HUD Whistleblower Survives Motion to Dismiss in S.D.N.Y.

The U.S. District Court for the Southern District of New York issued an encouraging decision for whistleblowers this week.  In the case of Ashmore v. CGI Group Inc. and CGI Federal Inc., Benjamin Ashmore sued his former employer alleging that the company had violated § 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) when it terminated him following his complaints that the company was engaging in fraud.  The company moved to dismiss on the basis that it was not a publicly traded company, and therefore was not covered by SOX.  The Court rejected this argument, agreeing with an earlier ruling by the U.S. Department of Labor’s Administrative Review Board that subsidiaries of publicly traded companies were covered employers even before the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) specifically amended Section 806 to make this clear.

The case arose in connection with the “Section 8” rental subsidies provided by the U.S. Department of Housing and Urban Development.  HUD outsources responsibilities for administering the project-based rental subsidy program to public housing authorities (“PHAs”).  This case involves a Canadian-based and publicly-traded PHA, CGI Group, and its wholly-owned American subsidiary, CGI Federal (“CGI”).  In 2007, HUD announced that it would rebid all of its Section 8 administrative services contracts, and would cap the number of units that any individual PHA could administer at 300,000.

At the time, CGI already provided administrative services to 267,000 Section 8 housing units.  As a result, the cap posed a serious threat to the company’s efforts to materially increase its share of the Section 8 subcontracting market. In order to circumvent these limits, Ashmore alleged that a unit within the company led by Marybeth Carragher, one of Ashmore’s supervisors at CGI, developed what Ashmore called the Director Shell Company Scheme (“DSCS”).  That scheme would essentially break the company into several smaller companies to maximize the growth opportunity during the rebid process.  Ashmore alleged that he consistently opposed the DSCS as an illegal and fraudulent attempt to evade HUD and federal acquisition regulations.  Following his complaints to Carragher and others, he was initially removed from his unit and then terminated on June 16, 2010.

CGI moved to dismiss on a number of different grounds.  It first argued that Ashmore’s employer, CGI Federal, was not a publicly-traded company and therefore was not a covered employer under the SOX.  The Dodd-Frank Act amended SOX to make it explicit that subsidiaries of publicly traded companies were covered employers under the Act, but Dodd-Frank was not passed until a month after Ashmore was terminated.  However, relying on Johnson v. Siemens Bldg. Techs., Inc., a 2011 decision by the Administrative Review Board of the Department of Labor, the Court held that inasmuch as Dodd-Frank constituted a clarification rather than a substantive alteration of the existing law, its changes would apply retroactively.  Therefore, the Court ruled that subsidiaries of publicly-traded companies are covered by SOX even where the alleged retaliation took place prior to the passage of Dodd-Frank in July, 2010.

CGI also argued for dismissal on the grounds that Ashmore had failed to make his complaints regarding possible SOX violations with sufficient specificity to constitute protected activity.  The Court rejected this argument as well, noting that the Fourth Circuit’s 2008 decision in Welch v. Chao, made it clear that all “the specificity requirement … demands is that employees’ communications … identify the specific conduct that the employee believes to be illegal.”  The Court found that Ashmore easily cleared this bar when he communicated his concerns that the company was participating in fraud to his supervisor, and rejected CGI’s argument.  Having found no basis upon which to dismiss Ashmore’s claim, the Court rejected the motion to dismiss and allowed the case to proceed.