Strange twist for plaintiff in UBS case

Government makes unusual request in whistle-blower suit

UBS is being sued by a whistle-blower who says the firm forced him out for cooperating with Massachusetts regulators. (Christian Hartmann/Reuters)

For investigators at the US Department of Labor, a whistle-blower lawsuit against the biggest offender in Wall Street's auction-rate market shutdown would seem to offer plenty of red meat.

But so far, the department appears to be giving the employer the benefit of the doubt.

Timothy Flynn is a stockbroker who sold auction-rate securities to numerous Massachusetts cities and towns on behalf of UBS Financial Services Inc. He sued UBS in July, alleging that the firm forced him out for cooperating with Massachusetts regulators investigating the firm. But what seemed a classic legal case has taken an unusual turn: Labor officials, who oversee whistle-blower cases, have asked Flynn to prove that his former employer is subject to a federal law that is meant to protect employees from retaliation.

Often, legal experts say, companies in UBS's position might raise this as a defense. They may argue that a subsidiary is not subject to Sarbanes-Oxley, a 2002 law passed after the Enron scandal that includes whistle-blower protections.

But UBS did not raise this defense. Rather, the Labor Department raised it on UBS's behalf, according to Flynn's lawyer in Pittsburgh, Jason A. Archinaco.

"It is absolutely bizarre," said Archinaco, who responded with a 42-page document, detailing his research that UBS's subsidiaries are, in fact, subject to the law barring retaliation against whistle-blowers.

He shouldn't have had to go to the lengths he did. UBS, responding to a Globe inquiry last week, readily acknowledged that its brokerage unit is subject to Sarbanes-Oxley, along with the parent company.

"The whole company is covered under Sarbanes-Oxley," UBS spokesman Douglas Morris said.

A Labor Department spokeswoman, Sharon Worthy, declined to say whether it was typical practice for the Labor Department to place this burden of proof on a whistle-blower. In a statement, she said the department "must establish as part of the investigation that the complainant is covered by any of the statutes; consequently, information would be requested to establish coverage."

But legal experts in whistle-blower cases said it's highly irregular to see the Labor Department going to bat for a defendant in this way.

"Their job is to investigate these claims and determine whether they're valid claims or not," said Richard Moberly, an assistant professor at the University of Nebraska College of Law, who testified before Congress on the rarity of whistle-blowers winning cases under the law that was supposed to offer sweeping protections against retaliation against employees.

Archinaco said the Labor Department's Syracuse, N.Y., investigator working on the case told him that the request was coming from his supervisors. The request was made verbally, not in writing, Archinaco said.

The investigator did not respond to a request for an interview.

Flynn was a key figure in Massachusetts Attorney General Martha Coakley's case against the firm. He was called to testify before her in April, two months after Wall Street brokers stopped all trading in auction-rate securities. He told investigators that UBS had led its brokers to believe that auction-rate securities were cash alternatives, similar to money markets.

The meeting led to a $40 million settlement in which UBS agreed to buy back investments Flynn and others had sold to Massachusetts municipalities. Later, the state's Securities Division would lead a $19 billion settlement with UBS over sales of auction-rate securities.

After his testimony, Flynn alleged, he was ordered not to have full conversations with his clients; his office door was locked, his computer hard drive was examined, and his e-mail access was shut off.

UBS, in its legal response, refuted all of Flynn's claims, saying he left the company of his own free will, not under pressure. His manager, in an affidavit, said he tried to convince Flynn to stay, even after Flynn stopped coming to work.

Flynn's lawyer, Archinaco, said his client was working from home because going to his Manhattan office had become uncomfortable: "The environment was such that he was scared of being fired."

The arm of the Labor Department appointed to investigate these complaints is the Occupational Health and Safety Administration, the agency that normally is in charge of employee safety.

Moberly, the law professor, said OSHA so far has had a poor record of investigating whistle-blower cases. Plaintiffs like Flynn are routinely turned away when defendant employers can show that a subsidiary is not subject to the law barring retaliation against whistle-blowers.

Archinaco said the OSHA investigator told him UBS and other companies had successfully defended themselves against whistle-blower cases before using a Sarbanes-Oxley exemption. In his response to the Labor Department's request - some details of which were reported by The Wall Street Journal on Tuesday - Archinaco said that if UBS has in the past obtained dismissals of Sarbanes-Oxley claims, the federal government should investigate those cases.

Two other branches of the federal government have found wrongdoing at UBS in recent months - the Securities and Exchange Commission and the US Department of Justice.

Beth Healy can be reached at bhealy@globe.com.