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May 11, 2012

Compliance Officers Are Not Covered Under Exception to At-Will Doctrine

On May 8, 2012, in a 5-2 decision, the New York Court of Appeals declined to make an exception to the at-will doctrine for a hedge fund compliance officer who confronted his employer about allegedly improper trades. Sullivan v. Harnisch, 2012 WL 1580602 (May 8, 2012).  In this decision, New York’s highest court confirms that New York common law does not recognize a cause of action for the wrongful discharge of an at-will employee.   

The plaintiff, Joseph Sullivan, was the former Chief Compliance Officer and COO for Peconic Partners and Peconic Asset Managers (“Peconic”).  He confronted his boss, William Harnisch, about his alleged “front-running,” a practice in which Harnisch allegedly sold his personal shares in a company before the firm started selling client’s shares.  Harnisch fired Sullivan within days of this confrontation.  Sullivan sued for wrongful termination.

In Sullivan, the Court of Appeal explained that it has long hold that absent violation of a constitutional requirement, statute or contract, “an employer’s right at any time to terminate an employment at will remains unimpaired.”  Murphy v American Home Prods. Corp., 58 NY2d 293, 305 (1983).  A narrow exception to this rule was recognized in Wieder v Skala, in which a lawyer claimed to be dismissed by his law firm because he insisted that the firm to report professional misconduct committed by its attorneys.  80 NY2d 628 (1992).  The Court granted a narrow exception in Wieder because “plaintiff’s duties and responsibilities as a lawyer and as an associate of the firm were so closely linked as to be incapable of separation.”  Id. at 635.

The Sullivan Court declined to extend Wieder exception to compliance officers.  The majority explained that the relationship between a compliance officer and his employer is not the same as the relationship between a lawyer and his law firm.  The compliance officer’s “regulatory and ethical obligations and his duties as an employee” was not so intertwined “as to be incapable of separation.”  In addition, Sullivan held several other positions at Peconic in addition to his role as a Chief Compliance Officer.  Hence, the court held “[i]t is simply not true that regulatory compliance, in the words of Wieder, ‘was at the very core and, indeed, the only purpose’ of Sullivan's employment.”  
Significantly, the majority pointed it out that because Sullivan did not file a complaint with the Securities and Exchange Commission before he was fired, the “whistleblower” protections under Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 would not apply to him.

In their dissent, Chief Judge Lippman and Judge Ciparich cautioned about potential discouragement to compliance officers about confronting their employers’ illegal and unethical behavior.  Chief Judge Lippman’s dissenting opinion explained: “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.” 

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We are available to discuss the implications of this case and New York’s at will doctrine. If you should have any questions, please contact us.