Eighth Circuit Joins Other Courts in Adopting Less Rigorous Standard for Violation of Securities Laws
Author: Bruce J. Douglas (Minneapolis)
Published Date: June 23, 2016
The Sarbanes-Oxley Act of 2002 (SOX) prohibits a publicly traded company from discharging an employee in retaliation for providing information to a supervisor or another person in the company with investigative authority about "any conduct which the employee reasonably believes constitutes a violation of … any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” Joining three other courts of appeals, the Eighth Circuit has now adopted a definition of "reasonable belief," holding that "the employee must simply prove that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws,” whether or not the employee is factually correct in his or her belief. Beacom v. Oracle America, Inc., No. 15-1729 (June 6, 2016).
Vincent Beacom was the vice president of sales in the Americas division of the Retail Global Business Unit (RGBU) of Oracle America, Inc. As noted by the court of appeals, the RGBU comprised only a small portion of Oracle's business, generating about .4 percent of Oracle's $31 billion in revenue. RGBU Americas generated only .19 percent of Oracle's revenue. Following a change in the organizational structure of the RGBU, a new manager changed the method employed for projecting quarterly sales revenues from a "bottom-up forecasting process" to a "top-down" process. Under the new forecasting process, both information regarding sales in the pipeline and historical conversion rates were used to establish the forecasting goals for each region. The new forecasting method resulted in higher sales projections than under the former method.
Due to the higher projections, which Beacom acknowledged were "tight but doable," during the first three quarters of 2012, RGBU Americas overprojected its revenues. However, as noted by the court, the disparity was only a few million dollars, which the successful conversion of any single deal could have bridged. Beacom claimed that he repeatedly voiced concerns to his superiors about the new projection method, claiming that "‘the wrong, incorrect, non-fact-based expectations were being sent up through the management chains, which would be the foundation of an expectation sent to’ Wall Street, and that these inaccurate projections contributed to Oracle's decline in stock value.”
Following an increase in projected sales from $25 million to $30 million made by Beacom's superior in January of 2012, Beacom complained to the company’s human resources department about the high projections. Two months later, Oracle discharged Beacom on the basis of poor performance and insubordination. The U.S. District Court for the District of Minnesota granted summary judgment in favor of Oracle.
Eighth Circuit Decision
On appeal, the central issue was whether Beacom held a "reasonable belief" that what he considered to have been inflated sales projections constituted a violation of federal securities laws or fraud on shareholders. The reasonable belief standard has both an objective and a subjective component. Under the subjective component, an employee must simply believe that the employer’s conduct constitutes a violation of certain provisions of a rule or regulation of the Securities and Exchange Commission or any provision of federal law relating to fraud against shareholders. The nature of the objective component, the reasonable belief standard, however, had not been previously decided by the Eighth Circuit.
The panel observed that in a 2006 decision, Platone v. FLYi, Inc., ARB No. 04-154 (September 29, 2006), the Administrative Review Board (ARB) of the U.S. Department of Labor, which adjudicates SOX whistleblower claims, adopted a standard that required the employee to show that his complaint “definitively and specifically” related to one of the categories of fraud or securities violations listed in the SOX whistleblower statute. But, more recently, the ARB adopted a different standard in Sylvester v. Parexel International LLC, ARB No. 07 – 123 (May 25, 2011). Under the Sylvester standard, the employee must simply prove that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws. Further, an employee's mistaken belief may still be objectively reasonable.
The Eighth Circuit panel observed that no court had rejected the Sylvester standard and the Second, Third, and Sixth Circuit Courts of Appeals had deferred to the ARB’s most recent interpretation and rejected the former Platone standard: “This court, joining the Second, Third, and Sixth Circuits, adopts the Sylvester standard.”
Applying the Sylvester standard, the court noted that RGBU Americas missed its projections by no more than $10 million. Further, the court reasoned that an Oracle salesperson and shareholder would understand the predictive nature of revenue projections. More to the point, the court stated, "[An Oracle salesperson and shareholder] would understand that $10 million is a minor discrepancy to a company that annually generates billions of dollars. These facts compel the conclusion that Beacom’s belief that Oracle was defrauding its investors was objectively unreasonable, even under the less-stringent Sylvester standard."
The upshot of the Eighth Circuit's decision, even though it adopted the ARB's more lenient standard for determining what constitutes a "reasonable belief," is that it appears to establish a sliding scale of plausibility that an employee must satisfy. For example, the alleged overly aggressive sales forecasts in this case were insignificant in relation to the total revenues of the company. Yet the disparity that Beacom claimed violated federal law was perhaps significant in proportion to the revenue forecast for the particular Oracle division in which Beacom was employed. This decision interjects a reality factor into cases and requires an analysis of the bigger corporate picture.
Bruce J. Douglas is a shareholder in the Minneapolis office of Ogletree Deakins. He has more than 25 years of experience advising and defending employers in administrative and litigation matters in the full range of both traditional labor and employment law matters. He has represented clients in a wide range of industry lines, including manufacturing, baking, printing, resorts and lodging, finance, security, health care, insurance, communications, temporary personnel staffing,...