Sarbanes-Oxley gives whistleblowers broader basis to complain
Retaliation against company employees who bring inappropriate or illegal action to light has long been a problem. With the implementation of Section 806 of Sarbanes-Oxley, the issue became even more pressing. Section 806 requires that the audit committees of public companies establish and maintain systems to deal with whistleblowers who raise concerns about accounting or audits.
The SEC recognizes that companies need flexibility to design appropriate and effective programs. Whistleblower programs have developed a number of ways of dealing with these requirements. Generally speaking, when a company receives a complaint through its whistleblower hotline, it should, among other things: ensure the anonymity of the caller; if the call is not anonymous, ask the caller to submit a written complaint creating a broader, written record; get full information from the caller or arrange an interview; quickly distribute the information; report any allegations of financial impropriety to the audit committee; consult with outside counsel experienced in internal investigations; periodically review and, when appropriate, refine the program.
Some companies facing complaints go directly to the head of their audit committee. Others delegate an ombudsman to assess which complaints are valid. General counsel, corporate secretaries or corporate counsel can also fill this role.
If corporate counsel are delegated to conduct an internal investigation of a whistleblower complaint, they may claim attorney-client privilege. But they also bear responsibility for Sarbanes-Oxley Section 205 ‘up the ladder’ reporting requirements, and may have to waive privilege if later litigation requires they prove the adequacy of their investigation.
Some companies opt to delegate operation of the hotline to third parties, but outsourced vendors offer advantages and disadvantages. Whistleblowers may feel more comfortable speaking with outside contractors, who can operate 24/7 and via email, web or telephone. However, information sent to an outside vendor is discoverable in the event of an investigation or subpoena. The company may also not be able to indemnify itself from mistakes by the outside vendor.
Many companies are comfortable with hotlines, says Andrew Kaizer, a partner at McDermott Will & Emery and head of its SEC defense group: ‘They’d prefer to hear bad news this way before hearing it from a third party or regulator. They have an interest in finding out themselves whatever issues exist, correcting them, and as appropriate, self-reporting them. First, companies want to get it right, for its own sake. Second, they can point to the whistleblower hotline structure if the DoJ or SEC come calling. It doesn’t have to be perfect, but it must be a real genuine effort.’
Sox requires more stringent anonymous and confidential treatment of employee complaints than traditional employment law, even those areas governing sexual harassment. In addition, the Act requires that whistleblowers be protected from any form of retaliation by company employees, contractors, subcontractors, agents or officers. And this is true even if what they report is wrong, as long as they reasonably believed what they reported.
Enforcing the rules
Whistleblower protection cases have been infrequent since Sox was enacted in 2002. ‘Companies will self report to the SEC and/or DoJ and take remedial steps. These are not the sorts of things companies necessarily want to see aired in a public arena. In part, because of that, there isn’t a developed body of case law here,’ explains Kaizer.
The Occupational Safety and Health Administration (OSHA) received 285 Sox retaliation complaints in 2006, fewer than in 2005. OSHA dismissed 70 percent, 12 percent were voluntarily withdrawn, and only 18 percent (47 cases) were found to have merit.
Court rulings are sparse as well. In the most recent case from March of this year, the US District Court for the Eastern District of New York found triable issues of fact where other cases had been dismissed. In Mahoney v KeySpan, plaintiff Robert Mahoney, a spokesperson and director of strategic planning for KeySpan, claimed he was fired in retaliation for bringing financial fraud and accounting errors to the attention of senior executives.
Mahoney learned of alleged accounting issues in 1998 from another employee, Frank Fanning, director of accounting research, who raised his concerns about payments that had been made to KeySpan’s former CEO. Mahoney had no direct knowledge of the allegations and limited knowledge of accounting, but helped Fanning get the issue in front of senior management. After his involvement became known, Mahoney claimed he was isolated, received negative performance reviews, and lost his exposure to the CEO before being terminated 13 months later during a reduction in work force that affected other employees.
Mahoney filed a Sox whistleblower complaint with OSHA, and in the Eastern District after his OSHA complaint was dismissed. KeySpan argued that Mahoney did not engage in protected behavior because he couldn’t show that KeySpan launched an investigation of the alleged conduct. It also argued that since Mahoney didn’t have direct knowledge of the alleged violations, he was not protected by whistleblower protections.
The court found several triable issues; one as to the existence of an investigation; one on the question of whether the gap of 13 months prevented a causal link between the protected behavior and termination, and another regarding whether Mahoney’s exhortations to his CEO to attend a meeting with the whistleblower were protected activity under Sox.
The court denied KeySpan’s request for summary judgment. It stated also that to gain protection, a plaintiff has to ‘point to affirmative acts that advance the investigation’, but that Mahoney’s communications with general and outside counsel, while supportive of a whistleblower, were not protected because they did nothing to further the investigation.
Conflicting messages
The Eastern District applied a ‘clear and convincing evidence’ test to KeySpan’s argument that Mahoney’s termination was non-retaliatory – a far more stringent standard than is used in other employment discrimination cases. And the court followed a precedent in Hanna v WCI Communities, a 2004 case that made reputational damages available under Sox. This went against a 2005 Texas case (Murray v TXU) that limited Sox special damages to expert witness fees, litigation costs, and reasonable attorney fees.
Welch v Cardinal Bancshares, the first Sox whistleblower case, and Platone v Atlantic Coast Airlines show the differing burdens of proof afforded to employees and employers. Employees in both cases were found to have met their burdens of proof by a preponderance of the evidence. And both employers were found to have not met their more onerous ‘clear and convincing’ evidence standard. In Platone, Atlantic Coast Airways argued that employee Platone was terminated because her ability to do her job as a management representative in labor negotiations was compromised by her romantic relationship with a union representative.
At Cardinal Bancshares, CFO Welch was fired for refusing to meet with the bank on the issues for which he had blown the whistle without his lawyer. He became concerned with the accounting at Cardinal Bancshares and behaviors by president, CEO and chairman Leon Moore. In 2002, Welch wrote to the company’s external auditors, refused to certify the company’s 10-QSB, and wrote to Moore detailing his issues. He was suspended within a few weeks and terminated within two months. The administrative law judge found that Cardinal Bancshares just claiming that it had not engaged in federal fraud didn’t protect it since Welch didn’t need to prove a company violation. Instead, he needed only to show that he had a reasonable belief that the company engaged in such conduct, that he blew the whistle to the company or to the federal government, and that he suffered a resulting ‘adverse employment action.’
Expanding grounds for a case
In June 2006, the US Supreme Court significantly expanded employee protections, holding that employees complaining of retaliation under Title VII are not required to show that the retaliation was related to their workplace or employment. And the Supreme Court found that a retaliation case can proceed if the plaintiff can show that the retaliatory behavior would have dissuaded a reasonable employee from making a claim against the company. The standard employed in this case, Burlington Northern, is a more lenient standard and may result in more retaliation claims reaching a jury. So it behooves companies to ensure that officers, directors and employees know how to ensure employees who complain of discrimination or accuse the company of wrongdoing do not feel like objects of retaliation.
‘What makes Sarbanes-Oxley so insidious to employers and gives enormous new leverage to employees is that it creates a whole new playing field weighted toward the employee in three fundamental ways,’ says Jeffrey Eilender, a partner at Schlam Stone & Dolan. ‘First, under state law, an employee did not previously have a whistleblower complaint unless he or she complained about something that directly related to health and safety issues. Sox broadens that to potentially any issue that might affect the stock price of a company. Second, the Department of Labor is much more serious about reinstatement than courts have been under other employment statutes. This gives an employee enormous leverage because the employer will pay more in settlement to avoid reinstatement. Third, and most dramatically, Sox creates two different levels of proof, one for each side. The employee only has to prove a good faith belief in a report by a preponderance while the employer then has to prove the absence of retaliation by clear and convincing evidence.’
Companies can justifiably worry that these expansions by the Supreme Court and Sox may be used as a pretext by disgruntled former employees to avoid or delay at will firings. Companies can encourage employees to complain through normal management channels rather than by seeking whistleblower protections. By maintaining confidential records of how employees with whistleblower concerns that were not anonymous were subsequently treated, the company can show a track record of encouraging a ‘complaint’ culture. This can be useful in showing that an adverse action against a claimant was due to lack of job performance or misconduct. Such steps can keep everyone on an even keel and defuse situations that might otherwise give rise to potential liability.
