Sarbanes-Oxley criminal whistleblower provisions and the workplace: more than just securities fraud.

• Author: Lechner, Jay P.

The Sarbanes-Oxley Act (SOX) was enacted in 2002 to restore investor confidence in the nation's financial markets in the wake of the Enron scandal. (1) Its whistleblower provisions, both civil and criminal, were specifically designed "to prevent recurrences of the Enron debacle and similar threats to the nation's financial markets" by protecting whistleblowers who report fraudulent activity which could damage innocent investors. (2) In light of these goals, one might reasonably assume that a whistleblowing employee must assert at least some degree of fraud affecting shareholders before SOX's protections are implicated. (3) However, as the following two scenarios demonstrate, both SOX's criminal and civil whistleblower provisions can be interpreted as extending far beyond their intended scope.

EEO Participation Clause Retaliation Claims--Potential Criminal Sanctions and Civil RICO Liability

Assume an employee at a small, privately-owned company files an EEOC complaint alleging her supervisor discriminated against her because of race. In response, the supervisor and her coworkers engage in a pattern of harassment until the employee finally complains to the owner. The owner promptly fires the harassers and resolves the problem to the employee's satisfaction. Because the company has less than 15 employees and promptly corrects any harassing behavior, liability arising from the harassment is unlikely under Title VII. In addition, because the company is not publicly traded and no fraud against shareholders is alleged, one might assume that SOX's whistleblower provisions would not be implicated. However, that is not necessarily the case.

* SOX Criminal Whistleblower Provision--SOX contains both civil and criminal whistleblower provisions. The criminal provision, [section] 1107, provides:

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 [f]ederal offense, shall be fined under this title or imprisoned not more than 10 years, or both.

Criminal sanctions include, for individuals, fines up to $250,000 and/or imprisonment of up to 10 years and, for organizations, fines up to $500,000. (4) The Attorney General has expressed that the DOJ will "play a critical role" in implementing the criminal provisions of SOX, including [section] 1107. (5)

Section 1107's real value as a substantive prosecutorial tool may be questionable, however. It is arguably merely an extension of the already existing obstruction of justice charges currently available under 18 U.S.C [section] 1510 (obstruction of criminal investigations) and 18 U.S.C. [section] 1512 (tampering with witnesses, victims, or informants). What it does do, however, from a sentencing perspective is increase the penalty for such offenses from a maximum of five years in many cases to a maximum of 10 years.

The specific inclusion of [section] 1107 within SOX certainly reflects Congressional intent to aggressively ferret out criminal malfeasance in the post-Enron corporate environment. As recent prosecutions such as United States v. Scrushy, 366 F. Supp. 2d 1134 (N.D. Ala. 2005), may suggest, however, Congress' zeal to get tough in the corporate sentencing arena often has the unintended result of creating more trials and less guilty pleas.

Additionally, [section] 1107 does have a number of potentially significant ramifications, none of which have yet been addressed by the courts. First, [section] 1107 applies not only to publicly-traded companies, but to any "person." Because the term "persons" generally includes individuals, corporations, and other organizations, [section] 1107 covers both employers and employees. Therefore, employees who in the past were not subject to individual liability under other federal retaliation statutes now could face enormous fines and jail time for their workplace misconduct. Moreover, employers are covered regardless of corporate status or number of employees. Thus, companies too small to be covered under Title VII or other antiretaliation statutes are covered under [section] 1107. Finally, because there is nothing limiting the criminal provision to the employment relationship, third parties, regardless of their agency relationship with the employer, may be liable for participating in prohibited retaliatory conduct.

Second, [section] 1107 may criminalize retaliatory conduct in seemingly unrelated contexts which, in the past, may have given rise only to civil liability. Protected activity under [section] 1107 is not limited to complaints of fraud or securities violations, but covers truthful disclosures to any "law enforcement officer" relating to commission or potential commission of any federal offense* This provision could...