On Wednesday, New York’s highest court rejected a claim by the former Chief Compliance Officer of Peconic Partners, LLC – a New York based hedge fund – that he was wrongfully terminated for confronting the fund’s majority owner, CEO and President, William Harnisch, for front-running. Sullivan v. Harnisch, et al., No. 82, NYLJ 1202552974182, at *1 (Ct. of App., Decided May 8, 2012). The complaint filed by the CCO, Joseph Sullivan, alleges he was terminated within days of objecting to sales by Harnisch in his personal account and the accounts of his family members in Potash Corp. (POT) the day before selling shares of the stock in the hedge fund’s accounts. The court noted that Sullivan, as CCO, had a duty to ensure that Peconic followed its legal and ethical obligation under state and federal securities laws, as well as its own Code of Ethics, to avoid such conduct. Notably, the court found that those “legal and ethical duties of a securities firm and its compliance officer [do not justify the recognition] of a cause of action for damages when the compliance officer is fired for objecting to misconduct.” An important factor in the reaching this decision seemed to be the fact that Sullivan was not a full-time compliance officer; rather, he held four other titles at the firm, including Executive Vice President and Chief Operating Officer.
The high court also noted the limits of the recent protections afforded whistleblowers under the Dodd-Frank Act, stating a “private right of action for double-back pay for employees who are fired for furnishing information about violations of the securities laws to the SEC,” and no private right of action for termination that results in reporting violations internally. The opinion’s author, Hon. Robert S. Smith, Jr., stated Dodd-Frank “does not apply to conduct like that alleged in Sullivan's complaint; Sullivan does not claim to have blown a whistle…but only to have confronted Harnisch himself. Nothing in federal law persuades us that we should change our own law to create a remedy where Congress did not.”
Two of the court’s seven judges, included the court’s Chief Judge, Hon. Jonathan Lippman, disagreed with the ruling. Judge Lippman’s scathing dissenting opinion observed: “The majority's conclusion that an investment adviser like defendant Peconic has every right to fire its compliance officer, simply for doing his job, flies in the face of what we have learned from the Madoff debacle, runs counter to the letter and spirit of this Court's precedent, and facilitates the perpetration of frauds on the public.”
For additional information about the Sullivan case or any other securities compliance concern please contact the author, Sarah Weber at firstname.lastname@example.org or (619)298-2880.