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Verfuerth v. Orion Energy Systems, Inc.

United States District Court, E.D. Wisconsin

August 25, 2016



          William C. Griesbach, Chief Judge.

         The Plaintiff filed a lengthy complaint alleging no fewer than fourteen causes of action arising out of his termination from the position of CEO of Defendant Orion Energy Systems, Inc., a publicly-traded company.[1] In a November 4, 2014 decision, this Court dismissed several claims that had been the subject of a motion to dismiss. Following discovery, the Defendant filed a motion seeking summary judgment on the rest of the claims. The Plaintiff also filed a motion seeking partial summary judgment. For the reasons given below, the Defendant's motion will be granted and the Plaintiff's denied.

         I. Background

         Some of the background underlying this action was provided in this Court's previous decision on the Defendant's motion to dismiss. (ECF No. 35.) The Plaintiff served as the CEO of Orion Energy Systems, a public company he founded, for some five years. During his tenure, he alleges that he became bothered by a number of issues, including the conduct of his company's board of directors, the performance of outside counsel, and a lawsuit brought by a former employee. Throughout that period, he routinely certified that the company's SEC filings were complete and accurate, and that no material information had been omitted from its reports.

         A. Problems with Foley & Lardner

         According to Verfuerth, in 2008 he learned from Foley & Lardner lawyer Steve Barth that a former employee, James Prange, had been involved in stock manipulation soon after the company went public. Verfuerth alleges he then “instructed” Barth to lead an investigation into the issue, but he never heard back from Barth. (ECF No. 83 ¶ 10.) In any event, four years later Verfuerth believed that the Foley & Lardner law firm might have had a conflict of interest with respect to an unrelated state contract. (Id. ¶ 18.) Verfuerth also “participated in a number of conversations” regarding holding Foley & Lardner accountable for other problems he perceived, including his belief that Foley had been overbilling the company, in violation of their retainer agreement. This became an issue in 2012 when the SEC began investigating the company for unrelated issues. Some board members wanted Foley to handle the SEC inquiry, but Verfuerth believed that would pose a “conflict” because Foley had been overbilling the company (in his view) and Foley had itself handled earlier SEC filings, such as 8-Ks. (ECF No. 84 at ¶ 52.) He also asked Foley's Steve Barth to resign as outside counsel, telling the board chairman that keeping Barth engaged would violate their fiduciary duties as directors. (Id. at ¶ 7.) Barth did appear to resign, but then became involved in September 2012 with other board members, operating (again, in Verfuerth's view) under a “code of silence, ” to develop a “game plan” for replacing Verfuerth. (ECF No. 80 at 5.) He remains the company's lawyer.

         B. Problems with the Board

         In addition to his concerns about Foley & Lardner, Verfuerth was also unhappy with his company's board of directors. In July 2012, Verfuerth learned that a board committee meeting had taken place at a bar on the night before the meeting was scheduled. He viewed this as a violation of fiduciary duties and possible SEC infraction. (Id. at ¶ 29.) “I believed this meeting was unethical and inappropriate conduct and a violation of the Board Members' fiduciary duties as well as the Orion Code of Conduct which is required by SEC. [Company lawyer] Paul Kardish informed me that this conduct violated our code of conduct as the meeting participants had been consuming alcohol all evening. Kardish informed me that this conduct likely violated bylaws and state statutes regarding proper notice for meetings and altering meeting minutes.” (Id. at ¶ 43.) In addition to his concerns about the board meeting, he believed it was “fraud” for the company to represent in some of its public disclosures that a board member, Michael Altschaefl, was a CPA, because Altschaefl's CPA license had lapsed a few years earlier. Verfuerth sought to have Altschaefl removed from the board. (Id. at ¶ 38.) He also learned in August 2012 that board member Mark Williamson had a consulting business that had done work for competitors of Orion, and Verfuerth sought Williamson's removal from the board as well.

         C. SEC Investigation and 8-K

         In August 2012, the SEC subpoenaed Orion, seeking a variety of documents and information about inventory, revenue and other matters, apparently arising from its relationship with Solyndra, the failed solar startup company. The company filed an 8-K regarding the SEC matter, but in Verfuerth's mind the filing was not accurate. In his view, the company should have used the occasion to make additional disclosures, including information about his belief that two board members had conflicts of interest and that the company had been misrepresenting board member Altschaefl as a CPA “despite the fact that his CPA license had expired.” (ECF No. 83 at ¶ 41, 37.) Verfuerth does not say why those disclosures would have been relevant to the SEC inquiry, or why they would have been material.

         Verfuerth decided he wanted to use the occasion of the SEC investigation into the company's Solyndra relationship to raise the other issues he had identified, including insider trading, violations of disclosure rules, problems with the company's intellectual property, and conflicts of interest among board members. (ECF No. 83 at ¶ 31.) To that end, he began voicing his intention to meet with the SEC and expressed a refusal to sign the upcoming 10-Q statement for the period ending September 30, 2012, despite having signed off on all of the company's previous filings. In a meeting with the company's chairman of the board, Verfuerth states that he expressed his litany of concerns as follows:

On August 29, 2012 I met with Mr. Kackley, at his insistence, at my condominium in Minocqua, Wisconsin. During our conversation I informed him of the investigations that [lawyer] Mr. Kardish had been doing which had provided validation of the many issues of concern to me, including the matters mentioned in this declaration. These included Mr. Prange's stock manipulation, liabilities resulting from the Foley firm's substandard work product (including Mr. Prange's defamation lawsuit), Mr. Prange's involvement with Board members, and risks related to possible patent infringement claims related to Intelite. I reasonably believed the failure to make disclosures required per full disclosure rules would cause irreparable harm to the company's finances and reputation, and could be a fraudulent misrepresentation.

(Id. at ¶ 74.)

         The “possible patent infringement” Verfuerth alludes to involves the fact that he had learned that another company had filed for a patent on a similar product. According to Verfuerth, the board was unaware of these problems until he brought them to light.

         In 2012, according to the company, the board members became increasingly disenchanted with the Plaintiff's performance as CEO, citing the company's poor stock performance and what some on the board viewed as his distraction by a lawsuit brought by Prange. It is not clear whether the board's decision was precipitated by Verfuerth's recent efforts to have two of its members removed. Board Chairman Kackley indicated that Verfuerth seemed preoccupied with things like fee disputes with Foley & Lardner and the firm's quality of work, as well as some of the other issues mentioned herein, rather than creating any kind of business strategy or taking responsibility for the company's course of action. (ECF No. 94-7 at 23.) (Despite countless pages of briefing, Verfuerth has not explained to this court why he was so interested in revisiting the “stock manipulation” that occurred in 2008.) In Kackley's view, Verfuerth had also done an about-face on their decision to place Steve Barth on the board of directors as corporate secretary. On September 21, 2012 the directors met to consider whether Verfuerth should be removed as CEO and, on September 27, they voted to reassign him from the CEO position to “chairman emeritus, ” essentially an honorary position.

         This reassignment triggered a period of negotiations between Verfuerth and the company. In October, Verfuerth and the company were negotiating a severance package and release, as well as various consulting arrangements, but Verfuerth ultimately did not sign a completed agreement. One disputed item involved the fact that the company had earlier given him money intended to cover expenses relating to his divorce, but it came to light that Verfuerth had kept the money rather than paying his divorce attorney. Verfuerth said that he was in a fee dispute with his attorney, but the board demanded that he return the funds to the company. Without any agreement on the issue, the board chairman, James Kackley, began proceedings to terminate Verfuerth's employment entirely. A special meeting of the board was scheduled for 8:00 a.m. on November 8, 2012.

         At 7:17 that morning, Verfuerth circulated what he described as a “whistleblower” email to several board members:

Please accept this e-mail as a formal complaint registered with you as the Chairman of the company Nominating and Governance Committee pursuant to the Orion Energy Systems Inc Whistle Blower Policy, as well as the Sarbanes Oxley Act [of] 2002. . . . My Concerns/Complaints are numerous with many of them being already brought to the attention of Jim Kackley as Chairman of the Board. I have considerable evidence that will document my rapid demise within the company as retaliation against me for pursuing/exposing actions and ongoing activities that have to date negatively impacted the price per share of our stock. These issues include but are not limited to . . . Corporate Waste, Violations of the Orion Code of Conduct, Breach(s) of Fiduciary Duty[, ] Breach(s) of Attorney Client Privilege. Specific examples of these activities include but are not limited to 1) Tampering with/filing of false documents i.e. Compensation Committee meeting minutes and Documents included in the Prange vs. Orion legal proceeding 2) Unauthorized written communication(s) between our former Foley securities counsel and Joe Hildebrandt, and a non employee shareholder/consultant named Jim Naleid (April/May 2006 pre IPO) . . . 3) Evidence of a group of Orion senior executives organized by Naleid and Prange that were meeting regularly . . . to undermine my authority, and my business execution strategies. 4) I have sworn affidavits from several individuals that made statements under oath that Jim Prange has vowed to destroy me, these statements also contain numerous inferences as to Pranges abilities and / or direct involvement in the manipulation of our stock. 5) John Scribante being named as CEO after long and thoughtful deliberation. I believe the truth is John was offered the position as CEO because [inside counsel] Paul Kardish had just recently brought to the attention of the Comp Committee Chairman Mark Williamson the fact that the amended employment agreement drafted by [Foley attorney] Barth, executed by Kackley while he was Pres/COO had no non-compete language covering Solar panel sales. Consider the fact that the Employment agreement was drafted simultaneously with the Solyndra Contract and the establishment of the New Orion Division, set up to sell Solar. We had a situation that would allow the President of our new division to walk out the door, with 30-50 million dollars in business, and not be able to do a damn thing about it. There are numerous other issues relating to Scribante, that I describe in detail in a letter written to Kackley and cc to Barth just a few days ago which I will attach. As part of the preparation for the Prange lawsuit I was exposed to a considerable amount [of] evidence that's been deliberately suppressed as part of an ongoing Conspiracy to cover up these activities. Insider trading?? Given the overall dollars involved, the volatile history of our stock price, trading volume swings > 5 million shares opening day of trading. I suspect the participants in this conspiracy have much to lose financially, reputation, license to practice, maybe even criminal prosecution. They include members of the Orion Board of Directors past and present as well as our Outside Counsel Steve Barth of Foley. I will likely have another round of violations that I'm still in the process of collecting data, and discussing with my attorneys.
More recently the final cover-up is part of another multi faceted violation of our code of conduct. Driven primarily by Williamson, Barth and most recently Altschaefl have been trying to extort me into signing an extremely onerous non standard release as part of the Severance I'm entitled to, and should have received already. The problem is my unwillingness to forgo my rights as a Shareholder, to include the purchase of additional shares and my set on the board. Furthermore I question why the company insists on including an all encompassing indemnification, hold harmless, agree never to sue for their outside counsel. What are they afraid of . . . .
Respectfully submitted,
Neal R. Verfuerth Founder / Shareholder Board member

(ECF No. 63-5.)

         Although Verfuerth described his email as a “whistleblower” email, he did not make any filings or otherwise communicate his concerns to the SEC. (ECF No. 104-4.)

         Later that morning, the Board (including Verfuerth) met and voted to terminate his employment for cause. In a letter issued the next day, the Board explained that its action was due to the following:

1. Your acts of dishonesty, misappropriation and conversion of Company funds in connection with your retention of the Company's “reimbursement” to you of $90, 000 of attorney fees (grossed up for taxes). These attorney fees were claimed by you to have been incurred in connection with your divorce, but you have not paid these fees to your divorce attorney and you have not accounted for such fees, even after the October 22 written request to do so.
2. Your serial violations of the terms and conditions of your September 27, 2012 Board Directives Letter (including the Company's October 22 written warning to you) as a result of your:
a. Disparagement of John Scribante
b. Contacting Scott Jensen to obtain information about the Company's significant shareholders
c. Contacting shareholders in an attempt to form a dissident shareholder group.

(ECF No. 60-5.)

         II. Analysis

         Summary judgment is proper when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.” Fed. R. Civ. P 56(c). When determining if a genuine issue of fact exists, the court must view the evidence and draw all reasonable inferences in favor of the party opposing the motion. Bennington v. Caterpillar Inc., 275 F.3d 654, 658 (7th Cir. 2001); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). When parties file cross-motions for summary judgment, each movant must satisfy Federal Rule of Civil Procedure 56's requirements. See Cont'l Cas. Co. v. Northwestern Nat'l Ins. Co., 427 F.3d 1038, 1041 (7th Cir. 2005).

         A. Sarbanes-Oxley Whistleblower Claim

         1. Protected Activity: Transforming Everyday Corporate Issues into “Fraud”

         As will be seen below, this case presents the unusual scenario in which a CEO claims to have been a “whistleblower” about his company's failure to disclose material facts to shareholders during the same period he himself was certifying that his company's disclosures were complete. Section 1514A(a) of the Sarbanes-Oxley Act (SOX) provides whistleblower protection for employees of publicly-traded companies by prohibiting employers from retaliating against them for “any lawful act done by the employee . . . to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes” mail fraud, bank fraud, securities fraud, or violation of any rule or regulation of the SEC, or any federal law relating to fraud against shareholders, when the information or assistance is provided to a person with investigatory authority. 18 U.S.C. § 1514A(a). As noted earlier, Verfuerth did not provide any information to the SEC or any other typical investigatory authority. Instead, he relies on the fact that he told various members of the Board of Directors about his concerns about the company's disclosures. I assume here (it is not argued otherwise) that a company's board of directors-the only entity to which the Plaintiff arguably provided any information-could be a “person with supervisory authority over” the CEO, and thus it is conceivable that a CEO could be a whistleblower if he reported qualifying information to his Board. 18 U.S.C. § 1514A(a)(1)(C).[2]

         To prevail under this provision, an employee must prove by a preponderance of the evidence that “(1) she engaged in protected activity; (2) the employer knew that she engaged in the protected activity; (3) she suffered an unfavorable personnel action; and (4) the protected activity was a contributing factor in the unfavorable action . . . . If the employee established these four elements, the employer may avoid liability if it can prove ‘by clear and convincing evidence' that it ‘would have taken the same unfavorable personnel action in the absence of that [protected] behavior.'” Harp v. Charter Commc'ns, Inc., 558 F.3d 722, 723 (7th Cir. 2009) (quoting Allen v. Administrative Review Board, 514 F.3d 468, 475-76 (5th Cir. 2008)). To prevail on such a claim, the employee must subjectively believe that his employer was acting unlawfully, and that belief must also be objectively reasonable. Id.

         As set forth in Verfuerth's own “whistleblower” email, he believed members of the board were engaged in “retaliation against me for pursuing/exposing actions and ongoing activities that have to date negatively impacted the price per share of our stock. These issues include but are not limited to . . . Corporate Waste, Violations of the Orion Code of Conduct, Breach(s) of Fiduciary Duty[, and] Breach(s) of Attorney Client Privilege.” (ECF No. 63-5.) Sarbanes-Oxley, however, does not provide protection for complaining about things like “waste, ” violations of codes of conduct or breaches of fiduciary duty or attorney-client privilege. Instead, under 18 U.S.C. § 1514A(a), only allegations about illegal fraud (mail fraud, wire fraud, securities fraud, etc.) are protected. Based on Verfuerth's own ...

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