SOX Whistleblowers Protection

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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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

The case discussed below may show that a SOX Whistleblower may have more success redressing corporate coruption in Federal Courts than with Administrative Judges.   Smith v. Corning, Ltd, Inc., No. 06-CV-6516 (W.D.N.Y. July 12, 2007) is a Federal District Court case which may indicate that Federal Courts may have a more expansive view of what constitutes protected activity. 

 In Smith v. Corning, Inc. the New York Federal District court found that the Whistleblower’s contention that a software application, was being implemented in a way that was not correctly reporting financial data with resultant impact on the integrity of quarterly reports may possibly be a report of fraud against shareholders. The court rejected the Defendants’ contention that the complaint was deficient because it did not allege an actual fraud against shareholders. The court found that § 1514A only requires a plaintiff to have a reasonably believed that the problem constituted a violation of a provision of Federal law relating to fraud against shareholders. The court found that the SOX Whistleblower’s complaint met this standard insofar as it alleged that the Plaintiff reasonably believed that the company was violating 15 U.S.C. § 78m(b)(2)(B)(ii), and that he believed that § 78m(b)(2)(B)(ii) was related to fraud against shareholders.

The New York District Court also indicated that the submission of quarterly reports that were not prepared in accordance with GAAP would also violate a SEC rule, namely 17 C.F.R. § 210.4 01(a)(1), citing Richards v. Lexmark Int’l, Inc., 2004-SOX-49 (ALJ June 20, 2006). The court also rejected the Defendants’ contention that the Whistleblower’s complaints were not protected because they involved an internal accounting dispute, and only pertained to a potential for fraud occurring in the future. The court found that the Whistleblower had alleged that the Defendants repeatedly refused to address a problem that was resulting in incorrect financial information being reported to the company’s general ledger B.   The Court then found that this  allegation would survive the Motion to Dismiss Finally, the court rejected the Defendants’ contention that the Whistleblower’s complaint was deficient because he only complained about the software application, and therefore could not allege a basis for reasonably believing that the company’s entire system of accounting controls was so inadequate as to violate § 78m(b)(2), which speaks to systems rather than portions of accounting systems. The court found that based on facts alleged in the complaint and at this stage in the litigation, it could not say as a matter of law that it was unreasonable for the Plaintiff to believe that the company was violating § 78m(b)(2)(B)(ii) when it refused to address problems with the Software. 

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Does a Whistleblower complaint that results in an internal investigation constitute a protected activity?

 Yes under the facts of this case at least.

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 Employer, Stein Mart,  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. Stein Mart  argued that its vendor markdown allowances and season code changes were in line with general industry practices. The district court rejected this argument because Stein Martt had treated the Plaintiff’s complaints reasonable enough to have warranted an internal investigation.

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One of the factors that has contributed to the  disappointing results for many employees submitting SOX Whistleblower Retaliation claims has been the lack of understanding of  what constitutes protected activity under the Act. While there are two different sections on protected activity in the Act, the first section is the one  overwhelmingly used by employees presenting SOX Whistleblower claims. This Section provides that reporting conduct that the employee reasonably believes constituted a violation of securities, mail, bank or wire fraud is a protected activity.  

 The next few posts will explore recent rulings on this critical element of a  Sox Whistleblower claim. 

 Welch v. Cardinal Bankshares Corp., ARB No. 05 064, ALJ No. 2003-SOX-15 (ARB May 31, 2007)  is one of the most recent rulings on the issue of what is required to establish  that a Complainant had a “reasonable basis” to believe he was reporting a violation of securities laws. In Welch, the  ARB  wrote: “The “reasonable belief” standard requires Welch to prove both that he actually believed that the SEC report overstated income and that a person with his expertise and knowledge would have reasonably believed that as well. The ARB found that an experienced CPA/CFO like the Complainant could not have reasonably believed that the quarterly SEC report presented a misleading picture of the Respondent’s financial condition because whether reported as income or as a credit to expenses, the fact remained that the Respondent had $195,000 that it previously did not have.  The ARB also found that reporting violations of accounting standards is not “ipso facto” reporting a violation of securities laws.

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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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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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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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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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