United States District Court, S.D. New York
For Jennifer Yang, Plaintiff: Daniel Jordan Kaiser, Kaiser Saurborn & Mair, P.C., New York, NY.
For Navigators Group, Inc., Defendant: A Michael Weber, LEAD ATTORNEY, Joshua Daniel Kiman, Littler Mendelson, P.C. (NYC), New York, NY.
MEMORANDUM OPINION AND ORDER
NELSON S. ROMÁN, United States District Judge.
Plaintiff Jennifer Yang (" Plaintiff" ) commenced the instant action against her former employer, Navigators Group, Inc. (" Defendant" ), seeking monetary damages and reinstatement for alleged violations of the anti-retaliation provision of Sarbanes-Oxley Act (" SOX" ), 18 U.S.C. § 1514A, and the whistleblower protection provision of the Dodd-Frank Act (" DFA" ), 15 U.S.C. § 78u-6(h)(1). In her Amended Complaint,
Plaintiff asserts she was terminated because of her complaints about Defendant's improper risk control procedures, which she reasonably believed constituted shareholder fraud and violated securities laws and SEC rules and regulations.
Defendant now moves pursuant to Rule 12(c) for a judgment on the pleadings, asserting that the Amended Complaint fails to state a claim upon which relief may be granted. Defendant asserts that (1) Plaintiff did not make disclosures to the Securities and Exchange Commission (" SEC" ) as purportedly required under the DFA to be deemed a whistleblower, and (2) Plaintiff's communications to her supervisors were not required or protected under SOX. Although Defendant answered the initial complaint, it has not filed an answer to the Amended Complaint.
Plaintiff cross-moves for leave to file a Second Amended Complaint which supplements factual allegations and purports to clarify the existing pleadings, but adds no new claims. In opposition, Defendant asserts that (1) Plaintiff is not allowed to amend her pleading in opposition to a motion to dismiss, and (2) the proposed amended complaint would be futile because Plaintiff's communications were not protected conduct, because Plaintiff did not have a reasonable belief that Defendant was committing fraud, and because Plaintiff purportedly is not a whistleblower within the meaning of the DFA. For the following reasons, Plaintiff's cross-motion is granted and Defendant's motion is denied.
I. FACTUAL BACKGROUND
The following facts are alleged in the Amended Complaint and, where noted, in the Proposed Second Amended Complaint (" PSAC" ). Plaintiff was employed as Defendant's Group Chief Risk Officer from June 25, 2012, through November 2, 2012. In this position, she reported to Defendant's chief financial officer, Ciro DeFalco (" DeFalco" ). She left her previous position as Vice President and Regional Capital Management Director of another company to take the position with Defendant.
Plaintiff began her employment by learning the company business and existing enterprise risk management practice. She was initially tasked with developing a plan to improve the risk management function. Plaintiff allegedly noticed that in past presentations to Defendant's board and to the rating agencies S& P and AM Best, the market risk assessments of certain investment portfolios appeared low considering their asset classes. She investigated further using outside investment consultants and found that risk models used for certain asset classes were improper. The result was substantial underestimation of investment risks. Defendant's investments included municipal bonds, for which the old model did not account for callable features, and structured finance products, for which the old model ignored underlying collateral. Municipal bonds and structured finance products accounted for roughly 60% of Defendant's entire portfolio. In a July 2012 meeting, Plaintiff informed DeFalco of her findings and expressed concern over Defendant's investment risk. DeFalco ignored her concerns and insisted that risk was being properly assessed. Nevertheless, Plaintiff allegedly acquired resources to properly assess market risk.
In late July or early August 2012, DeFalco sought to include purportedly improper market risk assessment results in a report to Defendant's board of directors. When Plaintiff cautioned him that the improper material should not be presented to
the board, DeFalco told her she expressed her concerns too late. Plaintiff then requested to attend the board's finance committee meeting, because that committee discusses investment risks. However, DeFalco did not allow Plaintiff to attend even though the prior Chief Risk Officer attended such meetings. According to the PSAC, DeFalco also did not allow Plaintiff to attend the board of directors meeting at which directors would discuss enterprise risk management issues.
At some point, Plaintiff learned that five management committees shared responsibility for Defendant's risk management. These included the Group Enterprise Risk Management Steering Committee (" Steering Committee" ) and four subcommittees: the Underwriting and Claims Risk Committee, the Compliance and Governance Risk Committee, the Finance and Credit Risk Committee, and the Operational Risk Committee. Plaintiff chaired the Steering Committee, which included almost all the senior executives. Plaintiff realized that no committee was responsible for controlling reserving risk, one of the most significant risks faced by insurance companies. She also noted that the Finance and Credit Risk Committee had not met for almost a year, while Underwriting and Claims Risk Committee had not met for a long time and was out of compliance with its charter. According to the PSAC, neither the lack of meetings nor the failure of any committee to handle reinsurance recoverable was disclosed to rating agencies or in Defendant's SEC filings. According to the PSAC, Defendant's 10-K falsely represented that credit risk arising from reinsurance recoverable was actually monitored by a subcommittee. All this Plaintiff allegedly reported to DeFalco.
In or around August 2012, Defendant's board of directors met to discuss emerging risk management, which the rating agency S& P assessed as weak. Plaintiff attended the meeting, and DeFalco emailed her immediately afterwards praising her performance. However, Defendant's Chief Underwriting Officer and previous Chief Risk Officer, Clay Bassett (" Bassett" ), accused Plaintiff of inviting questions from board members and insisted that she represented management's interests in front of the board. Plaintiff replied that she was obliged to truthfully present information to the board, and that she had fiduciary duties to the company and its shareholders.
In September 2012, Plaintiff expressed to DeFalco that Defendant did not possess the proper skill set to manage market and credit risks, and she told DeFalco that certain subcommittees were out of compliance. She proposed solutions to risk management issues, including hiring additional personnel. Plaintiff told DeFalco and Bassett that Defendant's market risk was too high to justifiably maintain an A rating from S& P, as it was over twice as large as the capital buffer Defendant wanted to maintain. She also noted that the aggregate catastrophe risk was at or beyond Defendant's risk appetite. This angered Bassett because, according to the PSAC, he was responsible for catastrophe risk.
Plaintiff, in developing an action plan to address S& P's concerns over Defendant's operational risk control, allegedly sought certain additional information from DeFalco and Bassett but received nothing. Becoming concerned that the lack of regular risk management processes and Defendant's high aggregated risks threatened Defendant's S& P rating, Plaintiff shared her concerns with Defalco. DeFalco dismissed the concerns, saying a rating downgrade would not be the end of the world. Plaintiff shared the same rating downgrade concerns with Vincent Tizzio (" Tizzio" ), president and CEO of a related
company called Navigators Management Company. Tizzio acknowledged that a downgrade would cause significant damage to the business and agreed to use his monthly management meeting to discuss risk matters.
In September 2012, with a Steering Committee meeting one week away, DeFalco instructed Plaintiff to cancel the meeting because he and Bassett had not completed their assignments from the previous meeting. Plaintiff declined, saying the committee would be out of compliance if the meeting were not held. DeFalco then asked Plaintiff to postpone the agenda items on which he and Bassett were to report.
Plaintiff angered Bassett by insisting that the Underwriting and Claims Risk Committee meet. Bassett accused her of improperly pressuring him by mentioning Defendant's CEO in an email. Bassett also accused Plaintiff of turning Steering Committee meetings into battle grounds by showing quantitative results and sharing an S& P report identifying weaknesses in risk control. Bassett then stated he would watch Plaintiff very closely. Plaintiff alleges it took three months of pressure to finally get Bassett to hold an Underwriting and Claims Risk Committee meeting on October 25, 2012. This meeting occurred after Plaintiff worked out an alternative solution with Tizzio. DeFalco never held a Finance and Credit Risk Committee meeting while Plaintiff worked for Defendant. DeFalco instead recommended reducing the number required of meetings per year for each committee.
In October 2012, Plaintiff expressed to Defendant's general counsel her concerns over the failure of risk management subcommittees to hold meetings. She also discussed with Defendant's internal audit director concerns over the lack of regular risk reporting and monitoring. The internal audit director confirmed there was no regular reporting or monitoring, despite the fact that Defendant's presentations to rating agencies claimed internal audit had been an important part of the company's risk management.
Also in October 2012, Plaintiff received risk assessment results from Defendant's investment consultant (" first consultant" ) whose assessments had been presented to Defendant's board and to rating agencies in the past. She also received assessment results from a second independent investment consultant (" second consultant" ). The second consultant assessed Defendant's market risk at $95 million, whereas the first consultant placed Defendant's risk at $40 million. Allegedly, the actual risk was greater than Defendant's $80 million capital buffer, jeopardizing the A rating from S& P. On October 25, 2012, Plaintiff forwarded the second consultant's risk assessment to DeFalco and Defendant's CEO. DeFalco was angered because he did not fully vet Plaintiff's work product, and he accused Plaintiff of using the second consultant without his permission. Plaintiff alleges, however, that she had discussed with DeFalco numerous times she was using both consultants and that he had encouraged such use.
On October 26, 2012, DeFalco asked Plaintiff not to share any information with the CEO because the CEO would read it and ask questions. The same day, she presented the second consultant's results to the Steering Committee. At the meeting, DeFalco remained unconcerned with the company's risk profile. Executives at the ...