Wednesday, February 17, 2016

"MEMORANDUM OPINION AND ORDER; OSTEEN, JR., District Judge; GEORGE HARTZMAN, Plaintiff, v. WELLS FARGO & COMPANY, Defendant; 1:14CV808"

"...This matter is now ripe for resolution, and for the reasons stated herein, Defendant’s Motion to Dismiss will be granted in part and denied in part.

Plaintiff commenced this action on September 22, 2014, by filing a complaint alleging that Defendant retaliated against him for reporting Defendant’s allegedly fraudulent practices, in violation of the Sarbanes-Oxley whistleblower protection provisions set forth in 18 U.S.C. § 1514A(b).

...Plaintiff alleges that, while employed by Defendant, he raised “federal criminal concerns” through a confidential company ethics reporting channel.

...On November 29, 2011, Plaintiff submitted a complaint he summarizes as involving “Accounting Irregularities,” which included “concerns raised about accounting, internal accounting controls, and auditing matters.” (Id.) On December 2, 2011, Plaintiff submitted a complaint he summarizes as involving “Falsification of Company Records,” which apparently concerned the “accuracy and completeness of corporate financial reports.” (Id.) Finally, on December 3, 2011, Plaintiff submitted a complaint he summarizes as involving “Auditing Irregularities,” wherein he quoted Wells Fargo’s Code of Ethics and Business Conduct, which states that: "All business transactions . . . must be properly and accurately recorded . . . in accordance with applicable accounting standards, legal requirements, and Wells Fargo’s system of internal controls. Falsification of any company . . . information is prohibited. Falsification refers to knowingly misstating, . . . or omitting or deleting information from a Wells Fargo record or system which results in something that is untrue, fraudulent or misleading."

...While it is difficult to glean from the pleadings the exact nature of Plaintiff’s concerns, they apparently boil down to an allegation that Wells Fargo violated its Securities and Exchange Commission (“SEC”) reporting requirements by omitting from its filings that it had received (or, at minimum, by omitting the size and source of) what Plaintiff refers to as “secret loans” from the Federal Reserve... 5 ...These loans are apparently funds that Wells Fargo received access to under the federal Term Auction Facility during the financial crisis.

...At some point after Plaintiff raised these concerns, Wells Fargo apparently hired an outside consulting firm, Oyster Consulting, LLC (“Oyster”), to investigate his claims. (See id. ¶¶ 14-21.) Plaintiff contends that this report, which concludes both that Plaintiff’s complaints were given a fair hearing by Wells Fargo and that his complaints were without merit both as to Wells Fargo’s financial
statements and as to the Envision Reports, is essentially a sham... 6 ...Plaintiff’s contentions regarding this report range from complaints that Oyster never interviewed anyone outside of Wells Fargo other than “shills” of the alleged con to allegations that the report was “withheld” from him in violation of SarbanesOxley and RICO.

...After the investigation began, Plaintiff continued to raise his concerns with Wells Fargo internally, both by repeatedly attempting to follow up with the individuals in charge of his original ethics line complaints and by sending emails to multiple executives at Wells Fargo on March 4, 2012, including Danny Ludeman, the CEO of Wells Fargo Advisors, LLC, and John Stumpf, the CEO of Wells Fargo & Co. (Id. ¶ 36.)

Plaintiff was told to keep his communications regarding his concerns limited to the Ethics Line, (id. ¶ 41), and was told that he needed to cease his activities on several occasions, including by email on January 4, 2012, and January 19, 2012.

...Plaintiff also at some point apparently posted information about his concerns on his personal blog and began raising these issues during teaching events, because he was told in mid-June of 2012 both to cancel any future events and to take down his blog.

...Title VIII of SOX is designated as the Corporate and Criminal Fraud Accountability Act of 2002. Section 806 of this Act, codified at 18 U.S.C. § 1514A, provides “whistleblower”  protection to employees of publicly traded companies. SOX prohibits retaliation against an employee who “provide[s] information, cause[s] information to be provided, or otherwise assist[s] in an investigation regarding any conduct which the employee reasonably believes constitutes” mail, wire, or securities fraud, a violation of any rule or regulation of the SEC, or a violation of any federal law relating to fraud against shareholders. 18 U.S.C. 1514A(a)(1).

...Plaintiff essentially contends that he “blew the whistle” on two situations: (1) that Defendant failed to include certain funds received from the Federal Reserve (the “secret loans”) in their SEC filings from 2008 and 2009, and (2) that Defendant’s Envision Reports failed to include client costs in their projections, allegedly constituting mail, wire, and/or securities fraud.

...it does not appear that Plaintiff’s subjective belief about his allegations is in question. Although it is an extremely close issue as to the sufficiency of both the specificity and plausibility of Plaintiff’s allegations on this issue, the court finds that Plaintiff has met his burden of pleading an objectively reasonable belief regarding Wells Fargo’s alleged failure to include the receipt of federal monies in its SEC filings. The strength and veracity of those pleadings will be determined at a later stage.

...Plaintiff alleges that Defendant submitted Sarbanes-Oxley Section 302 certifications that did not include “unencumbered collateral pledged on December 20, 2007, at the beginning of Defendant’s first [Federal Reserve] offered Term Auction Facility (TAF) loan” which Plaintiff alleges represents a massive undisclosed credit line that was not properly disclosed in Defendant’s SEC filings.

 Defendant also alleges that the SEC at some point inquired about these SEC filings, citing to a letter between Wells Fargo and the SEC. (Id. ¶ 21.) Finally, Plaintiff alleges both that the Securities Division of the North Carolina Department of the Secretary of State found enough merit to his concerns on this issue to refer them to FINRA and the SEC, and former SEC officials who were interviewed about the issue found plausible violations among his concerns. (Id. ¶ 86.) Taking his allegations as true, Plaintiff has alleged that: (1) Defendant received large low-interest loans from the Government; (2) those loans were not disclosed as required in their SEC filings; and (3) other financial experts saw these facts as a problem. (Id. ¶¶ 12, 14, 21, 86.) At this stage, Plaintiff has alleged enough to show the objective reasonableness of his concerns. If financial experts and the SEC itself were concerned about the materiality of these nondisclosures and possible violations of the securities laws, it is contrary to reason to find it unreasonable for Plaintiff to have believed they were violations as well. As such, the court finds that Plaintiff has alleged that he had an objectively reasonable belief that these actions constituted a violation of the law.

...There appears to be no dispute as to the second and third elements that Plaintiff must allege, namely that: (1) Defendant was aware of Plaintiff’s protected activity, and (2) Plaintiff suffered an adverse personnel decision when he was given a formal warning and ultimately terminated. As such, the only remaining relevant inquiry is whether or not Plaintiff’s reporting of these believed violations was a “contributing factor” in that adverse personnel decision. See Livingston, 520 F.3d at 351-52.

...There is nothing in the record showing the internal process used to terminate Plaintiff, or any document or affidavit detailing the rationale behind that decision.

...Plaintiff initially brought his claims to Wells Fargo in late November and early December of 2011. (See Second Am. Compl. (Doc. 36) ¶ 13). Plaintiff then continued to pursue these claims internally despite first being told that his complaints were being investigated and finally being given instructions to stop raising the issue. (See, e.g., id. ¶ 52.) The report from the internal investigation that Wells Fargo commissioned was finalized on July 23, 2012. (Id. ¶ 44.) That same day, Plaintiff was issued a “Final Warning.”

CONCLUSION

For the reasons set forth herein, IT IS HEREBY ORDERED that Defendant’s Motion to Dismiss (Doc. 37) is GRANTED IN PART AND DENIED IN PART and that Plaintiff’s Second Amended Complaint (Doc. 36) is DISMISSED as to all claims except for his claim for retaliation under Sarbanes-Oxley, specifically as it relates to his raising of concerns regarding whether government loans were properly disclosed in Wells Fargo’s SEC filings from 2008 and 2009.

This the 17th day of February, 2016.

WILLIAM OSTEEN, JR."