The “cat’s paw” theory of liability for PwC’s alleged retaliatory firing of Mauro Botta for whistleblowing

Update: Botta v. PricewaterhouseCoopers LLP, Case 3:18-cv-02615-RS

Update:

On June 27, 2019, Judge Richard Seeborg in the Northern District of California denied PwC on its motion for summary judgement in the Botta case. PwC had sought summary judgment based on its argument that the individual who made the determination to terminate Botta had no knowledge of Botta’s SEC complaint.

A fact finder may very well ultimately conclude Botta was terminated for legitimate reasons. PwC, however, has not shown that undisputed facts insulate it from liability merely because the ultimate termination decision may have been made by Simon.

According to the judge’s decision after Botta filed a complaint with the SEC concerning his experiences with several PwC Silicon Valley audit clients, the SEC opened an investigation and alerted PwC by letter dated April 28, 2017. The SEC informed PwC that its investigation was related to two audits conducted in 2013 and 2014.

PwC retained Walter Brown as counsel to respond to the SEC investigation. Botta’s counsel also sent a letter to PwC’s general counsel, Marie Mazour, on July 5, 2017 memorializing Botta’s complaints about on-going retaliation resulting from his internal complaints.

During the SEC investigation, Brown met with Botta for two interviews, on June 14 and July 17, 2017. According to Brown’s declaration, Botta admitted he had made false statements about an internal control described in PwC’s working papers. Botta had made similar statements about the control in his SEC complaint, which represented the “control was created the night before the filing of the 10-K,” “was not noted during the walkthrough [of the client’s controls],” and was “a documentation exercise.”

PwC Managing Partner of the Assurance Practice, Mark Simon, believed the allegations regarding Botta’s behavior showed serious misconduct if it proved to be true. According to Simon, he decided to terminate Botta’s at-will employment because (1) either the existence of the client internal control had been fabricated and constituted a false statement in PwC’s working papers, or (2) Botta lied that he had verified the existence of the control in his interviews. Simon asserts he did not know about the SEC complaint at the time he fired Botta.

The judge wrote that PwC did not contend, “nor could it,” that its employees and attorneys involved in responding to the SEC inquiry “would have lacked any basis to suspect Botta was the “whistleblower” who triggered the investigation.” One reason is that the issues the SEC raised mirrored those Botta had been escalating to HR and practice leadership internally.

So, the judge said that, “At a minimum there are at least triable issues on that point.”

According to the judge’s decision, PwC did contend, however, that Botta “must show a person with supervisory authority over him ‘knew or suspected, actually or constructively, that the [plaintiff] engaged in protected activity.’

PwC is thus advancing a sole-decisionmaker theory, where Botta “must make a showing that the person who actually made the decision to fire him knew” of his protected activity to satisfy this element of a prima facie case, according to the judge.

In contrast, Botta advances something of a “cat’s paw” theory in which he must establish a subordinate, “set[] in motion” his firing and “influenced or was involved in the decision or decision-making process.” Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1061 (9th Cir. 2011).

The record shows that Botta was fired by PwC Managing Partner of the Assurance Practice, Mark Simon. As noted above, Simon declared he made the decision to fire Botta because either Botta “violated his professional, legal, and ethical duties and PwC policy, which prohibit the fabrication of audit evidence or documentation,” or he “lied about his conduct.” Simon also insists he “was not aware that [Botta] submitted a complaint to the SEC,” and “[t]o this day, . . . never even communicated with Mr. Botta.”

The judge wrote that it just doesn’t matter that Botta has failed so far to submit direct evidence that contradicts Simon’s declarations.

Recall, Simon claims he made the decision to fire Botta because either Botta “violated his professional, legal, and ethical duties and PwC policy, which prohibit the fabrication of audit evidence or documentation,” or he “lied about his conduct” and that he “was not aware that [Botta] submitted a complaint to the SEC,” and “[t]o this day . . . never even communicated with Mr. Botta.”

That’s because, the judge wrote, “the relatively strong circumstantial evidence available to PwC that the SEC complaint may have been submitted by Botta weighs against concluding as a matter of law that the decision maker acted solely on other, legitimate, grounds.”

Even assuming a Botta may have been fired for good cause, Simon’s stated reasons for the firing are “intertwined with the alleged protected activity of reporting improprieties to the SEC,” the judge wrote.

I was struck by the use of the term “cat’s paw” theory of liability and had no idea what that meant.

Was the judge saying that, like a cat with dirty paws, Botta’s footprints were all over the SEC inquiry and no one could plausibly deny the possibility he had been fired in retaliation for that trouble he caused PwC?

Turns out there is an actual legal theory called “cat’s paws” theory of liability for employment discrimination and retaliation claims based on a Supreme Court decision written by Botta’s fellow Italian-American Justice Antonin Scalia in 2011.

Opinion recap: “Cat’s paw” theory upheld from the Scotus Blog:

As finally crafted by the Scalia opinion, the “cat’s paw” theory of liability falls upon the employer only if these steps play out in a sequence: (1) a supervisor of the worker takes a step (writing up a negative report, for example) that is done for a biased reason, (2) that supervisor intends to get the worker fired, demoted or otherwise penalized, and (3) the supervisor’s step is found to be the “proximate” cause of the ultimate decision — even if the executive or supervisor who actually carries out the firing or other penalty is someone else, and that person was not at all biased.

From the Obermayer Rebmann Maxwell & Hippel LLP. HR Legalist blog

The Fable

“The Monkey and the Cat” is a fable (dating back to the 17th century or perhaps earlier) about a monkey who persuades a cat to pull chestnuts from the embers of a fire, only to take the reward for himself and leave the cat nursing a burnt paw. The fable is the source of the English idiom “cat’s paw” – essentially, one who does another’s dirty work. The story of the clever monkey and the unsuspecting cat has also worked its way into modern employment discrimination law.

“Cat’s paw liability” describes a scenario when an employee or supervisor, motivated by discriminatory intent, influences an otherwise unbiased decision-maker to take an adverse employment action against another employee. In the end, the employer is still held responsible.

A 2011 Supreme Court Opinion, Staub v. Proctor Hospital, made the cat’s paw theory slightly more employee-friendly. After Staub, the employer can no longer automatically defend a cat’s paw case by arguing that the non-biased decision-maker investigated other materials (such as the employee’s personnel file) before making the ultimate decision. As long as the biased supervisor’s input is a factor (but not necessarily the sole factor) in the decision, the employer can still end up getting burned.

The judge also noted, in his decision to deny PwC summary judgment, that PwC had failed to “establish good cause” for the various motions it made to seal or make confidential, the documents and exhibits that were filed in connection with its motion for summary judgment. So the sealing motions were denied.

A trial is scheduled for October.

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Mauro Botta brought an action in district court in California against PricewaterhouseCoopers LLP alleging that PwC wrongfully terminated him in retaliation for a whistleblower complaint he made to the Securities and Exchange Commission about PwC’s auditing practices.

There’s been a lot written about the case, which is ongoing.

PwC Whistleblower Alleges Fraud in Audits of Silicon Valley Companies

The Project on Government Oversight, May 10, 2018, by David Hilzenrath

After more than a dozen years auditing technology companies in Silicon Valley, Mauro Botta took an extraordinary step: He decided to become a whistleblower.

He drafted an account of what he had seen and experienced as a senior manager at PwC, the accounting firm also known as PricewaterhouseCoopers. Then, in November 2016, he submitted it confidentially to a federal regulator, the Securities and Exchange Commission (SEC).

Under penalty of perjury, Botta described example after example of sloppy if not misleading bookkeeping and weak internal controls at businesses in the Valley.

Botta told the SEC that, when it came to their accounting, companies he observed generally had a “low level of competence.” (He explained to the Project On Government Oversight that he was referring to small and mid-sized companies.)

But the prime focus of Botta’s whistleblower complaint wasn’t the tech companies. It was something deeper and more far-reaching: the culture of auditing at PwC.

Botta alleged that, to keep corporate managers happy and to avoid losing their business, PwC was pulling its punches—trying not to flag too many problems with companies’ internal controls.

He said he was concerned about “the risk of collusion between auditors and management in this valley . . . with management paying us the fees and auditors picking and choosing what to call an audit issue.”

How PricewaterhouseCoopers Learned the Importance of Whistleblowing, the Hard Way

Posted on July 6, 2018 by Mike Bothwell

Whistleblowing can reveal tons of problems and mistakes, so it’s no wonder so many companies don’t like it.

Madison Marriage and her colleague at the Financial Times picked up the story, as part of her continuing coverage of the pressures the Big 4 are under in the U.K.

A dangerous dance: when auditors are too close to the client

Firms can be too focused on pleasing customers who are also a source of consulting income

Madison Marriage and Jonathan Ford

AUGUST 28, 2018

…In Mr Botta’s case, he said that PwC auditors were routinely correcting their clients’ accounts while they were being drawn up, which meant that when it came to auditing those documents, they were in effect marking their own work. His concern was that PwC partners were compromising their objectivity. He also believed that weaknesses in the internal controls at some of these companies were not flagged to shareholders by PwC when they should have been.

To outsiders, his claims may sound esoteric. But what was potentially more revealing was the feedback Mr Botta received on his performance in 2014, two years after he started raising these concerns internally.

A PwC document — seen by the Financial Times and first reported by the Project on Government Oversight — detailing the results of a peer review conducted that year shone an intriguing light on the firm’s behavioural expectations for its aspiring partners.

“Until he gets the clients pounding the table for him, I don’t think he’ll ever make partner,” one colleague said.

“Build the relationships where the client would never want to leave PwC,” said another. “If he were really responsible for bringing in the revenue and keeping clients, as partners are, he would have to adapt fast,” added a third.

Marriage wrote about it again to pick out one particularly colorful anecdote cited by Botta in his SEC whistleblower filing.

Whistleblower accuses PwC of failings over private jet trip

Former auditor says ‘outrageous’ incident highlights independence issues

Madison Marriage

MARCH 24, 2019

A PwC whistleblower has accused the Big Four accounting firm of serious independence failings after it allowed its auditors to fly in a private jet owned by a major audit client, US-listed chipmaker Micron. Mauro Botta, a former PwC auditor who is suing the firm in the US for wrongful dismissal, alleged that a photo of the Micron audit team standing in front of the private jet was singled out for praise during a meeting in California in 2016.

The incident is one of several alleged audit lapses involving a handful of PwC’s Silicon Valley clients that were highlighted in a document sent by Mr Botta to the US Securities and Exchange Commission as part of a whistleblowing complaint against his former employer in 2016. The document shines an intriguing light on cultural standards within PwC, and has raised further questions about whether large accounting firms are too close to the companies they audit at a time when the industry is under unprecedented scrutiny.

In the document, Mr Botta said the photo was shown to PwC’s San Jose office as an example of “best practice” as it demonstrated the auditors had a “great relationship” with Micron. Micron’s chief executive had offered to fly the PwC team to San Jose in his private jet so they did not miss an “internal firm party”, according to Mr Botta’s statement.

The case has also been covered in Forbes and by Brenna Nelinson for The Advocate, the magazine of the law firm Bernstein Litowitz and Berger.

It’s All About Relationships

As the Interests of Accounting Firms and their Clients Become More Interconnected, Errors and Conflicts of Interest Abound

By Brenna Nelinson

It is also important to understand that — contrary to popular belief — many auditors do not design their audits to ferret out fraud. A 2018 global study on occupational fraud found that only four percent of fraud is discovered by external audits. As a PwC audit partner famously testified under oath in 2016, “our audits are not designed to find fraud.”

Indeed, accounts from inside the “Big Four” accounting firms suggest that auditors often exploit flexibility in accounting rules to do the opposite: paint an overly rosy picture of the client’s finances. Along with such distortion of company finances can come retaliation against auditors who attempt to do the right thing.

For example, a recent Financial Times article recounts how a former PwC auditor, Mauro Botta, alleged that he experienced professional retaliation for raising internal concerns about the objectivity of the PwC partners performing audits for public companies. Botta was told that “you want these guys to like you,” and that he should prioritize generating revenue and nurturing client relationships and “build the relationships where the client would never want to leave PwC.” Ultimately, in response to client requests, Botta was removed from audits in which he raised concerns about audit accuracy.