A Protected Whistleblower under Sarbanes-Oxley:Introduction:Starting in 2001, companies such as Enron, WorldCom, Global Crossing and Tyco became familiar names when reports of their internal accounting fraud and other business abuses became public. Major, supposedly successful, companies unexpectedly sank into bankruptcy. The fraudulent corporate practices of these companies cost shareholders and employees billions of dollars and seriously damaged public confidence in the securities markets and in corporate governance and ethics. Many employees of these companies were aware of fraud and other abuses but failed to come forward from fear of retaliation. Other employees found their warnings ignored, and some who came forward faced harassment or termination. In response to the public outcry and the disclosed weaknesses in the laws regulating corporate behavior and conduct, Congress enacted the Sarbanes-Oxley Act in 2002. Sarbanes-Oxley is named after its architects, Senator Paul Sarbanes of Maryland and Congressman Michael Oxley of Ohio, and it is primarily intended to strengthen public confidence in the securities markets by outlining corporate responsibilities. Congress also inserted a whistleblower protection clause designed to protect employees who generally may be advantageously positioned to report conduct inconsistent with corporate obligations. The Sarbanes-Oxley whistleblower provision prohibits companies from retaliating against employees who report corporate wrongdoing. If a company retaliates against such an employee, it may be liable for any damages caused to the employee because of the unlawful discrimination. Am I covered by the Sarbanes-Oxley Act?Sarbanes-Oxley’s primary purpose is to protect shareholders by holding accountable companies and individuals engaged in corporate wrongdoing. Therefore, employees of publicly traded companies are the most obvious application of the Sarbanes-Oxley whistleblower protection clause. However, because the value of a publicly traded corporation is the sum of its constituent units, Sarbanes-Oxley extends its protection to the employees of contractors, subcontractors, agents, and subsidiaries of such public companies. Accordingly, a whistleblower does not need to have been employed directly by a publicly traded company to benefit from Sarbanes-Oxley’s protection. Rather, it is sufficient that that company’s contractor, subcontractor, agent, or subsidiary employed the individual, so long as the public company acted as an employer with regard to the complaining employee. A publicly traded company acts as an employer by exercising control of the employee’s work product or by establishing, modifying, or interfering with the terms, conditions, or privileges of his or her employment. What constitutes “whistleblowing” for which Sarbanes-Oxley provides protection?Sarbanes-Oxley protects employees against discrimination if they provide information, cause information to be provided, or assist in an investigation regarding fraudulent activity by the public company. Assisting in an investigation includes filing, testifying in, or participating in a proceeding filed or about to be filed against the public company relating to any alleged violation enumerated in Sarbanes-Oxley. Moreover, Sarbanes-Oxley’s whistleblower provision protects employees who refuse to participate in any unlawful conduct that may lead to fraud, securities fraud, or fraud against the company’s shareholders from discrimination. What information must I disclose to be a protected whistleblower?As previously noted, the primary objective of Sarbanes-Oxley is to reinforce confidence in the securities markets. As such, Sarbanes-Oxley protects employees who in good faith report or complain about corporate activities inconsistent with the interests of the company’s shareholders. A covered disclosure for which Sarbanes-Oxley provides protection is a report or complaint about any of the following three types of violations: (1) fraud in general; (2) securities fraud; and/or (3) any federal law relating to fraud against shareholders. Accordingly, Sarbanes-Oxley protections apply in the following circumstances:
Will I be protected from retaliation if the information I report is erroneous or incorrect?Because not all fraudulent or illegal corporate conduct is prohibited by Sarbanes-Oxley, the question of whether particular acts of misconduct by the employer are covered by Sarbanes-Oxley is usually determined on a case-by-case basis. Nevertheless, Sarbanes-Oxley broadly protects employees reporting what they objectively believe to be illegal or questionable activities, and this protection applies even if it is later determined that the employer’s conduct did not fall strictly within one of Sarbanes-Oxley’s specified frauds. Accordingly, an employee who is wrong with respect to his belief of illegal practices by the company nonetheless will be protected from discrimination if the employee’s complaint was based on a “reasonable belief.” The term “reasonable belief” means a belief that would be held by an ordinary and prudent man in the same circumstances as the employee. In other words, if an average person would be led to believe that the employer was violating a law enumerated in Sarbanes-Oxley, the employee’s belief is reasonable. The justification behind this broad application of protection for complaining employees is that requiring certainty on the employee’s part before protection will be granted would negate Sarbanes-Oxley’s purpose, which is to encourage employees to raise their concerns over questionable corporate practices. To whom must I communicate my concerns over the company’s practices?Disclosures, reports, or complaints should be made to a person with supervisory authority over the employee, or to other persons working for the employer who have the authority to investigate, discover, or terminate misconduct. It is appropriate to report to the board of directors if complaining to the company’s management officers would be futile because the management officers are the parties responsible for the fraud or illegal conduct. The information also may be provided to a federal regulatory or law enforcement agency that the employee believes has the authority to investigate, study, evaluate, or enforce the misconduct that is the subject of the disclosure. Finally, a protected disclosure may be made to any Member of Congress or any committee of Congress. Unlike a disclosure to a federal regulatory or law enforcement agency, the Member does not have to be serving on a committee with direct authority over the type of misconduct reported. What constitutes illegal retaliation on the employer’s part?An employer may not retaliate in any manner that is likely to stifle precisely the sort of behavior Congress intended to encourage. A company will be held liable under Sarbanes-Oxley for responding to an employee’s disclosure with disciplinary or retaliatory actions if they will dissuade potential whistleblowers from engaging in protected activity in the future. To that end, a company may not demote, suspend, threaten, harass or in any other manner discriminate against any employee with respect to the employee’s compensation, terms, conditions, or privileges of employment because of the employee’s protected disclosure. Moreover, if a company responds to an employee’s disclosure by creating such a hostile working environment that the employee decides to resign, the company may be charged with illegal termination. A hostile work environment that does not cause the employee’s resignation still may constitute retaliation. Some courts have held that even an employer’s retaliatory issuance of a permanent written reprimand, thereby damaging a worker’s personnel record, in reprisal for engaging in protected activity should be sufficient to invoke the protections of Sarbanes-Oxley. Now that I have been retaliated against, what should I do next?You should promptly contact an attorney to discuss your possible Sarbanes-Oxley case. The statue of limitations on such a claim is only 90 days from the date of the illegal discrimination against you. This means that your attorney will need to file a complaint with the Department of Labor within that short time period. Also, as a victim of retaliation, you have a duty to prevent further loss by seeking suitable employment in the meantime. Reasonable efforts should be used to search for employment, such as checking want ads, registering with the state employment agency, and using personal contacts. You should keep a detailed, written record of your efforts to find new employment in the event that your efforts are later questioned. How does Sarbanes-Oxley provide me protection?An employer that is found liable under Sarbanes-Oxley will be ordered to reinstate the employee to the position previously held, or to a similar position. Additionally, the employer may be required to compensate the employee for back pay and benefits, mental pain and suffering, and loss of future earnings and professional reputation. The employee also may be entitled to compensation for expenses incurred during the litigation process, such as witness’ and attorney’s fees and other costs. What is Protected Activity?In the course of employment with a United States publicly traded company an employee stumbles upon information relating to some company practice which indicates that the company is engaging in a fraudulent scheme that may ultimately affect the company’s stock prices. What must the employee include in a complaint to be protected under the Sarbanes-Oxley Act’s whistleblower provision if he or she wishes to report the information? Sarbanes-Oxley mandates that a company may not retaliate against an employee for engaging in protected activity. Protected activity includes disclosures that relate to securities fraud, bank fraud, wire fraud, or violation of "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. But what has to be said in a disclosure for it to constitute protected activity? When reporting the fraudulent conduct, must an employee use a specific formula or "magic words" to insure protection against later retaliation? A review of the statutory and case law gives some insight into the answers to these fundamental questions. As a general matter, if Congress had intended to demand of whistleblowers specific language or references it would have explicitly stated so. Collins v. Beazer Homes USA, Inc ., 334 F. Supp.2d 1365 (N.D. Ga. 2004). The lack of such direction by Congress suggests that it intended instead to be more lax with respect to the burden placed on complainants when their reports may ultimately benefit the company’s investors. The question then becomes, assuming that one has a reasonable belief that the publicly held company is engaged in fraudulent activity, how particular must a complainant be in outlining the fraud to engage in protected activity within the meaning of the Sarbanes-Oxley Act? May one simply state to a supervisor that he or she has "a bad feeling about the way the company is conducting itself" and expect to be protected by Sarbanes-Oxley’s whistleblower provision in case of later retaliation? In Carter-Obayuwana v. Howard University, 764 A.2d 779 (D.C. 2001), the District of Columbia Court of Appeals rejected the notion that an employee must complain using "magic words" to engage in protected activity. While the Obayuwana case arose as a result of a sex discrimination complaint under Title VII and not under the Sarbanes-Oxley Act, the principles established there are helpful in determining the acceptability of complaints in the Sarbanes-Oxley context. In rejecting the defendant’s argument that the plaintiff failed to engaged in protected activity, the Obayuwana Court explained that, "the plaintiff is required merely to ‘alert the employer [and make the employer aware of the fact] that [he or] she is lodging a complaint about allegedly [illegal] conduct.’" Id. at 791. The court stressed, however, that in alerting an employer that he or she is lodging a complaint an employee need not utilize any "magic words" to trigger statutory protection against later retaliation. Id . Because of the impractical nature of creating bright-line rules in varying and fact-specific disclosures, there is uncertainty as to the exact level of specificity courts will require before concluding that an employee’s disclosure constitutes an engagement in protected activity. In Lerbs v. Buca Di Beppo, Inc. , 2004-SOX-8, the Department of Labor’s Administrative Law Judge found that the complainant failed to engage in protected activity when he reported his vague concerns to various officers at the company. The company had employed the complainant as a cash manager for approximately four years, and on numerous occasions the complainant questioned his supervisor about certain account entries in the company financial records that the complainant found to be out of the ordinary. Initially, the complainant simply asked his supervisor in general terms "what a particular entry was doing." Later, the complainant indicated that he "did not think that it was right and that it was misleading" to bankers and investors because the entry was contrary to generally accepted accounting principles.
In rejecting the alleged protected activity, the Administrative Law Judge in Lerbs noted that the complainant subsequently conceded that the company’s practices were in fact consistent with generally accepted accounting procedures but that in applying the new practice the company should have disclosed its method changes in its accounting records, which the company admittedly failed to do. Lerbs, at 14. That the complainant "did not think that [the company’s accounting practice] was right and that it was misleading" was not sufficiently specific to qualify as protected activity because it failed to outline the objectionable practice. Id. Moreover, the Administrative Law Judge concluded that the complainant’s question about "what a particular entry was doing" was a mere "inquiry" and would certainly not qualify as protected activity. "[G]eneral inquiries do not constitute protected activity . . . . Instead, in order to be protected, a whistleblower must state particular concerns which, at the very least, reasonably identify a respondent’s conduct that the complainant believes to be illegal." Id. Finally, the Administrative Law Judge reasoned that the employee’s subsequent concession that in fact he did not believe the practice to be illegal negated the disclosure’s protected classification, as the employee must believe that the practice over which he or she is complaining is illegal and not merely contrary to industry practice. Id.
Moreover, to constitute protected activity the activity about which an employee complains must relate to one of the enumerated frauds outlined in the whistleblower provision of the Sarbanes-Oxley Act, and if the activity about which the employee complains does not qualify as securities fraud, bank fraud or wire fraud then the disclosure will not constitute protected activity absent a reasonable belief that the activity will have an adverse material effect on the company shareholders. Accordingly, the court in Minkina v. Affiliated Physician’s Group, 2005-SOX-19, granted the respondent’s motion to dismiss after finding none of the above frauds applicable. The complainant in Minkina claimed that she was discriminated against for reports she made to the Occupational Safety and Health Administration and her employer regarding a ventilation problem in her workplace, which she believed to be a dangerous work condition and a violation of federal regulations. The Department of Labor’s Administrative Law Judge granted the company’s motion to dismiss, noting that "while the complainant may have had a valid claim of poor air quality, Sarbanes-Oxley . . . was enacted to address the specific problem of fraud in the realm of publicly traded companies and not in the resolution of air quality issues, even if there is a possibility that poor air quality might ultimately result in financial loss." Id.
Finally, several administrative judges at the Department of Labor have held that a complainant alleging that a company practice adversely affects shareholders is required to show that the allegedly illegal conduct amounts to material fraud against the shareholders. For example, in Harvey v. Safeway, Inc., 2004-SOX-21, the complainant complained to officers at Safeway that his work hours were not accurately calculated and that he was therefore underpaid in violation of the Fair Labor Standards Act. He further claimed that the withholding of his wages by Safeway constituted fraud against the shareholders because the wages were wrongly labeled as profits, thereby misleading the shareholders with respect to the company’s value. In granting Safeway’s motion to dismiss, the Administrative Law Judge concluded that the employee’s disclosure of discrepancies in his weekly paycheck did not amount to protected activity because he failed to demonstrate that the company practice in question had a material impact on the company’s financial reports. (Note: according to this logic the employee can arguably engage in protected activity if he demonstrates with a level of specificity that systematic wage underpayments by Safeway rise to a level sufficient to materially impact the company’s financial records, thereby affecting the shareholders.)
In sum, the foregoing cases suggest that in order to make a protected disclosure a complainant must articulate with specificity the allegedly illegal activity, as mere inquiries about company practices will not suffice. Moreover the activity outlined in the complaint must relate to one of Sarbanes-Oxley’s enumerated frauds, e.g., securities fraud, bank fraud, wire fraud, or violation of "any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders." Further, the complainant also must have a reasonable belief that the activity complained of is illegal and not merely immoral or contrary to industry practice. Finally, when making a disclosure relating to fraud against the shareholders the complainant must articulate and actually believe that the company practice will have a material effect on the shareholders. As the Administrative Law Judge noted in Minkina v. Affiliated Physician’s Group, Sarbanes-Oxley was enacted to address the specific problem of fraud in publicly traded companies and not other workplace issues, even if there is a possibility that those other issues might ultimately result in minor financial loss. Extraterritorial Application of Whistleblower ProtectionsJohn is employed in a foreign country by a subsidiary of a United States publicly traded company. The latest financial report sent by the subsidiary to the American parent company contained major errors in figures and forecasts, which John believes will result in unjustified inflation of the company’s stock price in the United States market. John wishes to report the fraudulent nature of the documents in order to protect the company’s shareholders but fears that his disclosure may lead to retaliation that could adversely affect John’s employment. How may John, employed overseas, minimize the danger of retaliation when making a disclosure about fraudulent activities taking place in a subsidiary outside of the United States?
Extraterritoriality is a jurisdictional concept concerning the authority of a nation to adjudicate the rights of particular parties and to establish the norms of conduct, effects, or persons outside its borders. More specifically, the extraterritoriality principle provides that United States statutory laws, whether prescribed by federal or state authority, apply only to conduct occurring within, or having effect within, the territory of the United States. Where the conduct and effects take place outside of the United States, the United States law will only control if it carries extraterritorial force. While Congress has the authority to enforce laws that are effective beyond the territorial boundaries of the United States, courts will generally presume, absent indication to the contrary, that Congress did not intend to exercise its full power as to apply extraterritorial force to its statutes. The United States Seventh Circuit Court explained in its opinion in Pfeiffer v. Wm. Wrigley Jr. Co., 755 F.2d 554, 557 (7th Cir. 1985), that "[t]he fear of outright collisions between domestic and foreign law – collisions both hard on the people caught in the cross-fire and a potential source of friction between the United States and foreign countries – lies behind the presumption against the extraterritorial application of federal statutes."
The Sarbanes-Oxley Act does not contain express language relating to its extraterritorial application to employees overseas who engage in protected disclosures. However, the exclusion of explicit language allowing for its extraterritorial application does not necessarily foreclose the possibility that courts in the future may find the Act’s whistleblower provision to contain extraterritorial force. Indeed, when the Supreme Court determines whether Congress has afforded a statute extraterritorial effect it takes into consideration more than the mere statutory text, and instead also reviews the legislative history and purpose. Sale v. Haitian Centers Council, Inc., 509 U.S. 155 (1993).
Because courts are reluctant to apply extraterritorially statutes that do not expressly indicate such intent by Congress, many complainants have had better results when they did not confront the question of extraterritorial application head-on when filing their Sarbanes-Oxley whistleblower complaint. Instead, complainants who have focused on developing and presenting their claims as territorial (domestic) ones have had more success.
In Carnero v. Boston Scientific Corporation (BSC), 2005 WL 3602373 (C.A. 1 (Mass)), the First Circuit Court of Appeals was confronted with a situation similar to the one presented above. Mr. Carnero, a citizen of Argentina, accepted employment with BSC’s subsidiary, Boston Scientific Argentina (BSA). His employment agreement with BSA expressly provided that his place of work would be in Argentina and that the laws of Argentina would govern the employment contract. Mr. Carnero subsequently took an assignment as Country Manager for BSB, a Brazilian subsidiary of BSC. Mr. Carnero filed a Sarbanes-Oxley complaint against BSC, the parent company, alleging that BSB and BSA both retaliated against him after he reported to BSC about fraudulent accounting practices occurring at both subsidiaries. In analyzing the validity of the complaint, the First Circuit first considered whether the complainant, being employed by a subsidiary, qualified as a protected "employee" of the American parent company within the meaning of the statute. The Carnero Court concluded that Mr. Carnero’s complaint, absent the extraterritorial complication, would be properly brought under the Sarbanes-Oxley Act.
To qualify as an "employee" under the Sarbanes-Oxley Act, the First Circuit explained, a complainant need not be directly employed by it so long as a "company representative" of the publicly traded company employs the complainant. The court had little trouble holding that subsidiaries qualified as "company representatives" and that the complainant, who was indeed employed by company representatives, therefore qualified as an "employee" of the publicly traded company for Sarbanes-Oxley purposes. Ultimately, however, the court found that it lacked jurisdiction over the complaint. The facts in the case presented an extraterritoriality question, the First Circuit reasoned, and the presumption against extraterritoriality prevented the complainant from asserting his SOX whistleblower claim in the United States.
In contrast to the Carnero decision, an Administrative Law Judge at the Department of Labor denied a defendant’s motion for summery judgment in Penneso v. LCC International, Inc., 2005-SOX-16, in a seemingly similar fact pattern as the one presented in Carnero. In Penneso Mr. Penneso was employed in Italy by an Italian subsidiary of an American corporation headquartered in Virginia. Mr. Penneso alleged that he was retaliated against after reporting to officers in the United States, both by telephone and in person, the fraudulent financial dealings that took place in the Italian subsidiary. The Administrative Law Judge acknowledged that the Sarbanes-Oxley whistleblower provision does not carry with it extraterritorial power, however the Administrative Law Judge pointed out that Penesso presented materially different facts that created a substantial nexus between the complainant and the United States. For example, Mr. Penesso was a United States citizen, whereas Mr. Carnero was not; some of Mr. Penesso’s protected activity took place while he was in the United States visiting the company’s headquarters in Virginia, and even reports made while he was in Italy were communicated directly to officers in the United States; and finally, at least part of the decision to retaliate against the complainant occurred in the United States. Given the substantial connections alleged between the complainant and the American company and the possibility that the facts did not raise a question of extraterritoriality, the Administrative Law Judge denied both the defendant’s motion to dismiss and motion for summary judgment.
The notion that there is no need for extraterritorial application of other statutes when the complainant is sufficiently connected to the United States has been echoed by a number of courts in various employment contexts. In Torrico v. IBM, 213 F. Supp. 2d 390 (S.D.N.Y. 2002), for example, IBM assigned its employee, a Chilean citizen, to a temporary assignment in Chile. IBM subsequently terminated the employee while the employee was in Chile. The complainant sought to bring an action based on a New York law making it unlawful to discharge or discriminate against an employee on the basis of disability. In an action alleging that the complainant’s discharge was in fact based on his disability and asserting violations of U.S. labor laws, the Torrico Court reasoned that because the decision to discharge allegedly took place within the United States and, according to the complainant, he was employed in New York the application of the New York law to the Chilean employee would not constitute an extraterritorial application of United States law.
Similarly, the New Jersey Supreme Court in D’Agostino v. Johnson & Johnson, Inc., 268 A.2d 305 (N.J. 1993), when confronted with similar facts, held that it did not lack jurisdiction simply because the complainant was employed overseas by a Swiss subsidiary. In that case, the complainant alleged that Johnson & Johnson directed his discharge from its Swiss subsidiary in retaliation for having engaged in protected conduct. The court reasoned that New Jersey employment law should govern a domestic company when the conduct being regulated takes place within the court’s jurisdiction, even though the forbidden effects are extraterritorial, i.e., causing the termination of an employee overseas. The defendant’s motion for summary judgment was therefore denied, as the court found that many of the retaliatory acts, which admittedly had effects outside of the United States, occurred in New Jersey.
Applying the same reasoning as was employed in D’Agostino, the D.C. Circuit denied the defendant’s motion to dismiss in Shekoyan v. Sibley International Corp., 217 F. Supp.2d 59 (D. D.C. 2002), where the plaintiff, an employee of an American company working in the Republic of Georgia, filed a complaint under the False Claims Act alleging that he was retaliated against after reporting the misappropriation of funds by his employer. The Shekoyan Court explained that it did not need to apply the statute extraterritorially in order to obtain jurisdiction because the "crux of the inappropriate conduct occurred within the United States." In support of its conclusion, the circuit court noted that the decision to retaliate occurred domestically after the plaintiff allegedly directly notified officials in the United States. Finally, the court pointed out in Launer v. Buena Vista Winery, Inc., 916 F. Supp. 204 (E.D. N.Y. 1996), that "one need not be physically present in order to be subject to the jurisdiction of our courts . . . for, particularly in this day of instant long-range communications, one can engage in extensive purposeful activity here without ever actually setting foot in the State."
These cases demonstrate that the presumption against extraterritorial application of United States statutes often will not be invoked where the conduct being regulated takes place largely in the United States or where the complainant demonstrates sufficient ties to the United States. For example, in denying the defendant’s motion to dismiss on extraterritorial grounds, the Administrative Law Judge in Penneso found it significant that the complainant reported directly to officers at the parent company in the United States. Not only does the direct contact create a nexus between the complainant and the United States, but such communication to the United States officers also may lead a trier of fact to conclude that the decision to retaliate in fact occurred domestically, thereby avoiding the question of Sarbanes-Oxley’s extraterritorial force. In finding that there may be no need to apply Sarbanes-Oxley extraterritorially to protect the foreign employee, the Administrative Law Judge further found very compelling the fact that some of the protected activity actually took place in the United States when the complainant visited the company’s headquarters in Virginia. These factors’ significance, aside from creating a nexus between the complainant and the United States, is that they tend to suggest that the retaliation, the forbidden company conduct under the whistleblower provision, occurred domestically.
So, in summary it would appear that courts tend to agree that protecting a foreign employee from retaliation by an American employer or parent company does not require the extraterritorial application of domestic law if the decision to retaliate occurred in the United States. Torrico v. IBM, 213 F. Supp. 2d 390 (S.D.N.Y. 2002) (applying New York law to a foreign employee while rejecting the need to consider the statute’s extraterritorial application where it was alleged that the decision to discriminate against the disabled complainant occurred in the state of New York); D’Agostino v. Johnson & Johnson, Inc., 268 A.2d 305 (N.J. 1993) (allowing plaintiff to take advantage of the state’s forum because many of the retaliatory acts were alleged to have occurred in New Jersey); Shekoyan v. Sibley International Corp., 217 F. Supp.2d 59 (D. D.C. 2002) (entertaining a foreign employee’s FCA claim because the crux of the inappropriate conduct were alleged to have occurred within the United States). In fact, even the First Circuit, in its decision in Carnero v. Boston Scientific Corporation, 2005 WL 3602373 (1st Cir. 2005), which dismissed a Sarbanes-Oxley whistleblower claim because it found no Congressional intent to have the provision extraterritorially applied, was premised to a large degree on the fact that the American company was not directly involved in either the protected activity or in the retaliation that the foreign employee suffered while working for the company’s subsidiary. |
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