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Stroh v. Saturna Capital Corp.

United States District Court, W.D. Washington, Seattle

June 2, 2017


          LANE POWELL PC, Christopher B. Wells, Attorneys for Plaintiff Gordon Scott Stroh

          Jeffrey B. Coopersmith, Brendan T. Mangan, Attorneys for Defendants DAVIS WRIGHT TREMAINE, LLP



         Federal Jurisdiction

         There is federal jurisdiction in this case because Plaintiff is pursuing two federal statutory claims that have survived motions to dismiss: Plaintiffs Sarbanes-Oxley claim under 18 U.S.C. § 1514A and his Dodd-Frank claim under 15 U.S.C. § 78u-6.

         The Court has subject matter jurisdiction pursuant to 18 U.S.C. § l5l4A(b)(1)(B), 15 U.S.C. § 7202(b)(1), 15 U.S.C. § 78u-6(h)(1)(B)(i), 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.

         Venue is proper under 28 U.S.C. § 1391(c) (1) and (2) because the individual defendants are domiciled in Bellingham, Washington and the corporate defendant maintains its principal place of business in Bellingham.

         Claims for Relief

         Plaintiff characterizes the claims that he will pursue at trial as follows:

1. Plaintiff will pursue Sarbanes-Oxley and Dodd-Frank claims against all three defendants. Plaintiff will seek damages based on lost compensation - back pay and double back pay between his termination and the trial plus front or future pay over the years his whistleblower status will impede his opportunity to gain equivalent employment.
2. Both of Plaintiff s claims are predicated on the same facts. Defendant Kaiser imposed a poor "culture of compliance" or "tone at the top, " as the SEC describes management's attitude toward adhering to securities regulations. There are salient examples. Kaiser mocked prosposals by a compliance and risk management consultant. When Kaiser perceived a conflict between securities regulations, he threatened not to comply with either. Kaiser responded angrily to advice from Stroh about employee disciplinary disclosure requirements and compliance with new SEC "pay to play" requirements, leading to his telling Stroh's compliance team to set aside compliance functions and pursue "loopholes" and "arbitrage schemes" instead.
3. Kaiser created the impression of doing due diligence to comply with AML and SAR duties and avoid facilitating terrorist financing but in reality prioritized business development. For example, Kaiser convened a meeting of Saturna's IT staff and directed them to create a computer network on his yacht, in case the FBI confiscated the office computers, in which event the IT staff were not to tell FBI agents about the yacht network. Kaiser threatened to fire the entire IT staff when he learned of their reaction to his directive to lie to the FBI. Kaiser acknowledged that "red flags" appeared in the investigation of a prospective customer's ties to terrorist financing and a U.S. Senate report warned of terrorist financing concerns about a prospective business partner, but Kaiser brushed them aside. Kaiser rejected without even skimming a compliance manual prepared for STC by its president, a veteran trust officer, and then repeatedly ordered the trust officer, Stroh and later a lawyer assisting Stroh to violate attorney rules of professional conduct and state laws regarding authorized practice of law by drafting instruments for customers.
4. Under the leadership of Kaiser and Carten, Saturna engaged in a litany of securities regulatory violations from 2011-2014. These included for years failing to file Outside Business Activity reports on companies that Saturna's star business developer, Monem Salam, had failed to disclose and even attempted to conceal. Carten, despite holding a securities industry supervisor's license, as did Monem Salam, had also failed to file outside business activity reports. Kaiser kept excess cash in a mutual fund in violation of SEC Rule 35d-1 (the "names rule") for years in spite of Stroh's repeatedly urging him to rectify it. Kaiser ignored Stroh's advice on investment advisor "best execution" requirements and investment of customer account funds in a manner inconsistent with objectives. When Stroh reported insider trading by an officer of Saturna and consulted outside counsel, Kaiser berated Stroh and directed him to terminate the engagement immediately. Kaiser again harassed Stroh for consulting outside counsel for an affiliated mutual fund regarding prospectus disclosure of minimum purchase waivers.
5. When he determined that Saturna was violating securities regulations, Stroh advised Kaiser and Carten to take corrective action. Defendants often followed Stroh's advice, but in the process Kaiser usually attacked Stroh's competency, belittled him, threatened Stroh with loss of his job on occasion and continued to harass Stroh. Kaiser was particularly infuriated by Stroh's directives to Monem Salam, Saturaa's "MVP, " regarding repeated compliance problems. Kaiser's retaliation against Stroh culiminated shortly after a particularly severe scolding of Monem Salam by Stroh and on the same day Salam was obtaining permission for yet another outside business activity, July 16, 2014.
6. On July 15, 2014, Stroh met with Carten, told her how deeply wounded he was by Saturna's refusal to raise his pay for the coming year and that he had other employment options, although he did not. Carten told Stroh to go home and cool off for two days. Stroh had repeatedly expressed concern that he and his team - compliance assistant Jacob Lewis and Saturna Capital Chief Compliance Officer Michael Lewis - were substantially underpaid because of Kaiser's animosity toward compliance. Stewart had interviewed with Frank Russell and Lewis with the SEC, so Stroh was still pushing for an increase in their compensation as well. After he left the office on July 15, Stroh sought a concerted effort by the three, learned that Lewis had been given a pay raise, and asked Lewis to advocate for Stroh. Lewis did, and Carten softened her stance. She and Stroh then began negotiating a raise for Stroh.
7. As the Carten-Stroh negotiation moved toward a midpoint of their respective positions on July 16, but without concluding, Carten invited Stroh to ''discuss further" in the morning his onging employment at a higher salary or his working on a temporary basis until a replacement could be obtained. Carten did not tell Stroh that two days earlier she had signed an agreement with a recruiter to replace Stroh or that her last offer to Stroh was for an amount that his replacement would earn. Carten then phoned Kaiser for advice. Kaiser seized the opportunity to intercede, and decided that Carten should bring in "an idependent counsel to help [her] fire her chief legal officer in the morning." Carten followed Kaiser's instructions and had an outside counsel meet Stroh the next moring before he could conclude the negotiation. The outside counsel greeted Stroh with notice that Stroh was no longer employed there because Saturna had accepted his resignation - although Stroh had never tendered it. Stroh begged for his job but was repeatedly rejected by Carten and the outside counsel.
8. Plaintiff objects to application of the "after acquired evidence" defense on any basis for the reasons set forth in his Motion in Limine. Plaintiff asserts that he has standing to bring SOX and Dodd-Frank claims despite his role of providing legal and compliance advice. Defendants mischaracterize protected activity by presuming that it is limited to advice relating to "securities fraud" alone; but protected activity clearly includes advice regarding violations of other federal securities statutes as well as regulations promulgated by the SEC and its self-regulatory organizations such as FINRA. Controlling Ninth Circuit authority and rulings in this case on Defendants' initial motion to dismiss have established Plaintiffs standing and application of his claims to SEC regulations beyond fraudulent securities transactions alone.

         Affirmative Defenses

         Defendants dispute the legal and factual characterizations in Paragraphs 1 -8 above.

         1. Defendants will pursue the following affirmative defenses at trial: Failure to State a Claim: SOX, Dodd-Frank, and Wrongful Termination

         Mr. Stroh's First Cause of Action for violation of the Sarbanes-Oxley Act's whistleblower retaliation provisions ("SOX claim") and Second Cause of Action for violation of the Dodd-Frank Act's whistleblower retaliation provisions ("Dodd-Frank claim") both require that Mr. Stroh establish that he suffered some form of adverse employment action, and that the adverse employment action was tied in some manner to a protected activity. These claims fail for lack of proof in the following ways:

a. Mr. Stroh Quit and Refused Saturna's Offer to Return.

         The evidence will show that Mr. Stroh quit his job and then refused Saturna's offer to return to work. These facts defeat all three of the claims set forth above.

b. Mr. Stroh Did Not Suffer Any Adverse Employment Actions Prior to His Departure from Saturna.Plaintiff has advised that he claims only his alleged termination as an adverse employment action for which any damages are sought. However, to the extent the claims set forth above turn on an alleged adverse employment action purportedly suffered by Mr. Stroh prior to his separation from Saturna, the evidence will show that he did not in fact suffer any actionable adverse employment action.

         c. Mr. Stroh's Separation Was Because of Money, Not Protected Activities.

The evidence will show that the reason for Mr. Stroh's separation from Saturna - regardless of whether he quit or was terminated - was his desire for additional pay. There was no causal link between any protected activity and the end of Mr. Stroh's employment at Saturna.

         d. Many of Mr. Stroh's Actions Do Not Qualify as Protected Activities Under SOX.

Many of Mr. Stroh's allegations regarding Saturna's legal and compliance actions do not relate to alleged violations of the rules and regulations of the SEC in order to support Mr. Stroh's SOX claim, or to his making disclosures that are required or protected under SOX or rules and regulations under the jurisdiction of the SEC, in order to support Mr. Stroh's Dodd- Frank claim.

         e. Mr. Stroh's Reports of Compliance Issues are not Protected Activity Because they do not Step Outside of his Role as Chief Legal Officer.

Because all of Mr. Stroh's actions in raising compliance issues took place as part and parcel of his job as Chief Legal Officer of Saturna Capital Corporation (or his parallel duties with Saturna's affiliate or subsidiary companies) they do not constitute protected activities.

         2. Saturna Would Have Made the Same Decision Absent Mr. Stroh's Protected Activities.

         Saturna accepted Mr. Stroh's resignation. The evidence will show that it would have made the same decision to allow him to resign even in the absence of any protected activity. This defense defeats Mr. Stroh's claims. As noted above, Plaintiff claims only his alleged termination as an adverse employment action for which any damages are sought.

         3. Mr. Stroh's Claims for Damages Are Foreclosed or Limited.

         a. After-Acquired Evidence Cuts Off Any Damage Claim.

         After Mr. Stroh left Saturna, the company's investigation into his work history (including a review of the hard drive of his work computer) revealed evidence of gross insubordination, drug and alcohol use impacting his work performance, pornographic materials, and other materials evidencing an egregious lack of respect for and loyalty to his employer. Saturna also discovered that Mr. Stroh had been convicted of a felony forgery charge, which he had never disclosed to the company or to Saturna's regulators. These facts, alone or in combination, are sufficient to defeat Mr. Stroh's claim for damages.

         b. Mr. Stroh Failed to Mitigate or Minimize His Damages.

         Mr. Stroh remains unemployed today, nearly three years after his resignation from Saturna. The evidence will show that Mr. Stroh rejected Saturna's offer for him to return at a higher base salary and failed to take reasonable efforts to ...

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