Interpretation of Dodd-Frank and SOX highlights corporate executive risk

Increasing the already substantial exposure of directors and officers discussed in our September 2015 Corporate Newsletter, a very recent decision by a federal judge in the Northern District of California interpreting the Dodd-Frank and Sarbanes-Oxley laws underscores the need for clients to have in place and closely follow sound compliance procedures, as well as director-officer liability insurance.

U.S. Chief Magistrate Judge Joseph C. Spero determined that where there is unlawful retaliation against a whistleblower by a company, a legal claim may be brought against individual members of the company’s board of directors as well as the company itself. (The case is Wadler v. BioRad Laboratories, Inc.) Wadler, BioRad’s former general counsel, filed a qui tam suit alleging he was terminated in retaliation for reporting that the company was potentially engaged in violations of the Foreign Corrupt Practices Act in China. Judge Spero upheld Wadler’s claims of Dodd-Frank Act and SOX violations against the company and CEO Norman Schwartz however, because Wadler did not include the names of the individual board members in his original complaint, Judge Spero ruled they were not adequately warned of their potential role in the suit.

While an appeal is likely, assuming the decision is upheld, this substantially increases the exposure of directors (and presumably, their LLC equivalent) to claims involving the mishandling of whistleblower allegations and suggests that such managers need to directly participate in the review and disposition of such claims. Discussion should be had with legal advisors as to the possible need for amendment of formal policies. It is less clear, but cannot be ruled out that similar exposure exists with respect to all other Dodd-Frank and SOX claims.

This increased exposure makes it imperative that public companies, and many private ones as well, discuss with their insurance advisors whether they need to obtain and/or modify officer-director coverage. (Please click here to view recent related FisherBroyles articles)

Our corporate and white collar litigation partners can assist with the consideration of the implications of this decision for your specific circumstances.

For further information on this subject matter, please contact the following FisherBroyles attorneys.

Brian E. Dickerson

Martin B. Robins

Nicole Hughes Waid