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Appeals court ruling in Fidelity case: Whistleblower law doesn’t apply to mutual funds

A federal law that protects employees at public companies when they blow the whistle on alleged fraud does not apply to mutual funds, a US appeals court ruled Friday.

The ruling, by the US Court of Appeals for the 1st Circuit, overturned a Boston federal judge’s decision involving two former Fidelity Investments employees. The new ruling finds that employees of mutual fund companies are not protected under Sarbanes-Oxley, the law passed in the wake of the Enron scandal.

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The case started with two separate lawsuits brought by former Fidelity Employees, alleging that the company illegally retaliated against them.

Jackie H. Lawson alleged that during her 14 years at Fidelity Brokerage Services, she raised concerns about accounting methods, including the company improperly keeping millions of dollars in fees. She said she resigned in 2007 after the company retaliated against her and threatened her.

In 2006, Jonathan M. Zang, a former portfolio managers of several industry sector funds, claimed he was fired after telling his superiors in a widely circulated e-mail that there were “material inaccuracies” in regulatory filings for the funds. Specifically, he complained that the company’s disclosures “overstated the connection between a Select fund’s performance and the compensation of the Select fund’s portfolio manager.”

Fidelity, a private company controlled by Boston’s Johnson family, argued that its investment group is not subject to Sarbanes-Oxley because it is not publicly traded. The District Court had ruled that the whistleblower protection applied because the investment firm is a contractor or subcontractor to the mutual funds, which have public shareholders. But the appeals court reversed that ruling, stating that Congress did not include contractors in its definition.

The majority opinion stated that if Congress intended the term “employee” to have a broader meaning, “it can amend the statute. We are bound by what Congress has written.”

The US Securities and Exchange Commission and the Department of Labor had filed briefs supporting the plaintiffs, but, the judge wrote, “We owe no deference to the positions stated there.”

The US Chamber of Commerce filed a brief supporting Fidelity’s argument.

Beth Healy can be reached at
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