SOX Whistleblowers Protection

SOX WHISTLEBLOWER PROTECTED ACTIVITY.

 A STOCK ANALYST’S STATEMENT AT A REVIEW MEETING THAT SHE WOULD REFUSE TO CHANGE A STOCK RATING WAS NOT PROTECTED ACTIVITY WHERE SHE DID NOT VOICE A BELIEF THAT A CHANGE WOULD VIOLATE A SECURITIES LAW AND SHE WAS NOT DIRECTED TO CHANGE THE RATING

In Getman v. Administrative Review Board, USDOL, No. 07-60509 (5th Cir. Feb. 13, 2008) (unpublished), the Fifth Circuit Court of Appeals  affirmed the ARB’s holding that the Complainant employee, a research analyst for a securities company, had not engaged in protected activity under SOX when she refused to recommend a high rating for a stock she reported on. A review committee had questioned her rating and asked for her reasoning. At the end of the meeting, the Complainant told the committee that they could change the rating but that she would not sign on to the change. She did not, however, inform the committee that she believed that changing the rating would violate any securities law. Moreover, none of the committee members told her to change the rating.

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SOX Whistleblowers Protection gives its total support to the post in Work/ Life/Law 3.0   by whistle blowing scholar Terry Morehead Dworkin.

Dworkin point is that Sarbanes-Oxley Whistleblowers should be given the same incentives as  given in the False Claims Act.  He points to the recent 671 million dollar award against Merck. 

Dworkin writes:

“The Sarbanes-Oxley Act (SOX) relies on whistleblowers to help enforce it. It tries to promote whistleblowing through requiring companies to set up anonymous whistleblowing procedures, protecting whistleblowers from retaliation, and providing criminal penalties for intentional retaliation. It does not give rewards though. While most employees who work in companies covered by SOX thought they were protected when they blew the whistle, this has proved to be an illusion. SOX whistleblowers are most commonly fired, and they have been unable for a variety of reasons to get redress. Not surprisingly, whistleblowing has gone down under SOX. Because of these problems, many are calling for changes in the law, including a reward system similar to that in the FCA.”

Dworkin asks suppose that you are working for a company and that you discover that it is misleading shareholders and the public about its financial stability. Would you blow the whistle? Would you be more likely to if you got a reward? If your answer to the latter is yes, how much do you think would be just compensation for the risks invovled? Who should have to pay for the reward?

 The answer is the the upper management that reap the huge financial gains from their fraud. Like the defrauded government agencies that benefit from the False Claims Act whistleblowers, investors will benefit more if SOX whistleblowers have more incentive and should be willing to compensate them from the monies disgorged from the wrong doers.

SOX WHISTLEBLOWERS deserve our encouragement, help AND MORE SARBANES-OXLEY PROTECTIONS!!!

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Kudos right back to  SoxFirst for its recent discussion of  an interesting paper  written by Adair Morse and Luigi Zingales and Alexander Dyck  entitled Who Blows the Whistle on Corporate Fraud?  As SoxFirst  summarizes, the article  discusses an indepth study of all reported cases of corporate fraud in companies with more that 750 million dollars in assets between 1996 and 2004.

Employee Whistleblowers were the highest contributors to fraud detection.  The article also found that monetary incentives for detection of frauds against the government influence detection without increasing frivolous suit.  The article encourages extending more incentives to corporate whistleblowers. 

The “proof is in the pudding” and in this article. The problem continues to be corporate fraud and SOX Whistleblowers are the answer. 

SOX WHHISTLEBLOWERS deserve our encouragement, help  AND MORE SARBANES-OXLEY PROTECTIONS!!!

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PROTECTED ACTIVITY; REASONABLENESS OF PLAINTIFF’S BELIEF IN ACCOUNTING VIOLATION; DEFENDANT’S INTERNAL INVESTIGATION AS A RESULT

In Johnson v. Stein Mart, Inc., No. 3:06-cv-00341 (M.D.Fla. June 20, 2007)  the Employee 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 failed to 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 Defendant Stein Mart’s argument because the Defendant had treated the Plaintiff’s complaints reasonable enough to have warranted an internal investigation. 

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In a recent City Journal article, Nicole Gelinas, a City Journal contributing editor and the Searle Freedom Trust Fellow at the Manhattan Institute,  is overly critical of Sarbanes-Oxley.  Her article entitled Criminalizing Capitalism  warns investors not to rely upon agency regulation and/or criminal prosecutors to protect their investments.  Ms. Gelinas writes:

 ”Criminalizing bad internal controls ignores another big problem. As the Wall Street Journal’s George Anders wrote recently of the mortgage blowup, paraphrasing John Reed, Citicorp’s CEO for much of the 1980s and ’90s, “Everyone in banking points to risk management as a top priority . . . but that is often just lip service. Risk analysis can easily become a series of routine chores that offer little protection from the unexpected.” Sarbanes-Oxley, a burdensome risk-management tool, isn’t free of this weakness.”  http://www.city-journal.org/2008/18_1_criminalizing_capitalism.html

Her argument falls apart when she attempts to portray Enron’s Lay, Skilling and Fastow as victims of overzealous prosecution. Perhaps  more telling is what Ms. Gelinas doesn’t write in her article, however.  She does not criticize the whistleblower protections of SOX because she can not. As Ms. Gelinas undoubtedly understands it is the whistleblowers help protect the investors. It was whistleblowers that brought the Securities fraud at Enron and WoldCom into the open and it is whistleblowers that deserve our respect and require the most stringent protections from us. 

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O’Mahony v. Accenture 

 A New York Federal Judge has found that a former senior employee of a global consulting firm who was stationed in Paris can sue for damages under the whistleblower protection provision of Sarbanes-Oxley.Rosemary O’Mahony, a British citizen who worked for Accenture in France for 14 years, claimed the company demoted her after she accused it of withholding more than $3 million it owed in French social security payments.The Southern District of New York Judge rejected a motion to dismiss by co-defendants Accenture, which is based in Bermuda, and itsU.S. subsidiary. The co-defendants argued that the provision of  Sarbanes-Oxley did not cover employees outside theUnited States.The  Court determined that because the alleged “wrongful conduct and other material acts occurred in the United States … the exercise of jurisdiction by this Court to resolve the dispute before it would not implicate extraterritorial application of American law.”This appears to be the first case that applies Sarbanes-Oxley whistleblower protections to an employee working overseas.The Plaintiff in the case, O’Mahony, was a partner at Accenture’s U.S. subsidiary from 1984 through Aug. 31, 2004, and a partner and employee of its French subsidiary from Sept. 1, 2004, to Oct. 31, 2006.Around September 1992, she left the United States to establish and head a new office for Accenture in France. She worked in
France part time for a year, but in September 1993 her assignment was made full time.Accenture’s
U.S. subsidiary received a certificate of coverage exempting it from making contributions to the French social security system for five years. But since she worked in Paris for more than five years, O’Mahony claimed that Accenture was obligated to make payments to the system.O’Mahony alleged in her complaint that her former employer owed the French government “in an amount equal to approximately 36 percent of Ms. O’Mahony’s total compensation for the period September 1997 through September 1, 2004.”She said that she earned $10.4 million during that period, making the amount owed to the French $3.7 million.O’Mahony said that she notified American executives about the problem, but in September 2004 Accenture’s global financial controller in New York told her that the company had decided that its “‘interests’ would be better served by not making any of the French social security contributions and continuing to affirmatively conceal from the French authorities the fact that [O’Mahony] had been working in France since 1992.”O’Mahony said that she responded that she could not violate the law, and brought the matter to the attention to the French authorities. She claimed that Accenture responded by demoting her in November 2004 and reducing her salary by $670,000.O’Mahony filed a complaint on March 24, 2005, with the U.S. Labor Department, alleging that the company had violated §1514A of Sarbanes-Oxley by retaliating against her.The Labor Department dismissed the complaint in May 2005. It noted that O’Mahony’s “employment and each of the alleged elements of her complaint occurred in
France.” For that reason, it ruled that it had no jurisdiction over her claim.

After losing an administrative appeal, O’Mahony filed her action in the Southern District. Meanwhile, she had left the company on Oct. 31, 2006.

The New York Federal Court disagreed.

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AN EMPLOYEE’S   ASSISTANCE IN RESPONDING TO A SUBPOENA  BY A GRAND JURY WAS POTENTIALLY ”ASSISTING” A PROCEEDING AND THEREFORE POTENTIALLY  A PROTECTED ACTIVITY

In Miles v. Wal-Mart Stores, Inc.,No. 5:06-CV-05162, slip op. at n.4 and surrounding text (W.D.Ark. Jan. 25, 2008), the court found that the Plaintiff had created a geniune issue of material fact as to whether she engaged in protected activity under the SOX where she had provided assistance to the FBI and an Assistant U.S. Attorney in connection with Wal-Mart’s response to a grand jury subpoena calling for production of documents concerning union-related labor relations and the investigation of a former executive for suspected fraud. The Plaintiff  had objected to an instruction to shred certain documents being digitized in her labor relations department which might have been subject to the subpoena. Wal-Mart argued that the Plaintiff had only aided an “investigation” as opposed to a “proceeding.” The court found that under the circumstances, a genuine issue of material fact existed as to whether the Plaintiff  engaged in protected activity.

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The President’s Corporate Fraud Task Force created in July 2002, recently issued a report which showed the number of senior executives convicted of Fraud. Some high- profiel CFO’s, including Enron’s Any Fastow ane WorldCom’s Scott Sullivan were not on the list because their cases were handled by another fraud team with the U.S. Attorney’s office. The charges brought included securities fraud, insider trading, market manipulation, false statements, stock-option backdating, conspiracy, money laundering, and violations of the Foreign Corrupt Practices Act. In addition to the convictions, the task force noted, more than $1 billion in forfeitures has been distributed to victims of corporate fraud.The task force cited the role that Sarbanes-Oxley and SOX Whistleblower Protections played in facilitating convictions (or, more precisely, plea deals, which occurred in more than 75 percent of cases). In fact, three CFOs were convicted based on direct violations of SOX. New securities-fraud provisions from Title 18 of the U.S. Code, Section 1348, played a role in more than 50 cases. 
 

Among the 1,236 people convicted by the Task Force were:  214CEOs & presidents;  53 CFOs; 23 Corporate counsels or attorneys; and 129VPs.

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REPORTING WITHIN JOB DUTIES IS SUFFICIENT;

THE SOX WHISTLEBLOWER DOES NOT HAVE TO EXPRESSLY  IDENTIFY THE COMPLAINED OF ACTIONS AS ILLEGAL

In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29, 2007), the Respondent contended that the Complainant’s SOX whistleblower complaint was barred because his allegations fell within his job responsibilities and because he failed to communicate to the Respondent that he believed the conduct to be illegal. In support of the first contention, the Respondent cited several decisions in which it was found that finding irregularities as part of one’s job duties cannot constitute protected activity and  that the employer must be put on notice that the reporting is being done to expose illegal acts rather than merely warning of the consequences of its conduct. The ALJ distinguished the decisions as arising under other laws with different contexts, and returned to the purposes of SOX in interpreting the respondent’s knowledge element of protected activity. The ALJ concluded that restricting protected activity to exclude job duties would be contrary to Congressional intent. The ALJ pointed out that the legislative history of SOX explicitly discusses the case of Sherron Watkins, whose job responsibilities at Enron arguably included reporting accounting fraud. The ALJ also pointed out that, to be actionable, a SOX whistleblower complaint requires the respondent’s knowledge of protected activity, and an adverse job action to which protected activity is a contributing factor. 

As to the employer’s second contention that SOX Whistleblowers  must expressly state that he considers the conduct to be illegal, the ALJ found that an examination must be made of the context in which and to whom the statements were made. the ALJ focused on the fact that the statements were made to the controller, auditors, and an investigating law firm, all of whom should logically have recognized fraudulent behavior if the Complainant described it to them, and that publishing of fraudulent statements with the SEC was illegal. Thus, the ALJ found that the Complainant was not required to specifically state to the Respondent that the activity of which he complained was illegal.

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In January, 2008, President Bush signed into law the National Defense Authorization Act for Fiscal Year 2008 (H.R. 4986), which includes a provision protecting employees of defense contractors who blow the whistle on contracting fraud.  Section 846 amends 10 U.S.C. § 2409 to protect employees who disclose to Congress, an Inspector General, the Government Accountability Office, or  a Department of Defense employee responsible for contract oversight or management “information that the employee reasonably believes is evidence of gross mismanagement of a Department of Defense contract or grant, a gross waste of Department of Defense funds, a substantial and specific danger to public health or safety, or a violation of law related to a Department of Defense contract (including the competition for or negotiation of a contract) or grant.” A complainant must be filed with the Inspector General (IG) of an agency, and unless the IG determines that the complaint is frivolous, the IG will conduct an investigation.  Once the complainant exhausts administrative remedies, the complainant may bring a de novo action in federal court and is entitled to a jury trial.  Remedies at the administrative level and in federal court include reinstatement, back pay, compensatory damages, and attorney fees and costs.

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The SEC recently announced that it’s giving another delay to the implementation of Sarbanes-Oxley to smaller public companies.

Now the small companies won’t have to comply with an internal-controls audit requirement until December 15, 2009. Some wonder if the compliance date will ever actually arrive. 

 The SEC has also announced it is going to commence a  cost-benefit analysis of Sarbanes-Oxley section 404 for small businesses including a look at  cost and benefit data. The delay has earned praise from the US chamber of Commerce which said it was an important step for business, particularly in this economic climate.

Senator  Olympia Snowe stated  ”When you consider that businesses that employ fewer than 20 people spend more than $2000 per employee in regulatory compliance costs than [larger]  businesses ….  it’s painfully clear that we could be doing more to help small businesses succeed. I am pleased that the SEC has taken steps today to help address and rectify this discrepancy,” 

One should question how many publicly trade companies actually have so few employees and why a company with only twenty (20) employees should really benefit from “going public”. Let’s hope that the current downturn in the economy is not somehow blamed on SOX regulations and that the true benifit of courageous SOX Whistleblowers is not diminished by such an unsupported conclusion.

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Cynthia Cooper, the internal auditor who unearthed the WorldCom accounting scandal has written a  book about her investigation — Extraordinary Circumstances.  Cooper writes that she was following the lack of information.  Time and again, as she worked her way through the accounting records, she encountered lingo that sounded authoritative, but proved to be completely phony. Cooper knew better. When an accounting piece of financial reporting didn’t make sense to her, she asked about it — even if it meant questioning two of the most powerful executives in the country at the time: Bernie Ebbers, CEO, and Scott Sullivan,  CFO.

The book, to be published by John Wiley & Sons, should be a must read for SOX Whistleblowers looking for help and protection from the Act.

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In Mahony v. Keyspan Corp, No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24) the Federal Court  found that SOX includes an illustrative list of the types of special damages that may be recovered rather than an exhaustive list. The court indicated that it agreed with the reasoning of the court in Hanna v. WCI Communities, Inc., 348 F.Supp.2d 1332 (S.D.Fla.2004), where the court held that the SOX whistleblower provision includes damages for loss of reputation. SOX whistleblowerswhistleblowers helpwhistleblowers protectionwrongful termination

To clarify the previous post, SOX is not clear whether there is a right to a jury trial in SOX Whistleblower cases brought in Federal court. Whistleblowers have argued that the Act’s provision to afford the complainant “all relief necessary to make the employee whole” may be a basis for a jury trial. In Fraser v. Fiduciary Trust Co.,Fraser v. Fiduciary Trust Co., 417 F.Supp.2d 310 (S.D.N.Y. 2006) the court denied the defendant’s motion to strike a jury trial demand for a SOX Whistleblower claim without prejudice to bring the motion again prior to trial.    SOX whistleblowerswhistleblowers helpwhistleblowers protectionwrongful termination