Summary
noting whether or not the Sylvester standard now applies in the Ninth Circuit "is irrelevant" because the plaintiff could not satisfy "even the lesser standard that requires that he had an objectively reasonable belief"
Summary of this case from Erhart v. BofI Holding, Inc.Opinion
No. C-13-5498 EMC
06-17-2015
FRED NAZIF, Plaintiff, v. COMPUTER SCIENCES CORPORATION, Defendant.
ORDER (1) GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT; (2) DENYING AS MOOT PLAINTIFF'S MOTION FOR PARTIAL SUMMARY JUDGMENT; AND (3) DENYING AS MOOT PLAINTIFF'S MOTION FOR JUDGMENT ON THE PLEADINGS
(Docket Nos. 66, 67, 71)
I. INTRODUCTION
Plaintiff Fred Nazif brought this action against his former employer, Defendant Computer Sciences Corporation (CSC), alleging that his employment was terminated in retaliation for making internal reports of alleged securities law violations and/or refusing to participate in CSC's unlawful activities. See Docket No. 39 (Second Amended Complaint). Nazif's operative complaint contains three causes of action: (1) whistleblower retaliation in violation of Section 21F of the Dodd Frank Act (Dodd Frank or DFA); (2) retaliatory termination in violation of California Labor Code § 1102.5; and (3) wrongful termination in violation of public policy.
Pending before the Court is CSC's motion for summary judgment. Docket No. 71. After reviewing the briefs and considering the views expressed during extended oral argument on this matter, the Court concludes CSC is entitled to summary judgment on all three of Nazif's asserted claims. As explained in more detail below, Nazif submitted insufficient evidence that he actually engaged in a protected activity (i.e., blew the whistle) to recover under Dodd Frank, because there is no evidence that his subjective belief that CSC violated securities laws was objectively reasonable. More specifically, Nazif's DFA claim fails because he did not submit evidence from which a reasonable juror could conclude that Nazif reported material securities law violations to his supervisors. Nazif's California Labor Code cause of action fails because he presented no evidence that he refused to participate in an activity that would violate a federal or state statute or regulation, as required to maintain a retaliation claim under section 1102.5(c). And Nazif's wrongful termination in violation of public policy claim necessarily fails because it is derivative of his first two causes of action.
Also pending before the Court is Plaintiff's motion for partial summary judgment and Plaintiff's motion for judgment on the pleadings. Docket Nos. 66-67. Because the Court grants Defendant summary judgment, and thereby resolves this case in its entirety, the Plaintiff's pending motions are hereby denied as moot.
II. BACKGROUND
Plaintiff Fred Nazif has been a Certified Public Accountant since the mid-1990s. Docket No. 82-7 (Nazif Decl.) at ¶ 3. During this time, Nazif has provided accounting and auditing services mostly to large "high-tech" companies like Hewlett Packard and Defendant CSC. See id. at ¶ 4-8. Nazif has "gained extensive experience in public company accounting issues, particularly as it relates to accounting for high tech companies and revenue recognition" including "extensive knowledge of US GAAP [(Generally Accepted Accounting Principles)]." Id. at ¶ 9.
Nazif was hired by CSC in July 2012 to serve as a Technical Accounting Director. Docket No. 82-13 at 313. According to Nazif, he was "aware that CSC had settled a securities fraud class action for $97.5 million the previous December," but he was assured during his interview that "CSC was taking corrective action." Nazif Decl. at ¶ 12. Nazif's job duties included providing "technical accounting support for significant transactions," reviewing "the application of revenue recognition guidance for new and existing contracts," and ensuring the "accuracy of financial statements." Docket No. 71-4 at 12. Nazif was initially assigned to report to April Hand, a fellow accountant at CSC. Id.
During the time that Nazif reported to Hand, Nazif apparently became aware of what he believed to be errors in CSC's accounting practices. Nazif's concerns were five-fold. The first concern was about certain 2006 contracts with Abbott Labs (Abbott Contracts). During a joint conference call with other audit staff, an audit staff member (not Nazif) noticed a mistake in the accounting treatment under the Abbott Contracts. Nazif Decl. at ¶ 17. Hand adjusted the accounting treatment for the Abbott Contracts, but Nazif claims that Hand's adjustment was "incorrect" because she took two contracts that were worth more than $1 million in total, and "split the two contracts and adjusted them separately." Id. Nazif claims that he believes Hand "did that to avoid having to make an out of period adjustment." Id.
After learning of the improper accounting treatment in the Abbott Contracts, Nazif states that he became "concerned" that the issue had gone unspotted for six years. Nazif Decl. at ¶ 19. While Nazif now acknowledges that the Abbott Contracts had been signed by another company that was later acquired by CSC (hence, CSC's auditors would not have reviewed the contracts at the time the predecessor entity signed them in 2006), in 2012 he was concerned that there might be other existing contracts that contained similar accounting errors that had gone unspotted by CSC accountants. Id. Consequently, Nazif suggested to Hand that she "review other contacts to determine whether the issue was widespread." Id. He also informed Hand that he believed her accounting adjustment for the Abbott Contracts was "incorrect." Id. Nazif admits that Hand inquired within CSC whether the identified accounting issue was a "common" problem in prior contracts, and indicates that Hand was reassured that it was not. Id. Nevertheless, Nazif claims that Hand's inquiry was insufficient under GAAP because her investigation consisted of calling and receiving assurances from "the same business unit that did not notice the issue [in the Abbott] contract[s] for six years." Id. According to Nazif, this inquiry was not GAAP compliant because "accountants are expected to use professional skepticism when exercising their judgment." Id. Nazif alleges that a GAAP compliant investigation into the contract issue would have taken significantly longer than the investigation Hand undertook. Id. Nazif claims that Hand stopped communicating with him about Abbott Labs after he raised his concerns with her. Id.
Nazif's second concern was with improper accounting treatment relating to a contract with Arc Insurance. Nazif Decl. at ¶ 20. According to Nazif, revenue was being recognized under the Arc contract improperly, but when he "contacted Ms. Hand about it, she told me that we should not rock the boat, and took me off the job" reviewing the Arc contract. Id.
The third accounting problem Nazif observed was with a type of accounting treatment called Vendor Specific Objective Evidence, or VSOE. Nazif Decl. at ¶ 21. According to Nazif, CSC was using VSOE to recognize revenue on certain contracts, but was not doing so consistently with GAAP best practices. Id. Moreover, while Nazif knew that CSC had recently adopted new VSOE policies before he began working for the firm, he was concerned that "most of the business units were not aware that there was a new checklist" containing the proper VSOE procedures, and thus the new procedures were not being consistently followed. Id. at ¶ 24.
The fourth accounting issue Nazif observed related to CSC's practice of "capitalizing routine research, development, and maintenance." Nazif Decl. at ¶ 25. According to Nazif, "in order to capitalize a software development cost" under GAAP, the company must be assured that the development cost either "significantly increases the marketability of the product; or [] extends its useful life." Id. Nazif apparently "personally observed Ms. Hand approve issues for capitalization based on bald assertions" that a software development "extended the useful life of the product." Id. Nazif also apparently "observed Ms. Hand approve capitalization before she received the supporting documentation." Id. Hand told Nazif we "should be rubberstamping these capitalization costs" but when Nazif "refused to do so . . . she reassigned the work." Id. at ¶ 26.
Finally, Nazif states that he was concerned that CSC did not have a "global contract database" where employees could go to access all of CSC's contracts, and particularly contracts that were "related" to those contracts being considered for a particular accounting treatment. Nazif Decl. at ¶ 28. Rather, "the accounting team needed to rely on the business units to self-report whether there were related contracts." Id. According to Nazif, this "is not a control that complies with GAAP." Id. Nazif alleges that "I expressed my concern that this was an inadequate control to . . . Ms. Hand." Id. Hand reports, however, that at no time during his employment did Nazif ever "disclose[] to me that he believed any of CSC's accounting policies, procedures, or practices violated any state or federal laws, or could lead to misstatements on CSC's required financial reports and disclosures." Docket No. 71-13 (Hand Decl.) at ¶ 31. Hand further declares that in her experience, CSC's accounting "comport[ed] with U.S. GAAP." Id. at ¶ 32.
Sometime in November 2012, CSC reorganized its auditing group, and CSC's Chief Accounting Officer, Michael Sweeney, became Nazif's direct supervisor. Docket No. 71-15 (Sweeney Decl.) at ¶¶ 5-6. On November 26, 2012, Sweeney phoned Nazif. Id. at ¶¶ 7-8. According to Sweeney, he called Nazif to ask "what he was working on" and otherwise discuss Nazif's job responsibilities for CSC. Id. at ¶¶ 6, 8. Sweeney avers that Nazif "did not respond directly to my inquiries, and I left the call unable to understand what Mr. Nazif was working on or what he considered his duties to be." Id. at ¶ 8.
Nazif remembers the November 26 call differently. According to Nazif, he expressed his various concerns with CSC's accounting practices to Sweeney. Specifically, Nazif states that he "complained to Michael Sweeney about the Abbott Labs situation," and that he variously "shared," "raised" and "expressed" his "concerns" regarding the other accounting practices described above. See Nazif Decl. at ¶¶ 19, 23-24, 28. Nazif provided few additional details regarding precisely what he told Sweeney, either in his declaration or during his deposition. See, e.g., Nazif Depo. at 133:9-141:21 (describing generally the four topics of conversation Nazif had with Sweeney but without elaboration). Sweeney has testified that he "did not understand from Mr. Nazif that what Nazif was stating or suggesting on the November 26 call involved "any specific instances of, or systemic issues of, improper accounting." See, e.g., Sweeney Decl. at ¶ 9.
On November 27, Nazif sent Sweeney an email that began: "Dear Mike: It was a pleasure talking with you the other day [Nov. 26th] and I am looking forward to take [sic] all the assignments/responsibilities as you see fit under your direction, which might be the same or different than I had been assigned by Ms. April Hand . . ." Sweeney Decl, Ex. 19 (first bracketed alteration in original). The email went on to list the accounting papers he had reviewed and his other outstanding tasks. Nowhere in the email did Nazif mention any accounting "issues" or problems. Id. Indeed, it is largely undisputed that there is no documentary evidence in the summary judgment record whatsoever of Nazif making complaints or otherwise informing Sweeney or Hand that he believed that CSC's accounting practices were fraudulent or materially violated any rule or procedure. It is similarly undisputed that Nazif did not tell any other CSC personnel about his belief that CSC was violating securities laws, nor did he alert outside enforcement agencies while he was still employed by CSC. See Nazif Depo. at 79:20-81:17 (admitting that he did not report any possible violations to anyone other than Hand or Sweeney).
Nazif has pointed to some documents as evidencing proof that he complained about certain practices to his superiors, but the Court finds that none of the documents bear this out. For instance, when asked at his deposition about one such document that seemed to indicate Nazif's agreement with Hand's proposed accounting treatment, Nazif testified that when he wrote to Hand telling her that her accounting idea was "a good strategy," what he really meant to say was "that's improper." See Nazif Depo. at 159:10-16. (Q: So what you really meant by "that's a good strategy" is "that's improper"? A: Yes).
Toward the end of 2012, CSC "engaged in a major corporate-wide reorganization . . . meant to cut costs and ensure the right people were in the right roles and the right locations." Sweeney Decl. at ¶ 15. Sweeney was asked to "review the personnel in [his] group as a part of this exercise, and understood [CSC's] charge to keep the better performers." Id. According to Sweeney, he spoke with a number of individuals about Nazif's job performance. Id. at ¶ 16. Apparently, CSC staff had "complained about Mr. Nazif" and stated that his "communication skills were poor . . . and that he was not making a significant contribution." Id.; see also Hand Decl. at ¶ 18. Consequently, Sweeney decided to fire Nazif. Sweeney Decl. at ¶ 17. Nazif disputes that he was a poor performer, and contends that he was fired in retaliation for reporting potential securities law violations to Sweeney and Hand. The only evidence Nazif presents to support a finding of retaliatory intent is the timing between his alleged internal reports of illegality (made in the Fall of 2012) and his termination (in January 2013).
III. DISCUSSION
CSC moves for summary judgment on all three of Plaintiff's wrongful termination claims. For the reasons explained below, the Court grants the motion. A. Summary Judgment Standard
The court may grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed R. Civ. P. 56(a). The court must view the evidence, and draw all reasonable inferences therefrom, "in the light most favorable to the nonmoving party." Cameron v. Craig, 713 F.3d 1012, 1018 (9th Cir. 2013). An issue of fact is material if it has the potential to "affect the outcome of the case." Kasperzyk v. Shetler Sec. Servs., Inc., No. C-13-3358 EMC/TEH, 2015 WL 1348503, at *6 (N.D. Cal. Mar. 25, 2015) (citations omitted).
When the moving party has carried its burden under Rule 56, "its opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, the party opposing summary judgment must "come forward with specific facts showing that there is a genuine issue for trial . . . . Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Id. at 587 (internal quotation marks and citations omitted) (emphasis in original); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986) (holding that a party opposing summary judgment that has the burden of proof at trial must come forward with sufficient probative evidence as to each element of the claim(s) on which it bears the burden of proof); T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 631 n.3 (9th Cir. 1987). B. Nazif's Dodd-Frank Act Claim Fails
Nazif's first claim is for whistleblower retaliation in violation of Section 21F of the Dodd-Frank Act. See SAC at ¶ 35. As this Court recently explained in great detail in Somers v. Digital Realty Trust, Section 21F protects "whistleblowers" against retaliation where those individuals undertake one or more of the protected activities listed in the statute. See Somers v. Digital Realty Trust, -- F. Supp. 3d --, 2015 WL 2354807, at *3-4 (N.D. Cal. May 15, 2015). Here, Nazif concedes that he did not report any alleged law violations to the SEC during his employment with CSC, and so only subsection (iii) of Section 21F can apply to his claims. See id. As relevant here, that subsection protects certain employees from retaliation for "making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002." See id. at *4; 15 U.S.C. § 78u-6(h)(1)(A)(iii).
Codified at 15 U.S.C. § 78u-6.
CSC argues that Nazif's DFA whistleblower claim fails for two main reasons. First, CSC argues that Nazif is not a "whistleblower" as a matter of law because he did not make an external report to the SEC. Alternatively, CSC argues that Nazif has provided insufficient evidence that he actually engaged in a protected activity (i.e., blew the whistle). Specifically, CSC argues that Nazif presented insufficient proof that his subjective belief that CSC was engaging in securities law violations was objectively reasonable. While the Court recently rejected CSC's first argument, the Court finds that CSC's alternative contention has merit.
The Court rejects CSC's argument that Nazif cannot qualify as a whistleblower under the DFA because he did not make an external report to the SEC. In so doing, the Court adopts its reasoning in Somers. See 2015 WL 2354807.
In order to prevail on his Dodd Frank claim, Nazif would need to present evidence that he made disclosures to Sweeney or Hand that were either "required or protected" under Sarbanes-Oxley (SOX). Nazif acknowledges that none of his claimed disclosures were "required" under any relevant law. Rather, he claims his disclosures were "protected" under 18 U.S.C. section 1514A, which is the SOX anti-retaliation provision. The parties agree that in order to prevail on his DFA claim, Nazif must prove that he could win a SOX anti-retaliation action brought directly under section 1514A. See Opp. Br. at 16. Stated differently, to show that his disclosure was "protected" under SOX, Nazif must show that he is entitled to the anti-retaliation protections of Sarbanes-Oxley.
1. Nazif Has Not Made A Prima Facie Case Under Sarbanes-Oxley
Section 1514A prohibits publicly-traded companies from "discriminat[ing] against an employee in the terms and conditions of employment" for "provid[ing] information . . . regarding any conduct which the employee reasonable believes constitutes a violation of section 1341 [mail fraud], 1343 [wire 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." 18 U.S.C. § 1514A(a)(1). To make out a prima facie case for a violation of section 1514A, a plaintiff must establish that: (1) the employee engaged in a protected activity or conduct; (2) the named person knew or suspected, actually or constructively, that the employee engaged in the protected activity; (3) the employee suffered an unfavorable personnel action; and (4) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action. See Van Asdale v. International Game Technology, 577 F.3d 989, 996 (9th Cir. 2009) (citing 29 C.F.R. § 1980.104(b)(1)(i)-(iv)). If the employee can satisfy these four elements, the burden shifts to the employer to demonstrate "by clear and convincing evidence that it would have taken the same adverse employment action in the absence of the plaintiff's protected activity." Id.
For the purposes of this motion, the Court assumes without deciding that Nazif has satisfied the final three elements of the prima facie test under SOX. The Court concludes, however, that Nazif has failed to present sufficient evidence to support his contention that he satisfies the first element of the SOX test; namely that he engaged in a protected activity or conduct. See Van Asdale, 577 F.3d at 996.
As noted above, section 1514A only prohibits discrimination against an employee for providing information "regarding any conduct which the employee reasonably believes constitutes a violation of" a listed law. 18 U.S.C. § 1514A(a)(1) (emphasis added); see also Van Asdale, 577 F.3d at 1000. Thus, as the Ninth Circuit has held, the "plain language of th[e] section, as well as the statute's legislative history and case law interpreting it, suggest that to trigger the protections of the Act, an employee must . . . have (1) a subjective belief that the conduct being reported violated a listed law, and (2) this belief must be objectively reasonable." Van Asdale, 577 F.3d at 1000 (citations omitted).
Van Asdale further holds that "to constitute protected activity under Sarbanes-Oxley, an 'employee's communications must 'definitively and specifically' relate to [one] of the listed categories of fraud or securities violations under 18 U.S.C. [] § 1514A(a)(1).'" Van Asdale, 577 F.3d at 996-97 (quoting Platone v. FLYi, Inc., 25 IER Cases 278, 287 (U.S. Dept. of Labor Sept. 29, 2006)). In 2011 the ARB abrogated Platone - the decision to which Van Asdale deferred - "concluding that the 'definitively and specifically' test is 'inapposite' to the Sarbanes-Oxley whistleblower protection provision and in 'potential conflict with the express statutory authority of § 1514A,' which 'prohibits a publicly traded company from discharging or in any other manner discriminating against an employee for providing information regarding conduct that the employee 'reasonably believes' constitutes a SOX violation." Nielsen v. AECOM Technology Corp., 762 F.3d 214, 220 (2d Cir. 2014) (quoting Sylvester v. Parexel Int'l LLC, ARB No. 07-123, 2011 WL 2165854, at *14-15 (ARB May 25, 2011) (en banc)). "The Board interpreted § 1514A to hew more closely to what its text expressly provides: that the plaintiff must have a subjective belief that the challenged conduct violates a provision listed in § 1514A, and that this belief must be objectively reasonable." Nielsen, 762 F.3d at 221. The Second Circuit decided that the ARB's latest interpretation of SOX was persuasive, and thus entitled to deference. The Third Circuit has similarly deferred to the ARB's more recent interpretation of SOX. See Wiest v. Lynch, 710 F.3d 121, 131 (3d Cir. 2013) ("We conclude that the ARB's rejection of Platone's 'definitive and specific' standard is entitled to Chevron deference."). In the absence of Ninth Circuit authority contrary to Van Asdale, the Court assumes that the "definitively and specifically" test still applies in this Circuit. The Court believes that Nazif has not submitted sufficient evidence to meet the "definitive and specific" standard articulated by the Ninth Circuit. Ultimately, however, whether or not that portion of Van Asdale is still correct is irrelevant here, because Nazif cannot satisfy even the lesser standard that requires that he held an objectively reasonable belief that CSC had violated the securities laws.
In order to "'have an objectively reasonable belief there has been shareholder fraud, the complaining employee's theory of such fraud must at least approximate the basic elements of a claim of securities fraud.'" Van Asdale, 577 F.3d at 1001 (quoting Day v. Staples, Inc., 555 F.3d 42, 55 (1st Cir. 2009)). For plaintiffs like Nazif, this means that there must be evidence the plaintiff had an objectively reasonable belief that their employer's violations involved a "material misrepresentation or omission, scienter, a connection with the purchase or sale of a security, reliance, economic loss, and loss causation." Id. at 1001 (citing Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)). This test does not require Nazif to "prove that [CSC] officials actually engaged in fraud." Id. But an objectively reasonable accountant in Nazif's position would need to believe that fraud occurred. Id.
Here, Nazif cannot satisfy the objective prong of the SOX test because he submitted insufficient evidence to show that his "theory of fraud approximates a securities fraud claim." Van Asdale, 577 F.3d at 1001. Specifically, Nazif has cited no evidence that the GAAP violations he complained of are "material" as that term is used in the context of a shareholder fraud cause of action. As the First Circuit explained in Day, the "materiality requirement means that the complainant must believe there is a 'likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.'" Day, 555 F.3d at 57 (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). Specifically in the context of GAAP violations, the Ninth Circuit has explained that such violations are typically immaterial where they are "minor or technical in nature," and are material where they "constitute[] widespread and significant inflation of revenue." In re Daou Systems, Inc., 411 F.3d 1006, 1017 (9th Cir. 2005); see also Nathanson v. Polycom, Inc., -- F. Supp. 3d --, 2015 WL 1517777, at *4 (N.D. Cal. Apr. 3, 2015) (holding that minor or technical GAAP violations are quantitatively immaterial under Ninth Circuit law).
Despite the fact that he would have the burden to prove materiality at trial, Nazif made no showing with respect to this element. In fact, what evidence Nazif has submitted undercuts any potential inference of materiality. For instance, with regards to the Abbott Contracts, Nazif declared that the overall contract value between the two contracts was more than $1 million, but by splitting the contracts up (i.e., treating them as separate transactions, when they were truly related) Hand avoided an "out of period adjustment" by making the contract value appear to be less than the $1 million threshold for such a report. See Nazif Decl. at ¶ 18. Notably, Nazif did not present the Court with evidence regarding the impact on CSC's overall reported revenues that this inappropriate accounting treatment might have had, if any. Nor did Nazif present any evidence regarding how wide ranging this particular alleged accounting impropriety was, assuming that it was more than an isolated incident. In any event, even if this Court assumes that the entire value of the Abbott Contracts was improperly booked as revenue in a financial statement that was ultimately disseminated to investors, a $1-2 million overstatement of revenue would be a "minor or technical violation" that is not material to a company, like CSC, that submitted uncontroverted evidence that it reported annual revenue of over $14 billion dollars during the period of Nazif's employment. See In re Daou Systems, 411 F.3d at 1018 (explaining that "although overstatement of revenues in violation of GAAP may support a plaintiff's claim of fraud," a plaintiff must show "how the adjustments affected the company's financial statements and whether they were material in light of the company's overall financial position") (emphasis added).
The Court notes generally in this regard that Nazif's briefing frequently makes factual assertions without any record citations whatsoever. And often where Nazif does include record citations, the cited documents often do not support (or directly support) the corresponding statement in Nazif's brief. It is worth repeating the familiar refrain that "judges are not like pigs, hunting for truffles . . . ." Independent Towers of Washington v. Washington, 350 F.3d 925, 929 (9th Cir. 2003) (internal modification and citation omitted).
Cases recognize that in some circumstances a misstatement could be "material" as a qualitative matter, even if the misstatement is not quantitatively significant. See Nathanson, 2015 WL 1517777, at *4 (explaining that even if certain misstatements or omissions were "minor or technical in nature . . . and thus quantitatively immaterial" the misstatement could nevertheless be qualitatively material because "investors have a right to know - and would consider it important - when the head of a publicly-owned company is stealing any quantity of money from their company") (citations and internal modification omitted). Nazif does not make this argument - he makes no materiality argument at all - and there is no evidence or allegation that the misstatements here are qualitatively significant, because, for instance, the CEO of CSC was stealing money from the company.
In fact, Nazif admitted in his summary judgment opposition that he "testified that he had personal experience with approximately $15 million of misstatements" by CSC before he was terminated. Opp. Br. at 17. That is, Nazif testified at his deposition that he apparently believed that the aggregate effect of the various accounting flaws he identified on CSC's overall revenues would have been approximately $15 million. See id. By any measure, no objectively reasonable accountant could have believed that a revenue misstatement of "approximately $15 million" was sufficiently material to corporation as large as CSC to warrant a colorable suspicion of securities fraud. Moreover, the Court observes that Nazif: (1) presented no evidence that any of the alleged GAAP violations he reported were widespread accounting problems at CSC as opposed to isolated incidents; (2) admits that he had no knowledge at the time he was terminated whether any of the alleged accounting issues were widespread; and (3) conceded at his deposition that at least some of the GAAP "violations" that he identified to Sweeney and Hand are not clear-cut violations of GAAP - rather they would only be considered "violations" by someone who agreed with Nazif's interpretation of what GAAP requires. See Nazif Depo. at 255:19-256:1 (agreeing that "whether an enhancement is properly capitalized" is a "matter of interpretation that requires some amount of judgment and accounting expertise"); see also LeGraverend 30(b)(6) Depo. at 64:15-65:1 (CSC's accounting expert testified that while Nazif's interpretation of GAAP vis-a-vis software capitalization was not "unreasonable," there is room for debate because there are "few details in [GAAP's] guidance on that specific topic"). Put simply, no reasonable juror could find that an objectively reasonable accountant in Nazif's position would have suspected CSC was guilty of securities fraud.
Plaintiff speculates that the amount of any misstatement "might be much larger given his limited exposure" to CSC's accounting practices, but this surmise is irrelevant. The question before the Court is whether Nazif engaged in protected activity at the time he told Hand and Sweeney about CSC's alleged GAAP problems. Nazif does not claim (and has submitted no evidence that would indicate) that he told Hand and Sweeney that there could be additional misstatement problems lurking in the ether. Nazif's claim is simply that he was terminated for reporting known GAAP violations which allegedly totaled $15 million.
By way of comparison, the Court recounts the evidence that the Ninth Circuit found sufficient to survive summary judgment on the plaintiffs' SOX claim in Van Asdale. See Van Asdale, 577 F. 3d at 1001 (holding that plaintiffs' claims survived summary judgment because they had submitted evidence to support a "theory of fraud [that] approximates a securities fraud claim"). The Van Asdale plaintiffs were intellectual property attorneys at defendant International Game Technologies (IGT). Id. at 991. At some point IGT merged with another gaming company, Anchor Gaming. Id. at 993. One of the main assets that Anchor brought to the merger was a patent that covered most of IGT's slot machines; machines which "generate[d] a substantial portion of IGT's total income." Id. at 1001. One IGT employee described the patent as "the Crown Jewel of IGT's intellectual property portfolio." Id.
Sometime after the merger, plaintiffs claimed they discovered that Anchor had known all along (i.e., pre-merger) that the relevant patent was invalid. Id. at 993. While plaintiffs never used the words "fraud," stock fraud, or similar, they told certain IGT executives that Anchor was "aware" of the invalidating prior art, "had not disclosed it prior to the merger, and that 'there's a possibility it could go to the top.'" Id. at 993. Shortly after plaintiffs revealed this information to their superiors, they were fired. Id.
The Ninth Circuit held that the above allegations were sufficient to present a triable issue of fact for the jury. Specifically, the panel found that it was "clear" that the withheld prior art was material because it arguably invalidated the "Crown Jewel" of the acquiring company's patent portfolio, and plaintiffs had further informed management that "the merger would not have occurred if IGT had been made aware of the [prior art]." Id. at 1001. Moreover, "[g]iven the potential importance of the [prior art] and related documents, the top management positions at IGT occupied by several former Anchor officials, and their alleged financial motives favoring nondisclosure, we hold that it was objectively reasonable for [plaintiffs] to suspect that the non-disclosure of the [prior art] prior to the merger could have been deliberate." Id.
Nazif has cited insufficient evidence to support any claim of materiality, and unlike in Van Asdale, a reasonable inference of materiality is not obvious when viewing the facts in the light most favorable to Nazif. At best, a jury could conclude that Nazif reported "minor or technical" GAAP violations to his superiors. See In re Daou Systems, 411 F.3d at 1017. This is insufficient to state a valid primae facie claim under Sarbanes-Oxley.
Plaintiff's alternative argument fares no better. In addition to arguing that CSC violated the securities laws by misstating certain accounting figures in violation of GAAP, Nazif claims he informed Hand and Sweeney that CSC's failure to maintain a "global contract database" was an "inadequate internal control" under GAAP. Nazif Decl. at ¶ 28. Specifically, he claims that CSC's failure to maintain a global contract database violated the "books and records" provision of the Exchange Act, although he admits he did not say as much to either Sweeney or Hand. See 15 U.S.C. § 78m(b)(2) (requiring public companies to "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that . . . transactions are recorded as necessary to . . . permit preparation of financial statements in conformity with [GAAP] . . . and [] to maintain accountability for assets").
Section 78m (the "books and records" provision) does not require or protect any disclosures in its own right. Thus, the only way Nazif's complaint about inadequate record keeping could be "protected" under SOX (as it must be to state a claim under Dodd Frank) is if the books and records provision is construed as one "relating to fraud against shareholders." See 18 U.S.C. § 1514A (prohibiting retaliation against an employee who provides information "regarding any conduct which the employee reasonably believes constitutes a violation of . . . any provision of Federal law relating to fraud against shareholders"). But even assuming that Nazif's report of books and records violations could be protected under SOX, Nazif's books and records claim nevertheless fails for the same reason his other DFA claims fail; Nazif has not made any showing that an objectively reasonable individual in his position would have believed that CSC's failure to maintain a "global contracts database" was potential evidence of "fraud against shareholders." Stated differently, Nazif presented no evidence that would indicate that CSC's apparent failure to maintain a "global contracts database" could (and actually did) result in the publication or dissemination of materially misleading or inaccurate financial statements. Rather, Nazif simply speculates that such misstatements possibly could have occurred.
As both the ARB and Second Circuit have recognized, "'[i]t may well be that a complainant's complaint concerns such a trivial matter', in terms of its relationship to shareholder interests, 'that he or she did not engage in protected activity under § 1514A.'" Nielsen, 762 F.3d at 222 (quoting Sylvester, 2011 WL 2165854, at *19) (internal modification omitted). This is such a case. CSC is entitled to summary judgment on Nazif's Dodd Frank whistleblower retaliation claim. C. Nazif's California Labor Code Claim Fails
Nazif's operative complaint contains claims for retaliatory termination brought under both California Labor Code sections 1102.5(b) and (c). SAC at ¶¶ 28-33. Nazif did not oppose CSC's summary judgment motion regarding his section 1102.5(b) claim - Nazif admits he did not report alleged wrongdoing to any "government or law enforcement agency" before he was fired, and such an external report is a necessary predicate for a section 1102.5(b) claim. See Cal. Lab. Code 1102.5(b) (prohibiting an employer from retaliating against an "employee for disclosing information . . . to a government or law enforcement agency"); see also Weingand v. Harland Financial Solutions, Inc., No. 11-cv-3109 EMC, 2012 WL 3537035, at *4 (N.D. Cal. Aug. 14, 2012) (noting that Labor Code section 1102.5(b) "does not apply to plaintiff because he only reported his concerns to a private employer, rather than a public agency").
Nazif does oppose CSC's summary judgment motion with respect to his section 1102.5(c) claim, however. "To establish a prima facie case under section 1102.5, Plaintiffs must offer proof that (1) they engaged in a protected activity, (2) Defendant subjected them to adverse employment actions and (3) there is a causal link between the two." Casissa v. First Republic Bank, No. 09-cv-4129, 2012 WL 3020193, at *9 (N.D. Cal. July 24, 2012) (citing Mokler v. Cnty. of Orange, 157 Cal. App. 4th 121, 138 (2007)). There is no dispute Nazif satisfies the second prong, and the Court assumes without deciding that he could satisfy the third prong as well. Nevertheless, Nazif's retaliatory termination claim fails because he has not produced any evidence to suggest that he "engaged in a protected activity" as that term is used in section 1102.5.
Defendant argues in the alternative that this claim fails because Nazif did not exhaust his administrative remedies. This Court rejected a similar argument in Melgar v. CSK Auto, Inc., No. 13-cv-3769 EMC, 2014 WL 546915 (N.D. Cal. Feb. 7, 2014). The Court will not revisit that decision here, because it finds that CSC is entitled to summary judgment on Nazif's retaliatory termination claim in any event.
Section 1102.5(c) "forbids an employer from taking retaliatory action against an employee for 'refusing to participate in an activity that would result in a violation of state or federal law, or a violation or noncompliance with a state or federal rule or regulation.'" Casissa, 2012 WL 3020193, at *8 (quoting Cal. Lab. Code § 1102.5(c)). As Judge Wilken has explained, the Legislature enacted the statute "to protect employees who refuse to act at the direction of their employer or refuse to participate in activities of an employer that would result in a violation of law." Id. (internal quotation marks and citation omitted).
Here, Nazif has presented no evidence that he refused "to participate in an activity that would result in a violation of state or federal law, or a violation or noncompliance with a state or federal rule or regulation." Cal. Lab. Code § 1102.5(c). Indeed, the only activity Nazif claims that he refused to participate in was Hand's instruction to "rubberstamp" certain software development capitalization costs. See Opp. Br. at 20. See Nazif Decl. at ¶¶ 25-26 (stating that Hand "wanted me to coach the business unit into including information that would qualify the cost to be capitalized, regardless of whether it should be. She told me that we should be rubberstamping these capitalization costs. I refused to do so, and she reassigned the work"). But even assuming, as this Court must, that Nazif refused to "rubberstamp" these capitalization costs, that is not sufficient to state a claim under section 1102.5(c) because Nazif has not established that "rubberstamping" capitalization costs "would result in a violation of state or federal law." See Cal. Lab. Code § 1102.5(c).
One could potentially read Nazif's complaint to allege that he refused to participate in any of the allegedly improper accounting practices he claims he identified to Hand and Sweeney. But even construing Nazif's complaint in this way, Nazif has no viable claim under section 1102.5(c) because he identifies no federal or state law that was violated by any of the accounting practices he refused to endorse. Instead, Nazif alleges simply that such accounting practices violate GAAP.
Indeed, Nazif testified at his expert deposition that he was not aware of any state or federal law that speaks to, or regulates, the proper accounting treatment for the capitalization of software development costs. Nazif Expert Depo. at 314:9-317:10. Instead, Nazif testified that Hand's behavior vis-a-vis software capitalization costs was in violation of GAAP. See Nazif Expert Depo. at 316:21-24 (Q: To your knowledge, does the situation that you just described [regarding software capitalization] constitute noncompliance with state or federal rules of regulations? A: As I mentioned, based on against [sic] the GAAP.). As a number of courts have recognized, however, violations of GAAP are not necessarily violations of law. See Lovelace v. Software Spectrum Inc., 78 F.3d 1015, 1020-21 (5th Cir. 1996). As the Fifth Circuit explained, "[t]he term 'generally accepted accounting principles,' as we have often noted, is a term of art encompassing a wide range of acceptable procedures, such that 'an ethical, reasonably diligent accountant may choose to apply any of a variety of acceptable accounting procedures when that accountant prepares a financial statement." Id. at 1021 (citing Fine v. American Solar King Corp., 919 F.2d 290, 297 (5th Cir. 1990)). Thus, as the Ninth Circuit has recognized, the "'mere publication of inaccurate accounting figures, or a failure to follow GAAP, without more, does not establish'" a violation of the securities (or any other) laws. DSAM Global Value Fund v. Altris Software, Inc., 288 F.3d 385, 390 (9th Cir. 2002) (quoting In re Software Toolworks Inc., 50 F.3d 615, 627 (9th Cir. 1994)); see also Lovelace, 78 F.3d at 1020; In re Daou Systems, 411 F.3d at 1017 (holding that "minor or technical" violations of GAAP typically cannot typically undergird a securities fraud claim).
The Court also notes that Nazif further testified that the proper accounting of software development costs is open to at least some interpretation under GAAP. Nazif Depo. at 255:19-256:1 (agreeing that "whether an enhancement is properly capitalized" is a "matter of interpretation that requires some amount of judgment and accounting expertise").
Indeed, Nazif's section 1102.5(c) claim is particularly defective because Nazif has made no effort to establish that any of the GAAP violations that he refused to condone ever resulted in incorrect figures being published in a CSC financial statement or otherwise disseminated to investors or other company outsiders. Nor has Nazif attempted to prove the number of GAAP violations that occurred, or that any potential GAAP violation that was reported to investors was material. See Section 3.B, supra. Thus, even though Nazif argues that one can infer that he refused to violate certain (unidentified) federal or state laws that prohibit making false entries in certified accounting statements, there is no evidence in the record before this Court that the specific conduct Nazif refused to participate in ever resulted in the publication of inaccurate accounting statements or the violation of any specific law. Without such evidence, Nazif cannot make out a prima facie case for retaliatory termination under California law.
In fact, Magistrate Judge James recently rejected a claim brought under Labor Code section 1102.5(c) where the plaintiff, like Nazif, argued that they had refused to participate in the "falsifying of financial and/or accounting statements" where they refused to go along with alleged GAAP violations. Dauth v. Convenience Retailers, LLC, No. 13-cv-47 MEJ, 2013 WL 5340396, at *2 (N.D. Cal. Sept. 24, 2013). As Judge James recognized, a plaintiff "must specify the law, rule, or regulation that supports her claim" in order to "establish a prima facie case for violation of section 1102.5(c)." Id. The court concluded that "Plaintiff's reliance on GAAP is . . . insufficient." Id. This was so because "[w]hile GAAP may provide mandatory accounting reporting requirements, Plaintiff has not cited any authority indicating that GAAP regulations equate to state or federal statutory or regulatory law. Notably, as Defendants point out and as Plaintiff acknowledges, GAAP procedures are issued by the FASB - an independent private sector organization - not a state or federal entity. In fact, as Defendants correctly argue, courts have recognized that GAAP does not establish mandatory procedures, but a 'wide range of acceptable procedures' that an accountant may choose to apply when the accountant prepares a financial statement." Id. (quoting Reiger v. Alrtis Software, Inc., 1999 WL 540893, at *6 (S.D. Cal. Apr. 30, 1999)).
In his opposition brief, Nazif writes that he "observed numerous violations of GAAP which he believed (and are) [sic] violations of federal and state securities laws and regulations, including without limitation, the DFA, Sarbanes-Oxley, Rule 10b-5, and the books and records provisions of the '34 Act." Opp. Br. at 24. Notably, this sentence is not followed by any citation, and the Court has identified no provision of either federal or state law that prohibits the mere act of capitalizing software development costs in a manner inconsistent with GAAP, or otherwise failing to comply with GAAP in all circumstances regardless of materiality. Nor does Nazif cite any case where a plaintiff who refused to endorse a GAAP violation, without more, was held to state a claim under section 1102.5(c). Like the plaintiff in Dauth, Nazif has not cited any "authority indicating that a failure to follow a GAAP procedure, standing alone, constitutes a violation of federal or state law." Dauth, 2013 WL 5340396, at *2. Thus, CSC is entitled to summary judgment on this claim. D. Nazif's Wrongful Termination in Violation of Public Policy Claim Fails
Nazif's final claim alleges that he was wrongfully terminated in violation of public policy. "A claim for wrongful termination in violation of public policy must be based on a fundamental policy established by a constitutional, statutory or regulatory provision." Casissa, 2012 WL 3020193, at *11 (citing Green v. Ralee Eng'g Co., 19 Cal. 4th 66, 76 (1998)).
Here, the statutory provisions that Nazif alleges CSC violated when it terminated him are Dodd Frank's whistleblower-protection provision and Labor Code section 1102.5. As discussed above, Nazif has not presented sufficient evidence to proceed to the jury on either of these claims. There is no genuine issue of disputed fact as to whether Nazif engaged in "protected activity" under either statute. Thus, his wrongful termination in violation of public policy claim must similarly fail. See Casissa, 2012 WL 3020193, at *11 ("To the extent that Plaintiffs' Tameny causes of action rest on the fundamental policy established by section 1102.5(c), these claims fail for the same reason that Plaintiffs have failed to establish a prima facie case for violations of this section.").
Wrongful termination in violation of public policy claims are often "referred to as Tameny claims, after the decision in Tameny v. Atlantic Richfield Co. . . ." Id.
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IV. CONCLUSION
Viewing the evidence in the light most favorable to Nazif, it is plain that he reported only minor or technical violations of GAAP to CSC. CSC is therefore entitled to summary judgment because Nazif has not presented evidence from which a reasonable jury could find that he engaged in protected activity under either the DFA or the Labor Code.
This order disposes of Docket Nos. 66, 67, and 71.
IT IS SO ORDERED. Dated: June 17, 2015
/s/_________
EDWARD M. CHEN
United States District Judge