National Whistleblowers Center - Johnson v. Siemens

Johnson v. Siemens

UNITED STATES DEPARTMENT OF LABOR

ADMINISTRATIVE REVIEW BOARD

CARRI S. JOHNSON. ARB Case No. 08-032

Complainant, OALJ Case No. 2005-SOX-00015

against,

SIEMENS BUILDING TECHNOLOGIES,

INC. and siemens ag,

Respondents.

______________________________________________________________

BRIEF OF AMICUS CURIAE

NATIONAL WHISTLEBLOWERS CENTER

______________________________________________________________

Richard R. Renner, rr@kkc.com

Attorney for Amici

Kohn, Kohn and Colapinto, LLP

3233 P St., N.W.

Washington, DC 20007

(202) 342-6980

(202) 342-6984 (FAX)

I. Introduction

The remedial purpose of SOX, and the context of its enactment within securities law and after the scandal of Enron's abuse of subsidiary accounting, make clear that Congress intended SOX to cover subsidiaries. Traditional rules of statutory construction lead to the same result.

A. Interests of amicus National Whistleblowers Center.

Established in 1988, the National Whistleblowers Center (NWC) is a non-profit tax-exempt public interest organization. The Center regularly assists corporate employees throughout the United States who suffer from illegal retribution for lawfully disclosing violations of federal law. NWC maintains a nationwide attorney referral service for whistleblowers, and provides publications and training for attorneys and other advocates for whistleblowers. NWC has participated as amicus curiae in the following cases: English v. General Electric, 110 S.Ct. 2270 (1990), Kansas Gas & Electric Co. v. Brock, 780 F.2d 1505 (1985); EEOC v. Waffle House, 534 U.S. 279 (2002); Haddle v. Garrison, 525 U.S. 121 (1998); Vermont Agency Of Natural Resources v. United States ex rel. Stevens, (98-1828) 529 U.S. 765 (2000); Beck v. Prupis, 529 U.S. 494 (2000).

In 2002, the Center worked closely with the Senate Judiciary Committee and strongly endorsed its efforts to “prevent recurrences of the Enron debacle and make similar threats to the nation’s financial markets.” 148 Cong. Rec .S. 7420 (daily ed. July 26, 2002) (remarks of Senator Leahy, quoting from letter signed by the Center as well as the Government Accountability Project).

Senator Leahy recognized the role of amici in the enactment of SOX:

This “corporate code of silence” not only hampers investigations, but also creates a climate where ongoing wrongdoing can occur with virtual impunity. The consequences of this corporate code of silence for investors in publicly traded companies, in particular, and for the stock market, in general, are serious and adverse, and they must be remedied. …

Unfortunately, as demonstrated in the tobacco industry litigation and the Enron case, efforts to quiet whistleblowers and retaliate against them for being “disloyal” or “litigation risks” transcend state lines. This corporate culture must change, and the law can lead the way. That is why S. 2010 is supported by public interest advocates, such as the National Whistleblower Center, the Government Accountability Project, and Taxpayers Against Fraud, who have called this bill “the single most effective measure possible to prevent recurrences of the Enron debacle and similar threats to the nation's financial markets.”

S. Rep. 107-146, at 10.

The amici advocate on behalf of whistleblowers because these truth-tellers uncover and rectify grave problems facing our federal government and our society at large. Whistleblowers are a bulwark of accountability against those who would corrupt government or corporations. Therefore aggressive defense of whistleblowers is crucial to any effective policy to address wrongdoing or abuse of power. Conscientious employees who point out illegal or questionable practices should not be forced to choose between their jobs and their conscience.

Whistleblowers who take an ethical stand against wrongdoing often do so at great risk to their careers, financial stability, emotional well-being and familial relationships. Society should protect and applaud whistleblowers, because they are saving lives, preserving our health and safety, and protecting vital fiscal resources.

II. INTERPRETATION OF SOX MUST BE GUIDED BY ITS REMEDIAL PURPOSE.

A. SOX is a remedial law, broadly construed to accomplish its remedial goals.

The Sarbanes-Oxley Act (“SOX”) Section 806, 18 U.S.C.A. § 1514A, protects employees who provide information relating to a violation of any other rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders. Actions brought pursuant to the SOX are governed by the legal burdens set forth under AIR 21, 49 U.S.C.A. § 42121. 18 U.S.C.A. § 1514A(b)(2)(C).

SOX’s legislative history reflects that “the law was intentionally written to sweep broadly, protecting any employee of a publicly traded company who took such reasonable action to try to protect investors and the market.” Carnero v. Boston Scientific Corporation, 433 F.3d 1, 13 (1st Cir. 2005) (citing Senator Leahy’s comments at 149 Cong. Rec. S1725-01, S1725, 2003 WL 193278 (Jan. 29, 2003)).

B. SOX seeks to remedy abuse of subsidiary companies.

The political impetus for SOX arose from scandals that involved the abuse of overseas subsidiaries. The House Report for SOX explains:

Following the bankruptcies of Enron Corporation and Global Crossing LLC, and restatements of earnings by several prominent market participants, regulators, investors and others expressed concern about the adequacy of the current disclosure regime for public companies.[1]

The Senate Report, 107-205, stated the purpose as follows:

The purpose of the bill is to address the systemic and structural weaknesses affecting our capital markets which were revealed by repeated failures of audit effectiveness and corporate financial and broker-dealer responsibility in recent months and years.

If the reason for the enactment of SOX had to be distilled down into one word, that word would be “Enron.” The congressional record is loaded with references to Enron being the catalyst for this Act. Ironically, attached to the last 10-k Enron filed with the SEC before they imploded in 2001 was a 56 paged list of hundreds of subsidiaries and limited partnerships.[2] The various frauds that caused Enron’s downfall occurred at these subsidiaries and LPs. In fact, Enron’s S-4 registration statement, filed with the SEC on October 9, 1996, states: “Essentially all of Enron’s operations are conducted through its subsidiaries and affiliates…”[3]

In Walters v. Deutsche Bank AG, 2008-SOX-70 (ALJ Mar. 23, 2009), p. 9-10, Judge Levin reported on SOX's legislative history as follows:

Time and again, the legislative history of Sarbanes-Oxley reflects Congressional appreciation for the important antifraud contribution whistleblowers can make and the unique role inside whistleblowers can play in deterring financial fraud and misrepresentation. The role Congress envisioned for the whistleblower was best described by Senator Leahy: “When sophisticated corporations set up complex fraud schemes, corporate insiders are often the only ones who can disclose what happened and why.” See, Senate Banking Committee Legis. History,Vol. III. at 1300-01. Senator Leahy revealed that Enron operated through a veil of subsidiaries and entities including Ponderosa, Jedi Capital, Big Doe, Sundance, Little River, Yosemite, OB-1 Holdings, Pregrine, Kenobe, Braveheart, Mojave, Chewco, and Condor, Osprey, Zenith, Egrit, Cactus, Big River, Whitwing, and Raptor, among others, and observed that without an inside whistleblower: “There is no way we could have known about this… If you look at that, [the Enron corporate structure] you do not know these entities belong to Enron.” Id.

*** Senator Leahy emphasized that Congress was dealing not only with the web of subsidiaries Enron and other corporations had used systematically to defraud stockholders, but the realization that the average investor and professional accountant, in many instances, were unlikely, without inside assistance, to untangle the complex corporate structure in which fraud or financial misrepresentation could fester undetected.

Judge Levin concluded that, “the predominant purpose of Section 806 is fraud detection, not

worker protection … .” Walters, at p. 11. Quoting Senator Johnson, Judge Levin noted that the employee protection was, “designed to protect investors from corporate greed.” Senate

Banking Committee Legis. History,Vol. III, at 1461. This purpose is consistent with a scope of coverage that follows the full extent of transactions affecting the parent company's financial reports. It is inconsistent with a narrow scope that looks to control of the employment relationship. SOX's whistleblower protection is not motivated by the nature of the employment relationship itself, as say the Civil Rights Act is, but rather by the public policy that encourages employees to come forward to help with the detection and proof of fraud, wherever it might be. This purpose follows the scope of entities included in the parent company's public reports, not the scope of control over the employment relationship.

After the enactment of SOX, Senator Leahy stated that “[t]he law was intentionally written to sweep broadly, protecting any employee of a publicly traded company who took such reasonable action to try to protect investors and the market.”[4] Earlier, when Senator Leahy had reported on the whistleblower provision of the pending legislation which would become law a few days later he described it in the context of Enron:

Look what they were doing on this chart. There is no way we could have known about this without that kind of a whistleblower. Look at this. They had all these hidden corporations—Jedi, Kenobi, Chewco, Big Doe—I guess they must have had “little doe”—Yosemite, Cactus, Ponderosa, Raptor, Braveheart. Ahluwalia think they were probably watching too many old reruns when they put this together. The fact is, they were hiding hundreds of millions of dollars of stockholders’ money in their pension funds. The provisions Senator Grassley and I worked out in Judiciary Committee make sure whistleblowers are protected.[5]

Senator Durbin said that Section 806 “creates protections for corporate whistleblowers. We need them. If insiders don‘t come forward, many times you don‘t know what is happening in large corporations.” Senate Banking Committee Legis. History, Vol. III, at 1294. These goals would be completely frustrated if international companies simply moved their fraudulent activities to subsidiaries outside the US. Does it make sense that Congress would be so concerned about Enron’s “hidden corporations” but would not have intended to protect a whistleblower at a subsidiary of a publicly traded company who would be in a position to blow the whistle on that fraud? No.

C. Other whistleblower protections are construed in light of the remedial purpose of their principal statute.

The ARB has recognized that a whistleblower protection statute “should be liberally interpreted to protect victims of discrimination and to further its underlying purpose of encouraging employees to report perceived . . . violations without fear of retaliation.” Fields v. Florida Power Corp., USDOL/OALJ Reporter (HTML) ARB No. 97-070 , ALJ No. 96-ERA-22 (ARB Mar. 13, 1998) at 10 (decision under the Energy Reorganization Act, 42 U.S.C. § 5851, citing English v. General Elec. Co., 496 U.S. 72 (1990) and Bechtel Constr. Co. v. Secretary of Labor, 50 F.3d 926, 932 (11th Cir. 1995) (“it is appropriate to give a broad construction to remedial statutes such as nondiscrimination provisions in federal labor laws”)).

III. SOX is a securities law and SUBSIDIARIES ARE INCLUDED IN THE DEFINITION OF A PUBLICLY TRADED COMPANY UNDER SECURITIES LAW.

Each whistleblower law is written in the context of the industry it covers and the laws regulating that industry. Under Section 806 of SOX, a covered company is defined, in part, as a “company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)).”[6] This is a securities law definition – not an employment law definition. The same applies to coverage definitions in the other whistleblower statutes, i.e., an “air carrier” comes from the FAA definition[7]; “commercial motor carrier” comes from the DOT definition[8]; “licensee of the Commission” comes from the NRC definition[9], etc. Definitions of covered companies and jurisdiction arise from the general provisions of the various statutes, in the case of SOX, from the Securities Exchange Act of 1934, 15 U.S.C. § 78a and sequence. SOX defines the scope of covered employers to include any, “company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) . . ..” While jurisdiction is established from the general provisions of the Act, employment law is applied to the burdens of proof and elements of an alleged violation in whistleblower cases.

In Walters v. Deutsche Bank AG, 2008-SOX-70 (ALJ Mar. 23, 2009), Judge Levin carefully examined the “labor law perspective” of SOX's whistleblower protection and found that it was inconsistent with SOX's remedial purpose, legislative history and regulatory context. On page 8, he sets out the following contradiction that flows from the labor law perspective:

The legislative history of Sarbanes-Oxley would seem to confirm that Section 806 was meant to include an agent or contractor like the accounting firm of Arthur Andersen, not because there was any evidence that Andersen implemented Enron‘s personnel actions, but because Congress hoped an insider in an Arthur Andersen situation would blow the whistle on the type of fraud Arthur Andersen helped to conceal. Yet, application of the labor agency test probably would have been fatal to the claim of an Andersen whistleblower, and has been fatal to claims of

whistleblowers in wholly owned subsidiaries, because the labor law simply does not deem it especially relevant if a non-publicly traded subsidiary, agent, or contractor that allegedly caused or facilitated fraud or misrepresentation were to fire a whistleblower for its own reasons; for example, to keep the business of an important client or to keep damaging financial disclosures from coming to light. Under such circumstances, simply to state the labor law test in the context of Sarbanes-Oxley seems sufficient to refute it, because it leaves essentially unchanged conditions Congress passionately wanted to reform.

This contradiction between the remedial purpose of SOX and the labor law/agency perspective explains why the ARB should reject the holdings of the vast majority of cases to have addressed this issue to date. See, for example, See e.g., Klopfenstein v. PCC Flow Tech. Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-011 (ARB May 31, 2006) (Klopfenstein I); Perez v. H&R Block, Inc., ALJ No. 2009-SOX-042 (ALJ Dec. 1, 2009). The doctrine behind these cases is a good example of how SOX has been misapplied. See, Richard E. Moberly, UNFULFILLED EXPECTATIONS: AN EMPIRICAL ANALYSIS OF WHY SARBANES-OXLEY WHISTLEBLOWERS RARELY WIN, 49 Wm. & Mary L. Rev. 65, 135 (“administrative decision makers … in some cases misapplied, Sarbanes-Oxley‘s substantive protections to the significant disadvantage of employees.”).

Judge Levin got it right when he examined the legislative purpose for SOX on page 9 of his decision in Walters:

If Congress wanted to encourage corporate insiders to monitor and report financial fraud and deception, and clearly it did, very little in cases that apply the labor law test and deny that protection seems consistent with that goal. To the contrary, any employee of a subsidiary familiar with the labor test case law might still find it difficult to ignore the advice of the attorney who advised Enron of the minimal risk associated with the terminating a whistleblower. Yet even more important, the burdens and hurdles associated with proof of agency for labor law purposes seem misdirected and unnecessary not only because Section 806 imposes direct responsibility on the publicly traded company, but also because Section 806 is fundamentally an antifraud law, not a labor law. This, moreover, is not an isolated fringe assessment foundering about in a sea of contrary opinion; it is the unanimous consensus of every Senator who commented on the issue. About this, the legislative history is crystal clear. [Footnotes omitted.]

Judge Levin went on to explain that while a parent company's limited liability normally serves the interests of the shareholders, SOX intends to protect shareholders by protecting the whistleblowers who might reveal how corporate managers are abusing subsidiaries to the detriment of the the shareholders. Walters, pp. 19-20.

If the definition of a covered company under SOX is a securities law definition[10] – and the definition cites the Securities Exchange Act of 1934 twice – then there are really are no other conclusions but that 1) the other sections of SOX apply to subsidiaries; 2) the parent and subsidiary are jointly and severally liable under section 20(a) of the Exchange Act for a violation of section 806 of SOX; 3) that a subsidiary of a publicly traded parent is part of the §12 registration of the parent; 4) that a subsidiary of a publicly traded parent is part of the §15(d) reporting requirement of the parent.

D. Other sections of SOX apply to subsidiaries.

In the case of SEC v. Koninklijke Ahold N.V. (Royal Ahold) (SEC Litigation Release No. 18929, October 13, 2004), the SEC sued the parent (Royal Ahold) for fraud that occurred at its wholly-owned subsidiary, U.S. Foodservice. While the SEC had jurisdiction to sue Royal Ahold for the fraud at U.S. Foodservice, the ALJ dismissed a whistleblower complaint against U.S. Foodservice for lack of jurisdiction. Ambrose v. U.S. Foodservice, Inc., 2005-SOX-00105 (ALJ Apr. 17, 2006). It makes no sense that Congress would intend for the SEC to have jurisdiction to sue for a violation, and also intend that the whistleblower is not covered under the same securities law definitions (and in this case, in the same parent-subsidiary relationship). This result is repugnant both to the congressional intent of protecting whistleblowers, and the intent of securities laws to protect shareholders.

When consumers buy a public company’s stock, they are buying ownership in the company and also ownership in the subsidiaries. The subsidiaries are as much a part of the stock as the parent company. They are a part of the company that issued the security and part of the underlying value owned by the shareholders. The shareholders own the company, including the subsidiaries. Congress enacted SOX, the Exchange Act and amendments and included many references to subsidiaries in the section 12 registration and 15(d) reporting requirements to protect the shareholders. If the whistleblower works at a subsidiary, he works at part of the publicly traded company. The whole company is subject to securities laws since the whole company — including its subsidiaries — is part of the stock.

In the Walters opinion, Judge Levin explained how SOX Section 301 permits employees anywhere in the corporate structure to submit internal and anonymous disclosures to the parent company's audit committee, even though the word “subsidiary” is absent from Section 301, just as it is absent from Section 806. Walters, pp. 22-23. The audit committee serves as an additional option for whistleblowers to call management's attention to weaknesses in the company's internal controls. Those weaknesses could be anywhere in the corporate organization and still affect the soundness of the public reports. Just as there is no reason, and no support in the legislative record, to exclude the employees of subsidiaries from the audit committee process, there is no reason to exclude them from the whistleblower protection.

E. The parent and subsidiary are jointly and severally liable under Section 20(a) of the Exchange Act for a violation of section 806 of SOX.

For years, the SEC and private litigants have successfully used Section 20(a) of the Securities Exchange Act of 1934 to assert jurisdiction over parents, their subsidiaries, and various individuals:

20(a) Joint and several liability; good faith defense. Every person who, directly or indirectly, controls[11] any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. [Footnote added.]

Section 20(a) expressly imposes joint and several liability on “persons” who directly or indirectly control other “persons” subject to the provisions of the Act (the definition of which includes parent corporations and their subsidiaries). This provision means that the parent can be held liable for an act of the subsidiary for securities law purposes. Should the parent be able to meet the good faith defense, they may be let off the hook as a respondent, but the subsidiary could still be on the hook. This is exactly why Congress did not need to put the word “subsidiary” in Section 806 (but did feel the need to include “any officer, employee, contractor, subcontractor, or agent of such company”). Section 20(a) has been used for years to give the SEC and private litigants the ability to reach out and touch the parents and subsidiaries and other control “persons.” The applicability of section 20(a) of the Exchange Act to section 806 of SOX is clear. Section 3(b)(1) of SOX states:

A violation by any person of this Act, any rule or regulation of the Commission issued under this Act, or any rule of the Board shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or the rules and regulations issued thereunder, consistent with the provisions of this Act, and any such person shall be subject to the same penalties, and to the same extent, as for a violation of that Act or such rules or regulations.

So a violation of Section 806 of SOX “shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.)” Therefore, section 20(a) of the Exchange Act – joint and several liability – applies to a violation of Section 806 of SOX. Therefore, the parent and subsidiary are jointly and severally liable under 20(a) of the Exchange Act for a violation of section 806 of SOX.

F. A subsidiary of a publicly traded parent is part of the § 12 registration of the parent.

A security registered under Section 12 “shall” contain in the registration statement:

“(b)(1) Such information, in such detail, as to the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer, and any guarantor of the security as to principal or interest or both, as the Commission may by rules and regulations require, as necessary or appropriate in the public interest or for the protection of investors, in respect of the following...” [Emphasis added.]

This means subsidiaries, directly or indirectly controlled, are included in the registration of the issuer. And what directly follows is “(b)(1)(A) the organization, financial structure, and nature of the business…” which, again, includes subsidiaries, directly or indirectly controlled, as per 12(b)(1) above. Section 12(b)(1)(D) contains the same language with respect information on: “the directors, officers, and underwriters, and each security holder of record holding more than 10 per centum of any class of any equity security of the issuer (other than an exempted security), their remuneration and their interests in the securities of, and their material contracts with the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer.”

Section 12(b)(2) requires:

“Such copies of articles of incorporation, bylaws, trust indentures, or corresponding documents by whatever name known, underwriting arrangements, and other similar documents of, and voting trust agreements with respect to, the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer as the Commission may require as necessary or appropriate for the proper protection of investors and to insure fair dealing in the security.”

Thus, subsidiaries (persons controlled by the issuer) are clearly included in the registration requirements under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) and are subject to Section 806 of SOX. Judge Levin held that “responsibility for compliance with Sarbanes-Oxley reforms rests directly with the publicly traded corporate parent that files the reports.” Walters, p. 19. Similarly, the decision in Morefield v. Exelon, 2004-SOX-00002 (ALJ, Jan. 28, 2004), cogently reasoned as follows:

Nothing in the structure, language, or purpose of Sarbanes-Oxley, however, suggests that Congress viewed the publicly traded entity as a free-floating corporate apex. To the contrary, when the value and performance of the publicly traded company is based, in part, on the value and performance of the component entities within its organization, the statute ensures not only that those entities are subject to internal controls applicable throughout the corporate structure, but that they are also subject to the oversight responsibility of the audit committee. A publicly traded corporation is, for Sarbanes-Oxley purposes, the sum of its constituent units; and Congress insisted upon accuracy and integrity in financial reporting at all levels of the corporate structure, including the non-publicly traded subsidiaries. In this context, the law recognizes as an obstacle no internal corporate barriers to the remedies Congress deemed necessary. It imposed reforms upon the publicly traded company and, through it, to its entire corporate organization. Morefield Order at 3.

G. A subsidiary of a publicly traded parent is part of the § 15(d) reporting requirement of the parent.

Section 15(d) provides that:

“Each issuer…shall file with the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, such supplementary and periodic information, documents, and reports as may be required pursuant to section 13 of this title in respect of a security registered pursuant to section 12 of this title.” (This refers us directly to §13.)

Section 13(a)(1) requires that every issuer of a security registered pursuant to section 12 file, among other things “such information and documents (and such copies thereof) as the Commission shall require to keep reasonably current the information and documents required to be included in or filed with an application or registration statement filed pursuant to section 78l [Section 12]of this title.” This includes keeping current from § 12(b)(1) of the registration: “Such information, in such detail, as to the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer…” (which includes subsidiaries, directly or indirectly controlled).

Section 13(b)(1) addresses “books, records, and internal accounting; directives” and specifically requires that this information be reported regarding “any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer.”

There are further examples in 13(e)(2) which states that if a subsidiary buys stock in the issuer, it “shall be deemed to be a purchase by the issuer”, and 13(k)(1) which prohibit subsidiaries from providing personal loans to executives. Further, Regulation S-X and Regulation S-K (both having to do with the 15(d) reporting requirements) are replete with examples of how the business, activities, transactions, financial statements etc. of the subsidiaries are to be reported on the 15(d) reports. The subsidiaries are very clearly required to be reported by the issuer.

Section 302 of SOX requires that the CEO and CFO certify each quarterly and annual report – §13(a) or 15(d) reports – and such certification is based on several criteria to insure the accuracy of the reports. § 302(a)(4)(B) requires that the CEO and CFO certify that they: “have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared.” (Emphasis added.) This is part of the argument the ALJ used in Morefield v. Exelon Services, Inc. Thus, subsidiaries (persons controlled by the issuer) are clearly included in the reporting requirements under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d) and are subject to Section 806 of SOX.

IV. SUBSIDIARIES ARE AGENTS OF A PUBLICLY TRADED COMPANY UNDER SECURITIES LAW.

“the fiduciary relationship which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act.” Rest. 2d. Agen. § 1; see also Rest. 3d. Agen. § 1.01 (draft approved, publication expected 2006). The person “for whom action is to be taken is the principal” and “the one who is to act is the agent.” Rest. 2d. Agen. § 1.

Under securities law, a signed certification under § 302 of SOX, 15 U.S.C. § 7241, as well as management’s assessment of internal controls under § 404 of SOX, 15 U.S.C. § 7262, demonstrate a principal/agent relationship between parent[12] and the consolidated subsidiary.[13] In this relationship, the consolidated subsidiary is acting as a fiduciary or agent of the parent and subject to the parent’s control in implementing and maintaining the internal controls required under § 13(b)(2) of the Securities Exchange Act of 1934 and § 302 and § 404 of the Sarbanes-Oxley Act of 2002.

Finally, the ARB held that “[t]he Act prohibits an agent from discriminating against an employee who engages in protected activity, and Holdings offers no persuasive reason why we should not allow a cause of action against an agent who does so. Therefore, we do not interpret the Act to require a complainant to name a corporate respondent that is itself ‘registered under § 12 or … required to file reports under § 15(d),’ so long as the complainant names at least one respondent who is covered under the Act as an ‘officer, employee, contractor, subcontractor, or agent’ of such a company.” Klopfenstein at 13.

As noted above, Section 12 of the Securities and Exchange Act requires parent companies to include activities and information about their subsidiaries in their public filings. Section 12(b)(1) of the registration requires inclusion of, “Such information, in such detail, as to the issuer and any person directly or indirectly controlling or controlled by, or under direct or indirect common control with, the issuer…” (which includes subsidiaries, directly or indirectly controlled). Regulation S-X, 17 C.F.R. 210, and Regulation S-K, 17 C.F.R. 229, govern reporting under Section 13 and 15(d) of the Act and are replete with examples of how the business, activities, transactions, financial statements etc. of the subsidiaries are to be reported on the Section 13 and 15(d) reports. The subsidiaries are very clearly required to be reported by the issuer. The subsidiaries thereby have a legal duty to report their activities to the parent, and to abide by the parent's instructions on the establishment and maintenance of internal controls. Every subsidiary acts on behalf of the parent, and is there an agent of that parent.

SOX Section 302 requires the CEO and CFO to certify, in part, that they have:

Designed such disclosure controls . . . to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities . . .. [Emphasis added.]

The internal controls required by SOX are thus, by law, controlled by the parent company, and obligatory on the subsidiaries. The subsidiaries are duty bound to act under the control of the parent company in their compliance with SOX. If a subsidiary were to balk against the parent's direction, that would be a material weakness in the parent company's internal controls. It would constitute a violation of SOX that the parent would be required to report.

Therefore, consolidated subsidiaries are agents of the parent where a certification is present under Section 302 of SOX. This relationship is further solidified by the report pursuant to Section 404 of SOX. More to the point, the nature of this agency relationship – disclosure controls and internal control over financial reporting – relates directly to the nature of protected activity under Section 806 of SOX and the congressional intent for enacting Section 806, which is entitled: “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”

To the extent that the ARB required evidence of any particular agency relationship between a given respondent and its parent company in Klopfenstein, this ARB is free to modify that requirement. In FCC v. Fox Television Stations, Inc., 556 U.S. ___, 129 S. Ct. 1800 (2009), the U.S. Supreme Court permits an agency to change its policy when it "examine[s] the relevant data and articulate[s] a satisfactory explanation for its action." Quoting Motor Vehicle Mfrs. Assn. of United States, Inc. v. State Farm Mut. Automobile Ins. Co., 463 U. S. 29, 43 (1983). The Court added:

To be sure, the requirement that an agency provide reasoned explanation for its action would ordinarily demand that it display awareness that it is changing position. An agency may not, for example, depart from a prior policy sub silentio or simply disregard rules that are still on the books. . . . And of course the agency must show that there are good reasons for the new policy.

Now is a good time to relieve parties and ALJs from repetitive litigation of the scope of each subsidiary's agency on behalf of its parent. Parental control of the subsidiary's employment practices is not necessary to find that the subsidiary is an agent of the parent under SOX – within its securities law context. Indeed, SOX's coverage of subsidiaries flows naturally from its remedial purpose, and its statutory context within securities law.

V. SUBSIDIARIES ARE AGENTS OF A PUBLICLY TRADED COMPANY UNDER SECURITIES LAW.

SOX's scope of coverage includes “any officer, employee, contractor, subcontractor, or agent of such company [with a class of registered securities] . . ..” 18 U.S.C. § 1514A(a). As such, it is appropriate to consider a subsidiary's status as an “contractor” of the parent company. This language and the historical context of SOX, in the wake of Arthur Anderson's complicity in Enron's fraud, makes clear that Congress wanted the employee protection to reach beyond the employees of the registrant company and include employees of any entity that agrees to assume any duty of the registrant, or perform any service for the registrant. See Walters at pp. 15-18 (concluding that, “With abundant clarity, Congress expressed its concern with the operations of subsidiaries, not as separate entities, but as consolidated assets and liabilities which are susceptible to manipulation on the books of their publicly traded parents.”). The statutory language does not contain any limitation on the nature of the contract that would extend employee protections to the employees of the contractor. Oral and written contracts are both sufficient to make the contractor a covered employer.

For subsidiaries, contractor coverage is superfluous to their coverage as part of the company with a class of registered securities, as a company required to report to the SEC, and as an agent of the parent company. Still, if the ARB is going to focus on this case to set policy about the scope of SOX coverage of subsidiaries, is should not ignore how subsidiaries are also covered under SOX by virtue of their contractual relationship with the parent.

Subsidiaries are contractors of their parents. The very nature of being a subsidiary is contractual. The parent gives life to the subsidiary in exchange for the subsidiary's service to the parent – typically in generating revenue. This mutual exchange is the essence of a contract and essential to the subsidiary relationship. As such, every subsidiary is also a contractor of its parent.

SOX Section 806 also covers “subcontractors” so that a subsidiary's placement farther from the parent on a corporate tree will make no difference to its status as a covered employer. Contractor coverage would also extend SOX coverage to subsidiaries that the parent might not consolidate into its financial statements. Those parent companies that wish to emulate Enron through the creation of off-the-books Special Purpose Entities (SPEs) should know from SOX's plain language that the SPE's employees will still be covered through their contractual link.

III. CONCLUSION

The amici ask this Board to declare that all subsidiaries of cover companies are themselves covered employers under Section 806 of SOX. Anything less than a blanket declaration that all employees of all subsidiaries are covered would leave this issue to be relitigated separately in each individual case. Reliance on the integrated employer test would leave many employees uncovered, and deprive the employee protection of its desired effect of encouraging employees to come forward with information that could assist in the detection and proof of fraud. For example, Berkshire Hathaway and its subsidiaries employs approximately 257,000 persons according to its form 10-K.[14] In Warren Buffet’s 2006 letters to shareholders, he mentioned that there were 19 people working in the corporate office.[15] Berkshire’s subsidiaries are famously independent and none would pass an “integrated employer test” with the public parent. Form their latest 10-K, p. 31: “Berkshire’s operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operating businesses.” So, only 19 out of 257,000 employees would be protected under SOX if employees of subsidiaries must prevail under the “integrated employer” test. This is inconsistent with the legislative purpose and would deprive investors of the flow of information Congress sought through the whistleblower protection. As statutory language of SOX includes all employees of all subsidiaries, amici ask this Board to declare that all such employees are covered.

Respectfully submitted by:

_____________________________

Richard R. Renner, rr@kkc.com

National Whistleblowers Legal Defense and Education Fund

3233 P St., N.W.

Washington, DC 20007

(202) 342-6980

(202) 342-6984 (FAX)

CERTIFICATE OF SERVICE

I certify that a true copy of the foregoing Brief of Amicus Curiae was served by regular mail, unless email is indicated, on the following persons of the following address on this 15th day of July, 2010:

Jacqueline Williams

Attorney for Complainant

2524 Hennepin Ave.

Minneapolis, MN 55405

BY EMAIL: williams.jacqueline2008@gmail.com

Gregg F. LoCasio

Rebecca Ruby Anzidei

Attorneys for Respondents

Kirkland & Ellis LLP

655 Fifteenth Street, N.W

Washington, D.C. 20005

BY EMAIL: gregg.locascio@kirkland.com

rebecca.anzidei@kirkland.com

Administrative Review Board

200 Constitution Ave., NW, # S-5220

Washington, DC 20210

Directorate of Enforcement Programs

U.S. Department of Labor/OSHA

200 Constitution Avenue, NW

Room N-3603, FPB

Washington, DC 20210

Associate Solicitor

U.S. Department of Labor/SOL

200 Constitution Avenue, NW

Room N-2716, FPB

Washington, DC 20210

__________________________

Richard R. Renner

Attorney for Amici

[1] House Report 107-414, available at: http://www.thomas.gov/cgi-bin/cpquery/?&item=&&sid=cp107wSLP0&&refer=&&r_n=hr414.107&&dbname=cp107&&sid=cp107wSLP0&&sel=TOC_82035&

[2] http://www.sec.gov/Archives/edgar/data/1024401/000102440101500010/exh21.txt

[3] http://www.sec.gov/Archives/edgar/data/1024401/0000950129-96-002433.txt

[4] Congressional Record S1725, January 28, 2003

[5] Congressional Record S7358, July 25, 2002

[6] Section 806 of the Sarbanes-Oxley Act of 2002 (SOX), 18 U.S.C. §1514A. This language is more specific than the general “owner or operator” under CERCLA, 42 U.S.C. §9601(20)(A)(ii), that the Supreme Court considered in U.S. v. Bestfoods, 524 U.S. 51, 61 (1998). The Supreme Court came to “rue” the uselessness of CERCLA's definition in Bestfoods, a problem Congress has not give us in SOX. Even the Bestfoods opinion recognized that “there is an equally fundamental principle of corporate law, applicable to the parent-subsidiary relationship as well as generally, that the corporate veil may be pierced and the shareholder held liable for the corporation’s conduct when, inter alia, the corporate form would otherwise be misused to accomplish certain wrongful purposes, most notably fraud, on the shareholder’s behalf.” 524 U.S. at 62. The issue in Bestfoods, however, was whether a parent may be subject to derivative liability for the actions of its subsidiary under CERCLA's vague liability for an “owner or operator.” The issue here is whether the subsidiary is liable for its own act of retaliation under SOX.

[7] Section 519 of the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (AIR21), 49 U.S.C. §42121

[8] Section 405 of the Surface Transportation Assistance Act of 1982 (STAA), 49 U.S.C. §31105

[9] Section 211 of the Energy Reorganization Act of 1978 (ERA), 42 U.S.C. §5851

[10] Use of the securities law definition of a covered company does not exclude the possibility of establishing coverage or liability through doctrines of employment law. For example, two companies that are not related by any subsidiary relationship may become so intertwined as to become an integrated employer for liability purposes even though neither company has any SOX obligation to report for the other company. The securities context and the employment law context are not mutually exclusive, but rather independent and supplementary. Use of the securities law analysis is preferable to the labor law analysis though. The securities law set out in this brief would provide a blanket answer that subsidiaries are always covered. The integrated employer or common law agency analysis would require the parties to litigate a mixed question of law and fact in each and every case.

[11] The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise. – Rule 1-02 (Regulation S-X) 17 CFR § 210 and Rule 12b-2.

[12] Regulation S-X (17 CFR 210.1-02(p)) defines “parent” as: “A parent of a specified person is an affiliate controlling such person directly, or indirectly through one or more intermediaries.”

[13] The term “consolidated subsidiary” while used in SOX Section 302 as well as throughout the SEC regulations is not specifically defined in SEC laws and regulations. It refers to a subsidiary whose assets and liabilities (i.e., revenues and debts) are consolidated and reported in the financial reports of the parent. See Regulation S-X Rule 3A-02 and Rule 3-01, for example. Various other subsidiary relationships are defined in Rule 1-02. Also see definitions of “consolidated subsidiary” elsewhere, such as 26 CFR 1.597-1 (IRS) and 12 CFR 559.2 (Banking).

[14] See page 18 (“Berkshire employed approximately 222,000 persons at December 31, 2009, which excludes the 35,000 employees of BNSF which was acquired on February 12, 2010.”), available from http://www.sec.gov/Archives/edgar/data/1067983/000119312510043450/d10k.htm

[15] http://www.berkshirehathaway.com/letters/2006ltr.pdf