THE SARBANES-OXLEY WHISTLEBLOWER PROVISIONS

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1 September 1, 2008 THE SARBANES-OXLEY WHISTLEBLOWER PROVISIONS The accounting scandals at Enron and Worldcom caused huge losses of not only investment capital, but also of investors confidence. In response, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Act"), SOX, as it is typically called, is primarily intended to address fraud in financial reporting and the lack of oversight by selfinterested members of senior corporate management. The Act embodies an unprecedented effort by Congress to impose Federal securities regulation (and liability) on the, inner circle, of corporate America. Section 806 of SOX protects employees who complain of financial or other specific wrongdoing related to shareholder fraud, and/or mail, wire, or bank fraud. Since Congress passed the Act, over 500 corporate employees have filed complaints with the U.S. Department of Labor ( DOL ) alleging violations of the Act. Even though the vast majority of these complaints have been dismissed or resolved in favor of the employer 1, complaining employees have received significant awards and the cost of defending these claims has been high for the responding employer. Below is an outline of the requirements of this Act and a discussion of the more relevant and instructive rulings by the DOL s Administrative Law Judges ( ALJ ), Administrative Review Boards ( ARB ) and the Federal courts. Because the Act only recently passed, the administrative judges and the courts have looked to other whistleblower laws for guidance when adjudicating SOX whistleblower claims. 2 At times, Federal courts rely on ALJ and ARB decisions when addressing SOX claims, yet note that the administrative decisions may 1 From its enactment through 2005, 491 employees filed Sarbanes-Oxley complaints with the Occupational Safety and Health Administration ( OSHA ), which is the agency assigned to initially investigate these complaints. OSHA entered findings in 361 of these cases and only found for the employee 13 times. See Unfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 Wm. & Mary L. Rev.65 (2007.) 2 Collins v. Beazer Homes USA, Inc., 334 F.Supp.2d 1365 (N.D.Ga. Sept. 2, 2004); Bozeman v. Per-Se Technologies, Inc., 1:03-CV-3970 (N.D.Ga. Sept. 12, 2006) (citing Beazer Homes., 334 F.Supp.3d 1365, 1374 (N.D.Ga. 2004)). 312

2 provide guidance but are not binding on them. 3 This article includes a compilation of both relevant administrative judges opinions as well as opinions from Federal courts on SOX Whistleblower claims. SOX WHISTLEBLOWER CIVIL PROTECTIONS SOX essentially protects employees of publicly traded companies who either: (1) provide information that he or she reasonably believes constitutes mail fraud, bank fraud, wire fraud or securities fraud; or (2) file, participate or assist in a proceeding filed (or about to be filed) concerning the same types of fraud. The Act affords such employees with civil protections for any adverse employment decisions made, at least in part, because of the employees conduct as described above. 4 I. What Employers are Subject to Regulation by SOX? SOX applies to companies that are required to register with the U.S. Securities and Exchange Commission under Section 12 of the Securities Exchange Act of 1934 ( 1934 Act ) or are required to file reports under section 15(d) of the 1934 Act. It essentially covers publicly traded corporations, 5 or any officer, employee, contractor, subcontractor, or agent of such company. The courts have consistently ruled that the Act does not apply retroactively to alleged conduct that occurred prior to July 30, Application to Subsidiaries of Publicly Traded Companies In some circumstances, the DOL judges and the Federal courts have found that employees of a privately owned subsidiary of a publicly traded company may also be able to bring SOX 7 claims. Two recent decisions addressing the issue are RAO v. Daimler Chrysler Corp 8 and 3 Collins. at 1366 & n.10; see also Livingston v. Wyeth, No. 1:03-CV (M.D.N.C. July 28, 2006). 4 See Appendix A for the actual language of the Act. 5 An ALJ has held that a privately held employer that filed a SEC registration statement, but then withdrew it, is not covered by the Act. Roulette v. American Capital Access 2004-SOX-78 (ALJ Dec. 22, 2004). 6 Gallagher v. Granada Entm t. USA, 2004-SOX-74 at 51, FN3. (ALJ Oct. 19, 2004). 7 See e.g. Klopfenstein v. PCC Flow Technologies Holdings Inc., 2004-SOX-11 (ARB May 31, 2006). 8 No. 2:06-CV (E.D.Mich. May 14, 2007) (case below 2006-SOX-78). 313

3 Savastano v. WPP Group, PLC. 9 In RAO, the district court granted summary judgment against the plaintiff employee because the publicly traded parent of the defendant employer had not been named in the complaint. The court emphasized that the plaintiff s amended complaint only mentioned employees of the subsidiary as those who were aware of the situation and did not assert that anyone at the parent company had such knowledge. In Savastano, the ALJ found that the complainant had alleged no facts that would tend to support a finding that either her non-publicly traded employer or its non-publicly traded holding company were acting as agents of the publicly traded parent in connection with the termination of her employment. The ALJ found that, while the complainant had identified statements from the parent's annual report indicating that its non-public subsidiaries may act as its agents for purposes of collecting and reporting financial data, there was no factual predicate for finding an agency relationship pertaining to employment matters. Accordingly, the ALJ granted summary judgment in favor of the respondents. 2. Application to Overseas Employers or Employees The Act is silent as to whether it applies to U.S. Citizens overseas who work for 1) a publicly traded foreign company or 2) a privately held foreign subsidiary of a publicly traded U.S. company. In Carnero v. Boston Scientific Corp. 10, the First Circuit affirmed a ruling that the Act did not protect an Argentinean citizen who worked for the Argentinean and Brazilian subsidiaries of the U.S. parent corporation. Yet, the court specifically stated that it was not deciding whether Congress intended to cover an employee based in the United States who is retaliated against for whistle blowing while on a temporary assignment overseas. 11 However, in O Mahony v. Accenture, a New York Federal Judge found that a former senior employee of a global consulting firm who was stationed in Paris could sue for damages under the whistleblower protection provision of Sarbanes-Oxley. 12 Rosemary O'Mahony, a British citizen who worked for Accenture in France for 14 years, claimed the company demoted her after she accused it of withholding more than $3 million it owed in French social security payments. The Southern District of New York Judge rejected a motion SOX-34 (ALJ July 18, 2007) F.3d 1, 23 IER Cases 1505 (1st Cir.2006). 11 Id. at 18, n WL (S.D.N.Y. Feb. 5, 2008). 314

4 to dismiss by co-defendants Accenture, which is based in Bermuda, and its U.S. subsidiary Privately Held Contractors or Subcontractors of Publicly Traded Companies Section 806 of SOX provides that no contractor, sub-contractor or agent of a company subject to the Act, may enter into conduct prohibited by the Act. The legislative history of the Act reveals that this language was intended to protect employees of privately owned accounting, legal, or other consulting firms that provide information about securities fraud by publicly traded companies. 14 In Deremer v. Gulfmark Offshore, Inc., 15 the complainant was engaged by the respondent as an independent contractor to serve as a project manager coordinating SOX compliance. The contract was for a set period. The respondent employer took the position that the complainant was not a covered employee or person under the SOX whistleblower provision. The ALJ disagreed and observed that the regulation was purposely broad, and found that a contractor or sub contractor may be an individual whose employment could be affected by a company or company representative Individual Liability The Act specifically applies to all officers, employees, contractors, subcontractors, or agents of a covered company. At least one ALJ has ruled that individuals may be properly named as respondents under Section II. JUDICIAL PROCESS FOR PURSUING A SOX CLAIM 1. Department of Labor OSHA In order to pursue a SOX whistleblower claim, an employee must file a 13 Id. Other ALJ decisions have dismissed claims brought by overseas employee and have cited the reasoning of the district ruling in Canero as its basis. See Concone v. Capital One Fin. Corp., 2005-SOX-6 (ALJ Dec. 3, 2004); Ede v. Swatch Group, 2004-SOX-68, 69 (ALJ Jan. 14, 2005). 14 S. Rep. No at 5 (2002) SOX-2 (ALJ June 29, 2007) C.F.R Granada Entm t, 2004-SOX-74 (ALJ Oct. 19, 2004). 315

5 written complaint with any office of the Occupational Safety and Health Administration ( OSHA ). The written complaint must be filed within 90 days of the adverse employment action. Unwritten complaints are not sufficient. Respondent employers are not required to file a response to the Complaint unless requested by OSHA. 18 The 90 day statute of limitations is triggered by the final definitive adverse employment action. A continuing violation argument to avoid the limitation period was rejected by the administrative judge in Walker v. Aramark Corp. 19 Administrative Judges have declined to honor the parties private agreement to toll the 90 day period. 20 Judges have found equitable tolling when certain circumstances support it, such as when the complaining employee is actively mislead and/or lulled into a delay by his employer 21, however ignorance of the legal requirements is not an excuse Jordan v. Sprint Nextel Corp., 2006-SOX-41 (ALJ Mar. 14, 2006), Brady v. Direct Mail Management, 2006-SOX-16 (ALJ Jan. 5, 2006). 19 Walker v. Aramark Corp., 2003 SOX 4 (ALJ Aug. 26, 2003). See Rollins v. American Airlines, Inc., ARB No , ALJ No AIR-9 (ARB Apr. 3, 2007) (finding that the trigger date in a AIR21 and SOX action was the date that the complaining employee was presented with a career decision advisory letter). The ARB observed that under English v. Whitfield, 858 F.2d 957, 962 (4th Cir. 1988), rev'd on other grounds, 496 U.S. 72 (1990) and Wagerle v. The Hosp. of the Univ. of Pa., 1993-ERA-1, slip op. at 3-6 (Sec'y Mar. 17, 1995), the possibility that the Complainant could have avoided the effects of the advisory letter by resigning voluntarily or accepting employment in another division did not negate the effect of the advisory letter's notification of intent to terminate the Complainant's employment. See also Salian v. Reedhycalog UK, 2007-SOX-20 (ALJ May 11, 2007) (noting an unequivocal verbal notice of termination gave the Complainant adequate notice to trigger the running of the statute of limitations). Moreover an event that shows a link between the protected activity and the termination does not extend the filing period when the credible evidence showed that the employee already knew that there was a link. Roulett v. American Capital Access, 2004-SOX-78 (ALJ Dec. 22, 2004). 20 Szymonik v. Tymetrix, Inc., 2006-SOX-50 (ALJ Mar. 8, 2006) (stating that When the United States Congress passed the Sarbanes Oxley Act, its explicit intent was for a 90-day statute of limitations for whistleblower claims (citing 18 U.S.C. 1514A(b)(2)(D); 29 C.F.R (d))). There is no suggestion in the language of the Act that Congress intended for private parties to enter into private, legally binding agreements to toll the statute of limitations. The purpose of the Act is "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes." Sarbanes-Oxley Act of 2002, Pub. L. No , 116 Stat 745. To allow private parties to contract at will out of the 90-day limitation would effectively thwart the explicit legislative intent of Congress regarding the applicable statute of limitations. Slip op. at Bulls v. Chevron/Texaco, Inc., 2006-SOX-117 (ALJ Oct. 13, 2006). 22 Carter v. Champion Bus, Inc., ARB No , ALJ No SOX-23 (ARB Sept. 29, 2006); Moldauer v. Canadaigua Wine Co., ARB No , ALJ No SOX-26 (ARB Dec. 30, 2005). 316

6 2. OSHA Investigative Process Upon receipt of the complaint, OSHA will notify the respondent(s) named and the Securities and Exchange Commisson (the SEC ). The complaint will be dismissed if the complaint does not make a prima facie showing that protected behavior was a contributing factor in the unfavorable employment action. 23 A SOX Whistleblower must prove three things to establish a prima facie case. First, that the employee was engaged in a protected activity. Second, that the employer took adverse employment actions against the employee. Third, that the adverse employment action against the employee was influenced, at least in part, by the protected activity. The respondents may submit a written response to OSHA within 20 days including affidavits and documents to support its position. Unless the respondent establishes by clear and convincing evidence 24 that it would have taken the same action in the absence of the protected activity, OSHA will investigate the claim. This evidentiary standard is a higher standard than preponderance of the evidence but less than beyond a reasonable doubt. 25 OSHA must complete its investigation within 60 days of the filing of the complaint. If OSHA has reasonable cause to believe that a violation has occurred, it will provide the respondent(s) with the evidence supporting the allegations and the respondent(s) will have 30 business days to submit a written response and/or meet with OSHA investigators. If OSHA substantiates the claim, it will issue written findings and a preliminary order providing remedies to the employee. Remedies include: reinstatement; 26 back pay with interest; and special damages sustained, including attorney fees. The respondent may appeal the preliminary order by requesting a hearing within 30 days. Requesting a hearing stays enforcement of the preliminary order, except for an order of reinstatement C.F.R (b)(2004) (d). 25 Welch v. Cardinal Bankshares Corp., ARB No , ALJ No SOX-15 (ARB May 31, 2007) (case below page 163 FN 38). 26 Reinstatement will not be ordered if the employee is a security risk (a)(1) (c). 317

7 3. Hearings Before An Administrative Law Judge SOX Whistleblower claims are tried before an ALJ in accordance with the procedures of the Office of Administrative Law Judges ( OALJ ). 18 USC Section 1514A(b)(2004). 28 Hearings are conducted de novo and the ALJ is not allowed to remand the case to OSHA for further investigation. 29 Formal rules of evidence do not apply. 30 (a) Discovery The scope of available discovery for SOX cases before an ALJ is not settled. The rules of practice and procedure 31 provide for depositions upon oral examination or written questions; written interrogatories; production of documents or other evidence for inspection and other purposes; and requests for admissions. 32 (b) Burdens of Producing Evidence Section 806(b) specifically provides that the evidentiary burdens that apply in hearings before ALJs shall be as set forth in the Federal Aviation Whistleblower statute. 33 Accordingly, the following burdens apply: When a whistleblower case proceeds to a formal hearing before an ALJ, a complainant must demonstrate by a preponderance of the evidence that protected behavior was a contributing factor in the unfavorable personnel action alleged in the complaint. Once a complainant meets this burden, he is entitled to relief unless the respondent demonstrates by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of any protected behavior USC 1514A(b) (2004); See 29 CFR (b) (d) C.F.R. 18. The general rule governing subpoenas is found at Section 18.24(a) provides that the Chief Administrative Law Judge or the presiding administrative law judge, as appropriate, may issue subpoenas as authorized by statute or law upon written application of a party requiring attendance of witnesses and production of relevant papers, books, documents, or tangible things in their possession and under their control. 32 Id USC 1514A(b)(2)(C); 49 USC 42121(b). 318

8 Accordingly, in a Sarbanes-Oxley whistleblower case, complainant must establish by a preponderance of the evidence that: (1) he engaged in protected activity as defined by the Act; (2) his employer was aware of the protected activity; 34 (3) he suffered an adverse employment action, such as discharge; and (4) circumstances exist which are sufficient to raise an inference that the protected activity was likely a contributing factor in the unfavorable action. The foregoing creates an inference of unlawful discrimination. With respect to the nexus requirement, proximity in time is sufficient to raise an inference of causation. (c) Evidence Required to Establish Employer Awareness of Whistle Blowing Activity In Deremer v. Gulfshore, Inc., 35 the ALJ found that disclosures made by the audit committee investigating complainant s allegations to the hired law firm were disclosures to such other person working for the employer who has the authority to investigate, discover or terminate misconduct. 36 The ALJ, applying a broad interpretation to comport with the intent of SOX, also found that disclosures made to an external auditor fit within the complaint to a proper person element of a SOX whistleblower complaint. In Deremer, the ALJ noted that: a complainant is not required to prove direct personal knowledge on the part of the employer making the final decision that the employee engaged in protected activity. The law will not permit an employer to insulate itself from liability by creating layers of bureaucratic ignorance between a whistleblower s direct line of management and the final decision maker. Therefore, constructive knowledge of the protected activity can be attributed to the final decision maker, whether or not he knew of the protected activity. 37 (d) Contributing Factor to Adverse Employment Action In Collins v. Beazer Homes USA, Inc. 38 the court wrote that: 34 The regulations define the element of employer knowledge more broadly as follows: The named person knew or suspected, actually or constructively, that the employee engaged in the protected activity. 29 C.F.R (b)(1)(ii) SOX-2 (ALJ June 29, 2007). 36 See 18 U.S.C. 1514(A)(1)(c). 37 Id.; see also Platone, supra. Slip op. at F.Supp.2d 1365 (N.D. Ga. 2004). 319

9 Under the evidentiary framework, of a SOX whistleblower cause of action, plaintiff must also establish that there are circumstances which suggest that the protected activity was a contributing factor to the unfavorable action. (Citations omitted) Under the Whistleblower Protection Act, 5 U.S.C. 1221(e)(1), [t]he words a contributing factor mean any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision and noting that [t]his test is specifically intended to overrule existing case law, which requires a whistleblower to prove that his protected conduct was a significant,' motivating,' substantial,' or predominant' factor in a personnel action in order to overturn that action.". 39 The complainant is not required to prove that the protected activity was the primary motive for the termination, only that it was a motive. 40 While direct evidence is the most receptive form of evidence relied upon by judges to find a contributing factor, 41 judges have looked at other factors for assessing whether the protected activity was a contributing factor. The complainant is not required to prove pretext 42 and evidence of the legality of the reported accounting practices has been considered an evidentiary factor. 43 Close temporal proximity between the employer s knowledge of the protected activity and the adverse employment action has been recognized as a factor but in and of itself does not establish retaliatory intent. 44 In fact, an Administrative Judge has found that termination one day after the raising of concerns about inventory accounting problems was not sufficient See also Allen v. Stewart Enterprises, Inc., ARB No , ALJ Nos SOX-60 to 62 (ARB July 27, 2006). 40 Halloum v. Intel Corp., ARB No , 2003-SOX-7 (ARB Jan. 31, 2006). 41 Kalkunti v. DVI Financial Services, Inc., 2004-SOX-56 (ALJ July 18, 2005). 42 Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No , ALJ No SOX-11 (ARB May 31, 2006). 43 Henrich v. Ecolab, Inc., ARB No , ALJ No SOX-51 (ARB June 29, 2006). 44 Taylor v. Wells Fargo Bank, NA, ARB No , ALJ No SOX-43 (ARB June 28, 2007). 45 Richard v. Lexmark International, Inc., 2004-SOX-49 (ALJ June 20, 2006). For a discussion on adverse employment action, see Section III

10 (e) Clear and Convincing Evidence that Employer Would Have Taken Same Employment Action Regardless of Protected Activity One of the most persuasive arguments made by employers in SOX retaliatory discharge cases is proving by clear and convincing evidence that a legitimate non-retaliatory business reason existed for the adverse employment action. 46 However, several judges have found that the employer did not meet the clear and convincing burden. In Platone v. Atlantic Coast Airlines Holdings, Inc., 47 the ALJ found that the employer established a legitimate non-retaliatory reason for the discharge 48 but had failed to meet its burden of showing by clear and convincing evidence that the employee would have been discharged in the absence of her protected activity. The ALJ stated: It is not enough that the evidence proves that the employer, in retrospect, made its employment decision on legitimate grounds. Id. In Kalkunte v. DVI Financial Services, Inc., 49 the ALJ found that the 46 Klopfenstein, 2004-SOX-11 (ALJ July 6, 2004)(complainant s violations of employer s revenue recognition policies); Henrich, 2004-SOX-51 (ALJ Nov. 23, 2004)(complainant s violation of code of conduct by encouraging subordinates to falsify inspection records), aff d, ARB (ARB June 29, 2006); Hendrix v. American Airlines, Inc., 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2004) (complainant s history of conflict and difficulty with interpersonal relations due to military style ); Barnes v. Raymond James & Assocs., 2004-SIX-58 (ALJ Jan. 10, 2005) (complainant told employer she intended to go to work for a competitor); Harvey v. Safeway, Inc., 2004-SOX-21 (ALJ Feb. 11, 2005) (complainant s unexcused absence from work for three consecutive days), aff d, ARB (ARB June 2, 2006); Taylor v. Wells Fargo, Tex., 2004-SOX-43 (ALJ Feb. 14, 2005) (complainant engaged in series of unprofessional and contentious actions that resulted in final written warning for breach of ethics, and ultimately termination); Allen v. Steward Enters. Inc., 2004-SOX-60, 61, and 62 (ALJ Feb. 15, 2005) (reduction in force, including many persons across the company, in addition to three complainants), aff d, ARB (ARB Aug. 17, 2005); Grant v. Dominion E. Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005) (complainant s violation of e- mail policy by sending vulgar message to company executive); Stojicevic v. Arizona-American Water Co., 2004-SOX-73 (ALJ Mar. 24, 2005) (complainant s inappropriate comments, hostile attitude, and insubordination, resulting in suspension, and, ultimately, discharge for coming into work while suspended and refusing to leave the work premises); Trodden v. Overnite Transp. Co., 2004-SOX-64 (ALJ Mar ) (complainant violated company policy by providing information about a subordinate to a third party outside the company); Granada Entm t 2004-SOX-74 (ALJ Apr. 1, 2005) (complainant s repeated refusal to work for assigned supervisor constituted insubordination justifying non-renewal of contract) SOX-27 (ALJ Apr. 30, 2004). 48 The employer showed that the employee had failed to disclose the existence of a romantic relationship with an airline pilot who was an active leader of the pilot s union. Id. at SOX-56 (ALJ July 18, 2005). 321

11 employers did not establish by clear and convincing evidence that the complainant was laid off as a part of a reduction in force ( RIF ) because he was the only employee terminated between two broader RIFs. 4. Removal to Federal Court Section 806(b) provides that if the DOL has not issued a decision within 180 days of the filing of the complaint, the complainant may refile his or her claims in the appropriate Federal district court, without regard for the amount in controversy. Section 806(c) and its implementing regulation add the requirement that there must be no delay due to the bad faith of the complainant. 50 Under this provision, an employee has been granted leave to withdraw his DOL complaint in order to pursue litigation in Federal court because the complaint had not been resolved within 180 days. 51 The filing of a Federal action after the expiration of 180 days has been found to deprive the DOL of jurisdiction over the claim. 52 Federal courts have issued orders staying DOL proceedings in cases in which the plaintiffs filed lawsuits in Federal court when the DOL had not resolved their claims within 180 days. 53 The Act is not clear whether there is a right to a jury trial in SOX Whistleblower cases brought in Federal court. It has been argued that the Act s provision to afford the complainant all relief necessary to make the employee whole may be construed as providing for equitable relief and therefore provide a basis for a jury trial. In Fraser v. Fiduciary Trust Co. 54, the court denied the defendant's motion to strike a jury trial demand for a SOX Whistleblower claim without prejudice to bring the motion again prior to trial. The court observed that SOX was silent as to whether a litigant could demand a jury trial, and that it had only found one published decision which considered that issue, Murray v. TXU Corp., 03 Civ (N.D.Tex. June 7, 2005). In Murray, the court struck the jury demand based in part on the fact that the plaintiffs claim for punitive damages and reputational C.F.R (a); 18 U.S.C. 1514A(b)(1)(B) (2004). 51 Willy v. Ameritron Properties, Inc., 2003 SOX 9 (ALJ June 7, 2003) fn Williams v. Borden Chem., fn Stone v. Duke Energy Corp., 432 F.3d 320 (4th Cir. 2005) (case below 2003-SOX-12). (holding that once the qualifying complainant files his complaint with a federal district court under section 1514A(b)(1)(B) of the SOX, jurisdiction vests in the district court and an ALJ no longer has jurisdiction. See also Corrada v. McDonald s Corp., No (JAG) (D.P.R Jan. 22, 204). 54 Fraser v. Fiduciary Trust Co., 417 F.Supp.2d 310 (S.D.N.Y. 2006). 322

12 damages were not allowed in a SOX action Arbitration The Act does not speak to whether it preempts arbitration agreements. However, the legislative history of the Act as well as several cases, have determined that arbitration agreements may be enforced to compel arbitration of SOX Whistleblower claims. 56 In Kimpson, 57 the plaintiff did not deny the existence of a valid agreement to arbitrate employment disputes with the defendant, but argued that he did not consent to arbitrate SOX claims because SOX was not listed among the statutes stated to be covered by the dispute resolution policy. The defendant responded that the comprehensive language of the policy applied to the plaintiff s SOX claims. The court agreed with the defendant. Even though SOX had not yet been passed when the arbitration contract was entered into, the court found that the language in the agreement regarding the inclusion of any claims involving rights protected by any Federal statute captured the plaintiff's SOX claim. Pursuant to the Federal Arbitration Act, 9 U.S.C. 3, the court stayed the district court suit pending the conclusion of 55 But see Mahony v. Keyspan Corp., No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below SOX-24) (disagreeing with the Murray court's interpretation and found that 1514A(c)(2)(C) comprises an illustrative list of the types of special damages that may be recovered rather than an exhaustive list. The court indicated that it agreed with the reasoning of the court in Hanna v. WCI Communities, Inc., 348 F.Supp.2d 1332 (S.D.Fla.2004), where the court held that the SOX whistleblower provision includes damages for loss of reputation). 56 See Guyden v. Aetna Inc., 3:05-CV-1652 (D.Conn. Sept. 25, 2006) in which the Court granted a motion to compel arbitration because the Plaintiff had signed an employment contract with a provision calling for mandatory arbitration of employment-related disputes. See also Ulibarri v. Affliated Computer Services, 2005-SOX-46 and 47 (ALJ Jan. 13, 2006) (observing that the Federal Arbitration Act (FAA) enforces contractual waivers of the right to judicial resolution of disputes in favor of arbitration. It provides that "[a] written provision in a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." The FAA requires that any proceedings brought upon any issue referable to arbitration under the terms of such a contract shall be stayed pending arbitration upon application by a party who is not in default in the arbitration. The case, the ALJ found that adequate consideration had been provided for the arbitration clause, that the clause was not unconscionable, and that the Respondent had not breached the contract. The ALJ issued an order staying the hearing in order for the parties to enter arbitration). 57 Kimpson v. Fannie Mae Corp., No. 1:06-CV (D.D.C. Mar. 31, 2007). 323

13 arbitration. III. IMPORTANT ISSUES CONCERNING SOX CLAIMS 1. What Constitutes a Protected Activity Under SOX? The Act sets forth two separate categories of protected activity. Section 806(a)(1) protects an employee who voluntarily provides information that the employee reasonably believes constitutes Federal mail fraud, bank fraud, wire fraud and/or securities fraud, (hereinafter the SOX Actionable Fraud ). Section 806(a)(2) protects the employee who files a proceeding which relates to fraud against shareholders or assists in such a proceeding filed or about to be filed. These categories are discussed below. (a) Section 806(a)(1) Providing Information with Reasonable Belief Section 806(a)(1) protects the employee who voluntarily provides information within the employer s corporate organization to 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. The section also protects the employee who blows the whistle externally to a Federal regulatory or law enforcement agency, or to any Member of Congress or any committee of Congress. A key requirement for the application of this section is that the employee must have a "reasonable belief that he is reporting a violation of a SOX Actionable Fraud. This Section has been the subject of numerous reported opinions from both Federal courts and the ALJ s. i) The Reasonable Belief Dichotomy Welch v. Cardinal Bankshares Corp. 58 was the first SOX Whistleblower case to have resulted in a reported ALJ opinion, however it was recently reversed by the ARB. Welch has provided substantial guidance on many SOX issues but its most important contribution has been addressing the issue of reasonable belief. In Welch, the complainant was the CFO of the respondent and expressed concerns that the respondent had overstated income in a quarterly SEC report because it had improperly treated $195,000 in loan recoveries as income when 58 ARB No , ALJ No SOX-15 (ARB May 31, 2007) (case below page 163 FN 38), appeal docketed, No (4th Cir. July 20, 2007). 324

14 they should have been allocated to the loan reserve account. The complainant argued that the error improperly inflated the respondent's income by 13.7%, and therefore could have materially misled investors. The ARB reversed the ALJ's finding that this was a protected activity. The ARB wrote: The reasonable belief standard requires Welch to prove both that he actually believed that the SEC report overstated income and that a person with his expertise and knowledge would have reasonably believed that as well. Furthermore, [b]ecause the analysis for determining whether an employee reasonably believes a practice is unlawful is an objective one, the issue may be resolved as a matter of law. 59 The ARB found that an experienced CPA/CFO like the complainant could not have reasonably believed that the quarterly SEC report presented a misleading picture of the respondent's financial condition because whether reported as income or as a credit to expenses, the fact remained that the respondent had $195,000 that it previously did not have. The ARB in Welch also found that reported violations of Generally Accepted Accounting Principles ( GAAP ) and Federal Financial Institutions Examination Council ( FFIEC ) Accounting Standards were not ipso facto violations of Federal securities laws and therefore the reporting of such violations was not automatically a protected activity. The ARB also determined that Welch s complaint about insufficient access to an outside auditor did not constitute a protected activity because Welch did not prove by a preponderance of evidence how his unhappiness about access [to the outside auditor] constituted a reasonable belief that Cardinal was violating or might violate the SOX Actionable Fraud. The ARB stated that to be protected, an employee's SOX complaint must definitively and specifically relate to the listed categories of fraud or securities violation. 60 The recent opinion of a New York District Court in Smith v. Corning 61 applied a potentially inconsistent analysis to Welch. The court denied the defendant s motion to dismiss the plaintiff's SOX suit under FRCP 12(b)(6). The motion was based on a contention that the plaintiff did not engage in protected activity when he raised concerns that a 59 Id. at Id. at Smith v. Corning, Inc., No. 06-CV WL (W.D.N.Y. July 12, 2007). 325

15 software application was being implemented in a way that was not correctly reporting financial data with resultant impact on the integrity of quarterly reports. The court rejected the defendants contention that the complaint was deficient because the plaintiff had not alleged an actual fraud against shareholders. The court found that 1514A only requires a plaintiff to have reasonably believed that the problem constituted a violation of a provision of Federal law relating to fraud against shareholders. The court found that the plaintiff's complaint met this standard insofar as it alleged that the company was implementing a financial reporting system that was not GAAP compliant, and that the company was refusing to correct problems with the program, which would have resulted in the issuance of incorrectly quarterly reports which could have misled investors. The court also indicated that the submission of quarterly reports that were not prepared in accordance with GAAP would also violate a SEC rule. 62 The court rejected the defendants' contention that the plaintiff's complaints were not protected in that they involved an internal accounting dispute, and only pertained to a potential for fraud occurring in the future. The most recent opinion on protected activity under Section 806 (a)(1) is Allen v. Administrative Review Bd. 63 The Fifth Circuit held an employee s complaint must definitively and specifically relate to one of the six enumerated categories found in the Act 64 Further, an employee must have a reasonable belief that the employer engaged in one of the enumerated categories, and such reasonable belief is to be scrutinized under both a subjective and objective standard. 65 The Fifth Circuit found that the objective standard to be applied is similar to that of Title VII retaliation claims. However, while the objective reasonableness of an employee s belief is sometimes decided as a matter of law, if there is a genuine issue of material fact it cannot be. 66 The Fifth Circuit noted that an employee s mistaken belief an employer violated one of the six categories is protected if said mistaken belief was reasonable. 67 Of particular note, when dealing with the sixth category (any provision of federal law relating to fraud against 62 Citing Richards v. Lexmark Int'l, Inc., 2004-SOX-49 (ALJ June 20, 2006). 63 F.3d, 2008 WL , (5th Cir. 2008) 64 Id. at *6 (noting the categories are mail fraud, wire fraud, bank fraud, securities fraud, any rule or regulation of the SEC, and any provision of federal law relating to fraud against shareholders). 65 Id. 66 Id. at *7. 67 Id. at *6. 326

16 shareholders), the employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders. 68 ii) Protected Activity Found Proof of Actual Violation of Securities Laws Not Required - In Grove, 69 the complainant complained to management that a new formula, which increased revenue projections tenfold during a time when the company was being acquired by another company, could defraud investors. The ALJ found that, although the record did not establish that the company recklessly or fraudulently inflated its revenue forecasts for the purpose of drawing a higher purchase offer from an acquiring company, the complainant was not required to prove an actual violation of securities law. Because the complainant was a salesman with no specialized training or expertise in the area of corporate acquisitions, and there was no evidence that the complainant did not actually believe that the revised revenue forecast overstated expected income, the ALJ did not find it unreasonable for a person in the complainant's position to believe that the new formula presented investors with a materially misleading picture of the company's financial condition. The ALJ thus found that the complainant engaged in protected activity. The judge in Grove also found that contact with the SEC in connection with a "reasonable belief of a violation of securities law was protected even if SEC did not institute a formal proceeding. Conducting an Internal Investigation in Response to Allegations Evidence of a Reasonable Belief - In Johnson, 70 the plaintiff had been hired as a buyer at the defendant's corporate headquarters and was later promoted to be a planner, in which capacity she complained to management about (1) the collection of markdown allowances from vendors, (2) the changing of season codes on older inventory, and (3) the accounting for the value of inventory. The court rejected the defendant s argument that the plaintiff did not have a reasonable belief that these practices were illegal because the defendant had treated the plaintiff's complaints reasonable enough to have warranted an internal investigation. Thus the internal investigation was evidence 68 Id. at *9 69 Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 2007). 70 Johnson v. Stein Mart, Inc., No. 3:06-CV WL (M.D.Fla. June 20, 2007) (case below 2006 SOX 52). 327

17 of a reasonable belief. Complaints of Wire Fraud or Mail Fraud Need Not be Linked to Fraud Against Shareholders - In Reyna, 71 a district court found that reports of mail or wire fraud need not be linked to fraud against shareholders to be protected under SOX. Employing principles of statutory interpretation, the court denied summary judgment holding: The statute clearly protects an employee against retaliation based upon that employee's reporting of mail fraud or wire fraud regardless of whether that fraud involves a shareholder of the company. The court rejected defendants interpretation that the last phrase of the provision, relating to fraud against shareholders, modifies each of the preceding phrases in the provision. 72 iii) Protected Activity Not Found. In Platone v. FLYi, Inc., 73 the ARB found that billing complaints do not rise to the level of a protected activity. The ARB found that SOX does not provide whistleblower protection for all employee complaints about how a company spends its money and pays its bills. Further, when allegations of mail or wire fraud arise under... [section 806], the alleged fraudulent conduct must at least be of a type that would be adverse to investors interests. 74 The ARB s decision in Platone provides significant support for dismissing SOX claims that are based on employment law issues, such as race discrimination or wage and hour complaints, which are not directly related to shareholder or securities fraud. The decision also serves as a reminder to document the specifics of an employee s internal complaint at the time it is first made. Miscellaneous - Complaints by an auditor who is merely performing duties has been found not to be a protected activity unless the auditor goes beyond assigned duties and reports to upper management Reyna v. Conagra Foods, Inc., No. 3:04-CV (M.D.Ga. June 11, 2007). 72 But see Section III(a)(vi) below SOX-27 (Sep. 29, 2006); ARB Case No The ARB also emphasized that at the time she complained to her employer, Platone did not claim that her complaints were based on securities fraud. Rather, this gloss had been added later, once Platone brought the matter to the DOL. It is an employee s report to her employer at the time she complains not theories manufactured later which form the basis for assessing whether the employee engaged in SOXprotected activity. 75 Robinson v. Morgan Stanley, 2005-SOX-44 (ALJ Mar. 26, 2007). The ALJ detailed the holding of the ARB in Platone v. FLYi, Inc., ARB No (Sept. 29, 2006), and the Sixth Circuit in Sasse v. 328

18 General inquiries about potential illegalities do not rise to the level of providing information [to upper management]. 76 A certain degree of specificity is required. 77 While the complaint must be expressed to constitute a protected activity 78, a formal written complaint is not necessary. 79 iv) Intentional v. Unintentional Fraud. ALJ decisions have drawn a distinction between complaints about intentional fraud, which tends to be protected, and unintentional accounting irregularities or mistakes. ALJ decisions have consistently held that complaints about unintentional financial mistakes or other inadvertent conduct does not constitute protected conduct. 80 v) Materiality USDOL, No (6th Cir. May 31, 2005) (cases below ARB No and ALJ No CAA 7), and summarized the components that the complainant would need to establish in order to prove that she engaged in protected activity under SOX: First, the report or action must relate to a purported violation of a federal law or SEC rule or regulation relating to fraud against shareholders. Second, the complainant s belief about the purported violation must be subjectively and objectively reasonable. Third, the complainant must communicate her concern to either her employer, the federal government, or a member of Congress. Fourth, the report or complain must involve actions outside the complainant s assigned duties. Slip op. at 115, Fraser, 417 F.Supp.2d 310, 24IER Cases 246 (S.D.N.Y. 2006) (concerns expressed by investment manager about portfolio strategy not protected); Buca di Beppo, 2004-SOX-8 (ALJ June 15, 2004); Allen v. Stewart Enters., Inc., 2004-SOX-60, -61, and -62 (ALJ Feb. 15, 2005); Dominion E. Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, ). 77 Buca di Beppo, 2004-SOX-8 (ALJ June 15, 2004). 78 Henrich v. Ecolab, Inc., ARB (ARB May 31, 2006); Trodden v. Overnite Transportation Co., 2004-SOX-64 (ALJ Mar. 29, 2005). 79 Gonzalez v. Colonial Bank, 2004-SOX-39, at 4 (ALJ Aug. 20, 2004). 80 Allen, 2004-SOX-60, -61, and -62, at 85; Townsend v. Big Dog Holdings, Inc., 2006-SOX-28 (ALJ Feb. 14, 2006) (generalized allegations of fraud not protected); Levi v. Anheuser-Busch Cos., 2006-SOX- 37 (ALJ May 3, 2006) (general concerns about poor management not protected); Johnson v. Mechanics & Farmers Bank, 2006-SOX-19 (ALJ June 9, 2006) (concerns that customer of bank may have submitted fraudulent documents to obtain loan not protected); Gale v. World Fin. Group, 2006-SOX-43 (ALJ June 9, 2006) (complainant who admitted he did not believe employer was committing fraud not protected); Buca di Beppo, 2004-SOX-8, at 13 (ALJ June 15, 2004); Dominion E. Ohio Gas, 2004-SOX-63, at (ALJ Mar. 10, 2005). 329

19 The materiality of intentional fraud has become a factor in recent ALJ decisions. While the ARB has not ruled on whether Section 806 contains a materiality requirement, in Harvey v. Home Depot 81 the ARB ruled that complaints about alleged violations of labor laws was not a protected activity and stated: The mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect of the financial condition could in turn be intentionally withheld from investors is not enough. 82 vi) Latest Decisions on Fraud Against Shareholders As stated above, the recent Fifth Circuit decision of Allen v. Administrative Review Bd 83 is instructive concerning the sixth category of fraud enumerated in the Act (any provision of federal law relating to fraud against shareholders), the employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders for his disclosure to be considered a protected activity. 84 In Deremer v. Gulfmark Offshore Inc., 85 the ALJ observed a split in authority over whether SOX whistleblower protection is limited to fraud against shareholders, and after reviewing the nature of that split, found that his conclusion was consistent with that of the ARB that an allegation of shareholder fraud is an essential element of a cause of action under SOX. The ALJ concluded that materiality was required for alleged conduct to rise to the level of shareholder fraud. In cases where allegations of shareholder fraud are based on potential or actual dissemination of fraudulent information, the ALJs have found that there must exist a substantial likelihood that the disclosure of the omitted or misstated information would have been viewed by the reasonable investor as having significantly altered the total mix of 81 ARB (ARB June 2, 2006). 82 Most recently the ALJ in Frederickson v. The Home Depot, U.S.A., Inc., 2007-SOX-13 (ALJ July 10, 2007) found that alleged fraudulent policy involving a single store was not of sufficient magnitude to matter to a reasonable investor. 83 F.3d, 2008 WL , (5th Cir. 2008) 84 Id. at *9 85 Deremer, 2006-SOX-2 (ALJ June 29, 2007). 330

20 information made available. 86 Finally, the ALJ addressed specifically the issue of internal controls, writing, in securities fraud cases, it has been observed that inadequacy of internal accounting controls are probative of scienter [defendant's intent to deceive, manipulate, or defraud]... and can add to the strength of a case based on other allegations. 87 Therefore, a significant deficiency in internal controls, at least when combined with other significant issues, would constitute a circumstance likely to be viewed by the reasonable investor as having significantly altered the total mix of information made available. 88 (b) Filing a Proceeding or Assisting in a Proceeding Under Section 806(a)(2) In Miles v. Wal-Mart Stores, Inc., the court found that the Plaintiff had created a geniune issue of material fact as to whether she engaged in protected activity under SOX where she had provided assistance to the FBI and an Assistant U.S. Attorney in connection with Wal-Mart's response to a grand jury subpoena calling for production of documents concerning union-related labor relations and the investigation of a former executive for suspected fraud. 89 The Plaintiff had objected to an instruction to shred certain documents being digitized in her labor relations department which might have been subject to the subpoena. Wal-Mart argued that the Plaintiff had only aided an "investigation" as opposed to a "proceeding." The court found that under the circumstances, a genuine issue of material fact existed as to whether the Plaintiff engaged in protected activity by her involvement in responding to the subpoena. 90 In Hendrix v. American Airlines, Inc. 91, the complainant alleged that he participated in an investigation of another employee who allegedly had engaged in fraudulent activity. The ALJ observed that [t]he Act protects an employee who provides information or otherwise assists in the investigation of fraudulent activity, 92 and ruled that the 86 Id. 87 Crowell v. Ionics, Inc., 343 F.Supp.2d 1, 12, 20 (D. Mass. 2004). 88 Deremer, 2006-SOX-2 (ALJ June 29, 2007) WL (W.D.Ark. Jan. 25, 2008). 90 Id SOX-23; 2004-AIR-10 (ALJ Dec. 9, 2004). 92 Id. at 10 (emphasis in original). 331

21 complainant had engaged in protected conduct by assisting in the investigation. In a similar case involving an employee aiding a coworker s investigation, the employee provided information to the coworker about alleged lack of required securities licenses. The coworker then reported the employee s concerns to management. The district court found that the employee had engaged in protected activity, reasoning that the employee had sufficiently alleged that he caused information to be provided to persons with supervisory authority over him, even though the employee had not himself reported the information What Is Considered Adverse Employment Action? Section 806(a) provides that an employer subject to the Act may not discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment. 94 Similar statutory language has been interpreted to require a tangible employment action, while others have taken a more flexible approach. 95 In the recent case of Allen v. Stewart Enterprises, Inc., 96 the Administrative Review Board explained that: a tangible job consequence is one that constitutes a significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing significant change in benefits. Under the detrimental effect test, an employment action is adverse if it is reasonably likely to deter employees from making a protected disclosure. In McClendon 97, the ALJ relied on the U.S. Supreme Court s ruling in a Title VII retaliation action that, to prove an adverse action, a plaintiff must show that a reasonable employee would have found the challenged action materially adverse, which in this context means it well might have dissuaded a reasonable worker from making or supporting a charge of discrimination Willis v. Vie Fin. Group, Inc., 2004 U.S. Dist. LEXIS *19-20, 21 IER Cases 1111 (E.D. Pa. 2004) USC 1514A(a)(2004). 95 Hendrix, 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2004). 96 ARB No , ALJ Nos SOX-60 to 62 (ARB July 27, 2007). 97 McClendon v. Hewlett Packard, Inc., 2006-SOX-29 (ALJ Oct. 5, 2006). 98 McClendon, slip op. at 76 (citing Burlington Northern & Santa Fe Railway Co. v. White, No

22 (A) Hostile Work Environment and Constructive Discharge The McClendon ALJ recognized that a hostile work environment could be prohibited conduct. The ALJ espoused the standard set forth by the U.S. Supreme Court in Harris v. Forklift Sys., 99 stating that to establish a hostile work environment, the conduct must be sufficiently severe or pervasive to alter the conditions of... employment and create an abusive working environment. 100 The ALJ noted the difference between a hostile work environment, which involves repeated conduct and discrete acts, which are easy to identify... [and] constitute a separate actionable unlawful employment practice. 101 (B) Adverse Employment Action Found Layoffs/Reorganization- In Hendrix 102, the ALJ thoroughly analyzed discordant administrative decisions relative to the meaning of adverse action under various whistleblower laws, and specifically the concept of tangible job consequence. She concluded that, although Title VII decisions are not binding precedent for purposes of a whistleblower claim, they provide helpful guidance. The ALJ also concluded that she should look to the law of the circuit in which the claim arises. Because the instant case alleging violations of SOX and other whistleblower laws arose in the Tenth Circuit, she applied the expansive definition of adverse action found in Hillig v. Rumsfeld 103, in which the court held that the fact that unlawful personnel action turned out to be inconsequential goes to damages, not liability, although the standard does not encompass mere inconvenience or alteration of job responsibilities. In a footnote, the ALJ observed that the Sarbanes- Oxley Act contains language, unlike other whistleblower laws, explicitly prohibiting threats and harassment acts which are not necessarily tangible and not ultimate employment actions. Applying this standard, the ALJ found that the complainant s placement on a lay-off list constitutes an adverse action, even though the complainant suffered no tangible consequence as his name was removed before the lay-offs 259, 2006 WL (U.S. 2006)) U.S. 17, 21 (1993). 100 McClendon at 80 (citing Harris, 510 U.S. 17, 21 (1993)). 101 Id. at 81 (citing to Nat l Railroad Passenger Corp. v. Morgan, 536 U.S (2002)). 102 Hendrix, 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2004) F.3d 1028 (10th Cir. 2004). 333

23 took effect. 104 Transfer In McClendon 105, the ALJ ruled that complainant s transfer to an entirely new position was an adverse act. 106 The ALJ noted that complainant had previously discussed with management a transfer to another department, however, it was in the context of doing the same type of work he had already been enjoying and succeeding in. Complainant had only one day to decide whether to accept the new position and faced placement on the lay-off list if he declined. In addition, complainant s workload decreased significantly and the scope of complainant s new position varied unfavorably from the scope of the position when past employees filled it. 107 Thus, the ALJ ruled that the transfer of complainant to the new position would dissuade a reasonable employee from engaging in protected activity, and it therefore constituted and adverse act under SOX. 108 Loss of Job Responsibilities In Willis 109, the employer argued that a claim based on loss of job responsibilities should be dismissed because it is not one of the enumerated acts that constitute a violation of the SOX whistleblower provision. The court, however, held that the complaint sufficiently alleged a change in employment conditions within the meaning of the Act. 110 Diminution in Authority and Responsibility - In Reines 111, the complainant-cfo alleged that adverse action was taken against her because she was removed from her IT responsibilities. 112 The ALJ held that the respondent acted adversely under SOX by removing complainant's sole authority over IT duties. 113 The ALJ noted that whether complainant's IT duties were "peripheral" rather than central 104 Later in the decision, however, the ALJ found that there was no connection between protected activity and the placement on the lay-off list. 105 McClendon, 2006-SOX-29 (ALJ Oct. 5, 2006). 106 Id. at Id. at Id. at Vie Financial Group, Inc., No. Civ. A (E.D. Pa. Aug. 6, 2004) (available at 2004 WL) 110 Citing Glanzman v. Metro. Mgmt. Corp., 290 F.Supp.2d. 571, 582 (E.D. Pa. 2003) (recognizing that significantly diminished material responsibilities can constitute a materially adverse change in working conditions). 111 Reines v. Venture Bank and Venture Financial Group, 2005-SOX-112 (ALJ Mar ) 112 Reines, slip op. at Reines, slip op. at

24 to her role as CFO, as respondent asserted, was immaterial. 114 The ALJ concluded that "the restriction imposed by [complainant's supervisor], which represents a diminution in complainant's authority and responsibility, is the type of action which is "reasonably likely to deter employees from engaging in protected activity." Here, as in McClendon, the ALJ used the standard set by the Supreme Court in Burlington Northern: whether a reasonable employee would be dissuaded from whistleblowing based on the alleged adverse action. 115 (C) Action Found Not To Be Adverse ALJ decisions have found that the following conduct does not constitute an adverse action: i) work place relocation was not an adverse action where the new conditions did not affect the complainants' ability to perform their work and did not significantly change their employment status; 116 ii) removal of complainant s status as an officer of respondent; 117 iii) ordinary tribulations of the workplace; 118 iv) failure to conduct a performance review; 119 and v) refusal to communicate with the complainant. 120 (D) Litigation Conduct Allegedly False Statements of Counsel in Prior SOX Case as an Independent Cause of Action - In Hunter 121, the complainant alleged that certain statements made by the respondent's counsel in a motion to dismiss filed in an earlier SOX case 122 were false and retaliatory attempts to derail his SOX complaint and to avoid rehiring him and to blacklist him. The ALJ found that the allegedly false statements were objected to and were, in part, a basis for a pending appeal of the decision in the first case. Thus, the ALJ found that the complainant's allegations were subsumed in the earlier action. The ALJ also found 114 Id. at See id. at See McClendon, 2006 SOX 29 at 80 (ALJ Oct. 5, 2006). 117 Bechtel v. Competitive Technologies, Inc., 2005-SOX-33 (ALJ Oct. 5, 2005). 118 Allen v. Stewart Enterprises, Inc., ARB No , ALJ Nos SOX-60 to 62 (ARB July 27, 2007; Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 2007). 119 Bechtel v. Competitive Technologies, Inc., 2005-SOX-33 (ALJ Oct. 5, 2005); Dolan v. EMC Corp., 2004-SOX-1 (ALJ Mar. 24, 2004). 120 Harvey v. The Home Depot, Inc., 2004-SOX-77 (ALJ Nov. 24, 2004). 121 Anheuser-Busch, 2006-SOX-108 (ALJ Oct. 18, 2006) SOX

25 that the alleged false statements did not present an independent action under SOX because the earlier case had been dismissed as untimely, there had been no evidentiary development presented to the ALJ in the prior case, and therefore the fraud or perjury alleged did not arise in the first action. Lawsuit to Enjoin Complainant from Violating Confidentiality Agreement - In Vodicka 123, the complainant, who had been a member of the respondent's board of directors, filed a SOX whistleblower complaint alleging violation of SOX by the respondent when it filed a lawsuit seeking injunctive relief in the state of New York against the complainant on the ground that he had allegedly violated his confidentiality agreement with the respondent. The ALJ observed that Section 806(a) of the Act prohibits retaliation against an employee in regard to the terms and conditions of employment, and that the implementing regulations at 29 C.F.R similarly provide that a company may not discriminate against any employee with respect to the employee's compensation, terms, conditions, or privileges of employment. The ALJ concluded: "Here the lawsuit sought to enforce the confidentiality agreement by compelling complainant to return confidential documents to respondent and requiring him not to disseminate confidential information to other persons. Complainant has provided no explanation as to how this lawsuit could affect his ability to obtain future employment or the terms or conditions of such employment, and I can think of none." The ALJ, therefore, granted summary decision in favor of the respondent. 3. Criminal Penalties of Section 1107 of the Act Retaliation Against Informants. Section 1107 imposes severe criminal penalties 124 on whoever knowingly, with the intent to retaliate, takes any action harmful to any person including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense. 125 The section of SOX was codified with other criminal penalties that specifically allows for extraterritorial Federal 123 Vodicka v. DOBI Medical International, Inc., 2005-SOX-111 (ALJ Dec. 23, 2005). 124 The penalties include a fine and/or imprisonment for up to 10 years. Id. Section 1107 has been found not to create a private cause of action. See In Re Compact Disc Minimum Advertised Antitrust Litigation, MDL No (D.Me.Oct. 2, 2006) U.S.C. 1513(e)(2004). 336

26 jurisdiction. 126 This Section is not limited to publicly traded employers. It appears to apply broadly to both individuals and corporations. The Section prohibits retaliation against persons who provide to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense. Thus the information is not limited to matters involving corporate fraud or accounting abuses but can involve any Federal crime. Since Section 1107 also protects the communication of truthful information relating to a possible commission of a Federal offense and because of the breadth of Federal crimes, 127 this Section could present many land mines for the unwary employer. For example, a report to a law enforcement official that a co-worker or supervisor engaged in any of the following activities would appear to be protected under this Section: (1) willfully creating dangerous working conditions in violation of OSHA laws; (2) violating one of the multitude of environmental laws; (3) copying or using software with out permission; 128 (4) storing and/or transmitting indecent material via a company computer; 129 or (5) the destruction of documents in response to notice of a governmental investigation. 130 Another concern for employers should be the risk of defending both a civil proceeding and a criminal proceeding under the Act, with a potential early communication to OSHA being the employer s first required statement on the matter. The substantial resources required to defend against both proceedings simultaneously could result in a substantial drain on the employer s assets. 126 Id at 1513(d). 127 Including the recently promulgated computer hacking laws and anti-terrorist laws; E.g., Digital Millenium Copyright Act, 17 U.S.C (2004); E.g., Critical Infrastructure Information Act of 2002, 6 U.S.C (2004). 128 See A. Hugh Scott, Intellectual Property Crime: Federal and State law (2002); E.g. Economic Espionage Act of 1996, 18 U.S.C (2004); See also Katherine Barr et. al. Intellectual Property Crimes, 40 Am. Crim. L. Rev. 771 (2003). 129 Communications Decency Act of 1996, 18 U.S.C. 1462, 1465, 2422 (2004); Child Online Protection Act of 1998, 47 U.S.C. 231 (2004); Child Pornography Prevention Act of 1996, 18 U.S.C. 2241, 2243, 2251, 2252, 2256 (2004) ( 2251(a) and 2252(a)(5)(B) found unconstitutional as applied to intra-state production and possession of child pornography when not involved in interstate commerce by United States v. Matthews, 300 F. Supp. 2d 1220 (N.D. Ala. 2004); 2256(8)(B) held unconstitutional as applied to virtual child pornography by United States v. Hilton, 363 F.3d 58 (1st Cir. 2004)) U.S.C (2004). 337

27 The final concern resulting from Section 1107 is the location of its codification at 18 U.S.C. 1513(e). This section is specifically listed within the definition racketeering activity under the Racketeer Influenced and Corrupt Organizations Act ( RICO ). 131 The result of this is that Section 1107 will likely be a basis for asserting civil RICO claims in a whistleblower case. III. THE FUTURE OF THE SARBANES-OXLEY WHISTLEBLOWER ACT. The intent of the Sarbanes Oxley legislation was to reduce corporate fraud by publicly traded companies. While the reviews have been mixed as to whether this has been accomplished 132, one thing is clear, the results of SOX Whistleblower complaints filed have been very discouraging for the complaining employees. As recently reported, SOX Whistleblowers rarely win. 133 As a result, it appears employees are more likely to witness questionable or illegal conduct but are unlikely to report it. 134 However the legislation has affected employers. The cost of defending these claims and the risks that exist as a result of the Act have been material. Time will tell but the initial impression is that the Act has had the desired chilling effect to some degree but has not solved all the problems identified. The question is whether the legislatures are satisfied with the Act. The recent Federal Whistleblower legislation 135 may indicate that modification to the Act may be in its future Section 1107 is codified at 18 USC 1513(e), which is specifically enumerated in the RICO statute. 132 See Neil Weinberg, Malfeasance: Corporate Crime Wave Unabated, Forbes, Oct. 16, 2007, available at (discussing the continued rise of corporate fraud in America and elsewhere). 133 See Unfilled Expectations: An Empirical Analysis of Why Sarbanes-Oxley Whistleblowers Rarely Win, 49 WM. & MARY L. REV. 65 (2007.) 134 Angus Loten, What Enron Didn t Teach Us, INC., Jan. 2008, ( Among 2,000 public- and private-sector employees surveyed nationwide, 56 percent of said they had personally seen at least one violation of company ethics standards, policies of the law in the past year, up from 43 percent in [and] less than 42 percent said they reported the incident through company channels. ). 135 Senate Bill 274 Passed Dec. 17, On January 28, 2008, President Bush signed into law the National Defense Authorization Act for Fiscal Year 2008 (H.R. 4986), which includes a provision protecting employees of defense contractors who blow the whistle on contracting fraud. Section 846 amends 10 U.S.C to protect employees who 338

28 disclose to Congress, an Inspector General, the Government Accountability Office, or a Department of Defense employee responsible for contract oversight or management information that the employee reasonably believes is evidence of gross mismanagement of a Department of Defense contract or grant, a gross waste of Department of Defense funds, a substantial and specific danger to public health or safety, or a violation of law related to a Department of Defense contract (including the competition for or negotiation of a contract) or grant. A complainant must be filed with the Inspector General (IG) of an agency, and unless the IG determines that the complaint is frivolous, the IG will conduct an investigation. Once the complainant exhausts administrative remedies, the complainant may bring a de novo action in federal court and is entitled to a jury trial. Remedies at the administrative level and in federal court include reinstatement, back pay, compensatory damages, and attorney fees and costs. 339

29 APPENDIX A (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, or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934, 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 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[Mail Fraud], 1343[Wire Fraud], 1344 [Bank Fraud], or 1348[Securities Fraud], 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 filed or about to be filed (with any 340

30 knowledge of the employer) relating to an alleged violation of sections 1341[Mail Fraud], 1343 [Wire Fraud], 1344 [Bank Fraud], or 1348 [Securities Fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. 18 U.S.C. 1514A. Gibson McClure Wallace & Daniels, LLP 8080 North Central Expressway Suite 1300, LB 50 Dallas, Texas (P) u (F)