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Kalkunte v. DVI Financial Services

In the opinion below, the United States Department of Labor’s Administrative Review Board (ARB) affirmed the Administrative Law Judge’s (ALJ) holding that a privately-held company acting as a contractor, subcontractor, or agent of a publicly traded company can be held liable for violations of the whistleblower provisions of the Sarbanes-Oxley Act (SOX). The decision is a significant one, because it defined the scope of liability under SOX broadly and because it is the first time that the ARB has affirmed an ALJ decision in favor of a SOX plaintiff. The ARB awarded whistleblower Sheila Kalkunte lost wages and other compensatory damages after holding that she was terminated by her employer for reporting securities fraud.

Kalkunte v. DVI Financial Services
Final Decision and Order

ARB CASE NOS. 05-139 & 05-140
ALJ CASE NO. 2004-SOX-056
DATE: February 27, 2009

In the Matter of:
**************************************
SHEILA J. KALKUNTE,
COMPLAINANT,

v.

DVI FINANCIAL SERVICES, INC. and
AP SERVICES, LLC,
RESPONDENTS.
**************************************
BEFORE: THE ADMINISTRATIVE REVIEW BOARD

Appearances:

For the Complainant:
R. Scott Oswald, Esq., Nicholas Woodfield, Esq., Courtney R. Abbott, Esq., The Employment Law Group, PLLC, Washington, District of Columbia

For the Respondent DVI Financial Services, Inc.:
Thomas J. Barton, Esq., James K. Webber, Esq., Drinker, Biddle & Reath, LLP, Florham Park, New Jersey

For the Respondent AP Services, LLC,
L.A. Hynds, Esq., Sheldon S. Toll, Esq., Jeanne M. Scherlinck, Esq., Honigman, Miller Schwartz & Cohn, LLP, Detroit, Michigan

FINAL DECISION AND ORDER

This case arises from a complaint Sheila Kalkunte filed against DVI Financial Services, Inc. (DVI) and AP Services, LLC (APS). Kalkunte alleged that these respondents violated the whistleblower protection provisions of Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002 (SOX or Act), 18 U.S.C.A. § 1514A (West Supp. 2005), and its implementing regulations at 29 C.F.R. Part 1980 (2006), when they discharged her from employment with DVI in retaliation for disclosing and then inquiring into the progress of the investigation of what she reasonably believed were financial improprieties amounting to securities fraud. A Department of Labor Administrative Law Judge (ALJ) issued a Recommended Decision and Order (R. D. & O.) in which he held that DVI and APS violated the Act, and awarded damages. We adopt the recommendation as to DVI’s and APS’s violations of SOX, but modify the damages award.

Background

Kalkunte began employment with DVI as a contract attorney on June 4, 2001. R. D. & O. at 16; Hearing Transcript (T.) at 264-65. Her assignments included drafting documentation and negotiating provisions of loan agreements, lease agreements, guarantees, and security agreements. R. D. & O. at 16; T. at 265. Kalkunte became an in-house associate general counsel in December, 2002. R. D. & O. at 16; T. at 266. When Kalkunte began to draft opinion letters on behalf of DVI to address the securitization of the corporate finances in 2003, senior management changed her title in May of that year to assistant general counsel. R. D. & O. at 16; T. at 268-269. Her salary was $130,000.00, plus $10,000 bonus. R. D. & O. at 55; T. at 267-68.

In June of 2003, DVI’s independent auditors, Deloitte & Touche, resigned abruptly. R. D. & O. at 17; T. at 269-70. The resignation caused a rapid decline in the price of DVI’s stock, and an inquiry from the Security and Exchange Commission (SEC), which had already been questioning DVI’s disclosure statements. R. D. & O. at 17; T. at 270.

On or about July 24, 2003, a DVI employee, Susan Gibson, advised DVI’s board of directors that DVI’s system for accounting for security interests was being tampered with surreptitiously. R. D. & O. at 19; T. at 48; Complainant’s Exhibit (CX) 34 at 10-11). Around the same time, a member of DVI’s board of directors, Jerry Cohen, informed Kalkunte that DVI hired the law firm of Latham & Watkins to assist DVI in restructuring or going into bankruptcy, and hired APS to negotiate with Fleet Bank and Merrill Lynch to secure operating funds. R. D. & O. at 18; T. at 272.

An August 25, 2003 letter from Mark Toney, an APS principal, to DVI memorialized the agreement between the parties. CX 19. Under this agreement, APS sent Toney, a specialist in turnaround operations and corporate restructuring, to work at DVI. R. D. & O. at 3-4; CX 19, 26 at 22. APS also dispatched Christine Clay to provide general management consulting services and several other individuals. R. D. & O. at 18; CX 19, 28 at 34-35.

By August of 2003, Kalkunte had become familiar with DVI’s operations and litigation issues. She interacted regularly with DVI’s board of directors and executives. T. at 286-91. Steve Garfinkel, DVI’s chief financial officer, disclosed to Kalkunte that DVI’s senior management had engaged in multiple improper activities. R. D. & O. at 18; T. at 272. At the same time, DVI credit and workout employees, Ray Fear and Joe Mallot, told Kalkunte that DVI senior management had changed the delinquency numbers that Fear and Mallot had prepared for the first quarter of 2003 SEC disclosure filings. R. D. & O. at 18; T. at 273-74.

On August 11 or 12, Kalkunte sought the advice of Steve Whalen, a friend and attorney at the law firm of Thacher Proffitt & Wood LLP. R. D. & O. at 18-19; T. at 274-75. Whalen and three of his partners at the firm told Kalkunte that, as associate general counsel, she had an obligation to report improprieties up the chain, first to the president of DVI, or, if that was futile, to the audit committee of DVI’s board of directors.1 R. D. & O. at 18-19; T. at 275-76; CX 50.

Following Whalen’s advice, Kalkunte faxed a memorandum to members of DVI’s board of directors’ audit committee, Bill Goldberg, Nate Shapiro, and Jack McHugh, on August 18, 2003. Her memorandum detailed the financial improprieties that others had brought to her attention. R. D. & O. at 19; T. at 277-78; CX 7. She followed up with telephone calls to Goldberg and Shapiro, and another memorandum. R. D. & O. at 19; T. at 280; CX 32 at 47, 54. Specifically, she reported that DVI management had prepared improper delinquency reports and provided those altered reports to lenders, DVI’s board of directors, and the SEC through its filings. R. D. & O. at 19; CX 32 at 42-46, 34 at 11-13. She also asserted that DVI employees were shredding documents. R. D. & O. at 19-21; CX 32 at 46.

That evening, Goldberg and Shapiro contacted Rick Meller, a partner at Latham & Watkins, about how to proceed with an investigation. R. D. & O. at 19; CX 32 at 48-49. They agreed to hire Washington counsel, Arnold & Porter, as special counsel. CX 32 at 51-52. Meller then called Toney in the evening on August 21, 2003. R. D. & O. at 20; T. at 560. He told Toney that Arnold & Porter would be investigating alleged improprieties that Kalkunte had reported to the board of directors, and that Toney should make key employees available, and in particular that he should coordinate a meeting between Kalkunte and Arnold & Porter. R. D. & O. at 20; T. at 560-61; CX 26 at 162-64.

An investigative team from Arnold & Porter arrived at DVI headquarters in Jamestown, Pennsylvania on August 22, 2003, and they met with Toney and then Kalkunte. R. D. & O. at 20; CX 26 at 172-74; CX 46 at 21, 35-36, 173-74. After August 22, Kalkunte heard nothing further about the progress of the investigation. R. D. & O. at 25; T. at 295. Likewise, neither Goldberg, Shapiro, nor the audit committee heard anything further from Toney or Arnold & Porter about the status or findings, if any, of the investigation. CX 34 at 30-31, 33. However, at a later date, the board of directors learned that the trustee in bankruptcy had objected to retention and payment of Arnold & Porter on September 25, 2003. DVI’s Exhibit (EX) 33; CX 12.

On August 25, 2003, DVI filed for bankruptcy under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. R. D. & O. at 22; T. at 285; EX 33. At that time, DVI’s president and chief executive officer, Michael O’Hanlon, resigned. T. at 286. Toney became the new CEO, and Clay assumed the duties of the chief administrative officer. R. D. & O. at 4-5, 22; T. at 286; CX 28 at 103-04. As CEO, Toney could hire and fire DVI employees, and supervised APS employees who were under the contract with DVI. However, APS continued to pay APS employee salaries and health benefits, to furnish e-mail accounts, and to reimburse expenses. R. D. & O. at 5, 22; T. at 240-242; CX 26 at 87, 107, 112, 116, CX 28 at 272-75.

On August 27, DVI eliminated more than ninety employee positions, giving those employees back pay and vacation pay. R. D. & O. at 22-23; T. at 293. Kalkunte and four other in-house counsel stayed on. Tony Turek, the chief credit officer for DVI, and Nancy Cascioli, a DVI human resources officer, assured Kalkunte that the attorneys would be needed following the bankruptcy. R. D. & O. at 22-23; T. at 294-95. In fact, after DVI filed for bankruptcy protection on August 25, 2003, Kalkunte had added responsibilities that included working with auditors, managing the litigation section, and reviewing bankruptcy filings. R. D. & O. at 24; T. at 290-92.

Kalkunte also processed “first day orders,” which would allow the bankruptcy court to authorize DVI to retain and pay law firms during the bankruptcy proceedings. CX 42 at 32-34. Included was a first day order for Arnold & Porter as special investigative counsel. R. D. & O. at 26; EX 5. But unknown to Kalkunte, the filing format of Arnold & Porter’s application was incorrect, and attorneys at Arnold & Porter worked with Latham & Watkins to draft a proper application over the next several weeks. Neither of those firms, the board of directors, nor Toney informed Kalkunte that this process was taking place. EX 6, 9, 17, 19, 20, 23, 25. So on September 10, 2003, Kalkunte sent an e-mail to Goldberg with a copy to Toney in which she said she needed to discuss the status of Arnold & Porter’s investigation into her SEC violations report. R. D. & O. at 25; T at 297-98; CX 24; DX 13.

Kalkunte did not receive a reply to her September 10 e-mail until September 12, but within four hours of her e-mail that was copied to Toney, David Heller of Latham & Watkins sent Toney an e-mail saying, “Suggestion: have her get you a ‘job description’ for the next two weeks and have her update it weekly – where she thinks she can add value. You can then ‘yes/no’ it and tell her you will task her with anything beyond that. Might work.” R. D. & O. at 26; CX 24; DX 13. Toney then asked Clay to find out Kalkunte’s tasks and responsibilities, although she never obtained similar information about the four other in-house lawyers. CX 26 at 22; CX 28 at 166.

On September 12, Toney asked Kalkunte to meet with Clay and him. R. D. & O. at 24; T. at 298. “[Y]ou work for me and I’m the CEO of the company,” Toney told Kalkunte. R. D. & O. at 27; T. at 298. With regard to the Arnold & Porter investigation, “There is no investigation going on right now . . . because they’re not getting paid.” T. at 299. Although Kalkunte thought the bankruptcy court had approved payment weeks earlier, Toney informed her that “there was no way in hell that the [bankruptcy] estate would pay for Arnold & Porter’s investigation.” T. at 300. Evidently referring to Kalkunte’s complaints of impropriety that Arnold & Porter was supposed to investigate, Toney added, “[a]t some point you’ll get your justice. It’ll be brought up by the Unsecured Creditors Committee or the U.S. Attorney’s Office[,] and they’ll look into these improprieties. But there is no benefit to the estate to have these improprieties looked into.” R. D. & O. at 27; T. at 300.

Toney testified that “this meeting helped Ms. Clay and me focus on the lack of a role for Ms. Kalkunte in the organization, hastening our inevitable decision to terminate her.” CX 47-7. Toney concluded that Kalkunte was no longer adding value to DVI. R. D. & O. at 21, 33; CX 26 at 190. Clay testified that Toney perceived Kalkunte’s actions as a “distraction from the crisis work that was at hand.” CX 24 at 207.

Following the September 12, 2003 meeting with Toney and Clay, Kalkunte conferred again with Whalen of Thacher Proffitt & Wood. They advised her that, if reporting her concerns to the CEO was pointless, she should go back to the board of directors. R. D. & O. at 29; T. at 302. So she contacted Goldberg and Shapiro and recounted her conversation with Toney. T. at 303. Shapiro said Toney’s comments were “inappropriate” and they said they would look into the situation “right away.” R. D. & O. at 29; T. at 303.

On September 15, DVI filed a motion with the bankruptcy court to retain Arnold & Porter to investigate Kalkunte’s and Gibbons’ allegations of fraud. EX 25. On behalf of the special committee of the board, Goldberg and Shapiro told Toney that Kalkunte accused Toney of wanting to withdraw the bankruptcy filing to retain Arnold & Porter as special counsel. R. D. & O. at 29, 44-55; T. at 271-73.

Then on September 18, 2003, Clay called Kalkunte into her office, and in the presence of Cascioli from DVI’s human resources department, informed her that her position was no longer necessary, and that she was being discharged as a part of a reduction in force. R. D. & O. at 30; T. at 25, 305; CX 143-146. Clay had Cascioli escort Kalkunte out of the building immediately, the only discharged DVI employee to have been treated in that fashion. R. D. & O. at 30; T. at 293, 671; CX 30 at 148-49.

In participating in the discharge decision, Clay consulted with some but not other outside counsel at Latham & Watkins about Kalkunte’s duties and responsibilities. R. D. & O. at 34; CX 28 at 146; CX 38 at 40:20-42; CX 42 at 11:24-12:5. In making the discharge decision, Toney told Clay to review Kalkunte’s position and duties, but Clay never met with her. T. at 286. Although Kalkunte was told her position was no longer necessary, Robert DeCandia, a lawyer in DVI’s executive department, took over her work, and early in 2004, transferred from the executive department to the legal department. R. D. & O. at 35-36; CX 18; CX 26 at 187; CX 28 at 270.

The only other discharge during September was of Rebecca Kolbe, an administrative assistant who had requested in August that she be laid off for personal reasons. R. D. & O. at 37; CX 44 at 11-15, 17. At trial, Toney testified that DVI gave a reduction in force as the reason for Kalkunte’s termination, so that Kalkunte could collect unemployment and get another job. T. at 628. Kalkunte was also terminated for performance issues, he claimed. R. D. & O. at 32; T. at 628-28.

On September 19, the day after her discharge, Kalkunte left voice mail messages for Shapiro and Goldberg. T. 307-08; CX 51. Neither authorized her termination or was aware of it. R. D. & O. at 31; CX 51. Toney told board members that other lawyers could more competently handle the work, and that Kalkunte was part of the reduction in force. R. D. & O. at 31; T. at 99: CX 34 at 41. An attorney at Latham & Watkins told Goldberg that outside counsel could do better work at lower cost. R. D. & O. at 31; CX 32 at 97-98. However, between Kalkunte’s August 18 whistleblower complaint to the board and her September 12 termination, less than a month had gone by.

On December 15, 2003, Kalkunte filed a complaint with OSHA alleging that DVI and APS terminated her employment with DVI in retaliation for her disclosing and then inquiring into the progress of the investigation into conduct that Kalkunte reasonably believed constituted securities fraud. On April 7, 2004, the Occupational Safety and Health Administration’s (OSHA’s) regional administrator determined on behalf of the Security of Labor that DVI and APS illegally discharged Kalkunte, and ordered payment of damages of $100,000, plus interest, and expungement of adverse references from Kalkunte’s personnel records.

DVI and APS appealed the Secretary’s findings to an ALJ. The ALJ held a three-day trial between December 13, 2004, and December 15, 2004. He received depositions and other exhibits into evidence. On July 18, 2005, the ALJ issued his R.D. & O. holding that DVI and APS illegally terminated Kalkunte’s employment, and awarded damages. DVI and APS then appealed to the Administrative Review Board (ARB or Board).

Jurisdiction and Standard of Review

The Secretary of Labor has delegated her authority to issue final agency decisions under the SOX to the ARB. Secretary’s Order 1-2002 (Delegation of Authority and Responsibility to the Administrative Review Board), 67 Fed. Reg. 64,272 (Oct. 17, 2002); 29 C.F.R. § 1980.110 (2007). Pursuant to the SOX and its implementing regulations, the Board reviews the ALJ’s fact findings under the substantial evidence standard. See 29 C.F.R. § 1980.110(b). Substantial evidence is that which is “more than a mere scintilla. It means such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Clean Harbors Envtl. Servs., Inc. v. Herman, 146

F.3d 12, 21 (1st Cir. 1998), (quoting Richardson v. Perales, 402 U.S. 389, 401 (1971)). We must uphold an ALJ’s factual finding that is supported by substantial evidence even if there is also substantial evidence for the other party and even if we “would justifiably have made a different choice had the matter been before us de novo.” Universal Camera Corp. v. NLRB, 340 U.S. 474, 488 (1951).

In reviewing the ALJ’s conclusions of law, the Board, as the Secretary’s designee, acts with “all the powers [the Secretary] would have in making the initial decision . . . .” 5 U.S.C.A. § 557(b) (West 1996). Therefore, the Board reviews an ALJ’s conclusions of law de novo. See Getman v. Sw. Secs., Inc., ARB No. 04-059, ALJ No. 2003-SOX-008, slip op. at 7 (ARB July 29, 2005).

Discussion

1. The Sarbanes Oxley Act

Section 806, the employee protection provisions of the SOX, generally prohibit covered employers and individuals from retaliating against employees for providing information or assisting in investigations related to listed categories of fraud or securities violations. That provision states:

(a) Whistleblower Protection For Employees Of Publicly Traded Companies.– No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee–

(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire, radio, TV fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by–

(A) a Federal regulatory or law enforcement agency;

(B) any Member of Congress or any committee of Congress; or

(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or

(2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.

18 U.S.C.A. § 1514A.

The SOX’s employee protection provisions thus protect employees who provide information to a covered employer regarding conduct that the employee reasonably believes constitutes a violation of 18 U.S.C.A. §§ 1341 (mail fraud), 1343 (wire, radio, TV fraud), 1344 (bank fraud), or 1348 (fraud “in connection” with “any security” or the “purchase or sale of any security”), any rule or regulation of the Securities and Exchange Commission (SEC) (see, e.g., 17 C.F.R. Part 210 (2007), Form and Content of the Requirements for Financial Statements), or any provision of Federal law relating to fraud against shareholders.

Complaints filed under the SOX are governed by the legal burdens of proof set forth in the employee protection provision of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century, (AIR 21), 49 U.S.C.A. § 42121 (West Supp. 2005). 18 U.S.C.A. § 1514A(b)(2)(C). To prevail, a SOX complainant must prove by a preponderance of the evidence that: (1) she engaged in a protected activity or conduct (i.e., provided information or participated in a proceeding); (2) the respondent knew of the protected activity; (3) she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable personnel action. See Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-027, slip op. at 14-16 (ARB Sept. 29, 2006); Harvey v. Home Depot U.S.A., Inc., ARB Nos. 04-114, 115, ALJ Nos. 2004-SOX-020, 36, slip op. at 9-10 (ARB June 2, 2006); Getman v. Southwest Sec., Inc., ARB No. 04-059, ALJ No. 2003-SOX-008, slip op. at 7 (ARB July 29, 2005). Cf. 29 C.F.R. §§ 1980.104(b), 1980.109(a). See AIR 21, § 42121(a)-(b)(2)(B)(iii)-(iv). See also Peck v. Safe Air Int’l, Inc. d/b/a Island Express, ARB No. 02-028, ALJ No. 2001-AIR-003, slip op. at 6-10 (ARB Jan. 20, 2004).

If the complainant establishes by a preponderance of the evidence that her protected activity was a contributing factor in the adverse action, then the respondent can only avoid liability by providing by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of the protected activity.

Platone, slip op. at 16; Harvey, slip op. at 10; Getman, slip op. at 8. Cf. 29 C.F.R. § 1980.104(c). See § 49 U.S.C.A. § 42121(a)-(b)(2)(B)(iv). See also Peck, slip op. at 10.

2. Respondents’ violation of the Act

a. Coverage issues involving AP Services and Mark Toney

It is undisputed that Kalkunte was an employee of DVI, and that DVI was a publicly traded company subject to SOX. 18 U.S.C.A. § 1514A. Therefore, Kalkunte was an employee and DVI was an employer under the provisions of the Act.

Our work begins with whether Kalkunte can also hold APS liable under the SOX. The Act imposes liability on “any officer, employee, contractor, subcontractor, or agent” of the publicly held company for “discharge[ing]” (or “demot[ing], suspend[ing], threaten[ing] or in any other manner discriminating against . . .”) “an employee” because of the employee’s whistle blowing activity. 18 U.S.C.A. § 1514A(a). Under the SOX implementing regulations, “[N]o company or company representative may discharge . . . or in any other manner discriminate against any employee.” 29 C.F.R. § 1801.102. An employee is defined under those same regulations as “an individual presently or formerly working for a company or company representative . . . or an individual whose employment could be affected by a company or company representative.” 29 C.F.R. § 1801.101. A “company representative” is defined as “any officer, employee, contractor, subcontractor, or agent of a company.” 29 C.F.R. § 1801.102.

We agree with the ALJ and Kalkunte that, under these definitions, Kalkunte was “an employee” whose employment could be (and was) affected by APS, and that APS was a “company representative” of DVI, because it was its “contractor, subcontractor, or agent.” R. D. & O. at 3, 9.

DVI brought in APS to secure operating funds from Fleet Bank and Merrill Lynch. Mark Toney was an APS principal who specialized in turnaround operations and corporate restructuring. Under the August 25, 2003 letter agreement between DVI and APS, Toney agreed to work at DVI. APS also contracted to provide Christine Clay for general management services and several other individuals. After DVI filed for bankruptcy under Chapter 11 on August 25, 2003, Toney became CEO of DVI, and Clay its chief administrative officer. As CEO, Toney had authority to hire and fire DVI employees, and supervised the APS employees who were under contract with DVI. However, APS continued to pay the salaries and health benefits of Toney and other APS employees who worked at DVI, to furnish their e-mail accounts, and to reimburse their expenses.

Toney was the decision maker in eliminating more than ninety DVI employee positions on August 27, giving those employees back pay and vacation pay. It was Toney who, on or about September 12, 2003, determined that Kalkunte’s services were no longer needed. And it was Clay, who on September 18, 2003, notified her of her discharge, effective that day.

On these facts, APS, was a contractor, subcontractor, or agent of DVI. As DVI’s representative, through APS employees Toney and Clay, APS made decisions that affected Kalkunte’s employment. R. D. & O. at 5, 7. If the facts establish a violation of SOX, APS can be held liable. Because Toney was also CEO of DVI and thereby an “officer” under the Act and regulations, he could have been held personally liable, but the ALJ held that Kalkunte waited too long to seek to add Toney as a party respondent, and therefore the issue of his personal liability is not before us. R. D. & O. at 13.

b. Kalkunte’s protected activity

Kalkunte engaged in protected activity under the SOX and Toney, the decision-maker in this case, knew that. R. D. & O. at 42-45. SOX protection extends to employees who provide information to employers or participate in a proceeding regarding conduct the employee reasonably believes constitutes certain enumerated categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a).

Kalkunte learned that DVI’s senior management had engaged in multiple improper activities. She heard from Fear and Mallot, DVI credit and workout employees, that DVI management had prepared improper delinquency reports and provided those altered reports to lenders, DVI’s board of directors, and the SEC through its filings. She also found out that DVI employees were shredding documents. On August 18, 2003, Kalkunte brought that information to the attention of Goldberg, Shapiro, and McHugh of DVI’s board of directors’ audit committee.

The audit committee contacted Meller of Latham & Watkins, to learn how to proceed with an investigation, and they agreed to hire Arnold & Porter as special investigative counsel. Meller then let Toney know that Kalkunte had reported alleged improprieties to the board of directors, that Arnold & Porter would be investigating them, and that Toney should make Kalkunte and other key employees available to meet with investigators. A team from Arnold & Porter met with Toney and Kalkunte at DVI headquarters in Jamestown, Pennsylvania on August 22, 2003.

Thus, by August 22, Kalkunte had engaged in protected activity and Toney was aware of it. DVI and APS have so stipulated. R. D. & O. at 14, 43-44. But there is other evidence of protected activity and Toney’s knowledge that is in dispute. Unaware of the delay in processing Arnold & Porter’s application to the bankruptcy court to authorize DVI to retain and pay the firm, Kalkunte sent an e-mail to Goldberg with a copy to Toney on September 10, 2003, in which she said she needed to discuss the status of Arnold & Porter’s investigation into her SEC violations report.

On September 12, Toney asked Kalkunte to meet with him and Clay. It was then Toney told her that that she worked for him, and inferentially not the audit committee. “There is no investigation going on right now,” he said, “because they’re not getting paid.” Although Kalkunte thought the bankruptcy court had approved payment weeks earlier, Toney informed her that “there was no way in hell that the [bankruptcy] estate would pay for Arnold & Porter’s investigation.” The conclusions to be drawn from the conversation are that Kalkunte thought Toney was not supporting the investigation and Toney thought the investigation was none of her business.

Following the September 12, 2003 meeting with Toney and Clay, Kalkunte contacted Goldberg and Shapiro. She recounted her conversation with Toney. Describing Toney’s comments as “inappropriate,” Shapiro said they would look into the situation “right away.” Acting for the special committee of the board, Goldberg and Shapiro told Toney on September 15 that Kalkunte was accusing Toney of wanting to pull the bankruptcy filing to retain Arnold & Porter as special counsel.

We agree with the ALJ that Kalkunte’s inquiry into the status of Arnold & Porter’s investigation into DVI’s financial improprieties was protected under the SOX, and that the evidence shows Toney was aware of those inquiries. R. D. & O. at 42-45. DVI and APS dispute Kalkunte’s conclusion that Toney was delaying the Arnold & Porter investigation, but, because she was not aware of the role of the bankruptcy court in the delay, her belief was reasonable.

c. Protected activity as factor in discharge

To prevail on her SOX whistleblower complaint, Kalkunte had to prove by a preponderance of the evidence that her protected activity was a “contributing factor” in her discharge. See 18 U.S.C.A. § 1514A(b)(2)(C), adopting legal burdens of proof set forth in 49 U.S.C.A. § 42121(a)-(b)(2)(B)(iii)-(iv). Substantial evidence supports the ALJ’s conclusion that it was. R. D. & O. at 45-47. We summarize the evidence:

There is temporal proximity between Kalkunte’s protected activity and her discharge, providing probative evidence of a causal relationship. Her disclosures of financial improprieties to the audit committee of the board of directors occurred on August 18, 2003, and Toney through Clay discharged her on September 18, 2003. She contacted Goldberg and Shapiro as members of the audit committee on September 10 to inquire about the status of the investigation into her report of SEC violations, and on September 12 to recount her conversation with Toney. On September 15, Goldberg and Shapiro told Toney that Kalkunte accused Toney of wanting to pull the bankruptcy filing. Toney discharged her on September 18, three days later.

There is also evidence of and pretext and retaliatory animus. R. D. & O. at 46-47. Although Toney built a case that Kalkunte’s services were no longer needed in DVI, or later that her performance was inadequate, there is evidence that those reasons were a pretext, and that the real reason for her discharge was her ongoing preoccupation with the status of the Arnold & Porter investigation.

After DVI filed for bankruptcy protection on August 25, 2003, Kalkunte had added responsibilities that included working with auditors, managing the litigation section, and reviewing bankruptcy filings. On August 27, DVI eliminated more than ninety employee positions, but Kalkunte and four other in-house counsel stayed on. Tony Turek, the chief credit officer for DVI, and Nancy Cascioli, a DVI human resources officer, assured Kalkunte that the attorneys would be needed following the bankruptcy.

On September 10, 2003, Kalkunte sent an e-mail to Goldberg with a copy to Toney in which she said she needed to discuss the status of Arnold & Porter’s investigation into her SEC violations report. Within four hours of her e-mail that was copied to Toney, David Heller of Latham & Watkins sent Toney an e-mail saying, “Suggestion: have her get you a ‘job description’ for the next two weeks and have her update it weekly – where she thinks she can add value. You can then ‘yes/no’ it and tell her you will task her with anything beyond that. Might work.” Toney then asked Clay to find out Kalkunte’s tasks and responsibilities, although she never obtained similar information about the four other in-house lawyers. The timing suggests that Kalkunte’s future in the company was on a collision course with her drive for the investigation.

On September 12, Toney set up the meeting with Kalkunte and Clay. This was the meeting at which Toney told her she worked for him, because he was the CEO. The context suggests that she did not work for the audit committee and that her interest in following up on the Arnold & Porter investigation was outside her assigned duties and a source of irritation to him. There was no investigation, because there was “no way in hell” that the bankruptcy estate would pay for it. “At some point you’ll get your justice,” he told her.

Toney admitted that “this meeting helped Ms. Clay and me focus on the lack of a role for Ms. Kalkunte in the organization, hastening our inevitable decision to terminate her.” Toney concluded that Kalkunte was no longer adding value to DVI. Clay testified that Toney perceived Kalkunte’s actions as a “distraction.”

In participating in the discharge decision, Clay consulted with some but not other outside counsel at Latham & Watkins about Kalkunte’s duties and responsibilities. In making the termination decision, Toney told Clay to review Kalkunte’s position and duties, but Clay never met with her. The surrounding circumstances clearly suggest pretext; that, notwithstanding legal work for her to do, Kalkunte had become a thorn in Toney’s side, and he was devising a way to eliminate her.

Then on September 18, 2003, Clay called Kalkunte into her office, and with Cascioli from DVI’s human resources department there, informed her that her position had become redundant, and that she was being discharged as a part of a reduction in force. Toney told board members that Kalkunte was part of the reduction in force and that other lawyers could more competently handle the work. An attorney at Latham & Watkins told Goldberg that outside counsel could do better work at lower cost.

At trial, Toney testified that DVI gave a reduction in force as the reason for Kalkunte’s discharge, so that Kalkunte could collect unemployment and get another job. Kalkunte was also discharged for performance issues, he claimed. But the only other position eliminated during September was that of Rebecca Kolbe, an administrative assistant who had requested in August that she be laid off for personal reasons. Although Kalkunte was told her position was no longer necessary, Robert DeCandia, a lawyer in DVI’s executive department, took over her work, and early in 2004, transferred from the executive department to the legal department.

There is other evidence of animus. Clay had Cascioli escort Kalkunte out of the building immediately. She was the only discharged DVI employee to have been treated in that fashion.

Kalkunte need not show that her protected activity (in initiating and then following up on the Arnold & Porter investigation) was the only factor in her discharge, just that it was a “contributing factor.” Substantial evidence supports the ALJ’s conclusion that she has done so. R. D. & O. at 45-47.

d. Respondents’ failure to prove that they would have taken the same action without protected activity

DVI and APS can only avoid liability in this case if they can prove by “clear and convincing evidence” that they would have discharged Kalkunte when they did, even if she had not engaged in protected activity. See § 49 U.S.C.A. § 42121(a)-(b)(2)(B)(iv). Substantial evidence supports the ALJ’s conclusion that Toney would not have discharged Kalkunte when he did, even if she had not disclosed and then inquired into the progress of the investigation of what she reasonably believed were financial improprieties amounting to securities fraud. R. D. & O. at 47-54. Much of the evidence has already been discussed, but it also bears on the question of DVI’s and APS’ burden of proof.

Because DVI filed for bankruptcy under Chapter 11, the last lawyer left in October of 2004, and DVI eventually closed its doors in December, DVI and APS can not defend on the ground that Kalkunte would have eventually lost her job. DVI and APS must prove by clear and convincing evidence that she would have been discharged in or around September 2003. There is no doubt that DVI was in financial trouble when it hired outside bankruptcy attorneys, Latham & Watkins, and Toney of APS as turnaround and restructuring specialist. Although DVI eliminated more than ninety employee positions on August 27, Kalkunte and four other in-house lawyers were not among them. After the bankruptcy filing, Kalkunte had added responsibilities. Only one other employee, Kolbe, an administrative assistant who requested to be laid off, was discharged in September, and the evidence is that none of the other in-house lawyers lost their jobs during the same time frame.

It was only after Kalkunte started pressing Toney for answers about the progress of the Arnold & Porter investigation that he began to question her value to the organization. She was evidently an irritant because she went over his head to the board of directors. But what to him was an irritant the law regards as protected activity. Toney offered shifting explanations for the decision to let Kalkunte go. She did not add value; she was no longer needed; outside counsel could do better work for lower cost. But then another in-house lawyer took over her work. And all the other DVI in-house lawyers remained at least through April 2004, with the last leaving that October. T. at 233; 500-501; EX 40, 62. And finally, Kalkunte alone among all of the employees subjected to a reduction in force was unceremoniously escorted out of the building immediately after her discharge.

Kalkunte does not need to show that the reasons Toney gave are false. There may have been some truth to the need to downsize in view of the pending dissolution of the company. And Kalkunte may not have been a strong performer on the legal team. Yet the burden is on DVI and APS to provide evidence that those reasons were legally sufficient. The evidence is that in a few years Kalkunte progressed from contract attorney to associate general counsel to assistant general counsel who interacted with senior executives and the board of directors at a salary of $130,000. The record does not contain evidence of performance-related issues until Kalkunte began her whistle blowing activity. Although DVI and APS proffered some evidence of legitimate non-discriminatory reasons for discharging Kalkunte, they failed to prove by clear and convincing evidence that they would have discharged her when they did had she not engaged in protected activity. R. D. & O. at 47-54. There is thus substantial evidence for the ALJ’s decision on liability, and we affirm it.

3. Awardable damages

We disagree, however, on the ALJ’s award of damages. R. D. & O. at 54-62. Remedies under the SOX can include reinstatement, back pay with interest, compensatory damages, and attorney’s fees. See 18 U.S.C.A. § 1514A(c)(2)(A)-(C).

We begin with the issue of reinstatement. The ALJ noted that reinstatement is the preferred remedy, but that reinstatement was impossible in this case because DVI was no longer in business. R. D. & O. at 54. However, notwithstanding that fact, the ALJ ordered both back and front pay for a period of time long past when DVI had gone out of existence and had no employees. We agree with DVI that dissolution of the company is a superseding intervening cause that cuts off her entitlement to back or front pay. See Brief of DVI in Support of Appeal to Administrative Review Board at 6-8, and cases cited therein.

Because we disagree that Kalkunte would have been laid off in September 2003 notwithstanding her whistle blowing, we disagree with DVI that her back pay should end there. There are two relevant dates. One is October 2004, when the last member of the in-house legal department was terminated and the department closed its doors, or December 2004, when DVI terminated the very last of its employees. See DVI Reply Brief to ARB, at 9, citing Bankruptcy Court’s confirmation order. When damages are difficult to calculate, “uncertainties in establishing the amount of back pay to be awarded are to be resolved against the discriminating party.” McCafferty v. Centerior Energy, 1996-ERA-006, slip op. at 26-27 (Sec’y Sept 24, 1997). In this case, we vacate the ALJ’s award on back and front pay, and bonus, and award Kalkunte lost wages through December 2004 at the rate of $130,000 per year, less interim earnings, plus interest.

The ALJ also awarded $22,000 in damages for Kalkunte’s “pain, suffering, mental anguish, the effect on her credit [because of her loss of employment] and the humiliation that she suffered.” R. D. & O. at 65. Although we agree with DVI that the damage to credit may not be legally compensable, the balance of the award is supported by the evidence, is not clearly erroneous, and within the ALJ’s discretion. Accordingly, we affirm it.

We also note that, as prevailing party, Kalkunte is entitled to costs, including reasonable attorney’s fees, both before the ALJ and the ARB. The fees awards will be the subject of separate decisions.

Conclusion

Substantial evidence supports the ALJ’s ruling that Kalkunte proved by a preponderance of the evidence that her protected activity was a contributing factor in her discharge. Therefore, the Respondents, DVI and APS, violated the SOX. Substantial evidence also supports the ALJ’s holding that DVI and APS did not prove by clear and convincing evidence that they would have discharged Kalkunte had she not engaged in protected activity. Accordingly, DVI and APS did not avoid liability for violating the SOX. In that regard as well, we affirm the ALJ.

However, we modify the ALJ’s recommended decision as to remedies. We vacate the ALJ’s award on back and front pay, and bonus and award Kalkunte lost wages through December 2004 at the rate of $130,000 per year, less interim earnings during that period, plus interest as provided under 26 U.S.C. § 6621(a)(2). We also affirm the ALJ’s award of $22,000 in compensatory damages.

Kalkunte’s attorney shall have 30 days from receipt of this Final Decision and Order in which to file a fully supported attorney’s fee petition for costs and services before the ARB, with simultaneous service on opposing counsel. Thereafter, DVI and APS shall have 30 days from their receipt of the fee petition to file a response.

SO ORDERED.

M. CYNTHIA DOUGLASS
Chief Administrative Appeals Judge2

WAYNE C. BEYER
Administrative Appeals Judge

______________________

[ENDNOTES]

1 See § 307 of SOX, requiring an attorney to report evidence of a material violation of securities law or similar violation by the company to the chief legal counsel or chief executive of the company, or, if that is unsuccessful, to the audit committee of the board of directors. 15 U.S.C.A. § 7245.

2 Chief Administrative Appeals Judge Douglass resigned from her position at the Administrative Review Board, effective January 17, 2009. However, she signed this decision before her resignation became effective. The decision was issued subsequently to allow Judge Transue to write separately.

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