The Sarbanes-Oxley and Dodd-Frank Acts: Corporate Whistleblowers
Well-functioning financial markets in the United States rely upon the accurate and transparent transmission of information from publicly traded companies to investors. When companies fail to act in accordance with their legal obligations, investors stand to lose billions of dollars. In an effort to encourage individuals to come forward with information about corporate fraud and securities violations, the U.S. Congress included anti-retaliation protections in two major pieces of legislation. The Sarbanes-Oxley Act of 2002 (“SOX”) includes protections for those who blow the whistle, within their companies or externally, on various forms of fraud and securities violations. The Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) protects those who report to the Securities and Exchange Commission (“SEC”) violations of securities laws, the Foreign Corrupt Practices Act, and financial consumer protection laws, among others. Together, SOX and Dodd-Frank provide robust protections – and, in some cases, incentives – for conscientious employees seeking to do right by investors and the public.
In response to the accounting scandals at Enron and WorldCom that caused huge losses to shareholders and spawned a crisis in investor confidence, the U.S. Congress passed the Sarbanes-Oxley Act in 2002. SOX requires publicly traded companies to make certifications about their financial conditions and imposes stiff penalties on companies and their officers for misrepresenting their finances to shareholders and would-be investors.
The new law also contained protections for accountants and other finance employees who would serve as the front-line protectors of financial integrity and reporting. Modeled after the whistleblower provisions in federal aviation, nuclear, and environmental laws, Section 806 of SOX created a new civil action for employees of publicly traded companies who faced retaliation for providing information about, or participating in investigations relating to, what they believed to be fraud or violations of securities laws on the part of their employers.
Which Employees Are Protected By SOX?
SOX generally protects employees of publicly traded companies and their wholly owned subsidiaries, their contractors and subcontractors, and statistical rating organizations. The definition of “employee” is broad under the statute, and includes present and former workers, supervisors, managers, officers, and even independent contractors. Former employees are protected when their protected activity occurs during the course of their employment. SOX’s protection of independent contractors depends on the degree to which the publicly traded company exerts control over the contractor’s work.
Which Employers Are Covered?
SOX whistleblower provisions apply to a variety of employers. This includes publicly traded companies, along with subsidiaries and affiliates included in their consolidated financial statements, that are subject to the registration or reporting requirements of the Securities Exchange Act. This includes certain foreign corporations doing business in the U.S. The law also applies to some private companies that serve as agents or contractors of publicly traded companies.
SOX also applies to statistical rating organizations (“SROs”)—credit rating agencies that produce information on which firms in the finance industry must rely. The integrity and reliability of the credit ratings SROs produce are critical to investment decisions.
Finally, unlike many other retaliation laws, the law assigns liability not only to companies but also to the individual(s) who spearheaded the retaliation against a whistleblower.
What Does The Whistleblower Have To Prove?
There are three central elements to a SOX claim:
- the employee engaged in protected activity about which the employer knew;
- the employer took an adverse action against the employee; and
- the protected activity was a contributing factor in the employer’s decision to take an adverse action against the employee.
What Is Protected Activity?
An employee engages in “protected activity” when he or she complains that the company has violated one of several categories of wrongdoing, including securities fraud, mail fraud, wire fraud, bank fraud, any law any rule or regulation of the SEC, or any federal rule or law relating to fraud on shareholders. SOX prohibits retaliation against employees for a wide range of protected conduct, from internal complaints to reports to government regulators.
While the employee must reasonably believe the employer is engaged in fraud or a violation of securities laws, however, he or she need not ultimately be correct in that belief. As long as the employee’s belief is reasonable, the employer cannot retaliate against the employee for speaking out, even if the belief ultimately proves to be wrong.
When Does An Employee Suffer An Adverse Employment Action?
SOX prohibits an employer from taking “adverse employment action” against an employee for engaging in protected activity. This includes firings, demotions, cuts in pay, or denial of promotions, but it can also include reassignment of job duties and responsibilities, assignment of undesirable shifts, harassment, micromanagement, excessive supervision, or exclusion from important company activities.
Was The Adverse Employment Action Causally Related To The Protected Activity?
In order to prove a SOX whistleblower claim, the employee need only show that the protected activity was a “contributing factor” in the employer’s decision to take adverse action against the employee. The whistleblower’s protected activity does not have to be the employer’s sole reason or even a significant reason for the adverse action but must only play some role in the employer’s decision.
Employees bringing actions under SOX may satisfy the “contributing factor” standard in either of two ways. In rare cases, the employee may be able to present what is called “direct evidence,” such as the fact that the supervisor warned the employee that reporting possible fraud to securities regulators would result in termination. More often, the employee will have to prove his or her case through circumstantial evidence, which may include, among other factors: the close timing between the protected activity and the adverse action; the fact that the employer has purportedly taken action against the employee for conduct for which it has not disciplined other employees; the employer’s history of retaliating against whistleblowers; or the fact that the employer has presented reasons for its actions that are false or not credible.
Procedures For Filing A SOX Whistleblower Claim
To pursue a SOX whistleblower claim, an employee must file a written complaint with any office of the Occupational Safety and Health Administration (“OSHA”), which is part of the Department of Labor (“DOL”), within 180 days of the retaliatory action. OSHA will investigate if it determines that the complaint contains the necessary elements of a claim and will eventually issue a preliminary determination. If the Department of Labor has not issued a final decision within 180 days of the employee’s filing of a charge, an employee may elect to remove his or her case from the DOL and file in federal court.
In an effort to strengthen SOX protections for corporate whistleblowers, the Dodd–Frank Act invalidated clauses within employment agreements that required SOX whistleblower complaints be arbitrated. This means that an employer cannot contractually require an employee to submit SOX retaliation claims to an arbitrator in place of a jury trial.
What Remedies Are Available To Successful Whistleblowers?
The Sarbanes-Oxley Act entitles employees who prevail on their whistleblower claims to a full “make whole” remedy, which may include reinstatement (or front pay in lieu of reinstatement, back pay and benefits, and compensatory damages for emotional pain and suffering. Employees who prevail in such proceedings may also recover their litigation costs, including attorneys’ fees.
How Do I Decide Whether and How To Report Unlawful Conduct?
Whether to report apparent fraud or violations of federal securities laws — and, if so, when, how, and to whom — can be a very difficult decision, one with potentially significant professional and personal consequences. While the decision to blow the whistle on corporate wrongdoing is not one to take lightly, the Sarbanes-Oxley Act provides strong protections for employees, and there exist today a number of non-profit organizations that stand ready to support workers who blow the whistle on unlawful activity. Contact Katz Banks Kumin to speak with one of our intake attorneys to discuss your case, without charge or further obligation.
Dodd-Frank Act Whistleblower Incentives and Protections
Congress passed the Wall Street Reform and Consumer Protection Act — popularly known as the Dodd-Frank Act — in July 2010 as part of a massive overhaul of the nation’s financial regulatory system. As part of a comprehensive program to ensure corporate accountability and compliance, Dodd-Frank created important new incentive programs to reward and protect individuals who report violations of the laws that govern a wide range of activities in the financial markets and in the activities of U.S. companies doing business abroad. The law also created strong anti-retaliation protections that differ from those available under SOX.
What Whistleblower Incentives Are Provided by the Dodd-Frank Act?
The Dodd-Frank Act requires the Securities and Exchange Commission (SEC) to reward whistleblowers who voluntarily provide original information regarding securities violations or bribes paid to foreign officials in violation of the Foreign Corrupt Practices Act (FCPA). Section 922 of the law awards whistleblowers 10 to 30 percent of any monetary recovery of over $1 million that the SEC obtains from an offending party through enforcement actions. To learn more about the SEC's Whistleblower Program, read the SEC Whistleblower Practice Guide, authored by Katz Banks Kumin partners Lisa Banks and Michael Filoromo. The Dodd-Frank Act also established a similar program for the Commodities Futures Trading Commission (CFTC), which rewards information for violations in the trading of a wide range of commodities and on the currency exchanges. To learn more about the CFTC Whistleblower Program, read the CFTC Whistleblower Practice Guide, also authored by Ms. Banks and Mr. Filoromo.
How Does the Dodd-Frank Act Protect Whistleblowers From Retaliation?
In addition to incentivizing whistleblowers to come forward through the establishment of the SEC and CFTC Whistleblower Reward Programs, the Dodd-Frank Act also prohibits employers from retaliating against employees for reporting violations of laws regulating consumer finance, corporate and accounting fraud, and commodity and currency exchanges. Some of the protections provided by the Dodd-Frank Act augment protections already provided by the Sarbanes-Oxley Act by providing whistleblowers with a larger statute of limitations, the ability to file suit directly in federal court, and double back pay. While the Sarbanes-Oxley Act protects those who blow the whistle both internally and externally, only whistleblowers who report securities violations to the SEC are entitled to the broad protections available under the Dodd-Frank Act.
Why Hire Katz Banks Kumin For Your Dodd-Frank Act Whistleblower Case?
The attorneys at Katz Banks Kumin have represented many employees who have blown the whistle on unlawful conduct in finance and accounting. We are nationally recognized as experts in the representation of whistleblowers and regularly publish and lecture on whistleblower issues.
If you’re thinking about reporting violations of securities laws, the FCPA or consumer-finance laws, or if you already have and are facing retaliation, contact Katz Banks Kumin to discuss your case confidentially and without further obligation.