May 20 (Bloomberg) -- The U.S. Supreme Court will rule on the reach of the 2002 Sarbanes-Oxley investor-protection law, agreeing to decide whether the law’s whistle-blower protections cover the employees of a publicly traded entity’s contractors.
The justices today said they will hear an appeal from two former employees of a privately held company that provides investment advice and management services to the Fidelity mutual funds. The workers say they lost their jobs after reporting fraud.
The case will likely pit business groups against President Barack Obama’s administration, testing the scope of a law enacted after the collapses of Enron Corp. and WorldCom Inc.
The case “presents a question of pivotal importance to the integrity of the securities markets and to the preservation of investor confidence,” the two employees, Jackie Hosang Lawson and Jonathan M. Zang, argued in their appeal.
The case will be of particular importance to the mutual fund industry because of its unusual corporate structure. While the funds themselves are publicly traded, they typically have few if any employees, instead using privately held companies to conduct day-to-day activities.
Lawson and Zang worked for units of FMR LLC, Fidelity’s corporate holding company. Lawson complained that expenses were being inflated and, ultimately, passed on to fund shareholders. Zang contended that a Fidelity statement filed with the Securities and Exchange Commission misrepresented how portfolio managers were compensated.
FMR denies the allegations and says both employees had performance problems. Zang was fired in 2005 and Lawson resigned in 2007.
A federal appeals court ruled that Lawson and Zang can’t sue for retaliation under Sarbanes-Oxley because they didn’t work for publicly traded companies.
The Sarbanes-Oxley law bars publicly traded companies from discriminating against an “employee” who reports fraud or a violation of securities regulations.
FMR argued that letting the suits go forward “would upset the balance struck by Congress by exposing thousands of private companies that do business with public companies to a new type of employment litigation.”
The Obama administration urged the court not to take up the case, even while contending that the suits should be allowed to proceed.
The court will take up the case during the nine-month term that starts in October.
The case is Lawson v. FMR LLC, 12-3.
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