivan objected to Harnisch about certain sales of stock made by Harnisch for his own personal account.

Sullivan complained to Harnisch that Harnisch’s stock sales were inappropriate “front running” sales. Sullivan claims that Harnisch’s stock sales were made in anticipation of similar sales that the firm was going to make for its clients, allowing Harnisch to profit from an opportunity he did not provide his clients, Sullivan, at p. 2.

The Appellate Division, First Department’s decision in the same case identifies that the trades involved the sale of stock of the Potash Corp. of Saskatchewan, Inc., a fertilizer producer traded on the New York Stock Exchange, 81 AD3d 117, 120 (1st Dept. 2010). On Sept. 29 and 30, 2008, Harnisch sold two-thirds of his personal holdings in Potash stock of $100 million at $132 per share. He did so without pre-clearing the trades with Sullivan, and without notifying his firm’s clients, who held approximately $60 million of stock, Id.

Following the release of a disappointing third quarter report on Oct. 1, Potash’s stock price lost 15 percent in value. On Oct. 2, Harnisch’s hedge fund sold approximately $30 million worth of his clients’ shares at $103 per share. The hedge fund’s clients were estimated to have lost more than $6.5 million by not having their Potash stock sold at the same time Harnisch sold his own shares, Id.

On Oct. 6, 7 and 8, Sullivan objected to the trades by Harnisch, and demanded they be reversed. The complaint alleges that Harnisch refused to rectify the situation and yelled at Sullivan. Days later, Sullivan was fired, Sullivan, at pp. 2-3.

Soon afterwards, Sullivan filed a lawsuit asserting nine causes of action. The Court of Appeals decision only dealt with the breach of implied contract claim, and despite dismissing that claim, Sullivan has other remaining claims.

The Court of Appeals noted several of its prior decisions in which it refused to carve an exception to the employment at-will doctrine. Those cases involved an employee’s report of accounting improprieties, an employee’s refusal to participate in illegal conduct involving tax avoidance schemes, and a doctor who refused to disclose to his employer information about a patient, Sullivan, at pp. 3-4.

The Court of Appeals has made one exception in finding an implied contract in an employment at-will relationship. The case involved an associate attorney at a law firm who claimed he was fired because he insisted “that the firm comply with the governing disciplinary rules by reporting professional misconduct” committed by one of the firm’s attorneys, Wieder v. Skala, 80 NY2d 628 (1992).

The Court of Appeals in Sullivan asserted that its sole exception to the at-will doctrine recognized in Wieder was intended to be very narrow, Sullivan, at p. 5. In Wieder, the court reasoned that the attorney’s duties as an employee of the firm and his responsibility as a lawyer “were so closely linked as to be incapable of separation”, creating an implied-in-law obligation, 80 NY2d at 635-636.

However, in Sullivan, despite the hedge fund’s own code of ethics and FCC rules requiring investment advisors (which the hedge fund was) to designate a chief compliance officer to prevent violations of federal law, the Court of Appeals did not find an implied-in-law obligation as it did in Wieder, Sullivan, at page 6.

The court reasoned that Sullivan’s regulatory and ethical obligations were not as closely linked to his duties as an employee, as was the case in Wieder. Sullivan was not a full-time compliance officer, and had other responsibilities at the hedge fund. Moreover, the court noted that Sullivan was not a member of a firm whose members were “subject to self-regulation as members of a common profession” as were the attorneys involved in the Wieder action, Id. at p. 6.

A strong dissent was authored by Chief Judge Jonathan Lippman, who could not discern any appreciable difference between the attorney involved in Wieder and the chief compliance officer at the hedge fund involved in Sullivan.

The majority noted that while there are extensive federal regulations governing the securities business, overseen by compliance officers whose employment is mandated, those regulations cannot create a common law cause of action governing the employer-employee relationship. The court stated that such a claim must be governed by the legislature, and cited to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provides whistle blower protection, but only in those instances when information is provided by an employee directly to the SEC (15 USC §78u-6).

The Court of Appeals held that that statute had no application to, and would not protect Sullivan in this case because he did not report the Harnisch transgressions to the SEC, but rather only to Harnisch himself, Sullivan, at p. 7. The Court of Appeals would not create a claim in the circumstance where Congress refused to do so.

As a result, the employment at-will doctrine withstood another spirited challenge.

Paul Leclair is a partner in the Rochester law firm of Leclair Korona Giordano Cole LLP, where he concentrates his practice in civil litigation with an emphasis on business/commercial, construction and personal injury matters.