Paul Pezza’s case is a classic whistleblower scenario: The former compliance analyst for Lynnfield-based Investors Capital Corp. claims one of its investment managers was ripping off clients – and lining his own pockets – by charging fees for meaningless transactions. Pezza says he complained, and was then fired.

Like many such cases, Pezza seemed destined for arbitration, a quiet legal venue that keeps the case out of the public spotlight and generally favors companies over employees. But in a twist that has delighted whistleblowers’ advocates, a March ruling from the Boston office of the U.S. District Court in Massachusetts found Pezza could have a federal court trial instead – thanks to the Dodd-Frank Act.

Dodd-Frank’s many new rules include stronger rights for whistleblowers, including cash rewards for reporting a company to the SEC and, importantly, a provision that pre-employment contracts can’t force a whistleblower into mandatory arbitration.

Further, in this case, the judge ruled that Dodd-Frank can also apply to contracts signed before the law was enacted.

“It’s sort of a surprising decision to make, quite frankly,” said Steven Pearlman, a partner in the labor and employment group for law firm Seyfarth Shaw, which has a Boston office.

The ruling stands on dubious grounds, he told Banker & Tradesman, but although it might not set a strong precedent, employers should definitely be on alert.

A ‘Substantive’ Issue

According to his complaint, Pezza was hired in October 2008 as a compliance analyst at the Lynnfield company, but quickly noticed that one Georgia-based investment manger was clearly “churning” – that is, shuttling clients’ money between two nearly identical variable annuities, and charging them for it. The complaint alleged more than 95 percent of the manager’s commissions, amounting to nearly $600,000 in 2008, came from this activity.

Pezza said he complained to the company’s CEO, Timothy Murphy, but made no headway. He then complained to Georgia officials and the SEC, and was promptly fired in April 2009. Investor Capital Corp. flatly denied those allegations.

Pezza’s attorney declined to comment, and Investors Capital Corp.’s attorney did not respond to messages.

In the ruling, U.S. District Judge Douglas P. Woodlock decided that Dodd-Frank could apply to the pre-employment contract Pezza had signed before commencing employment. Put simply, Pearlman said, Woodlock decided that changing the venue didn’t really change the substance of the employment contract, and applying Dodd-Frank wouldn’t encroach upon anybody’s rights.

But the change does have a giant practical impact, one that shouldn’t have been overlooked, Pearlman said. Investor Capital Corp. created a legal contract that should have guaranteed that they’d go to the quieter, less expensive process of arbitration. But the ruling throws out that expectation; it goes back in time to alter a contractual agreement, and that’s a big deal.

Boston-based employees’ rights attorney Ellen Messing, however, points to a long history of case law that has repeatedly refused employees’ requests to go to court instead of arbitration. In most cases, judges have told whistleblowers that their rights are the same whether they’re in arbitration or in court, and there is no “substantive” difference between the two.

But in practice, there are significant differences between arbitration and a court trial, she said, and arbitration has indeed been found to favor companies over employees. But judges haven’t made that distinction.

The “substantive” issue has long been used against employees, and it is now being used against an employer; in this case, what’s good for the goose is good for the gander, she said.

Pearlman, for his part, argued that the contract’s sanctity shouldn’t be violated. Pearlman believed the ruling was shaky enough not to be widely emulated in other courts, and that a district court has less sway than a higher court like a federal appeals court. But still, smart employers will operate under the assumption that Pezza v. Capital Investors Corp. does indeed apply to them, and that a whistleblower case may land them in a costlier federal court.

Risk Or Reward

Even without the Pezza case, Pearlman said, Dodd-Frank itself does have a big impact in how future whistleblower cases will be fought, and employers would do well to take notice.

Jason Zuckerman, an attorney with Washington, D.C.-based Employment Law Group, said such cases belong in the public spotlight – indeed, having a courtroom trial is precisely the point of blowing the whistle in the first place.

These people take action because they want underhanded deeds brought to light in a public court – an outcome denied by arbitration, Zuckerman said. Dodd-Frank’s new rules essentially correct an oversight from the post-Enron Sarbanes-Oxley Act, where whistleblowers gained protections but were not explicitly protected from signing employment contracts that included arbitration requirements.

Dodd-Frank also allows for a reward for whistleblowers who bring their concerns to the SEC, something the American Bankers Association has vigorously opposed.

Employees who report wrongdoing to the SEC can receive 10 percent to 30 percent of any monetary recovery the SEC brings in from that company, Pearlman said. That’s a huge disincentive for employees to bring their concerns to their bosses, when they can instead cash in on going to the SEC. Sarbanes-Oxley required companies to put in policies and internal mechanisms to ferret out fraud, he said, an effort into which many companies poured resources. But now, the bounty system enacted by Dodd-Frank renders that effort useless.

Zuckerman, for his part, applauds the idea.

By providing a significant reward, he said, it is hoped more employees will do the right thing and reveal bad practices.

“From my perspective, one has to ask, where were all those people at the large financial institutions who knew about the significant corporate wrongdoing in the financial industry and the housing industry, and didn’t speak up about it?” he asked.

If they had an incentive to come forward, he said, it’s possible that many of the glaring financial problems building in the economy would have come to light before they imploded.