SOX Whistleblowers Protection

SOX also requires that information presented by protected whistleblowers be investigated by an “Independent” Audit Committee. While this is an excellent requirement, it is unfortunately susceptible to much abuse. If you have or are contemplating blowing the whistle on your publicly traded employer, please be mindful that the members of the company’s management team more than likely hired the “independent” audit committee members probably speak with the audit committee on a very regular basis.

MORAL OF THIS BLOG POST: If you are blowing the whistle on one of the higher ups at your publicly traded employer, chances are that your allegation and your identity will probably be known within hours. Get Help First.

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Last spring Chalace Epley Lowry reported  what she believed could have been insider trading by a senior executive at Wal-mart and then found herself looking for a new job.

According to a recent article in Buiseness Week, soon after she reported her  complaint Lowry’s identity as the whistleblower was disclosed to the boss she was complaining about.  Wal-Mart told Business Week that  Lowry agreed to the disclosure, but Lowry disagrees. A distressed Lowry said it was impossible to remain in her  department after the disclosure.  When she  asked to be transferred Lowry reported that she was told she had 60 to 90 days to find another position at the company.

Four months later, Lowry has a full-time job at Wal-Mart headquarters. But her job search was any thing but easy.  She thinks that the stress of the situation  contributed  to a  recent diagnosis of “stress-induced angina”  and to the breakup of her marriage. “The past four months have been very hard and, in my opinion, unfair to an honest, 51-year-old woman who chose to do the right thing,”  Lowry reported to Business Week.

While she was looking for a job within Wal-Mart, Lowry on Sept. 5 filed a whistleblower complaint with the Occupational Safety & Health Administration. OSHA administers whistleblower protections under the Corporate & Criminal Fraud Accountability Act of 2002, better known as Sarbanes-Oxley or SOX. 

Around mid-August, Lowry was moved to assist a legal team of two attorneys in Wal-Mart’s human resources group, known as the People division. On Oct. 1, Lowry was informed that her job is no longer temporary and she could work there full-time. Lowry told Business Week “I guess I should consider myself lucky at this point, but all of this should never have happened. I still feel I’m under the microscope.”

One of the two attorneys that Lowry will be working for is Sharon Butcher. She was the attorney at Enron who was given the task of handling Sherron Watkins’ request for reassignment to a new position after Watkins wrote a memo to then-CEO Ken Lay questioning the company’s accounting.

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The initial statistics are not favorable for a Sarbanes Oxley protected whistle-blower. Recent reports from the Department of Labor (”DOL”) indicate that SOX whistle blowers prevail only about ten percent of the time.

 Why? 

Many explanations come to mind. First, the more egregious cases are settled and resolved before the courts rule on the complaint.  Second,  SOX whistleblower protection is still relatively new and everyone continues to learn  what is and is not a “protected activity” or what constitutes discriminatory conduct against the SOX whistleblower.

What can a protected employee do?  That will be the subject of a later post, but the most important tip would be to protect him or herself. Don’t let an employer set you up and turn the investigation towards you instead of the truly culpable party.

Blaming the victim is the oldest trick in the book!

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A successful SOX whistleblower may obtain “all relief necessary to make the employee whole”.   Examples are reinstatement with full related rights and benefits, back pay with interest, and any special damages you can prove you incured as a result of the employers adverse employment actions. Reputational damages have been awared to Sarbanes Oxley Whistleblowers.  The SOX whistleblower is aslo entitled to recover his or her reasonable attorney fees, expert fees, witness fees and other litigation fees.

The Sarbanes Oxley statute also provides that a prevailing employer in a SOX whistleblowing case may be awarded attorneys fees not to exceed $1,000, but only if it is determined that teh employee’s case was frivolous or brought bad faith.

 All Sox Whistleblowers should be aware that the remedies afforded by Sarbanes Oxley do not premept other federal or state claims, such as wrongful termination, wrongful discharge or defamation.

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Once a case is filed, OSHA reviews the allegations in the complaint to determine whether the claim should be investigated.

If, on the basis of the investigation, OSHA determines that the employee was subjected to retaliation, OSHA must order the employer to provide a complete “make whole” remedy to the employee.

If OSHA determines that the claim is without merit, OSHA must dismiss the action. Either an employee or employer may appeal the investigative findings. The appeal is completely de novo. If appealed, the parties are entitled to an on-the-record hearing before the DOL’s Office of Administrative Law Judges (OALJ). Although a case is held de novo before the OALJ, a preliminary order of reinstatement issued by OSHA is immediately enforceable. Thus, if OSHA orders an employee reinstatement on the basis of an investigation alone, the employee must be immediately reinstated pending the appeal of the OSHA ruling.

The OALJ procedures for adjudicating whistleblower cases, codified at 29 C.F.R. Part 18, are very similar to the Federal Rules of Civil Procedure. Parties are entitled to discovery and may file standard pretrial motions. Upon the completion of pretrial proceedings, the DOL ALJ conduct formal bench trials, where each party is permitted to call and cross-examine witnesses.

The Federal Rules of Evidence are not directly applicable, and the cases are tried before a single judge, who will issue findings of fact and conclusions of law.

The ALJ’s decision is appealable to the DOL’s Administrative Review Board (“ARB”). The ARB was given the authority to issue final administrative orders on behalf of the Secretary of Labor. ARB orders are reviewable in the U.S. Courts of Appeal for the circuit in which the violation arose.

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Discrimination complaints must be filed with the Department of Labor (DOL) within 90 days of an alleged adverse action.

Once a case is filed, OSHA reviews the allegations in the complaint to determine whether the claim should be investigated. If, on the basis of the investigation, OSHA determines that the employee was subjected to retaliation, OSHA must order the employer to provide a complete “make whole” remedy to the employee.

If OSHA determines that the claim is without merit, OSHA must dismiss the action. Either an employee or employer may appeal the investigative findings. The appeal is “de novo”, which means the case starts over and is assessed by the new administrative judge with no reliance on the previous OSHA ruling.

If appealed, the parties are entitled to an on-the-record hearing before the DOL’s Office of Administrative Law Judges (OALJ). Although a case is held “de novo” before the OALJ, a preliminary order of reinstatement issued by OSHA is immediately enforceable. Thus, if OSHA orders an employee reinstatement on the basis of an investigation alone, the employee must be immediately reinstated pending the appeal of the OSHA ruling.

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According to Forbes, corporate crime remains rampant and a costly problem for businesses worldwide, despite heavy spending, tough new laws and technological countermeasures aimed at stamping it out, according to a survey  released today  by PricewaterhouseCoopers.

Steve Skalak, PricewaterhouseCoopers’ global investigations leader, said in a interview

“Economic crime remains an intractable problem, but the most effective approach to it is to combine financial controls with the right cultural structure,” Skalak says. “That means creating a good tone at top, emphasizing intolerance for wrongdoing, establishing whistleblower hotlines and giving employees the sense they can report wrongdoing without fear of reprisal.”

 In total, 43% of 5,400 companies surveyed in 40 countries reported suffering one or more significant economic crimes since the accounting firm last conducted its survey two years ago. The prevalence of economic crime reported was level with 2005 results but up six percentage points from 2003.

The findings are consistent with headlines implicating companies around the globe in a wide range of wrongdoing, including electronics giant Siemens (nyse: SI - news - people ) (bribery), York International, now part of Johnson Controls (nyse: JCI - news - people ) (foreign corrupt practices), Beazer Homes (nyse: BZH - news - people ) (accounting irregularities) and Biomet (kickbacks to doctors).

According to Steve Skalak “The basic finding is that economic crime is unabated everywhere in world, regardless of the size of companies, and continues to pose a significant business risk,” .

The survey sorts economic crimes into five categories. Asset misappropriation was most common, with 30% of companies reporting it, followed by intellectual property infringement (15%), corruption and bribery (13%), accounting fraud (12%) and money laundering (4%).

The highest perceived levels of economic crime were reported in Africa (52%) and the lowest in Western Europe (38%). In North America, 52% of companies surveyed reported suffering one or more economic crimes in the past two years.

In the wake of the Sarbanes-Oxley Act of 2002, more than 80% of U.S. executives surveyed expressed high confidence in their companies’ internal financial controls. However, only about half were confident of the effectiveness of whistle-blower hotlines.

Those findings contrast with the way economic crimes are typically uncovered, with internal controls revealing about 19% of wrongdoing versus 40% coming through hotlines and tips from employees and outsiders.

By industry, insurance, retail and consumer goods and government reported the highest levels of crime, with more than half of firms claiming to have been victims in the past two years. Health care, aerospace and the drug industry reported the lowest levels–between 27% and 33%.

Each incident of economic crime cost companies an average of $3 million, including direct losses plus legal and managerial costs, the survey found. Companies reporting fraud suffered average losses of $2.4 million each as a result, which was up from $1.7 million two years earlier. While the survey painted a grim picture of the economic crime landscape, there were a few bright spots. One is what PricewaterhouseCoopers terms the “fraud paradox,” in which aggressive countermeasures detect a greater percentage of fraud incidents, even though the total amount estimated to be occurring is declining.Companies implementing compliance programs and ethics training for employees were also found to have had success in limiting the problem. In total, 36% of firms with such programs in place reported suffering economic crimes, versus 48% of those without the programs.

Lynn Brewer, author of Confessions of an Enron Executive: A Whistleblower’s Story, has become a globally known authority on what went wrong at Enron.

Since 2002, she has given close to 200 speeches around the world. At $13,000 per appearance, she has earned hundreds of thousands of dollars for her company, The Integrity Institute. In her presentations, Brewer recounts the wrongs she witnessed at Enron — a company that grossly overstated its earnings and collapsed into bankruptcy six years ago — and exhorts her listeners to act ethically in all of their dealings.
In recognition of her bravery in speaking out as a whistle-blower, the Nobel Peace Center in Oslo, is featuring Brewer in an exhibition devoted to freedom of speech.

Within the world of business ethics, Brewer is considered a star. She is a founding member of the Open Compliance and Ethics Group. She delivered the keynote address at a Sarbanes-Oxley conference hosted by the New York Stock Exchange in 2003 (there are video clips of it on her site, www.lynnbrewer.info).

She has spoken in Great Britain, India, Venezuela, Italy, Canada, Malaysia and New Zealand, and given keynote addresses at dozens of other gatherings in the USA. She’s also a regular speaker at universities, where she lectures students on the importance of ethics in business.
Brewer has even co-authored an article in Business Strategy Review with noted management guru Oren Harari showing how the leadership skills of Colin Powell could have been applied at Enron.

But a USA TODAY investigation that involved interviews with several former colleagues of Ms. Brewer paint her as an astute self-promoter who succeeded in the corporate ethics industry by modeling herself after another Enron whistle-blower, Sharon Watkins. Her past co-workers claim she was not an executive and was not in charge of any revenue responsibilities.

What actually happened may never be fully uncovered but the end result of Ms. Brewer’s recent work to “upgrade” corporate ethics in the United States is greatly appreciated and applauded by this blog.

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After an OSHA complaint is filed, the OSHA investigator assigned to the file investigates the claim with the Company and typically issues a subpoena for records to the Company and possibly interviews Company personnel. The Company is also allowed to submit a response to the allegations.  After the investigation OSHA will issue a ruling on whether the Company violated the SOX statute.

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The whistleblower provisions of SOX prohibit a covered employer from discharging, demoting, suspending, threatening, harrassing, or “in any other manner” discriminating against an employee who has taken actions protected by the act. 

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The Boeing Co. fired at least one employee last month for having a conversation with Seattle reporter in July, the employee said. The company told the employee that he was being investigated and was not allowed to discuss allegations against him with any other Boeing employees.

On July 17, the Seattle publication P-I published an investigative report revealing that Boeing had failed to prove that it could protect its computer systems against manipulation, theft and fraud. The problems were found during the course of audits mandated by the Sarbanes-Oxley Act

Boeing has always maintained that it is compliant with the law and that its financial statements are accurate.

Last month, P-I also received an anonymous e-mail, with a subject line: “Boeing’s hunt for SOX Whistleblowers.”It said: “Computers are being surveilled, audit employees photographed from a distance, their activities video-taped. Multiple suspensions occurring this week. … We’re all under direct threat of firing, lawsuit, and criminal prosecution if we even mention this to each other.” The fired employee worked as an information technology auditor in Boeing’s St. Louis office. He gave the newspaper permission to report on his firing and said Friday that managers began to treat him badly after he raised ethics concerns within the company over how it was conducting its audits.

“Everyone who raises concerns is retaliated against,” the fired employee said. “There’s no way in the world that I expected to lose my job when all I am trying to do is save the company.”

Boeing representative say that the company would focus on fixing problems, not retaliating against employees who raised concerns.

The Whistleblowing employee said he has worked for Boeing for about three years and only recently joined the Sarbanes-Oxley compliance effort. He holds a master’s degree in business administration and has worked in compliance for more than 10 years, he said.

“I don’t know how I’m going to pay my bills; I’m in this all by myself now,” he said. “The last two years out of three I’ve been an ‘exceeds expectations’ employee.”

Immediately following the papers report, some employees said they worried that Boeing would access their personal e-mail accounts.

When asked whether Boeing investigators have read employees’ private e-mails, Boeing representative said, “Our company computing systems are the property of The Boeing Co., and our employees are very aware of their responsibilities in using their systems, and in their use they consent to using those assets properly.”

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You may still have a claim under SOX but you should  include the parent,  publicly traded company, as a Respondant in your OSHA claim.

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With the Occupational Health and Safety Administration (”OSHA”) of the Department of Labor (”DOL”).  You should file the office of the DOL closest to where you reside.

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If you are working for a publicly held company and you report what you reasonably believe is fraud you may have protection under SOX.

If you are working for a publicly held company and you file a claim or provide information for an investigation concerning a proceeding filed or about to be filed concerning fraud you may have protection under SOX.

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Civil Protections for Employees of Issuers Section 806(a) of the Act provides a civil cause of action for employees of public companies who suffer adverse employment action in retaliation for raising concerns about corporate fraud or accounting issues.

The substantive protections created by Section 806(a) provide as follows:

(a) Whistleblower protection for employees of publicly traded companies.

(b) No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. [’]781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. [’]78o(d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee.—

(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by—

(A) a Federal regulatory or law enforcement agency;
(B) any Member of Congress or any committee of Congress; or
(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); Or

(2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.

[1] 18 U.S.C. ‘1514A(a) (2004).

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