Employee Whistleblower Rights Under the Sarbanes-Oxley Act

Employee Whistleblower Rights Under the Sarbanes-Oxley Act by Karen L. Corman & Kristin Major On July 30, 2002, Congress enacted the Sarbanes-Oxley Act of 2002, 18 U.S.C. 1514A ( Sarbanes-Oxley or the Act ) to promote corporate accountability. Of particular importance to both securities and employment law practitioners are the whistleblower provisions of the Act, set forth in Section 806. These provisions allow employees to seek civil remedies against companies or individuals who retaliate against them for reporting violations of securities laws or fraud against shareholders and, in some extreme circumstances, allow for criminal penalties. While employers have thus far prevailed on the majority of complaints filed under Section 806, the Sarbanes-Oxley whistleblower protections continue to present a significant issue for public companies in terms of human resources and litigation management. For companies already concerned with SEC oversight and compliance issues as well as the constant pressure to increase shareholder value, these claims may provide yet one more cost in the already expensive proposition of complying with Sarbanes-Oxley. This article addresses the procedural elements of the employee whistleblower complaint that employers should be familiar with as well the potential for interaction with the Securities Exchange Commission ( SEC ) in the complaint investigation and adjudication. Also discussed is the developing body of case law in this area, where this relatively new law and newly-finalized regulations are being shaped and interpreted by both Administrative Law Judges ( ALJ s ) and the federal courts. 1. The Administrative Process The Occupational Health and Safety Administration ( OSHA ), a division of the Department of Labor ( DOL ), is the federal agency charged with enforcing the new regulations. OSHA already has responsibility for investigating whistleblower complaints under thirteen other federal statutes. These thirteen other statutes, however, all involve safety, health or environmental issues, so issues of complex securities law and accounting standards represent a new challenge for OSHA and its investigators. OSHA has already received well over 300 whistleblower complaints in the two years the Act has been in effect. In May of 2003, OSHA published its interim rules for the specific enforcement of Section 806. See 29 C.F.R. 1980. The interim Sarbanes-Oxley rules created a comprehensive, threelevel administrative review process within OSHA for employee whistleblower retaliation claims. On August 24, 2004, the DOL issued the final rules governing Sarbanes-Oxley whistleblower complaints (the Rules ). Although public comments were received from various organizations concerning virtually every section of the interim rules, OSHA ultimately included only one significant change in the final Rules concerning employee reinstatement rights, which is discussed in more detail below. To initiate the whistleblower complaint process, an employee is required to submit a detailed written complaint to OSHA within 90 days of the alleged retaliatory act. For purposes of the Rules, employee is broadly defined to include both current or former employees, applicants or any individual whose employment could be affected by a company or company representative. The following sets forth the steps the employer must navigate as the complaint winds its way through the administrative process established by OSHA. It is important to note that if the entire OSHA administrative claim process is not completed within 180 days of the filing of the complaint then the employee may bring a private action in federal district court, regardless of the amount in controversy. OSHA Investigator Level: Once notified of the complaint by OSHA, the employer has twenty days to submit a written response. If, after the twenty-day period, OSHA believes that evidence exists that gives reasonable cause to believe the employer violated the Act, OSHA will inform the employer of the evidence and then the employer has another ten business days to respond to that evidence. The OSHA investigator is required to issue a preliminary decision and an order of relief 2

within sixty days of the filing of the complaint. ALJ Level: If a party files an appeal of the preliminary decision or order within sixty days, then the complaint rises to the second level of review, a hearing before an OSHA ALJ. Upon appeal, the ALJ must expeditiously hold a formal hearing on the merits and issue a final decision. Administrative Review Board Level: Once the ALJ issues a decision, a party may then petition for review by the Administrative Review Board ( Review Board ) within ten business days of the issuance of the decision. The Review Board has thirty days from the filing of the petition for appeal to decide whether to grant it. If the Review Board denies the petition, the ALJ decision becomes final. If the Review Board agrees to review the ALJ decision, it must issue its own decision within 120 days of the conclusion of the ALJ hearing. Appeal to U.S. Federal Courts: A party then has sixty days after the Review Board issues its review of the ALJ decision to appeal to the federal appeals court, either in the circuit where the violation occurred or where the employee resided on the date of the violation. Alternatively, if the Review Board denies review of the ALJ decision, the aggrieved party has sixty days from the issuance of the ALJ decision to appeal to the appropriate court of appeals. 2. Remedies for the Whistleblower If the employee is determined to be the prevailing party, he or she is entitled to make-whole relief, including, where appropriate: reinstatement with the same seniority that the employee would have had but for the adverse personnel action; back pay with interest; and compensation for any special damages sustained, including litigation costs, expert witness fees and reasonable attorneys fees. The preliminary order of relief issued by the OSHA investigator takes effect thirty days after the employer receives it, unless one of the parties files an appeal within that time, in which case, all but the reinstatement order is automatically stayed. An employer may, under certain, narrow circumstances, avoid the preliminary reinstatement order, either by demonstrating that the employee poses a security risk (limited to circumstances in which the employer can clearly establish that physical violence against people or property might result from the employee s reinstatement) or by obtaining a stay of the reinstatement order. Under the final Rules, OSHA conceded that a stay of the reinstatement order would be appropriate in the exceptional case where the employer can make a showing of the criteria necessary for injunctive relief (i.e., irreparable injury, likelihood of success of the merits, and a balancing of possible harms to the parties and the public). If the employer is unable to obtain a stay of reinstatement and cannot establish that the employee poses a security risk, the employer may be allowed to limit the reinstatement to economic reinstatement and prevent the employee from physically returning to work. In the commentary to the final Rules, it was noted that if the employer establishes to OSHA s satisfaction that reinstatement is inadvisable, notwithstanding the employer s retaliatory discharge of the employee, then actual reinstatement may be delayed until after the administrative adjudication is completed as long as the employee continues to receive full pay and benefits. 3. SEC Involvement The Act and the Rules contemplate potential involvement of the SEC in the whistleblower complaint process. Notice of the whistleblower retaliation complaint must be sent to the SEC by OSHA and the SEC may participate as amicus curiae at any time in the proceedings. The SEC may also request copies of all of the pleadings in the case, whether or not it directly participates in the case. Thus, companies should assume that any information provided to OSHA with respect to a whistleblower retaliation claim will be shared with the SEC. Of course, there is also always the potential that the SEC may conduct its own investigation of alleged financial or accounting irregularities. Accordingly, this presents a strategic decision for an employer. Given that, pursuant to the Rules, the SEC will receive notice of the complaint and will have an opportunity to participate in the proceedings, the employer must determine whether it is in the company s interests to initiate contact with the SEC in order to attempt to defuse the situation and present its own version of the events surrounding the employee s complaint during the very early stages of the administrative process. 3

4. The Developing Case Law under Section 806 Procedural and Substantive Decisions a. Procedural Decisions ALJ decisions addressing whistleblower retaliation claims have been rendered on numerous jurisdictional and procedural grounds. For instance, several cases hold that the Act does not apply retroactively to retaliatory actions occurring before its enactment. See, e.g., Kunkler v. Global Futures & Forex, Ltd., OALJ Case No. 2003-SOX-00006 (Apr. 24, 2003) (rejecting a whistleblower claim where the employee was terminated 60 days before the Act became law). Further, complaints not filed with OSHA within 90 days of the alleged retaliatory act have been dismissed as timebarred. See, e.g., Kale v. Kakivik Asset Management, Inc., OALJ Case No. 2004-SOX-l (Mar. 24, 2004) (dismissing complaint where the employee failed to show that the employer committed any violations of the Act occurring within 90 days of the filing of the complaint). When the 90-day period commences was addressed in Flood v. Cendant Corp., OALJ Case No. 2004-SOX-00016 (Feb. 23, 2004). In Flood, the employee argued that the 90-day period commenced when his discharge became effective. The employer, however, contended that the 90-day period started when the employee received an e-mail notifying him that his employment would be terminated unless he found alternate employment within the company by a certain date. The ALJ dismissed the complaint, noting that the 90-day period commences when the discriminatory decision has been both made and communicated to the complainant. Id. at 2 (citing 29 C.F.R. 1980.103(d)). In a similar case, Lawrence v. AT&T Labs, OALJ Case No. 2004-SOX-00065, the ALJ held that the statute of limitations begins to run when the employee is made aware of the employer s decision to terminate, even if there is the possibility that the termination can be avoided e.g., by securing another position within the same company. Thus, even though the employee s termination date was pushed back by more than three months, her claim was barred as the 90-day period began to run when she received the letter notifying her of the intended elimination of her position. In addition, ALJ decisions have confirmed the provision in the Act that allows an employee to bring a private action in federal district court when OSHA has not issued a final decision within 180 days of the initial complaint. See, e.g., Cissom v. A.G. Edwards & Sons, Inc., OALJ Case No. 2004-SOX-00028 (Mar. 10, 2003) (dismissing administrative complaint on jurisdictional grounds where 180 days had elapsed and separate action was pending in federal court). Similarly, at least one federal district court refused to dismiss or stay an action where OSHA failed to act at all within 180 days. Murray v. TXU Corp., 279 F. Supp. 2d 799 (N.D. Tex. 2003). b. Substantive Decisions Recent ALJ decisions also have addressed the underlying merits of employee whistleblower claims. In Halloum v. Intel Corp., OALJ Case No. 2003-SOX-00007 (Mar. 4, 2004), the complainant, Ammar Halloum ( Halloum ), was a manager primarily responsible for reducing computer chip manufacturing costs for Intel Corporation ( Intel ). Halloum filed a complaint with OSHA alleging that he had been constructively discharged after he had informed the SEC that his supervisor had instructed him to delay payment of invoices to enable Intel to meet Wall Street expectations. Id. at 7. OSHA denied the complaint and Halloum appealed the case to an ALJ, who affirmed OSHA s decision. The ALJ, noting Halloum s reliance on the intense news coverage of Enron s creative accounting, first determined that Halloum s belief that following his supervisor s instruction would defraud Intel s shareholders was reasonable. Id. at 15 (noting that since the Act only requires an objectively reasonable belief that securities laws have been violated, a belief that activity was illegal may be reasonable even when subsequent investigation proves a complaint was entirely wrong ). Thus, Halloum s notifying the SEC was activity protected under the Act. See also Collins v. Beazer Homes USA, Inc., Civil Action No. 1:03-CV-1374-RWS (N.D. Ga., Sept. 4, 2004) (plaintiff, who was a marketing director, was not required to cite specific securities code sections allegedly being violated; more general allegations of internal accounting control violations through kickbacks and preferential treatment to certain vendors were sufficient). While the ALJ determined that Halloum met his burden of proving that his disclosures were a contributing factor to Intel s decision to take several disciplinary actions, including modifying Halloum s corrective action plan 4

and reducing his supervisory authority, ultimately, the ALJ ruled in favor of Intel. The ALJ determined that Intel met its burden of establishing by clear and convincing evidence that the actions it took would have been the same even if Halloum did not make the disclosures. For instance, Intel had documented Halloum s poor work performance in his initial corrective action plan, which the ALJ found was evidence that Halloum was on his way out anyway. Id. As such, Intel proved that it had adequate reasons to fire Halloum that were unrelated to his protected disclosures to the SEC. Id. By contrast, in Getman v. Southwest Securities, Inc., OALJ Case No. 2003-SOX-00008 (Feb. 2, 2004), the ALJ ruled in favor of the employee. Margot Getman ( Getman ) was an equity research analyst for Southwest Securities, Inc. ( Southwest ) who filed a complaint alleging that she was terminated for refusing to change a rating she had given to a company in which Southwest had a financial interest. Getman claimed that management pressured her to change her rating by intense and aggressive questioning as to why she had assigned the company the weaker accumulate rating and not a strong buy rating. The ALJ, in reversing OSHA s initial dismissal of the complaint, found that Getman s refusal to change her rating was protected whistleblowing activity. Further, the ALJ disagreed with OSHA s decision that the eight-month period between the management meeting and the discharge showed that the discharge was not motivated by the protected activity. Southwest failed to convince the ALJ it had met its burden of establishing a legitimate reason for terminating Getman that was unrelated to Getman s refusal to change her rating. Id. Southwest argued that Getman s work performance was poor, offering as evidence two e-mails and testimony from Getman s supervisor. Id. The ALJ refused to consider the e-mails, however, because he found that these evaluations were not written until several months following the management meeting. The ALJ also rejected Southwest s second purported reason for Getman s termination referral of a potential customer to a competitor on the grounds that the evidence did not support the assertion. Id. Accordingly, the ALJ ordered reinstatement, back pay with interest and additional damages for moving expenses. Because Getman proceeded pro se, she did not seek attorneys fees. Id. at 28-30. In Welch v. Cardinal Bankshares Corp., OALJ Case No. 2003-SOX-00015 (Jan. 28, 2004), which was featured in a recent front-page article in the Wall Street Journal, the ALJ also ruled against the employer. David Welch ( Welch ) filed a complaint alleging that he was discharged as Chief Financial Officer of respondent Cardinal Bankshares Corp. ( Cardinal ) after he had refused to certify a financial statement and repeatedly communicated to Cardinal his concerns regarding Cardinal s financial statements and accounting procedures. Cardinal argued that it discharged Welch for refusing to meet with Cardinal s attorney and auditor without his personal attorney being present. The ALJ reversed OSHA s decision to deny Welch s claim and instead determined that Welch s belief that certain entries in the financial statements were improper and could mislead potential investors was reasonable. The unrefuted evidence showed that Welch believed the entries were improper based on the Federal Reserve s instructions for the preparation of quarterly reports. Id. at 55. In addition, outside auditors later corrected the entries about which Welch had expressed concern. Id. Consequently, the ALJ determined that Welch had engaged in protected activity. The ALJ held that the relatively brief period of time approximately seven weeks between Welch s refusal to certify the financial statement and Cardinal s decision to suspend and then terminate him showed that Welch s conduct was a contributing factor to Cardinal s decision. Id. at 62. Even without the close proximity between Welch s activity and his suspension and discharge, the ALJ determined that Cardinal s explanation for its actions did not ring true. Id. The ALJ found that not allowing the complainant to have his personal attorney present while being questioned was an arbitrary requirement and, given the sequence of events, was imposed to cause the complainant s anticipated refusal to comply as a pretext for firing him. Id. at 62. As a remedy, Welch was reinstated, awarded back pay with interest and litigation costs and expenses, including expert witness fees and reasonable attorneys fees. In addition, Cardinal was ordered to purge from his personnel file all references to the discharge. Id. at 71-72. 5. Conclusion With the increased media exposure for high-profile whistleblowers and the nation s continuing concern with corporate accountability, it is safe to assume that these types of whistleblower 5

claims will increase and that the law will develop significantly in this area. While Sarbanes-Oxley requires the implementation of certain complaint policies and procedures, companies facing the prospect of Section 806 claims are well-served to make their reporting procedures easily accessible to all employees, not just those in the accounting and finance areas, and to educate managers and supervisors concerning the permissible treatment of whistleblowing employees. As we are now seeing, it is not just a company s accounting and finance employees who are potential whistleblowers, but employees from areas as unlikely as marketing or public relations. As the court stated in Collins v. Beazer Homes, if Congress had intended to limit protection of Sarbanes-Oxley to accountants, or to have required complainants to specifically identify the code section that they believe was being violated, it could have done so. It did not. Congress instead protected employees and adopted the reasonable belief standard for those who blow the whistle on fraud and protect investors. Civil Action No. 1:03-CV- 1374-RWS (N.D. Ga., Sept. 4, 2004). Karen L. Corman is a partner in the Los Angeles office of Skadden, Arps, Slate, Meagher & Flom LLP. Ms. Corman represents national and international clients in a broad range of workplace-related matters, including defending employers in individual and class action employment litigation. Ms. Corman regularly consults with clients regarding employment practices, as well as assists in conducting sexual harassment and other workplace internal investigations. Kristin Major is a senior associate in Skadden s Palo Alto office where she represents employers in all areas of labor and employment law, including employment-related litigation, preventive counseling and serving as a labor and employment specialist for mergers and acquisitions. ACC Releases New InfoPAKs Find out why members have accessed all InfoPAKs over 100,000 times this year. These new and updated packets represent some of the most commonly asked questions and are free to all members. Internal Investigations This InfoPAK examines the duties and responsibilities of corporate management, including their personal risks arising from both civil and criminal liability; the process of conducting an internal investigation; determining who should conduct the investigation and the relevant benefits and detriments associated with that decision; gathering information during the investigation; the responsibilities of the investigative counsel, and the findings of the investigation. Also discussed are the legal and practical aspects of protecting investigative results under the attorney-client privilege, the self evaluative privilege and the work product doctrine and practical tips to consider when conducting an internal investigation. Responding to Government Investigations This InfoPAK also provides practical advice regarding responding to a government investigation, including considerations to be made when selecting the appropriate team or person to oversee the response, if any, to the investigation. It outlines the relevant Department of Justice and Securities and Exchange Commission policies and sets forth various investigative methods utilized by investigative agencies in conducting corporate investigations and provides information regarding the duties and responsibilities of corporate management when it learns that an investigation is being conducted into activities conducted by the corporation or its agents. Hiring Foreign Nationals in the United States This InfoPAK provides a comprehensive overview of employment-based immigration which involves a corporation s sponsorship of a foreign national to work with the sponsoring company and live in the United States. 6