December 16, 2014
Section 806 of the Sarbanes-Oxley Act OF 2002 was designed to provide certain protections for corporate “whistleblowers.” Specifically, 18 U.S.C.A. § 1514A (often referred to as the “Section 1514A Provision”) originally provided: “No [public] company . . . or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in terms of employment because of [whistleblowing or other protected activity].” The Section 1514A Provision has subsequently been extended to cover and protect employees of public companies’ subsidiaries and national recognized statistic ratings organizations and in its decision in Lawson v. FMR LLC et al. in 2014 the Supreme Court extended the protections of the Section 1514A Provision to employees of contractors and subcontractors who are working with public companies.
The practical effect of the Section 1514A Provision is that covered employees that believe they are being subjected to retaliation after reporting instances of a company’s financial fraud are given the express right to sue their employer and recover compensatory damages. An employee can start an action by filing a complaint with Occupational Safety and Health Administration, a division of the Department of Labor. The department has 180 days to issue a final decision. If a report is not issued within that time period, an employee can file a suit in federal court.
As part of their “whistleblower” policies and procedures, companies are expected to make a clear statement that they will not discharge, demote, suspend, threaten, harass or in any manner retaliate or discriminate against any employee based upon any lawful actions of such employee with respect to good faith reporting. Given the substantial adverse impact that a whistleblower suit can have on the company’s reputation in the financial community, including a sudden and steep decline in the company’s stock price, the need to enforce protections available to whistleblowers should be taken seriously.
One important cautionary note for companies is that they should not assume that an employee must show that a violation of law actually took place. In one administrative law opinion, the judge held that an employee needs to show only that he or she had a “reasonable belief” that a company violated the law when making a whistleblower claim permitted under Sarbanes-Oxley. Further, mere proximity in time between a protected activity and the adverse action is itself sufficient to create an inference of unlawful discrimination. Thus, it is particularly important for companies to exercise additional caution to document their reasons for termination if it is necessary to terminate an employee on or near the date that the employee files a report.
The Lawson opinion referenced above has been touted as an important signal to private sector contractors of public companies that they are subject to the same anti-retaliation rules that apply to the companies for which they are working. A majority of the Court explained that if the Section 1514A Provision was not extended to contractors’ employees then: “Contractors’ employees would be disarmed; they would be vulnerable to retaliation by their employer for blowing the whistle on a scheme to defraud the public company’s investors, even a scheme engineered entirely by the contractor . . . Legions of accountants and lawyers would be denied § 1514A’s protections. Instead of indulging in fanciful visions of whistleblowing babysitters and the like, the dissent might pause to consider whether a Congress, prompted by the Enron debacle, would exclude from whistleblower protection countless professionals equipped to bring fraud on investors to a halt.”
In addition, Section 21F of the Securities Exchange Act of 1934 entitled “Securities Whistleblower Incentives and Protection.”, which was adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) established a whistleblower program that requires the Securities and Exchange Commission (“SEC”) to pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC with “original information” derived from the independent knowledge or analysis of the whistleblower about a violation of the federal securities laws that leads to the successful enforcement of a covered judicial or administrative action, or a related action. In light of this, public companies, as well as companies working as contractors and subcontractors of public companies, must clearly establish procedures for dealing with activity in this area.
It is common practice for companies to include language in their general codes of business conduct and ethics that encourages all employees to promptly discuss with or disclose to their supervisor, senior corporate officers or audit committee members events of a questionable, fraudulent or illegal nature. In addition, however, ethical guidelines should be supplemented by detailed policies and procedures regarding receipt, retention and treatment of reports of financial fraud, a step that is mandated by Sarbanes-Oxley. See Specialty Form at § 221:229. It is also good governance practice to expand the scope of reportable matters under a whistleblower policy to include possible violations of law, accounting irregularities and other suspected wrongdoing. See Specialty Form at § 221:229.30. Another useful tool for any whistleblower policy is a confidentiality disclosure report form. See Specialty Form at § 221:229.30.60.