Judge Orders Jury Trial in Whistleblower Action Against Bank of Internet

SAN DIEGO (CN) — Whistleblower claims from a former Bank of Internet internal auditor will go to trial, though the judge postponed the proceedings originally set for this spring due to the coronavirus pandemic.

U.S. District Judge Cynthia Bashant found in a lengthy 90-page order many of the claims and counterclaims in the whistleblower spat should be decided by a jury.

Charles Matthew Erhart, a former internal auditor at BofI Federal Bank sued the financial institution in 2015, claiming it fired him in retaliation for reporting misconduct allegations to its primary regulator, the Office of Comptroller of the Currency.

BofI countersued Erhart for Computer Fraud and Abuse Act violations less than a week after his federal lawsuit was filed and its stocks dropped following a New York Times story about Erhart’s lawsuit.

The judge summarized the parties’ “diverging stories.”

Erhart claims he was an auditor in a “turbulent corporate environment” where supervisors asked him to remove a finding from a report or mark it “attorney-client privileged” so it would not be discoverable should a class action be filed against the bank.

Erhart reported a dozen instances of what he believed to be wrongful conduct to government regulators.

BofI, on the other hand, claims Erhart was an “internal auditor gone rogue,” Bashant summarized, and that he conducted unauthorized investigations, including improperly obtaining the CEO’s personal tax returns and involving himself in a payroll audit.

Because the auditor and his former employer painted different stories of the workplace environment, Bashant found the bulk of the case should be decided by a jury.

Erhart’s claims for violation of the Sarbanes-Oxley Act of 2002 – a federal law enacted to protect shareholders and employees in the wake of the Enron scandal – largely survived summary judgment.

BofI’s argument Erhart improperly raised six additional misconduct categories in his lawsuit – but not in his preceding administrative complaint with the Occupational Safety and Health Administration – does not hold up, as Bashant found there is no federal requirement Erhart “exhaust” administrative recourse before bringing a lawsuit.

“He could have more skillfully completed his administrative pleading, but Sarbanes-Oxley’s ‘exhaustion requirement should not become a tripwire for hapless plaintiffs,’” Bashant wrote.

Erhart only failed to mention the issue of altered financial statements in his OSHA complaint, where Bashant granted summary judgment to BofI.

Bashant also granted partial summary judgment to the bank on several categories of alleged misconduct in violation of the Sarbanes-Oxley Act for failing to make disclosures.

Likewise, the court found for BofI on Erhart’s Dodd-Frank claims as the conduct identified by Erhart does not constitute a protected activity.

But BofI can’t dodge Erhart’s whistleblower retaliation claims regarding his belief the bank defrauded its regulator at the OCC for failing to disclose customer accounts, subpoenas and the sanitized global cash card review.

“At minimum, a factfinder could conclude Erhart reasonably suspected the bank was violating the law by withholding or refusing to provide accurate information to the OCC,” Bashant wrote.

“Further, giving credence to Erhart’s beliefs, his observations, and statements purportedly made by senior bank officials, a factfinder could also conclude Erhart disclosed reasonably based suspicions that individuals at the bank were attempting to obstruct the OCC’s lawful examination and regulation of the bank,” Bashant added.

As for the Bank’s countersuit against Erhart for allegedly misusing his access to confidential information, the court some of the claims must go to trial.

Bashant found so far as BofI seeks to impose liability on Erhart for improperly taking information, including storing copies of documents “in a bag that was buried in his closet under a bunch of items,” only allegations involving BofI’s customers’ and employees’ nonpublic personal information can be litigated at trial.

“A reasonable jury could conclude Erhart breached his duty of care to the bank as an internal auditor by mishandling customers’ and bank employees’ nonpublic personal information.  A jury could also find Erhart damaged the Bank,” Bashant wrote.

Likewise, a jury could find Erhart breached the confidentiality provision of his employment contract, Bashant found, denying dismissal on the breach of contract claim brought by BofI.

On the fraud claim against Erhart, “A jury could conclude Erhart did not exceed his authority in seeking to uncover wrongdoing as part of his purported whistleblowing activities or that this conduct was privileged,” Bashant wrote.

“But a jury could also conclude Erhart’s conduct was outside the scope of his duties; he knew it was; and he intended to defraud the bank’s other employees as part of a personal vendetta to ‘bring down the bank.’”

Erhart is represented by The Gillam Law Firm in Los Angeles. In a statement, his attorney Carol Gillam offered praise for Bashant’s order.

“We respect Judge Bashant’s meticulous work in crafting a 90-page decision,” Gillam said. “We still have significant claims to take to trial.”

BofI is represented by Sheppard Mullin Richter & Hampton, which did not respond to a request for comment.

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