Whistleblower Protections Under The Sarbanes-Oxley Act

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1 January 2005 AMERICAN HEALTH LAWYERS ASSOCIATION MEMBER BRIEFING SARBANES-OXLEY ACT TASK FORCE Whistleblower Protections Under The Sarbanes-Oxley Act Kimberly D. Baker, Esquire Holly B. Benton, Esquire Megan L. Pedersen, Esquire Willams Kastner & Gibbs PLLC Seatte, Washington INTRODUCTION To promote disclosure of corporate wrongdoing, Congress engrafted protective provisions under the Sarbanes-Oxley Act (SOA or Act) for the benefit of those who disclose violations of law. 1 Publicly- held companies and those companies required to file reports under the Securities Exchange Act of 1934 (SEA) S 15( d) must be attentive to prohibitions under section 806 of the SOA and the civil remedial measures afforded to whistleblowers who report a reasonable belief of misconduct. The Act provides for. This white paper is issued by the Sarbanes-Oxley Act Task Force. The Task Force is sponsored by the HMOs and Health Plans, Tax and Finance, and Hospitals and Health Systems Practice Groups of the American Health Lawyers Association. The Task Force co-chairs and the co-editors of this white paper are: Stuart I. Silverman, Esq. (Office of the Inspector General for the District of Columbia) and Douglas K. Anning, Esq. (Polsinell Shalton Welte Suelthaus PC). DISCLAIMER: Any views and opinions expressed by Stuart Silverman, as co-editor of the white paper, cannot be attributed to, and do not represent, the position of the Offce of the Inspector General for the District of Columbia. The Sarbanes-Oxley Act Task Force wishes to acknowledge, and expresses appreciation to, Tom Gies Esq. (Crowell & Moring LLP) for his contribution as reviewer of this paper. 1 Sarbanes- Oxley Act of 2002, Pub. L. No , 116 Stat. 745 (2002) (codified in scattered sections of the U. CA). 2 Sec Protection For Employees Of Publicly Traded Companies Who Provide Evidence Of Fraud. (a) In General - Chapter 73 of title 18, United States Code, is amended by inserting after Section 1514 the following:

2 Sec. 1514A. Civil action to protect against retaliation in fraud cases (a) Whistleblower Protection For Employees Of Publicly Traded Companies - No company with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (15 U. 781), or that is required to fie reports under Section 15(d) of the Securities Exchange Act of 1934 (15 U. C. 780(d)), or any offcer, 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 any lawful act done by the employee- (1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of Sections 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by- (A) a Federal regulatory or law enforcement agency; (B) any Member of Congress or any committee of Congress; or (C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or (2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding fied or about to be fied (with any knowledge of the employer) relating to an alleged violation of Sections 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. (b) Enforcement Action - (1) In General- A person who alleges discharge or other discrimination by any person in violation of subsection (a) may seek relief under subsection (c), by- (A) fiing a complaint with the Secretary of Labor; or (B) if the Secretary has not issued a final decision within 180 days of the fiing of the complaint and there is no showing that such delay is due to the bad faith of the claimant, bringing an action at law or equity for de novo review in the appropriate district court of the United States, which shall have jurisdiction over such an action without regard to the amount in controversy. (2) Procedure - (A) In General - An action under paragraph (1 )(A) shall be governed under the rules and procedures set forth in Section (b) of title 49, United States Code. (B) Exception - Notification made under Section (b)(1) of title 49, United States Code, shall be made to the person named in the complaint and to the employer. (C) Burdens of Proof - An action brought under paragraph (1 )(B) shall be governed by the legal burdens of proof set forth in Section (b) of title 49, United States Code. (D) Statute of Limitations - An action under paragraph (1) shall be commenced not later than 90 days after the date on which the violation occurs. (c) Remedies- (1) In General- An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole. (2) Compensatory Damages - Relief for any action under paragraph (1) shall include- (A) reinstatement with the same seniority status that the employee would have had but for the discrimination; (B) the amount of back pay, with interest; and (C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees. (d) Rights Retained By Employee - Nothing in this section shall be deemed to diminish the rights privileges, or remedies of any employee under any Federal or State law, or under any collective bargaining agreement.

3 expansive civil sanctions and establishes timelines and burdens of proof that are markedly different from Whistleblower claims in most other employment settings. To illustrate the uniqueness of SOA, in these respects, a comparison of the SOA provisions with Title VII is contained in Exhibit 1. The SOA also provides for criminal sanctions in section 1107 to punish retaliation directed against informants. settngs. Federal statutes to protect whistleblowers have existed for years in a variety of 4 Many of these statutes offer unique procedural restrictions, statutes of limitations, remedies and identify regulatory agencies for their enforcement. SOA surpasses all others for its breadth of potentially liable individuals, expansive corporate 3 Section Retaliation Against Informants (a) In General- Section 1513 of Title 18, United States Code, is amended by adding at the end the following: (e) 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 offcer 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. 4 See Civil War Reconstruction Era Federal Civil Rights Statutes, 42 U. C. SS 1981, 1983, (2); Clean Air Act, 42 U. C. S 7622, 29 C. R. Part 24; Coast Guard Whistleblower Protection Act 46 U. C. S 2114; Federal Coal Mine Health & Safety Act, 30 U. C. S 815(c); Asbestos Hazard Emergency Response Act of 1986, 15 U. C. S 2651; Asbestos School Hazard Detection & Control Act 20 U. C. S 3608; Atomic Energy and Energy Reorganization Acts, 42 U. C. S 5851; Civil Rights of Institutionalized Persons Act, 42 U. C. S 1997d; Civil Service Reform Act, 5 U. C. SS 2302, 2303; Civilian Employees of the Armed Forces, 10 U. C. S 1587; Commercial Motor Vehicles Program, 49 C. S 31105; Comprehensive Environmental Response, Compensation and Liability Act, 42 U. S 9610, 29 C. R. Part 24; Contractor Employees of the Armed Forces, 10 U. C. S 2409; Clayton Act, 15 C. S 615(a); Employee Polygraph Protection Act, 29 U. C. S C. F.R S 801; Employee Retirement Income Security Act, 29 U. C. SS 1132(a) and 1140; Energy Reorganization Act, 42 U. S 5851, 29 C. R. Part 24; Fair Labor Standards Act, 29 U. C. S 215(a)(3), 29 C.F.R Part 783; Family and Medical Leave Act, 29 U. C. S 2615; Federal Credit Unions, 12 U. C. S 1790(b); Federal Deposit Insurance Corporation, 12 U. C. S 1831j; Federal Employers Liability Act, 45 U. C. S 60; Federal Home Loan Banks, Resolution Trust Corporation, 12 U. C. S 1441a; Federal Railway Safety Act, 45 U. S 441, 49 U. C. S 20109; Foreign Service Act of 1980, 22 U. C. S 3905; Hazardous Materials Transportation Act, 49 U. C. S 1801; Jones Act, 46 U. C. S 688; Job Training and Partnership Act, 29 C. S 1574(g); lloyd- LaFollette Act, 5 U. C. S 7211; Longshoreman s and Harbor Worker's Compensation Act, 33 U. C. S 948(a); Major Fraud Act of 1989, 18 U. C. S 1031; Migrant and Seasonal Agricultural Workers Protection Act, 29 U. C. SS 1854, 1855; Military Whistleblower Protection Act, 10 U. C. S 1034; National Labor Relations Act, 29 U. C. S 158(a)(4); Occupational Safety and Health Act, 29 U. C. S 660(c), 29 C. R. Part 1977; Racketeer Influenced & Corrupt Organizations Act 38 U. C. SS ; Rehabilitation Act, 29 U. C. S 703, 29 C. R. SS 1614, 1641, Chapter 60; Safe Containers for International Cargo Act, 46 U. C. S 1506; Safe Drinking Water Act, 42 U. C. S 300j- Solid Waste Disposal Act, 42 U. C. S 6971, 29 C. F.R Part 24; Surface Mining Control and Reclamation Act, 30 U. C. S 1293; Surface Transportation Assistance Act, 49 U. C. S 2305, 29 C. R. Part 1978; Toxic Substances Control Act, 15 U. C. S 2622, 29 C. R. Part 24; Uniformed Services Employment and Reemployment Rights Act of 1994, 38 U. C. S 4301; Veterans Reemployment Rights Act, 38 U.

4 conduct violative of the Act and harsh fines and/or imprisonment for criminal misconduct. Section 806 of SOA, the civil provisions, allows federal protection for whistleblowers who work for a company with a class of securities registered under Section 12 of the SEA (15 U. C. Section 781) or that is required to file reports under Section 15(d) of the SEA (15 U. C. Section 780(d)). Section 806 amends 18 U. C. by adding Section 1514A which prohibits retaliatory conduct toward anyone who participates in lawful reporting of violations concerning financially fraudulent company activities. In order to receive protection under this statute, the whistleblower must reasonably believe that the activities constitute violations of (a) federal securities law (b) Securities and Exchange Commission (SEC) rules or regulations, or (c) other federal laws that relate to shareholder fraud. The three key elements are reporting, individual liability, and criminal liability. To warrant protection under SOA, the alleged violations must be reported to a law enforcement officer or to someone with supervisory authority or authority to investigate discover or correct the violations. Section 806 provides protection for employees who report a reasonable belief of the occurrence of a civil violation of Sections 1341, and 1348 of Title 18 of the U.S. Code. Section 1107 provides criminal penalties for any individual who knowingly, and with the intent to retaliate, takes harmful action against an employee who provides law enforcement with truthful information about a commission or potential commission of any Federal offense. The criminal penalties of Section 1107 are not exclusive to those sections of Title 18 of the U. S. Code to which Section 806 pertains. Under Section 1107, criminal liability attaches to both private and public companies, and non- profit organizations. Unlike Title VII, this new legislation permits remedies against individual actors well as the company. The broad class of people who may be liable includes officers employees of publicly traded corporations, and contractors, sub-contractors, and agents of the corporation. This class of people may include human resource personnel including outside consultants, and in- house or outside legal counsel. S 4311 (b); Water Pollution Control Act, 33 U. C. S 1367, 29 C. F.R Part 24; Welfare and Pensions Disclosure Act, 29 U. C; S 1140; Workforce Investment Act, 29 U. C. S 1974(g) or 29 U. C. S 2934(f). 5 The Sarbanes- Oxley Act and Implications for Nonprofi Organizations, Gift Planner s Digest 11/12/2003.

5 Because of the expansive protection afforded by SOA, and potential criminal exposure, it is important that corporations now draft, circulate, and implement effective compliance procedures. I. SECTION 806: CIVIL PROVISIONS Whistleblower Conduct Warranting Protection Section 806 of SOA covers reports of alleged violations in two circumstances. The first provides protection when an employee provides or causes information to be provided, or otherwise assists in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of Sections 1341, 1343, 1344, or 1348, any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders. Protection is available in this circumstance when the information is provided to or an investigation is conducted by a Federal regulatory agency, law enforcement, a member or committee of Congress, or a person with supervisory authority over the employee. The second circumstance where protection is afforded occurs when, in relation to a violation of Sections 1341, 1343, 1344, or 1348, any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders, an employee files or causes to be filed, testifies, participates in or assists in a proceeding filed or about to be filed where the employer has knowledge. B. Retaliatory Conduct Violative of the SOA A complaint of retaliation may arise if a company or company representative engages in the following retaliatory conduct: discharge, demote, suspend, threaten harass or in any way discriminate against an "employee with respect to the employee compensation, terms, conditions or privileges" of employment? Regulations implementing SOA extend the definition of retaliatory conduct by stating that a company or company representative is deemed to have violated Section 806 if it "intimidates threatens, restrains, coerces, blacklists or in any other manner discriminates against an 18 U. CA S 1514A(a). 7 Procedures for the Handling of Discrimination Complaints Under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of the Sarbanes-Oxley Act of 2002, 69 Fed. Reg (August 24, 2004) (to be codified at 29 C. R. S 1980).

6 employee in the terms and conditions of employment."b This is the most expansive definition of retaliatory conduct in federal labor and employment law. While neither SOA nor the regulations define the concept of "terms, conditions and privileges" of employment, it is reasonable to believe that the Department of Labor (DOL) and the courts wil adopt analogous definitions used in other labor and employment law contexts. For example, the Supreme Court articulated a definition of tangible employment action " in Burlington Industries, Inc. v. Ellerth 524 U. S. 742, 118 Ct L.Ed. 2d. 633 (1998). The Ellerth court adopted the following definition for purposes of employment discrimination actions brought under Title VII: (AJ tangible employment action constitutes a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits. The Ellerth court applied this definition in determining whether an employer could be held vicariously liable for an actionable hostile work environment due to sexual harassment created by a supervisor with authority. The National Labor Relations Act requires employers to bargain in good faith with labor unions that represent their employers with respect to "wages, hours and other terms and conditions of employment.,,1o Federal courts have given this term a broad definition. See, Ford Motor Co. v. NLRB 441 U. S. 488 (1979) (employer violated the National Labor Relations Act by unilaterally approving a supplier s increase in the prices charged at a c. manufacturing plant's vending machines and cafeteria). Procedures for Seeking Relief and Burdens of Proof Section 806 of SOA borrows the procedure for prosecuting a whistleblower claim used by the aviation industry, as set forth in Section 519 of the Wendell H. Ford Aviation Investment and Reform Act for the 21 st Century. 11 Under these procedures, the employee must first file a written complaint with the Occupational Safety and Health Administration (OSHA) Area Director responsible for enforcement on the geographic 29 C. F.R S (b). Burlington Industries, Inc. v. EI/erlh 524 U. S. 742, 761, 118 S. Ct. 2257, 141 L. Ed. 2d. 633 (1998). 29 U. C. S 158(d) C. R. S 1979; see also 29 C. R. S ; 49 U. C. S (b).

7 area where the employer resides or was employed within 90 days of the alleged retaliation. 12 The employee may file with any OSHA officer or employee. The filng date is calculated from when the discriminatory decision was both made and communicated to the employee. 13 The DOL, through OSHA, is responsible for processing the complaint. In doing so, OSHA first determines whether the complainant has made out a prima facie case of a statutory violation. The employee wil have met this burden if the complaint, on its face, including information gained during OSHA' s interviews of the complainant, alleges the existence of facts and either direct or circumstantial evidence to give rise to an inference that the named person knew or suspected that the employee engaged in a protected activity and such activity was a contributing factor in an unfavorable personnel action directed at the employee. 14 If the complainant fails to establish a prima facie case, the claim will be dismissed without investigation following notice to the complainant. Even if the complainant sets out a prima facie case, OSHA may not proceed with the investigation if the employer or other named person shows, by clear and convincing evidence, that the adverse action would have been taken, absent the employee s "protected conduct" (Le., the named person has a convincing nonretaliatory basis for its action and has not treated the whistleblower differently than similarly situated non-whistleblowing employees). 16 The named person may submit evidence to OSHA in response to the complaint within 20 days of receipt of the notice of filing of the complaint. The named person may also request a meeting with the assistant secretary within the same 20 days to present its position. 18 If the named person fails to show by clear and convincing evidence that it would have taken the adverse action in any event, OSHA wil commence an investigation of the complaint. The regulations require OSHA to provide the named person with another opportunity to present evidence in support of its position, at the conclusion of the investigation. If OSHA has reasonable cause to believe that the named person has 29 C. R. S ; see also 49 U. C. S (b)(1). 29 C. R. S (d). 29 C. R. S C. R. S (b). 29 C. R. S ; see also 49 U. C. S (b)(2)(a). 29 C. R. S (c). 29 C. F.R S (c). 29 C. F.R S (d).

8 violated the Act, the named person wil be contacted and given the opportunity to respond and present evidence countering the allegations. This response generally must be provided within ten business days of the notice or as soon thereafter by agreement. The response may include a written submission, a meeting with the investigator to provide written witness statements supportive of its position and a presentation of legal and factual arguments. The named person will be provided information gained during the investigation including witness statements with the identify of confidential informants redacted or a summary of a confidential informant's statements if the original cannot be redacted without revealing the informant's identity. The regulations require OSHA to make an initial determination on the complaint within 60 days of filing. 23 If OSHA determines that a violation has not occurred, the parties will be notified of that finding. 24 If OSHA finds reasonable cause to believe that a violation has occurred, it will issue a preliminary order providing relief to the complainant. A preliminary order typically will require reinstatement with the same seniority to the last position held, unless the respondent establishes that the complainant is a "security risk. n26 The respondent may establish the complainant is a security risk by submitting information known before or gained after the complaint was filed. Reinstatement must be offered immediately upon the respondent's receipt of OSHA' s findings and preliminary order. 8 The preliminary order may also provide for back pay with interest, compensation for special damages arising from the discrimination, including liigation costs, expert witness fees, and reasonable attorneys fees. The preliminary order and findings will advise the parties of their right to file objections. The named party will be advised of its right to seek recovery of attorneys 29 C. R. S (e). The preamble to the regulations makes it clear that this aspect of the procedure is intended to give due process to the named person, in order to justify the Act's preliminary reinstatement remedy, a matter that is discussed in more detail below. 29 C. R. S (e) C. F.R S (e). 29 C. R. S (a). 29 C. R. S (a)(2). 29 C. R. S (a)(1). 1d. 29 C. R. S (a)(1). 29 C. R. S (c).

9 fees for a frivolous claim or one brought in bad faith, without having to file objection. The named party s requests for fees must be made within 30 days. The agency s preliminary order becomes effective in all respects in 30 days after receipt unless an objection and request for a hearing have been filed within the same 30-day period. In the event of a timely objection, all provisions of the preliminary order wil be stayed, except for the portion requiring preliminary reinstatement. The objection must be filed with the Chief Administrative Law Judge, who wil promptly assign the case to an administrative law judge (ALJ). 32 The objections must also be filed with the opposing party, the OSHA official issuing the findings and order, and the Associate Solicitor, Division of Fair Labor Standards. The ALJ will conduct a hearing to commence expeditiously, except upon a showing of good cause or unless otherwise agreed to by the parties...,,34 Hearings are conducted de novo on the record according to procedures commonly used by OSHA ALJs under other regulatory schemes. The formal rules of evidence do not apply. 36 The ALJ will issue a decision following the hearing, which must contain findings, conclusions, and an appropriate order. Any party desiring to seek review, including judicial review, of the decision of the ALJ, must file a written petition for review with the Administrative Review Board (Board). 38 There are limitations on the availabilty of review as a party may not seek review of the Assistant Secretary s determination to dismiss a complaint without investigation or the determination to proceed with an investigation. 39 In addition, a complaint may not be remanded for completion of an investigation or additional finding based on the contention the dismissal was in error. 4D The petition must be filed within ten business days of the ALJ's decision, and must identify with particularity all of the findings, conclusions or orders to which the party is excepting. Any basis not specifically C. R. S (a)(1). 29 C. R. S (1)(b). 29 C. R. S C. R. SS and C. R. S (a). 29 C. R. S (b). See 29 C. R. S C. R. S (d). 29 C. R. S (a). 29 C. R. S C. R. S (a).

10 identified will be deemed waived and cannot be raised at a later date. In the event of a timely petition for review, the Board has 30 days to decide whether to accept the appeal. If the Board does not do so, the ALJ's decision becomes the final order of the DOL. If the Board accepts the case for review, it must issue a final decision within 120 days of the conclusion of the hearing. All relief, except reinstatement, is stayed pending the 43 The Board' Board's review. s standard for review is the substantial evidence standard. The Board' s decision becomes the final agency decision. If the Board does not issue a decision within 180 days after the filing of the complaint, the employee can initiate a suit, in law or equity, in federal district court. The complainant must issue a notice of intention to file 15 days before filing in federal court. Any preliminary decision made would be subject to de novo review in any such civil action. The complainant does not have to satisfy the amount in controversy requirements, to have jurisdiction in federal court. On the other hand, if the Board has issued a final order within 180 days after the complaint was filed, a party may seek judicial review of that order by filing a petition for review in a federal appellate court. The appropriate venue for such review is either the circuit in which the violation allegedly occurred or the circuit in which the complainant employee resided on the date of the alleged violation. Whenever any person has failed to comply with a preliminary order of reinstatement or a final order or the terms of a settlement agreement, the Secretary of Labor or the affected employee may seek enforcement of OSHA' s order in federal district court. Responding to the Investigation The enforcement procedures summarized above are obviously complex. As suggested above, respondents must be dilgent to comply with these procedural ld. 29 C. R. S C. R. S (b). 29 C. R. S (b). 29 C. R. S (b). 29 C. R. S (a). 29 C. R. S (b). 29 C. R. S (a). 49 U. C. S (b)(2)(a); see also 49 U. C. S 42121(b)(2). 49 U. C. S (b)(4)(a); 29 C. R. S (a). 49 U. C. S (b)(6)(a); 29 C. R. S

11 deadlines to prevent waiver of any defense. As an example, a named person s initial response, with any supporting documentation is due 20 days after receipt of the complaint. It is of course possible that OSHA's initial review of the complaint may result in a determination that the complainant has failed to set out a prima facie case. However, a complainant must make out only a relatively low showing to move the complaint into the investigation phase. For example, it is significant that the employee must only have a reasonable belief' of wrongdoing in order to satisfy that aspect of the prima facie case. Moreover, the employer s burden of persuasion- clear and convincing evidence not only greater than the whistleblower s burden of proof, but also much higher than most other civil whistleblower statutes, and is more akin to the burden of proof in a defamation case. The details of the Act's enforcement scheme suggest that an employer should give careful consideration to the form of its response to a Section 806 complaint. The employer should immediately initiate an internal investigation of the allegations. While the investigation may be conducted by in-house counsel, retention of outside counsel is recommended. In- house investigations may be viewed as biased and the employer may have more difficulty protecting the investigative material as attorney work-product or under the attorney-client privilege. Following that internal investigation, the employer may face a number of important strategic and tactical decisions, depending on the conclusions reached in such investigation, including the extent to which information should be supplied to OSHA. In many cases, one can anticipate that there will be no final decision reached by DOL within 180 days, and the complainant will proceed to federal court. With that prospect in mind, some employers may decide that it is not prudent to provide a detailed response to the allegations. In the event the employer decides to participate actively in C. R. S (c). 52 See e., Burlington Industries, Inc. v. Ellerth, 524 U. S. 742, S. Ct L.Ed. 2d 633 (1998) (in a sexual harassment suit, the defending employer may raise an affrmative defense to liability or damages, subject to proof by a preponderance of the evidence); Bachelder v. Am. W Airlines, Inc. 259 F.3d 1112 (9th Cir. 2001) (plaintiff need only prove by a preponderance of the evidence that taking Family Medical Leave Act-protected leave constituted a negative factor in the decision to terminate her); Carr v. Forbes, 259 F. 3d 273, 283 (4th Cir. 2001) (the defamation plaintiff bears the burden of proof by clear and convincing evidence).

12 the investigation, one should anticipate that the investigation may include interviews by OSHA investigators of the individuals with knowledge about the allegations and defense, and who have reviewed any documents produced by the parties. Since the Act is relatively new and most OSHA investigators are more familiar with workplace safety standards, respondents should consider presenting a witness who can easily explain financial documentation and transactions to educate the investigator and help with the complexity of the financial issues. To help prepare for an investigation, consider obtaining the revised Whistleblower Investigation Manual. Where an employer decides to defend the adverse action taken against the employee, it should be prepared to make a complete response. In many cases this will involve locating documents that establish the business justification for the adverse action. In some cases, this would include records of corporate plans to change work force assignments or to reduce the work force by eliminating the complainant's job, along with others in the same division. In other cases, a defense may be supported by warning memoranda and disciplinary documents, supplemented by company policies and relevant provisions of an employee handbook which demonstrate that the employee s conduct was violative of the policies and was an independent basis for disciplining or terminating the whistleblower. While affidavits or declarations may be submitted with the employer s response caution should be given to the scope of written testimony. It is critical to recognize that all sworn statements may be used later for impeachment or subject to production under a Freedom of Information Act request and/or used in other civil, criminal litigation or government investigations. OSHA does not provide the respondent access to the information obtained during the investigation by its Assistant Secretary, including documents produced by the complainant or the statements of other witnesses. Accordingly, in the event the employer decides to participate actively in the investigation. Respondent's legal counsel should prepare all witnesses and make sure all pertinent documents are reviewed in anticipation of the investigator inquiries. While there is no stated limitation on the scope 53 The manual is published by OSHA and found at the DOL website in the "Directives" section. Chapter 14 deals with Sarbanes-Oxley investigations.

13 of the investigation, the attorney-client privilege, work- product doctrine, and Fifth Amendment protections may be asserted. E. Civil Damages Under The Sarbanes-Oxley Act Section 806 of the SOA provides for reinstatement, back pay with interest, and compensatory damages. 55 If the whistleblower prevails, special damages include reasonable attorneys' costs of litigation and expert witness fees. The Act does not provide for punitive damages and is silent on whether damages for emotional distress are recoverable. Employers will be entitled to an award of attorneys' fees (up to $1 000) if it is determined that the complaint was frivolous or brought in bad faith. the Act does not preempt or supplant existing state law or collective bargaining Importantly, agreement protections for whistleblowers, including tort actions for wrongful termination in violation of public policy (for which emotional distress and punitive damages against the employer may be available). II. CASES CONSTRUING SECTION 806 OF THE SARBANES-OXLEY ACT Claimants have had considerable success in some of the early cases decided under Section 806. For example, in Getman v. Southwest Securities, Inc. 59 the successful complainant was awarded back pay and other relief totaling, $ additional interest on back pay, 60 and expenses incurred in moving to a new job. In Getman the complainant's responsibility as an equity research analyst at the company for which she worked was to prepare reports to alert potential investors to the market potential of information technology companies involved with the pharmaceutical and biotech industries. Her employer benefited from her work by the sale of the researched companies' stock or by participating in a new stock offering. Her job required that she provide a rating with each report for each company. After giving one company an "accumulate" rating, she was pressured by management to upgrade her 54 5 U. C. S C. R. S (b). 1d. 29 C. R. S (e). 18 U. C. S 1514A(d). 59 DOL ALJ, No S0A (2/2/04). 60 The rate of interest is established by the Internal Revenue Code, 26 U. C. S 6621.

14 rating to "strong buy." She refused to do so, stating that the company could put a higher rating on the stock, but that she would refuse to sign her name to the report. After this refusal, her work environment became openly hostile. She was eventually terminated. The ALJ determined that the record showed that complainant had proved by a preponderance of the evidence that she engaged in protected activity under the Act that Respondent was aware of her protected activity and that Respondent took adverse action against her. In another case Welch v. Cardinal Bankshares Corp, 61 complainant Welch, hired in 1989, raised concerns that the company president was improperly overriding internal financial controls. After the enactment of the SOA in July of 2002, Welch took a number of actions he believed were protected, including refusing to certify a quarterly financial statement due to what he viewed as irregularities involving individuals with significant roles in internal controls. The employee s allegations were openly criticized as unfounded by the company president at a board meeting and Welch was discharged soon thereafter. Despite OSHA' s denial of his complaint, Welch appealed to the DOL ALJ. The ALJ concluded that Welch had been subjected to an arbitrary requirement which prohibited Welch from having his personal attorney present at a meeting to investigate the alleged fraud. The DOL ALJ found that this requirement was "clearly imposed" for the purpose of using Welch's anticipated refusal to cooperate with the company s investigation as a pretext for firing him. After he refused to comply with the company s demand that he attend the meeting without his counsel, he was discharged for " insubordination. " Welch received reinstatement with back pay and interest, a purging from his personnel file of all references to his engaging in protected activity and the resulting discipline, and reimbursement for litigation costs, including reasonable attorneys' fees. A more recent case Platone v. Atlantic Coast Airlines 62 demonstrates the broad reach of the Act. In Platone the complainant persuaded the ALJ that she had been terminated in violation of the Act, for having raised questions about questionable practices in the administration of the employer s collective bargaining agreement with 61 DOL ALJ, No S0A-, (1/28/04). 62 DOL ALJ No S0A-00027, (4/30/04).

15 the Air Line Pilots Association. The ALJ reached this conclusion notwithstanding record evidence demonstrating that the employer had a legitimate reason for terminating the employee for failure to disclose a conflict of interest. The decision is an aggressive application of the burden of proof rules applicable to so-called "dual motive employment law retaliation claims. Platone is also significant because it did not involve allegations of violations of the federal securities laws; instead, the ALJ concluded that the employee had a reasonable belief that her employer, through its application of the collective bargaining agreement, was engaged in conduct that would constitute a fraud on the shareholders. Defenses Available To Respondent 1. Procedural Issues Several of the early decisions interpreting SOA arose from complaints filed after the statute s passage alleging employer misconduct that preceded the statute enactment. For example, in Gilmore v. Parametric Technology Corp. 63 employee Gilmore was terminated on July 17, 2002, and filed his complaint on September because the Act had only gone into effect on July 30, 2002, after the alleged retaliation, employee Gilmore argued that SOA should be applied retroactively. Evaluating the issue of whether a new federal statute may be retroactively applied, the ALJ relied upon the Supreme Court' s decision in Landgraf v. USI Film Products. Landgraf instructed that the analysis must begin with a review of the statute itself to determine Congress' intent. The ALJ found the legislative history to be silent about retroactive application of Section 806, and that, instead, the general spirit of the section supported prospective application. The ALJ looked to the intent of the law and evaluated the new statute based on considerations of fair notice to the employer, as well as reliance on the law and the expectations of remedial relief available thereunder. The ALJ was unpersuaded by employee Gilmore s argument that his employer would not suffer manifest injustice was unpersuasive and unsupported by evidence. Based on these considerations, the ALJ held that the SOA was to be applied only prospectively and therefore dismissed the claim. 63 DOL ALJ, No S0A-00001, (2/6/03). 64 Landgrafv. USI Film Products 511 U. S. 244 (1994).

16 In Steffenhagen v. Securitas Sverige 65 a complaint was fied with OSHA alleging adverse employment action in violation of Section 806 of the Act. The complainant failed to serve the 17 respondents named in the complaint. After an investigation, OSHA dismissed the complaint. OSHA determined that the complaint was untimely filed, no jurisdiction to proceed existed, and the complainant failed to provide contact information as to the respondents named in the allegations, in disregard of repeated requests. The complainant moved for a hearing and motion to remand or an investigation. The ALJ applied the Federal Rules of Civil Procedure, which require service of the complaint on all defending parties. 66 The lack of service lead to the dismissal of the claim. It remains to be seen whether Section 806 claims can be made subject to mandatory arbitration or other dispute resolution procedures that have been adopted by many public companies. One district court has held that a Section 806 claim should be stayed pending arbitration. 67 The plaintiff filed suit seeking damages and reinstatement when his employer fired him allegedly for his failing to change a draft research report under pressure from the employer. Plaintiff, however, had signed a mandatory arbitration agreement as a term of employment, and the employer moved to stay the liigation and compel arbitration. Plaintiff argued that because the Act provides for Federal court jurisdiction to hear whistleblower complaints, his suit was exempt from mandatory arbitration. The court rejected this argument and granted the relief requested by the employer. 2. Substantive Defenses Employers have been successful in defending Section 806 claims in a number of cases in which substantive defenses have prevailed. Thus, there are several decisions in which the employer prevailed because the complainant was determined not to have engaged in protected activity. For example, in Lerbs v. Buca Oi Beppo, Inc. 68 the ALJ concluded that the complainant was not engaged in protected activity by making general inquiries about the propriety of certain accounting entries. Similarly, in Hopkins 65 DOL ALJ, No S0A-00024, (8/5/03). 66 See Fed. R. Civ. P. 4(m) and 41(b). 67 See Boss v. Salomon Smith Barney Inc. 263 F.Supp.2d 684 (S. Y. May 16, 2003) (available at 2003 WL ). 68 DOL ALJ, No S0A-8 (6/15/04).

17 V. A TK Tactical Systems 69 an employee who raised questions about company practices in releasing sludge water into the ground water system due to poor maintenance and overdue inspections. The employee s conduct was held not to constitute protected activity, as his complaints made no allegations of fraud. Likewise, in Harvey v. The Home Depot, Inc. 7o the ALJ held that an employee s series of complaints about systematic individual racial discrimination did not state a claim under Section 806. Employers have also prevailed in cases where the employee did not suffer an adverse employment action in the first instance. See, e. Dolan v. EMC Corp. 71 where the ALJ concluded that a negative performance evaluation given to an employee without more, did not constitute an adverse employment action. Accord, Halloum v. Intel Corp. 72 (decision to place employee on a corrective action plan to improve his performance does not constitute an adverse employment action for purposes of Section 806). This sample of cases demonstrates that DOL and the courts will be receptive to a variety of employer defense arguments, drawn from other areas of labor and employment law. III. CRIMINAL CULPABILITY A. Prospects of Criminal Sanctions, Including Imprisonment Congress included harsh criminal sanctions in section 1107 of the SOA that are not contained in other whistleblower statutes. 73 The severity of the criminal sanctions, as well as the uniqueness of criminal sanctions in a workplace environment, mandate that companies be "on their toes" when handling reports of alleged SEC violations 69 DOL ALJ, No S0A- 19 (5/27/04). 70 DOL ALJ, No S0A-20 (5/28/04). 71 DOL ALJ, No S0A-1 (3/24/04). 72 DOL ALJ, No S0A-7 (3/4/04). 73 Section Retaliation Against Informants (a) In General - Section 1513 of Title 18, United States Code, is amended by adding at the end the following: ee) 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 offcer 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.

18 learning about whistleblowers while responding to a SOA complaint, or gaining information that an employee has disclosed to a law enforcement officer that a federal offense was committed. It is important to note that the statute uses the term "any" four times reflecting the drafters' intent to widely cast the net of criminal culpability to a variety of actors. The unique features of section 1107 include: The conduct may occur in publicly traded and private companies as well as both profit and not-for- profit settings. The person who alleges retaliation must have reported the information truthfully. Criminal liability may only attach to information disclosed to a "law enforcement officer.,,74 The complainant need only provide information about a "commission or possible commission of any federal offense. Companies subject to SOA must instruct managers, decision makers, and employees that each may be subject to criminal liabilty if retaliatory action resulting in "any action harmful to any person including interference with lawful employment or livelihood of a person,,75 is taken after the complainant reports a reasonable belief about the commission or possible commission of any federal offense. It is reasonable to assume that prosecutors will argue the criminal liability provisions of Section 1107 are not restricted to the securities arena, but encompasses all federal offenses-such as, but Sections 3571 (b)(3) and (c)(3) oftitle 18 further provide that an individual can be fined up to $250,000 and a corporation may be fined up to $ This is distinct from the Act providing civil liability for disclosure to a much larger group of persons including federal law enforcement, federal regulators, Congress, a person with supervisory authority over the employee or a person working for the employer with the authority to investigate misconduct. The definition of law enforcement in 18 U. C. S 1515(a)(4) encompasses federal agents, federal prosecutors probation offcers, pretrial services offcers, and local agents and prosecutors working with federal employees on task forces or mutual investigations. 18 U. C. S 1513(e). Section 1107, 18 U. C. S 1513(e), prohibits "any action harmful to any person including interference with the lawful employment or livelihood of any person." That phrase is not defined. Therefore, defendants should anticipate prosecutors wil craft limitless ways to characterize an individual' s or corporation s conduct as harmful. The violative conduct is not limited to adverse consequences suffered only by the complainant. The narrow definition of adverse employment action set by the U. S. Supreme Court in the Title VII case, Burlington Industries, Inc. v. Ellerlh 524 U. S. 742 (1998), requires significant change in employment status such as firing, failing to promote, reassignment to

19 not limited to, Medicare fraud, Medicaid fraud, violations of the narcotic prescriptive regulations, and failure to comply with federal withholding regulations. It is important to observe the explicit mens rea element under section 1107 of the Act. There, it is provided that the requisite criminal intent exists if a person " knowingly, with the intent to retaliate, takes any action harmful to any person....,,76 IV. GUIDELINES TO ENCOURAGE INTERNAL REPORTING To avoid prosecution under the SOA, an employer is well advised to adopt a protocol by which employees may report information about workplace violations of accounting and securities laws. As a preliminary matter, employers should train all employees, particularly managers and supervisors, about the Act's provisions. Employers should communicate to employees that the company has a " zero tolerance policy regarding violations of securities and other laws. The zero tolerance policy must be enforced not only by upper-most management, but also by supervisory and nonsupervisory employees. Further, employers should consider adopting and implementing policies to encourage reporting and discourage retaliation in response to employee reporting. To be effective, such a policy should include the following information: what constitutes material violations adapting language from 18 U. SS , and 1348; how and to whom to report (with several alternatives); how the report will be investigated; and how violations wil be addressed. It is imperative that an employer s reporting policy contain provisions for confidential or anonymous reporting. The policy should state the employer s intention to keep reports of violations confidential, subject to such disclosure as may be required to investigate the complaint, remediate any violative behaviors and/or to respond to governmental agency inquiries. Employers should take efforts to distribute a copy of the policy to all employees on a periodic basis and have them sign a receipt or acknowledgment form that wil be different responsibilities or material changes in benefis. The defense should argue that the standard is the most appropriate definition of harm. EI/erlh

20 maintained in their personnel file, as is done with employment manuals and noncompetition agreements. The independent auditing committee should be given a copy of the policy. The policy should also be posted in prominent locations around the office. The prohibition against retaliation should be highlighted throughout, in bold print, or otherwise. It is also important that numerous persons, not only employee supervisors, are designated to receive reports of violations. Those responsible for investigating reported violations should commence investigation promptly and aggressively. Employers are advised to treat complaints seriously, investigate the allegations thoroughly with trained investigators, and then take appropriate actions designed to end any violations. Employers should establish a procedure for documenting investigations. Information that should be documented includes the identity of witnesses who were interviewed, witnesses who were not interviewed, and witnesses who refused to be interviewed. The investigator should also write a summary of each witness s testimony, and keep a log of documents that were reviewed. Finally, the investigator should prepare a succinct written conclusion and record any remedial steps taken. Finally, employers should hold supervisors and employees accountable for any inappropriate behavior that is, or could be construed, to be harassment or retaliation. v. COMPLIANCE STRATEGIES In view of the breadth of prohibited conduct and extensive remedial relief afforded under section 806 and criminal penalties under section 1107 of the SOA, it is prudent that employers take defensive steps. First, employers should have an antiretaliation policy. The policy will be a helpful means of demonstrating corporate awareness and enforcement. If a report (as opposed to a formal complaint) of an alleged securities or other type fraud violation is received from an employee, a letter should be drafted to the employee acknowledging the company s receipt of the reported incident, and indicate that the company will investigate the allegation(s). It is advisable to exercise caution in the wording of the letter to emphasize that the company has 1d.