The U.S. Supreme Court expanded the reach of a federal law enacted in response to the 2001 Enron Corp. collapse, saying it protects people who work for a public company’s contractors, including law firms and auditors.

The justices, voting 6-3, allowed whistle-blower claims by two former employees of a privately held company that provides investment advice and management services to the Fidelity mutual funds.

The case centered on protections that watchdog groups and President Barack Obama’s administration say are important to prevent another Enron-like catastrophe.

Congress was “aiming to encourage whistle-blowing by contractor employees who suspect fraud involving the public companies with whom they work,” Justice Ruth Bader Ginsburg said in her opinion for the court. She said a ruling to the contrary would have put a “huge hole” in the law.

Enron, once the world’s largest energy trader, collapsed after using off-books partnerships to hide billions of dollars in losses and debt. The fraud also brought down Arthur Andersen, Enron’s auditing firm.

The disputed law, the 2002 Sarbanes-Oxley Act, bars publicly traded companies and their contractors and subcontractors from discriminating against an “employee” who reports fraud or a violation of securities regulations. The question was whether that provision allows retaliation lawsuits only by the employees of the public company, or by those of its contractors as well.

The case was significant for the mutual fund industry. While the funds themselves are publicly traded, they typically have few if any employees, instead using privately held companies to conduct day-to-day activities.

Ginsburg said the court’s interpretation of the law “avoids insulating the entire mutual fund industry” from the whistle-blower provision.


‘Fanciful Visions’

Justices Sonia Sotomayor, Anthony Kennedy, and Samuel Alito dissented. Sotomayor said the majority had given the provision a “stunning reach,” authorizing lawsuits by babysitters and cleaning people over fraud unrelated to corporate governance.

“If, for example, a nanny is discharged after expressing a concern to his employer that the employer’s teenage son may be participating in some Internet fraud,” the nanny could sue, Sotomayor said.

Ginsburg said the dissenters were “indulging in fanciful visions of whistle-blowing babysitters and the like.” She said there was no indication that anyone had sued under the provision without a connection to shareholder fraud.

The suing employees, Jackie Hosang Lawson and Jonathan M. Zang, worked for units of privately held FMR LLC. The units provide investment advice and management services to publicly traded Fidelity mutual funds.

The workers say they lost their jobs after reporting fraud. Lawson complained that expenses were being inflated and, ultimately, passed on to fund shareholders. Zang contended that a Fidelity statement filed with the Securities and Exchange Commission (SEC) misrepresented how portfolio managers were compensated.

FMR denies the allegations and says both employees had performance problems. Zang was fired in 2005 and Lawson resigned in 2007.

“We believe that the allegations were unfounded when they were made and they continue to be unfounded today,” said Vincent Loporchio, a spokesman for the company. He said Fidelity “has long offered employees a number of channels to report potential abuses,” including an anonymous telephone tip line.


Appeals Court Reversal

FMR argued that the reference to contractors and subcontractors in the disputed provision applies only to a “workout firm” brought in to wind down the affairs of a bankrupt company. The company pointed to the movie “Up in the Air,” in which George Clooney portrays an “ax-wielding specialist” brought in to fire people.

The company also said Congress addressed accounting firms and law firms in a different part of the 2002 statute, letting two federal agencies issue regulations to protect those workers. The agencies haven’t issued any such rules.

The decision reversed a federal appeals court, which had ruled that Lawson and Zang couldn’t invoke Sarbanes-Oxley because they didn’t work for publicly traded companies.

“The Supreme Court closed a potentially devastating loophole in corporate whistle-blower protection,” said Stephen M. Kohn, executive director of the National Whistleblower Center, which backed the workers in the case.

Small-business advocates said the ruling would prove costly.

“The court is downplaying the reality that this decision gives plaintiffs’ attorneys additional incentives to pursue aggressive litigation against independent companies,” said Karen Harned, executive director of the National Federation of Independent Business (NFIB) Small Business Legal Center.

The case is Lawson v. FMR LLC, 12-3.

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