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Sarbanes-Oxley Act: Legal Protection for Corporate Whistleblowers
By Stephen M. Kohn

The Sarbanes-Oxley Act of 2002 (“SOX”) contains significant protections for corporate whistleblowers. Given its diverse civil, criminal and administrative provisions, the statute may be considered, over time, one of the most important whistleblower protection laws.

Unlike most whistleblower laws, the SOX's whistleblower protection provisions are not limited to providing a legal remedy for wrongfully discharged employees. In addition to containing employment-based protections for employee whistleblowers, the law contains four other provisions directly relevant to whistleblower protection. First, the law requires that all publicly traded corporations create internal and independent “audit committees.” As part of the mandated audit committee function, publicly traded corporations must also establish procedures for employees to file internal whistleblower complaints, and procedures which would protect the confidentiality of employees who file allegations with the audit committee.

Second, the SOX sets forth new ethical standards for attorneys who practice before the Securities and Exchange Commission (SEC). This law, and the SEC’s implementing regulations, require attorneys, under certain circumstances, to blow the whistle on their employer or “client.”

Third, the SOX amended the federal obstruction of justice statute and criminalized retaliation against whistleblowers who provide “truthful information” to a “law enforcement officer” about the “commission or possible commission of any Federal offense.” This provision of the SOX was not limited in its application to publicly traded corporations; it covers every employer nationwide.

Fourth, Section 3(b) of the SOX contains an enforcement provision concerning every clause of the SOX. This section states that “a violation by any person of this Act [i.e. the SOX] . . . shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934.” This section grants jurisdiction to the SEC to enforce every aspect of the SOX, including the various whistleblower-related provisions. It also provides for criminal penalties for any violation of the SOX, including the whistleblower-related provisions.

These four provisions of the Sarbanes-Oxley Act collectively provide a unique and comprehensive federal framework for enforcing whistleblower protections for corporate employees. In addition to these four provisions, the law contains an employee protection provision which permits whistleblowers to file a complaint before the U.S. Department of Labor alleging unlawful retaliation. This complaint process was directly modeled on other DOL administered whistleblower laws. See 29 C.F.R. Part 24 (nuclear and environmental whistleblower protection laws); 29 C.F.R. Part 1979 (airline safety whistleblower protection law); 29 C.F.R. Part 1987 (surface transportation whistleblower protection law).There is an extensive body of administrative and judicial case law interpreting these whistleblower provisions, much of which is consistent with Congress’ intent to broadly protect whistleblowers covered under the DOL procedures.2

KEY WHISTLEBLOWER PROVISIONS OF THE SOX

I. PROHIBITION AGAINST EMPLOYMENT DISCRIMINATION (CIVIL):

Section 806 of the SOX, 18 U.S.C. 1514A protects whistleblowers employed by publicly traded companies from discrimination. The key provisions of this law are as follows:

  • The whistleblower protection provision was modeled on other whistleblower laws administered by the U.S. Department of Labor (DOL), such as the laws protecting airline employees (42 U.S.C. 42121) and employees who raise nuclear safety complaints (42 U.S.C. 5851). The DOL procedures incorporated into the SOX were adopted directly from the airline whistleblower protection provision. 49 U.S.C. 42121(b). Thus, although the SOX is a new law, there is extensive administrative and judicial case-precedent which provides detailed authority on interpreting various provisions of the SOX.
  • The DOL published interim regulations implementing the SOX whistleblower provisions. 29 C.F.R. Part 1980.
  • The statutory definition of protected whistleblowing is very broad. It covers reports to government officials, reports to supervisors and participation in SEC or shareholder legal proceedings. Under the applicable case law, protected activity covers a wide range of conduct, including contacts with the news media. Also, an auditor aggressively doing his or her job is protected under the anti-retaliation provision, even if he or she never filed an allegation of corporate wrongdoing with the SEC.3
  • Employees who prevail in a SOX action are entitled to a full “make whole” remedy, including reinstatement, back pay and attorney fees and costs. The law also provides for the payment of “special damages,” which would include non-economic damages, such as compensation for emotional distress.
  • 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 completely de novo. If appealed, the parties are entitled to an on-the-record hearing before the DOL's Office of Administrative Law Judges (OALJ).4 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.
  • The OALJ procedures for adjudicating whistleblower cases, codified at 29 C.F.R. Part 18, are very similar to the Federal Rules of Civil Procedure. Parties are entitled to discovery and may file standard pretrial motions. Upon the completion of pretrial proceedings, the DOL ALJ conduct formal bench trials, where each party is permitted to call and cross-examine witnesses. The Federal Rules of Evidence are not directly applicable, and the cases are tried before a single judge, who will issue findings of fact and conclusions of law. The ALJ’s decision is appealable to the DOL's Administrative Review Board (“ARB”). The ARB was given the authority to issue final administrative orders on behalf of the Secretary of Labor. ARB orders are reviewable in the U.S. Courts of Appeal for the circuit in which the violation arose.
  • The DOL must complete its adjudication of a whistleblower case within 180 days. If the DOL does not complete its final adjudication, an employee may continue to have his or her case heard within the DOL, or may seek a de novo trial in federal district court. Only employees have the ability to elect to dismiss the DOL proceeding and re-file the claim directly in federal court.
  • Other federal and state corporate whistleblower protection laws are not subject to federal preemption.5
II. PROHIBITION AGAINST EMPLOYEE DISCRIMINATION (CRIMINAL)

Section 1107 of H.R. 3763, codified as 18 U.S.C. 1513(e), amends the obstruction of justice statute to clearly prohibit retaliation against employee whistleblowers. The new provision states as follows:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.

This provision has very significant implications. The law covers disclosures for any violation under federal law. It is not limited to employee reports of criminal corporate fraud. Moreover, employers who lose civil whistleblower cases may find themselves personally accountable in a subsequent criminal proceeding. Finally, this amendment could result in whistleblowers obtaining coverage under civil RICO. Specifically, violations of 18 U.S.C. 1513 constitute one of the “predicate acts” upon which a person may base a civil RICO claim. 18 U.S.C. 1961(1). The SOX amendment to 18 U.S.C. 1513 addressed the major roadblock identified by the U.S. Supreme Court which prevented whistleblowers from obtaining protection under civil RICO. See, Beck v. Prupis, 592 U.S. 494 (2000).

The criminal prohibition against whistleblower retaliation also directly relates back to the civil employee protection provision and the SEC’s regulatory authority. Section 3(b)(1) of the SOX states that “a violation by any person” of any provision of the SOX “shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 . . . and such person shall be subject to the same penalties, and to the same extent, for a violation of that Act.” Thus, if any publicly traded corporation discriminated against any employee for blowing the whistle concerning any federal offense, such discrimination would not only constitute a potential criminal obstruction of justice, but would also constitute a violation of the Securities Exchange Act and would subject that employer to administrative sanctions by the SEC and other enforcement actions.

Any employer who discriminates against a whistleblower in violation of either 18 U.S.C. 1514A or 18 U.S.C. 1513(e) also commits a violation of the Securities Exchange Act of 1934. Under the SOX, any person who retaliates against a whistleblower would be subject to SEC “penalties” to the “ same extent” as if that person violated the Securities Exchange Act of 1934.

Consequently, if an employer loses a SOX whistleblower claim, that employer may also be subject to criminal prosecution under the SOX obstruction of justice amendment and “penalties” under the Securities Exchange Act of 1934.

III. CORPORATE RESPONSIBILITY

The Sarbanes-Oxley Act also sets forth requirements related to corporate responsibility. Two provisions in the law which directly apply to whistleblowers are:

  • Section 301 of the SOX requires publicly traded corporations to establish audit committees. These committees are required, in turn, to “establish procedures” for accepting employee complaints (both anonymously and non-anonymously) concerning “questionable accounting or auditing matters.” 15 U.S.C. 78j-1(m)(4). Under the whistleblower provisions, internal reports to such committees constitute fully protected activity. See 18 U.S.C. 1514A(a)(1). Corporations are now mandated to establish procedures to accept internal whistleblower complaints.
  • Section 307 establishes new rules of conduct for any attorney who appears or practices before the SEC. Under these rules, all attorneys (this should include both in-house and outside counsel) are now mandatory whistleblowers. As a matter of federal law, attorneys must report “evidence of a material violation of securities law” or “breach(s) of fiduciary dut(ies)
  • or “similar violation(s)” to a corporation’s “chief legal counsel” or “chief executive officer.” If these reports do not properly resolve an attorney’s concerns, an attorney is required to further report his or her concerns to a company’s audit committee or a similar committee. 15 U.S.C. 7245. Under the whistleblower provision, all such reports should be considered protected activity. 18 U.S.C. 1514A(a)(1).
IV. SEC ENFORCEMENT JURISDICTION

Section 3(b) of the SOX provides for a broad grant of jurisdictional authority for the SEC and/or the Department of Justice to enforce (civilly or criminally) all of the requirements contained in the SOX, including the four whistleblower-related provisions. The law states as follows:

A violation by any person of this Act [i.e. the SOX], 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.  
CONCLUSION

The whistleblower provisions of Sarbanes-Oxley provide a general framework for ensuring that employees (including attorneys and auditors) disclose information which may harm investors. For the first time, Congress has integrated into one statute a variety of diverse elements necessary for providing adequate whistleblower protection.

 
1 © 2002-04 by Stephen M. Kohn. Mr. Kohn is the Chairman of the Board of Directors of the National Whistleblower Center (NWC), a partner in the Washington, D.C. firm of Kohn, Kohn & Colapinto, LLP and the author of Concepts and Procedures in Whistleblower Law (Greenwood Publishing Group, 2000). Mr. Kohn is the co-author of Whistleblower Law: A Guide to Legal Protections and Procedures for Corporate Employees (Greenwood Publishing Group: October, 2004). Whistleblower Law is the first litigation handbook focused on the Sarbanes-Oxley Act. Information on the NWC and Mr. Kohn's publications may be obtained at the NWC website.

2 See Brock v. Roadway Express, 481 U.S. 252 (1987) (upholding constitutionality of a provisional reinstatement provision similar to a provision contained in the SOX); Clean Harbors Environmental Services v. Herman, 146 F.3d 12 (1st Cir. 1998) (broad interpretation of protected activity); Passaic Valley Sewerage Commissioners v. DOL, 992 F.2d 474 (3rd Cir. 1993) (broad definition of “good faith” whistleblowing).

3 See, Mackowiak v. University Nuclear Systems, 735 F.2d 1159 (9th Cir. 1984).

4 The DOL hearing procedures are set forth in 29 C.F.R. Part 18. The DOL's Office of Administrative Law Judges has a website that publishes whistleblower decisions. See, www.oalj.dol.gov . The procedures utilized by the DOL in adjudicating whistleblower cases are set forth in Chapter 5 of Concepts and Procedures in Whistleblower Law. The substantive DOL case law regarding proof of discrimination and damages in DOL-administered whistleblower cases is set forth in Chapters 8 and 9 of Concepts, available at the NWC website.

5 The statute does not directly address the issue of voluntary arbitration. Under EEOC v. Waffle House, 534 U.S. 279 (2002), employees cannot waive their right to file a claim with the U.S. Department of Labor. Any contractual terms which explicitly waive an employee’s right to file claims with DOL raises serious regulatory issues. Under the case law decided under the other DOL whistleblower laws upon which the SOX was modeled, any such waiver constitutes an adverse action. See, Connecticut Light & Power v. Secretary of Labor, 85 F.3d 89 (2nd Cir. 1996).