In many states, including New York, all employees are considered “at-will” under state law unless they have entered into a contract of employment for a specified period of time. In the absence of such employment contract, all employees are considered at-will and may be terminated for any lawful reason or for no reason at all.
In 2012, New York’s highest court made a pivotal decision in a case which pinned federal securities law against New York state employment law . In Sullivan v. Harnisch, the court rejected Sullivan’s argument, favoring the expansion of job protections similar to those held by attorneys under New York state law. Citing these attorney protections, the terminated compliance officer argued that he should have been protected from termination for reporting ethical violations. Sullivan, like attorneys, was subject to a code of ethics requiring him to report unethical stock market dealings; yet, when he reported deceptive broker trading practices, the court decided that New York state’s at-will employment doctrine overruled federal securities law, quickly dismissing ethical obligations of at-will employees.
The New York state court noted that the whistleblower protections found in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 protected employees who had reported fraud and misconduct to the SEC. Because Sullivan only reported broker-conducted front-running and unethical equity trading to his firm, neglecting to report to the SEC, the court decided he was not protected by Dodd-Frank. As a result of this ruling, the firm was deemed lawful in its termination of the compliance officer under New York’s at-will employment doctrine.
Three years after the court ruled in favor of Harnisch; however, the Second Circuit Court of Appeals decided that employees who report alleged securities violations to their employer, but do not report such violations to the SEC, are protected by the anti-retaliation protections found in Dodd-Frank. It remains to be seen how the New York courts would decide a similar federal securities vs. state employment law if presented a second time. Until such a case is brought and decided in New York, financial services industry whistleblowers in the state of New York should ague protection from termination, as a result of internal reporting of alleged securities-law violations, under the Sarbanes-Oxley Act.