7th Circuit Reinstates RICO Whistleblower Lawsuit, Applies Broad Relationship Standard

The United States Court of Appeals for the Seventh Circuit reversed a lower court decision dismissing whistleblower Michael DeGuelle’s lawsuit against his former employer, S.C. Johnson & Son, Inc. (SCJ) and members of management.  The Court recounted the facts alleged by DeGuelle that gave rise to the lawsuit:

[While working in SCJ’s tax department,]DeGuelle discovered that SCJ improperly received over $5 million in foreign tax credits.  In January of 2001, DeGuelle reported his findings to [Daniel Wenzel, SCJ’s Global Tax Counsel,] and asked how these errors should be remedied.  Wenzel responded that they should wait and “[t]his is why I go to church on Sundays.”  Wenzel reported DeGuelle’s findings to Robert Randleman, Vice President and Corporate Tax Counsel, but not to the IRS.  Instead Wenzel directed DeGuelle to alter or destroy records so that the errors would not be detected.  Subsequently, altered reports were submitted to the IRS. . . .

In 2002, Wenzel instructed DeGuelle and a fellow employee to structure a transaction so that SCJ could claim a tax deduction by exploiting tax accounting rules.  Wenzel told DeGuelle and his fellow employee to fabricate a business purpose for the transaction and then destroy associated business records in case “the IRS examines this transaction in the future.” DeGuelle believes SCJ received a benefit in excess of $2 million in the form of reduced tax liability as a result of this structured transaction. Further, Wenzel received a significant discretionary bonus for his role.

In February of 2005, Wenzel directed DeGuelle to fraudulently alter an income statement, which would result in approximately $3.7 million in financial benefits for SCJ.  DeGuelle refused to alter the statement.  He discussed his concerns with Donald Pappenfuss, a supervisor within the tax department, who instructed DeGuelle to alter the form pursuant to Wenzel’s instructions.  Wenzel approved the altered income statement and submitted it to the IRS by mail.

. . .

In March of 2008, Wenzel told DeGuelle to bring any concerns about issues in the tax department to appropriate department personnel instead of taking such concerns to accounting or human resources.  Wenzel was loud and physically aggressive toward DeGuelle during this meeting.  Wenzel also made disparaging comments about DeGuelle in front of other SCJ employees.  That same month, DeGuelle received a negative six-month performance review even though such mid-year reviews were not routine, and despite the fact that DeGuelle received an Officer’s Award in recognition of his superior job performance in January of that year.

. . .

On September 23, 2008, Wenzel and DeGuelle had another verbal altercation and DeGuelle received a negative “needs improvement” performance review from Wenzel.  DeGuelle contacted [Kristen Camilli, Director of human Resources,] and alleged that his review was retaliation for his whistleblowing activities.  Camilli informed DeGuelle on October 10, 2008, that the negative review would be investigated.

. . .

On December 18, 2008, DeGuelle met with [another manager, Gayle Kosterman,] and Camilli.  They informed DeGuelle that the negative review was retaliatory in nature and it would be revoked. . . .  Kosterman directed DeGuelle to drop his complaints of tax fraud, but DeGuelle stated he would file a whistleblower complaint with the Department of Labor.  Later that day, Kosterman and Camilli contacted DeGuelle by telephone and. . . offered to make a partial payment of DeGuelle’s attorney’s fees if DeGuelle agreed to sign a release of claims and confidentiality agreement.

. . .

DeGuelle continued to contact federal agencies about SCJ’s tax fraud.

. . .

On March 19, 2009, DeGuelle provided SCJ counsel with a five-page memorandum detailing his concerns about tax fraud within the company. . . . Kosterman met with DeGuelle and offered him the opportunity to resign with one year of salary and benefits if he signed a confidentiality agreement and released all claims.  Again, DeGuelle refused SCJ’s offer.

DeGuelle was subsequently terminated by SCJ.  DeGuelle’s complaint alleges that Wenzel, Randleman, and Pappenfuss engaged in tax fraud in order to receive significantly higher discretionary bonuses, and that management retaliated against him for disclosing the fraud to the government – a violation of the Racketeer Influence and Corrupt Organizations Act (RICO).

Sec. 1962(c) of RICO makes it unlawful for an employee of an enterprise engaged in interstate commerce “to conduct or participate, directly or indirectly, in the conduct of such enterprise’s racketeering activity . . . .”  Violations of RICO can include mail fraud, tax fraud, the destruction of records, and whistleblower retaliation.

The district court erroneously determined that the alleged tax fraud and alleged retaliation were patently unrelated for purposes of RICO, because the schemes “involved different actors, motives, and victims.”  The Seventh reversed the district court and agreed with DeGuelle’s argument that the Sarbanes-Oxley Act’s addition of Sec. 1513(e) as a RICO predicate act allows his claim to proceed.  Under RICO, violations of Sec. 1513 constitute “racketeering activity.”  Congress enacted the Sarbanes-Oxley Act or SOX to address growing concerns about the reliability and accuracy of disclosures made by publically-traded corporations.

Applying a relatively broad relationship standard, the Seventh Circuit stated:

When an employer retaliates against an employee, there is always an underlying motivation.  In this case, for example, the motivation was to retaliate against DeGuelle for disclosing the tax scheme.

. . .

We believe the district court erred in finding that the retaliatory actions taken against DeGuelle were unrelated to the ongoing tax fraud scheme.

The case is DeGuelle v. Camilli.

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• U.S. DOL ARB Ends Landmark Year Holding Summary Decision Improper Unless Employer Proves Sarbanes-Oxley Act Does Not Apply (employmentlawgroupblog.com)
• OSHA Sues Whole Foods for Terminating Whistleblower (employmentlawgroupblog.com)

Tagged: Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)