Lessons From The First SOX Whistleblower Cases

Transcription

1 The leading resurce n crprate cmpliance and gvernance fr U.S. public cmpanies. Lessns Frm The First SOX Whistleblwer Cases By Carrie Wffrd & Lisa Stephanian Nvember 16, 2004 The whistleblwer prtectins cntained in the Sarbanes-Oxley Act f 2002 are already creating a grundswell f emplyee cmplaints, with mre than 300 whistleblwers claiming their emplyers retaliated against them fr their allegatins f crprate miscnduct. While nly a handful f claims t date have been decided n their merits, they ffer imprtant cautinary tales fr crpratins. The Sarbanes-Oxley Act defines whistleblwing bradly. Cmplaints must be made either t smene with supervisry authrity ver the emplyee rather than, fr example, a cwrker r t smene wrking fr the emplyer wh has the authrity t investigate, discver, r terminate the miscnduct. This culd include cmplaints made t a cmpany s auditr r utside cunsel, wh may then have independent bligatins under the Act t reprt the wrngding up the ladder. ABOUT THE AUTHORS Carrie Wffrd is an assciate in the Litigatin Department f Wilmer Cutler Pickering Hale and Drr LLP, where she wrks n whistleblwer retaliatin claims under the Sarbanes-Oxley Act, as part f a general litigatin practice. Wffrd's experience includes ten years f dmestic plicy wrk fcused n labr issues and wmen's ecnmic and health issues, including serving as a plicy advisr in the White Huse under President Clintn, the U.S. Department f Labr under Rbert Reich, and the U.S. Small Business Administratin under Aida Alvarez. Whistleblwers als are prtected fr cmplaints made t gvernment authrities, including a federal regulatry agency, a federal law enfrcement agency, r a member r any cmmittee f Cngress. In additin t direct cmplaints, emplyees are prtected fr testimny, as well as direct r indirect assistance r participatin in a prceeding either filed r abut t be filed. Lessns fr Emplyers frm the Case Law: 1. Emplyees allegatins need nt be crrect. Sectin 806 f the Sarbanes-Oxley Act prhibits retaliatin against an emplyee f a publicly traded cmpany wh has reprted cnduct that the emplyee reasnably believes cnstitutes a vilatin f any cvered law whether r nt he is crrect. Several f the cases under the Act make clear that emplyees are prtected even if they are incrrect abut their allegatins f crprate wrngding. The emplyee may Lisa Stephanian Burtn is a partner in the Labr and Emplyment Department f Wilmer Cutler Pickering Hale and Drr LLP and the chair f the Immigratin Practice Grup. She jined the firm in Burtn's expertise is in representing and advising clients n all aspects f the emplyer-emplyee relatinship. Uniquely, she als specializes in immigratin law, assisting clients with such needs as securing emplymentbased visas and permanent residence fr emplyees f bth large and start-up cmpanies, including, but nt limited t, infrmatin technlgy and ther prfessinals, executive and managerial emplyees, investrs, medical prfessinals, scientists and researchers in academia and in the bimedical and pharmaceutical industries.

2 misunderstand the cmpany s accunting r may simply be misinfrmed; she is nevertheless prtected frm retaliatin fr her whistleblwing s lng as she makes her allegatin in gd faith and n a reasnable basis. Mst emplyees are able t meet this lw threshld, althugh ne whistleblwer admitted in a depsitin that his emplyer s manipulatin f an internal emplyee satisfactin survey did nt present fraud against sharehlders r a vilatin f securities law. In additin, emplyees wh nly participate in a prceeding, rather than making a direct cmplaint, need nt even meet the threshld f reasnably believ[ing] wrngding ccurred; they are prtected fr merely participating in the inquiry. 2. Emplyees allegatins need nt rise t the level f the accunting imprprieties that led t the Sarbanes-Oxley Act. Under the Act, whistleblwers are prtected fr cmplaints abut vilatins f securities, bank, mail, r wire fraud laws r f any federal law, rule r regulatin related t fraud against sharehlders. What kinds f allegatins rise t the level f fraud against sharehlders? Very few cases have addressed this questin. In September 2004, a federal curt in Gergia allwed an emplyee t pursue her claim under the Act, despite the fact that the emplyee s allegatins dealt with internal accunting cntrls (verpayment t an advertising agency because f a persnal relatinship and pssible kickbacks and verpayments t sales agents) rather than acts that might cnstitute fraud against sharehlders f the kind that inspired the Act. The curt cnsidered it a clse case whether the emplyee s cmplaints t management shuld be prtected, reasning, if Cngress had intended t limit the prtectin f the Act t accuntants, r t have required cmplainants t specifically identify the cde sectin that they believe was being vilated, it culd have dne s. It did nt. Cngress instead prtected emplyees and adpted the reasnable belief standard fr thse wh blw the whistle n fraud and prtect investrs. Administrative law judges at the Department f Labr generally have applied a lenient standard in determining whether an emplyee s cmplaints fall under the Act s prtectins. In ne decisin, allegatins f imprprieties in internal accunting issues were fund t be prtected under the Act because such internal accunting prblems culd develp int larger prblems that wuld affect sharehlders. In anther case, allegatins f a scheme t induce cncessins in labr negtiatins by having the cmpany absrb the csts f airline pilts absence fr unin meetings which the unin shuld have brne directly was deemed t affect the cmpany s bttm line and, therefre, its sharehlders. The exceptins t this general lenience are few. Fr instance, ne administrative law judge cncluded that a whistleblwer culd nt reasnably believe that sharehlders wuld be affected by an alleged inflatin f the cst f emplyee meals at a restaurant chain. And anther administrative law judge dismissed as insufficient a claim that a cmpany manipulated the line cunts in its dcuments, thereby cheating transcriptinists f incme. 3. Bth the whistleblwer and the whistleblwer s allegatins must be handled carefully. The first whistleblwer case decided n the merits under the Sarbanes-Oxley Act, Welch v. Cardinal Bankshares Crpratin, illustrates errrs that cmpanies shuld avid in handling the

3 whistleblwer and his allegatins. In that case, a publicly traded bank terminated its CFO allegedly fr substandard perfrmance issues shrtly after he cmplained t senir executives abut nging imprprieties in the bank s financial statements, which he refused t certify. The CFO prevailed in his whistleblwer retaliatin case in part because the bank failed t dcument his alleged pr perfrmance and then btched its investigatin int the alleged crprate wrngding. The administrative law judge cncluded that the bank s investigatin was rchestrated by the CEO, acting in cncert with investigatrs, wh manipulated bth the investigatin and the audit cmmittee t justify terminating the CFO. Based n this decisin, cmpanies are well-advised t fllw certain prcedures in handling whistleblwer cmplaints: D nt select a senir manager even the chief legal fficer t participate in an investigatin int alleged crprate wrngding if that manager s wn cnduct is at issue in the allegatins. In Welch, the bank s investigatin team cnsisted f nly tw peple, ne f whm was a subject f the whistleblwer s allegatins. Bear in mind that any internal investigatin may becme the fcus f administrative agency actin r litigatin, and discvery may be permitted f the recrds f an internal investigatin, depending n the circumstances. The peple assigned t cnduct investigatins may becme witnesses and all their dcuments may cme int issue. Take care, therefre, in selecting the individuals t manage the investigatin and in deciding hw the reprting is t be handled. Audit cmmittees will invite liability if there are imprprieties in an internal investigatin. In Welch, the bank s audit cmmittee was unaware that ne f the tw peple it assigned t investigate the allegatins was himself accused f the wrngding. The bank s audit cmmittee als was unaware that the ultimate reasn fr which the CFO was terminated his refusal t meet with the investigatrs may have been a pretext because he was willing t meet with the investigatrs s lng as he culd bring an attrney and he was als willing t meet with the audit cmmittee directly rather than the investigatrs. Audit cmmittees must take steps t discver all the emplyee s allegatins and must remain alert t bth the substantive allegatins and the investigatin s prgress. Carefully cnsider the ptics f taking actin against an emplyee shrtly after her whistleblwing, even if there are ther issues, such as substandard jb perfrmance. The Department f Labr regulatins implementing the Sarbanes-Oxley Act (discussed further belw) allw administrative law judges t draw an inference f imprper mtive if an emplyer takes actin against a whistleblwer shrtly after the whistleblwing, and cases t date have embraced this. The investigatin int crprate wrngding arising frm the whistleblwer s reprt shuld be bifurcated frm any emplyment review r actins based n the whistleblwer s jb perfrmance. In Welch, the administrative law judge rejected the bank s purprted reasn fr terminating the CFO in part because its investigatin reprt was replete with criticisms f the CFO s perfrmance, despite the fact that his perfrmance was nt at issue in the allegatins f crprate wrngding. Crprate directrs must take seriusly any allegatin f financial imprpriety, given their fiduciary respnsibilities and legal duty under the Sarbanes-Oxley Act. If a cmpany wishes t

4 terminate a whistleblwer fr substandard jb perfrmance, it must cnsider his perfrmance issues separately frm his legally prtected right t make cmplaints, and must handle his perfrmance issues in the same way it handles the perfrmance issues f nn-whistleblwing emplyees. Careful and cnsistent dcumentatin f any emplyee perfrmance issues is required, prir t the whistleblwing, in rder t supprt a cmpany s explanatin that it terminated the whistleblwer fr substandard perfrmance. In cntrast t the Welch case discussed abve, a majr technlgy cmpany recently successfully defended a whistleblwer retaliatin case by prving that it had adequate reasns t fire cmplainant... unrelated t his prtected disclsures t the SEC and t [the] CEO. The strength f the cmpany s dcumentatin f the whistleblwer s vilatin f cmpany plicies, aggressin tward c-wrkers, and substandard perfrmance which appeared repeatedly in his evaluatins prir t his whistleblwing adequately supprted the cmpany s decisin, despite the judge s finding that the cmpany als had set cmplainant up fr failure by assigning him unattainable tasks. Similarly, a leading financial management cmpany defeated a whistleblwer s claim when it prved that the whistleblwer was a substandard trader wh was treated n differently frm ther lw-perfrming traders. This finding carried the day even thugh the emplyee was crrect abut the cmpany s unauthrized sale f stck and even thugh the cmpany discussed his prductivity prblems at the same time it chastised him fr calling the ethics htline. On the ther hand, ne administrative law judge rejected a cmpany s dcumentatin f an emplyee s pr perfrmance and f a plan t terminate him, as insufficient fr summary judgment, where the cmpany terminated him the day after he blew the whistle n accunting imprprieties and where there was cntradictry evidence regarding the terminatin plan. This led the administrative law judge t cnclude that the decisin t terminate the whistleblwer was merely under cnsideratin and had nt been finalized, such that a full hearing was needed t determine if a retaliatry mtive cntributed t the cmpany s decisin t terminate him. 4. Crpratins may be respnsible fr the retaliatry mtives f mid-level managers. One emplyee wn her claim f retaliatin even thugh the senir manager wh made the final determinatin t terminate her had n knwledge f her whistleblwing. The administrative law judge cncluded that the senir manager culd be viewed as having had cnstructive knwledge f her whistleblwing because the mid-level manager wh initiated the prcess that led t her terminatin, and wh actively participated in the discussins and decisin-making, was aware f her allegatins. The curt reasned that the mid-level manager had, [i]n effect... planted the seeds fr the Cmplainant s dismissal, being careful nt t taint any ther persn amng the grup that debated [Cmplainant s] fate with any knwledge f her prtected activities. 5. Crprate subsidiaries may be liable. The Act s cverage is limited t publicly traded cmpanies and their fficers, emplyees, cntractrs, subcntractrs and agents. Hwever, several administrative law judges have expanded upn this definitin t include nn-publicly traded subsidiaries in certain circumstances. Specifically, nn-publicly traded subsidiaries may fall under the Act if the

5 emplyee crrectly names the publicly traded parent cmpany in his cmplaint and if there is a sufficient cnnectin between the parent cmpany and subsidiary, such as participatin by the parent cmpany in the hiring and firing f the subsidiary s whistleblwer, r where the parent cmpany s value and perfrmance is based, in part, n the value and perfrmance f its subsidiary. Fr example, ne administrative law judge held a parent cmpany respnsible fr retaliatry actin by its subsidiary where the parent cmpany used the tw crprate lgs and titles interchangeably, administered emplyee benefits and cntracts fr the subsidiary, had cmmn senir management, bard members, and fficers, and where the parent was merely a hlding cmpany, with n emplyees, and had nly ne subsidiary, which was its perating arm. 6. Dual mtive cases turn n credibility. Many cases under the Act invlve a dual mtive, in which the cmpany has alleged a legitimate business reasn fr its adverse persnnel actin against the whistleblwer but where the curt als finds sufficient circumstantial evidence f a retaliatry mtive. In such dual mtive cases, the burden is n the cmpany t prve by clear and cnvincing evidence that it wuld have taken the same actin even in the absence f the emplyee s whistleblwing. Such cases ften turn n which party the curt finds mre credible. Any discrepancy in the cmpany s stated reasn fr taking actin against the whistleblwer will undermine the cmpany s case. An investment brkerage firm discvered this when it first acknwledged, and later denied, that a meeting had ccurred at which a stck analyst allegedly was pressured t change her rating f a stck. The administrative law judge cnsidered this change in stry a substantial incnsistency that harms Respndent s credibility in general and renders it nn-credible regarding what tk place at the meeting. 7. Emplyees cmplaints must allege each unfavrable persnnel actin. Wilmer Cutler Pickering Hale and Drr LLP succeeded n behalf f a client, in ne f the few federal curt decisins t date under the Sarbanes-Oxley Act, in cnvincing the curt t dismiss a whistleblwer claim fr an adverse emplyment actin that ccurred after the emplyee had filed his cmplaint with OSHA. Similarly, tw administrative law judges have cncluded that emplyees must allege each unfavrable persnnel actin and may nt claim a cntinuing vilatin thery in the absence f a hstile wrk envirnment. 8. Emplyers mandatry arbitratin clauses may gvern Sarbanes-Oxley Act claims. Many cmpanies include in their standard emplyment cntracts a mandatry arbitratin clause fr all emplyment disputes. Emplyers may be able t enfrce such clauses fr cmplaints f whistleblwer retaliatin under the Sarbanes-Oxley Act. Only ne federal curt has cnfrnted this questin t date; it granted a cmpany s mtin t stay a whistleblwer s federal suit fr retaliatin in light f the cmpany s mandatry arbitratin clause. The curt relied n case law hlding that arbitratin clauses are generally enfrceable unless there is a clear Cngressinal intent t preempt them r an inherent cnflict between arbitratin and the statute s purpse. The curt cncluded that nthing in the Sarbanes-Oxley Act evinces an intent t preempt arbitratin and that there is n cnflict between arbitratin and the Act s purpse. Hence, at least based n

6 this ne decisin, whistleblwers must abide by their cmpany s mandatry arbitratin clause t reslve a whistleblwer claim under the Act. The issue is nt yet settled, hwever, in light f case law cncerning ther statutes. First, in the cntext f equal emplyment pprtunity law, the Supreme Curt has cautined that arbitratin clauses are nt enfrceable if the emplyee did nt enter the agreement vluntarily. Secnd, under anther whistleblwer statute, a federal curt has ruled that any emplyment cntract that waives the emplyee s right t file a whistleblwer claim with the Department f Labr raises serius regulatry issues. Third, again in the equal emplyment cntext, the Supreme Curt has cautined that a gvernment agency can independently pursue a claim n behalf f an emplyee if that emplyee is unable t d s because f an arbitratin clause, s lng as the statute s enables the agency. Given that the Act allws the Department f Labr t pursue whistleblwer retaliatin claims n behalf f emplyees even withut their participatin, emplyers may face whistleblwer claims pursued by the Department f Labr where the emplyees are subject t mandatry arbitratin clauses. Nevertheless, at least ne majr U.S. emplyer recently amended its emplyment cntract t specify that Sarbanes-Oxley Act claims must be arbitrated. 9. Settlement agreements must be crafted carefully. Agreements t settle Sarbanes-Oxley Act cmplaints must be apprved by the Department f Labr. Mre than ne cmpany has seen its settlement agreement rejected because the agreement restricted the emplyee s future rights t bring claims against the cmpany and t participate in investigatins int the whistleblwing allegatins. As whistleblwers gain publicity and as avenues fr reprting cncerns are highlighted like the natinal htline and nline filing system fr emplyee tips and cmplaints recently established by the Public Cmpany Accunting Oversight Bard the number f these cmplaints will nly increase. Crpratins need t carefully cnsider hw t handle such cmplaints.