Various federal laws prohibit the United States’ roughly 5,000 publicly traded companies from retaliating against whistleblowers. This month, the Supreme Court of the United States extended whistleblower protection under the Sarbanes-Oxley Act to private employers, specifically, the contractors and subcontractors of publically traded companies.
Passed in the wake of the Enron scandal, the 2002 Sarbanes-Oxley Act (“SOX” or the “Act”) has been called the most far-reaching U.S. securities legislation in years. SOX mandates increased reporting and corporate obligations for all companies regulated by the Securities and Exchange Commission (SEC). Non-compliance results in penalties. Briefly, the main components of SOX include:
1. Oversight Board: The Public Company Accounting Oversight Board was created to oversee the audit of public companies.
2. Auditor Independence: Auditors now have a list of non-audit services they can’t perform during an audit. SOX also imposes a one-year waiting period for audit firm employees who leave an accounting firm to become an executive for a former client.
3. Greater Financial Disclosures: Transactions and relationships that are off-balance sheet but that may affect financial status now must be disclosed. Personal loans from a corporation to its executives are now largely prohibited. Annual reports must include a report stating the management is responsible for the internal control structure and procedures for financial reporting.
4. Conflict of Interest Disclosures for Analysts: Conflict of interest disclosures now need to be made by research analysts who make public appearances or offer research reports. These disclosures need to contain certain information about the company that is the subject of the appearance or report. The analyst has to report whether he or she holds any securities in the company or received corporate compensation. Brokers and dealers have to disclose if the public company is a client.
5. Corporate and Criminal Fraud Accountability: Altering, destroying, concealing or falsifying records or documents with the intent to influence a federal investigation or bankruptcy case is subject to fines and up to 20 years imprisonment. New audit workpapers must be retained for five years. Any person who knowingly defrauds shareholders of publicly traded companies is subject to fines or imprisonment.
6. Attorneys’ Responsibilities: There are now minimum standards of professional conduct for attorneys representing public companies before the SEC. These include a rule requiring an attorney to report securities violations to the CEO.
7. Whistle Blower Protection: An employer may not retaliate against an employee who provides information about potential securities fraud. The retaliation provision of the Act applies to companies that are required to register with the SEC under Section 12 of the Securities Exchange Act or that are required to file reports under section 15 (d) of the Securities Exchange Act. Retaliation includes termination, suspension, demotion, harassment, threats, and any other act that would dissuade a reasonable person from reporting violations of SEC rules or federal laws.
In Lawson v. FMR LLC, No. 12-3 (Mar. 4, 2014), the U.S. Supreme Court clarified the scope of SOX’ whistleblower protection, holding that such protection extends to employees of private contractors and subcontractors who do work for public companies. The decision resolves what the Court acknowledged is ambiguous language in the Act and interpreted that language to allow persons employed by non-public contractors to public companies—such as lawyers or accounting firms—to bring whistleblower claims under the Act.
Section 1514A of SOX protects employees from retaliation for making certain types of complaints:
No [public] company . . . , 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 [whistleblowing or other protected activity].
The ambiguity stems from the term “an employee” and the question whether it refers to only to employees of public companies, which are the subject of the Act, or broadly encompasses employees of any of the types of entities which are prohibited from taking retaliatory action.
In the underlying case, the First Circuit held that the SOX whistleblower provision applied only to employees of public companies, not to employees of their private contractors, dismissing the claims of plaintiffs Jackie Lawson and Jonathan Zang. Lawson v. FMR, LLC, 670 F.3d 61 (2012).Lawson and Zang were employees of privately held companies providing advisory and management services to public company Fidelity. Lawson alleged that she suffered a series of adverse actions after raising concerns about cost accounting methodologies her employer, FMR LLC, used. Zang alleged he was fired in retaliation for raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds.
The First Circuit’s decision conflicted with a U.S. Department of Labor’s Administrative Review Board ruling which held that employees of contractors that render services to public companies may be protected whistleblowers under SOX. Spinner v.David Landau & Assoc., LLC, ALJ No. 2010-SOX-029 (May 31, 2012). The Supreme Court decision settles the dispute in favor of expanding SOX whistleblower protection.
SOX and the cases interpreting the Act can be confusing. Violations of the Act can also be costly. Retaliation claims under the Act are some of the toughest to defend and have one of the highest success rates of any workplace type claims. With expanded protection, there is bound to be increasing litigation. The attorneys at Fried & Bonder will follow these developments and continue to keep their clients informed.