SOX Whistleblowers Protection

Several recent decisions from the Department of Labor have discussed what is and what is not a Protected Activity under SOX.  Below is a discussion of two of these recent cases.

In Johnson v. Stein Mart, Inc., No. 3:06-CV-00341 (M.D.Fla. June 20, 2007) (case below 2006-SOX-52), the Plaintiff had been hired as a Buyer at the Defendant’s corporate headquarters, and was later promoted to be a Planner, in which capacity she complained to management about (1) the collection of markdown allowances from vendors, (2) the changing of season codes on older inventory, and (3) the accounting for the value of inventory. The Defendant argued that the Plaintiff failedto establish a prima facie case on the element of protected activity because she did not have a reasonable belief that these practices were illegal because she had no accounting background and had no knowledge of the Defendant’s accounting practices. The Defendant argued that its vendor markdown allowances and season code changes were in line with general industry practices. The district court rejected this argument because the Defendant had treated the Plaintiff’s complaints reasonable enough to have warranted an internal investigation.

In Reyna v. Conagra Foods, Inc., No. 3:04-CV-00039 (M.D.Ga. June 11, 2007), the Plaintiffs (who were employees in the Defendant’s HR Department) contended that the Defendant violated the whistleblower provision of the Sarbanes Oxley Act when they were terminated for reporting two incidents of fraud: (1) a fraudulent insurance scheme in which a supervisor falsely requested that individuals he identified as his wife and son (who were in fact his sister and nephew) be added to his company provided health insurance as dependents, and (2) an instance in which a HR supervisor and a benefits coordinator provided a fake social security card for an employee in order to satisfy the I 9 requirements of the immigration law. The Plaintiffs contended that these fraudulent activities necessarily involved the use of mail or the internet, and thus the reporting of the activities was protected under the SOX. The Defendant filed a motion for summary judgment arguing that the reporting was not protected activity because the reports of mail fraud and wire fraud did not relate to “fraud against shareholders.” Employing principles of statutory interpretation, the court denied summary judgment, holding: The statute clearly protects an employee against retaliation based upon that employee’s reporting of mail fraud or wire fraud regardless of whether that fraud involves a shareholder of the company. The Court rejected Defendants’ interpretation that the last phrase of the provision, “relating to fraud against shareholders,” modifies each of the preceding phrases in the provision. Defendants seek to redraft the statute to read that the employee is protected only if he reasonably believes that the conduct constitutes a “violation of section 1341 [mail fraud] ‘relating to fraud against shareholders,’ section 1343 [wire fraud] ‘relating to fraud against shareholders,’” etc.Slip op. at 39.

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