Matthew Moral, the CFO of Stargem, Inc., a listed New York Stock Exchange media company, faced a dilemma: Should he have certified the reliability of the company’s financial statements in accordance with requirements imposed by the Sarbanes–Oxley Act, despite his deep-seated concern that the company’s internal controls did not function adequately? Or, should he have just been a team player and signed an officer certification under penalty of per- jury? Matthew knew that if he refused to certify the company’s financial statements, the stock market would push the company’s stock price down, which would hurt many of his friends and colleagues who owned the stock. Also, he would suffer too because his stock options would lose value or even become worthless. He also knew that his “days of keeping his job with the company as CFO would be comin’ to an end.”
After reflecting on this issue, Matthew reached a decision. He wrote a letter to the company’s Audit Committee and Board of Directors in which he described three items that he identified as material weaknesses in internal controls. He also stated that he “regretted that he would not be able to certify the company’s financial statements before the filing deadline until these weaknesses were corrected.” As he had feared, the Board of Directors immediately fired him. They even had a company security guard escort him out of the office and prevented him from packing up his personal belongings. Also, as expected, the company’s stock price fell by almost 20% within an hour of the news becoming public that he had refused to sign the company’s SEC filings.
Later, when he filed a whistleblower lawsuit, he was surprised to learn that the company had accused him of using a “stunt.” They also claimed that his refusal to sign was a “bargaining tactic” to get a pay raise and a generous new contract. The company self-righteously claimed that “it proudly stood up to this CFO’s failed blackmail attempts” and that the company’s internal controls function entirely properly.
a. Does Mr. Moral qualify as a whistle blower under federal securities law? Explain?
b. If Mr. Moral had signed the company’s SEC filing despite knowing that there were substantial internal control weaknesses, would he potentially have faced criminal penalties? Explain?
c. Is Mr. Moral entitled to antiretaliation protections under federal securities law? Explain?
d. If Mr. Moral’s case went to court and you were on the jury, what items would you award him? Explain?
e. By virtue of sending this letter, Mr. Moral suffered public ridicule, lost his job, and had to spend several years fighting for damages in court. Would you have done what he did? Explain?