Sarbanes Oxley Whistle Blower Claims
Sarbanes Oxley Whistle Blower Claims
Employees can assert Sarbanes Oxley Whistle Blower Claims under the Sarbanes-Oxley Act of 2002. Section 806, codified at 18 U.S.C. § 1514A(a), provides “whistleblower” protection to employees of publicly traded companies, “with a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. § 781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. § 780(d)), or any officer, employee, contractor, subcontractor, or agent of such company.” 18 U.S.C. § 1514A(a). Under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, an employer may not discriminate against any employee in the terms and conditions of employment because of any lawful act done by the employee:
(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by—(A) a federal regulatory or law enforcement agency; (B) any Member of Congress or any committee of Congress; or (C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct). 18 U.S.C. § 1514A(a)(1).
Before an employee can assert a cause of action in federal court under SOX, the employee must file a complaint with the Occupational Safety and Health Administration (“OSHA”)(a division of the U.S. Department of Labor), and afford OSHA the opportunity to resolve the allegations administratively. 18 U.S.C. § 1514A(b)(1)(A). The administrative complaint must be filed “[w]ithin 90 days after an alleged violation of the Act occurs” and include “a full statement of the acts and omissions, with pertinent dates, which are believed to constitute the violations.” Id. § 1514A(b)(2)(D); 29 C.F.R. § 1980.103(b,d). If the employee has met these requirements for a particular violation, and a final administrative decision has not issued within 180 days of the filing, the employee can proceed with an action in federal court based on that violation. 18 U.S.C. § 1514A(b)(1)(B).
After a complaint is filed with OSHA, an investigation of the unfavorable personnel action alleged in the complaint may commence. A complaint “will be dismissed unless the complainant has made a prima facie showing that protected behavior or conduct was a contributing factor in the unfavorable personnel action alleged in the complaint.” 29 C.F.R. § 1980.104(b). OSHA will undertake an investigation only if the complaint makes such a prima facie showing. An investigation will not be conducted if the name person demonstrates by clear and convincing evidence that it would have taken the same unfavorable personnel decision in the absence of the complainant’s protected behavior or conduct. 29 C.F.R. § 1980.104(c).
Within 60 days of the filing of the complaint, OSHA issues written findings of whether or not there is reasonable cause to believe that the respondent has discriminated against the employee in violation of the Act. If OSHA finds for the employee, the findings will include a preliminary order providing relief. Then, the complaint and the respondents may file objections and request a hearing. 29 C.F.R. §§ 1980.105-106.
A hearing is then scheduled before an Administrative Law Judge (“ALJ”). After the ALJ issues a decision, the parties may file a petition for review by the Administrative Review Board. This review is limited to a review of the factual determinations of the ALJ under the substantial evidence standard. Within 60 days of the final order, any aggrieved party may file a petition for review in the Circuit Court of Appeals. If a petition is filed, the record of the case, including the record of proceedings before the ALJ, is transferred to the circuit court. 29 C.F.R. §§ 1980.109-112.
Under the statutory framework of the Act, the employee must successfully show by a preponderance of the evidence that his/her protected activity was a contributing factor in the unfavorable personnel action. Collins v. Beazer Homes USA, Inc., 334 F.Supp.2d 1365, 1375 (N.D.Ga. Sept. 2, 2004). The employee must demonstrate that (1) she engaged in protected activity; (2) the employer knew of the protected activity; (3) she suffered an unfavorable personnel action; and (4) circumstances exist to suggest that the protected activity was a contributing factor to the unfavorable action. Proximity in time is sufficient to raise an inference of causation. The employer may only avoid liability if it can demonstrate by clear and convincing evidence that it would have taken the same unfavorable personnel action in the absence of the employee’s protected behavior. Id. at 1375-1376.
Sarbanes-Oxley protects employees who provide information which the employee “reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” 18 U.S.C. § 1514(A)(a)(1). An employee is not required to show an actual violation of the law, but only that she “reasonably believed” that there was a violation of one of the enumerated laws or regulations. Id. The legislative history of the Act states that the reasonableness test “is intended to impose the normal reasonable person standard used and interpreted in a wide variety of legal contexts.” Legislative History of Title VIII of HR 2673: The Sarbanes-Oxley Act of 2002 Cong. Rec. S7418, S7420 (daily ed. July 26, 2002). “The threshold is intended to include all good faith and reasonable reporting of fraud, and there should no presumption that reporting is otherwise, absent specific evidence.” Id.
The employee must assert and demonstrate that the employer knew of her protected activity. The Act protects employees who provide information to any “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).” 18 U.S.C. § 1514A(a)(1)(C). The employee can meet this burden by providing factual evidence through a sworn affidavit and written documents such as email and other correspondence. The facts must demonstrate an awareness by the supervisor or management team.
The employee must assert and demonstrate she suffered unfavorable personnel actions. This element of the claim is identical to many other discrimination claims. The employee must show an adverse employment action was taken directly as a result of their disclosure of the SOX violation to the employer. Adverse actions can include pecuniary actions such as demotion, failure to pay bonus, failure to grant equity awards, denial of pension vesting, termination. Adverse actions can also include non-pecuniary actions such as disciplinary letters, negative performance reviews and performance improvement plans.
The employee must assert and demonstrate the factual circumstances directly evidence that her protected activity was a contributing factor to the unfavorable personnel actions she experienced. A contributing factor means any factor, which alone or in connection with other factors, tends to affect in any way the outcome of the employer’s decision. There must exist a temporal proximity (nexus) between the time when the employee made her internal complaints about corporate noncompliance under the Act and when she received the adverse employment action. Such proximity is sufficient to establish circumstances evidencing her protected activity was a contributing factor to the unfavorable personnel actions she experienced.
The employer must assert and demonstrate by clear and convincing evidence that they would have taken the same unfavorable personnel action in the absence of the employee’s protected activity. Use of personality conflicts with supervisors and coworkers etc. is not sufficient evidence to avoid liability. See, e.g., Collins, 334 F.Supp.2d at 1380. Employers will take two likely positions on this issue. First, that the employee’s performance of her essential functions of her position were not satisfactory. Second, employers have been recently asserting negative or poor performance in the form of the employee’s failure to exhibit leadership qualities and/or inability to work with a team of employees.
Employees who are thinking about this type of claim should remember the following issues. First, employees are directly placing their name in the public forum when they blow the whistle. This is an important issue to consider in terms of the direction of the employee’s career. Second, a SOX claim, if factually supported, can create a well leveraged position during severance negotiations. The essence of the severance strategy is to force the company to pay a sum of money for the nondisclosure of the SOX allegation to the markets. Third, be aware of insider trading laws. The SOX violation information the employee possesses cannot be ‘tipped” to any other person for purposes of trading on the information disclosed. In addition, the whistle blower herself cannot trade on the same information. Fourth, the employee must exhaust administrative procedures with the U.S. Department of Labor before commencing litigation in federal court. Fifth, the only damages potentially recovered are back pay, costs and attorneys’ fees. There are no punitive damages under the statute.
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