The Mirage of Whistleblower Protection Under Sarbanes‐Oxley: A Proposal for Change†

Published date01 March 2007
Date01 March 2007
DOIhttp://doi.org/10.1111/j.1744-1714.2007.00030.x
The Mirage of Whistleblower
Protection Under Sarbanes-Oxley:
A Proposal for Change
w
Beverley H. Earle
n
and Gerald A. Madek
nn
I. INTRODUCTION
Whistleblowers have a special place in American culture.
1
Deep Throat,
the Watergate whistleblower, was the object of intense speculation during
Watergate and the ensuing years.
2
Apparently, passing the ninety year
r2007, Beverley H. Earle and Gerald A. Madek
Journal compilation r2007, Academy of Legal Studies in Business
1
American Business Law Journal
Volume 44, Issue 1, 1–54, Spring 2007
w
This article was selected for inclusion in the Huber-Hurst Seminar in 2006 and is the winner
of the Academy of Legal Studies in Business’s Holmes-Cardozo award for best paper sub-
mitted to the 2006 annual conference in St. Petersburg,Florida. We wish to thank Christina A.
Madek for her superb research assistance.
n
Professor, Department of Law, Taxation and Financial Planning, Bentley College and the
McCallum Graduate School of Business; B.A., University of Pennsylvania; J.D., Boston Uni-
versity School of Law; Fellow in the Bentley Center for Business Ethics.
nn
Professor, Department of Law, Taxation and Financial Planning, Bentley College and the
McCallum Graduate School of Business; B.A. and M.A., Boston College; J.D., Suffolk Uni-
versity Law School; LL.M., Boston University School of Law.
1
See TIME, Dec. 30, 2002, at Cover (featuring Cynthia Cooper of WorldCom, Colleen Rowley
of the FBI, and Sherron Watkins of Enron as people of the year under the caption ‘‘The
Whistleblowers’’). See also TIME, Mar. 4, 1996, at Cover (featuring George Galatis, Nuclear
Whistleblower); Government Accountability Project, http://www.whistleblower.org/template/
index.cfm (last visited Sept. 22, 2005) (providing whistleblower information as the twenty-
eight-year-old nonprofit Government AccountabilityProject); National Whistleblower Center,
http://whistleblowers.org (last visited Sept. 22,2005) (serving as a resource for information on
whistleblowing). For a discussion of the recent conviction of Ken Lay and Jeffrey Skilling in
the Enron trial, see generally Alexei Barrionuevo, 2 Enron Chiefs Are Convicted in Fraud and
Conspiracy Trial, N.Y. TIMES, May 26, 2006, at A1 (dissecting the trial and the prosecution’s
successful strategy); John R. Emshwiller et al., Lay, Skilling are Convicted of Fraud,WALL ST.J.,
May 26, 2006, at A1 (discussing the verdicts and the question of credulity of the defendants).
2
See ToddS. Purdum, Deep Throat Unmasks Himself: Ex No. 2 at FBI, N.Y. TIMES, June 1, 2005,
at A1. See generally BOB WOODARD &CARL BERNSTEIN,ALL THE PRESIDENTS MEN (1974) (chron-
icling the pursuit of the story about the Watergate break-in and the ensuing presidential
cover-up, which led to the resignation of President Richard Nixon). Deep Throat, the
mark and at the urging of his family, Deep Throat finally decided to reveal
his identity, in part to parlay the national fixation into a few dollars for his
family.
3
Yet most whistleblowers do not reach the iconic status of a Deep
Throat. Rather, they are often, by virtue of their whistleblowing, exposed
and thus have no option about whether or not to self-identify.
4
Further-
more, financial security is elusive for a whistleblower.
5
Does anyone know
about Sheila Jayaraj
6
or David Welch?
7
Yet it is the less celebrated whis-
tleblower, the one not in the news, who most needs the protection of a
federal whistleblower law.
While there have long been a myriad of state whistleblower
protections as well as a developing core of federal whistleblower statutes,
Congress recognized, in light of the huge scale of corporate fraud
unearthed in WorldCom, Enron, and Adelphia, that a special protec-
tion was warranted to encourage the future Sharron Watkins, the
whistleblower in the Enron saga, to come forward without fear of
confidential informant, was critical to the search for the facts. See generally BOB WOODWARD,THE
SECRET MAN:THE STORY OF WATERGATESDEEPTHROAT (2005). Woodward researched the book
in anticipation of Deep Throat’s death. Id.
3
See Jay Fitzgerald, Deep Throat, Deep Pockets: Cashing In on Watergate Secret,BOSTON HERALD,
June 3, 2005, at 30 (discussing the ‘‘feeding frenzy’’ surrounding Mark Felt’s story about his
version of Watergate;it is not known what the quality of Mr. Felt’smemory is at this stage of his
life, however); Jeffrey A. Trachtenberg,Throat Book Advance Could Exceed $1 Million,W
ALL ST.
J., June 1, 2005, at B4 (reporting on former FBI official Mark Felt’s book proposal).
4
See generally Deborah Solomon, For Financial Whistleblowers, New Shield is an Imperfect One,
WALL ST. J., Oct. 4, 2004, at A1 (discussing how the Occupational Safety and Health Admin-
istration of the Department of Labor has addressed complaints, of which many have been
dismissed).
5
See id.
6
See Jayaraj, Case No. 2003-SOX-00032(Dep’t of L abor Office of Admin. Law Judges Feb. 11,
2005) (Recommended Decision and Order), http://www.oalj.dol.gov/Decisions/ALJ/SOX/
2003/JAYARAJ_SHEILA_v_PRO-PHARMACEUTICALS__2003SOX00032_(FEB_11_2005)_
133458_CADEC_SD.PDF. See also Jeffrey Krasner, Ex-biotech Officer Wins Whistle-blow Firing
Case,B
OSTON GLOBE, Mar. 26, 2005, at E1 (stating that ‘‘decision marks first Sarbanes-Oxley
Act ruling in Boston area’’). ‘‘Winning,’’ however,did not carry its normal meaning here be-
cause the employee received neither money nor her job back. Id.
7
See Welch, Case No. 2003 SOX 00015 (Dep’t. of Labor Office of Admin. Law Judges
Aug. 1, 2003) (Order Granting Motions for In Camera Inspection and Protective Order),
http://www.oalj.dol.gov/PUBLIC/WHISTLEBLOWER/DECISIONS/ALJ_DECISIONS/SOX/
03SOX15A.HTM.
2 Vol. 44 / American Business Law Journal
retaliation.
8
Thus, in 2002 Congress tucked Section 806, ‘‘Protection for
Employees of Publicly Traded Companies Who Provide Evidence of
Fraud,’’ into the Sarbanes-Oxley Act (SOX).
9
While this appeared to be a
major step in recognizing both the whistleblower’s importance to enforce-
ment and his right to protection against harm, the question remainsFwas
the protection promised by SOX only a mirage of safety? Did the statute
claim to offer protection to whistleblowers without really offering this pro-
tection? And, if so, what suggestions could transform the current system
into a true protection for the whistleblower? There are holes in the whis-
tleblower protection afforded by SOX. For example, the Occupational
Safety and Health Administration (OSHA) is the designated agency to in-
vestigate SOX whistleblower complaints, yet it has had no experience until
this point with such problems. There are no punitive damages provided
for in the statute. Thus a whistleblower might lose his job and, in the end,
only get the back pay he missed. Although he could be reinstated and re-
ceive additional special damages and attorneys’ fees, what about other
damages? Was this a remedy designed to fail? Did Congress want to appear
to be taking action but essentially not hinder companies from pursuing
business as usual?
This article examines the dilemma of whistleblower protection under
SOX. Part II examines the history and text of the statute’s provisions. Part
III places SOX in a broader context of whistleblower protection and re-
views the existing literature. Part IV reviews existing cases, both at OSHA
and in federal court. Part V reviews selective changes states have made to
protect whistleblowers. Finally, Part VI concludes with several recommen-
dations for modifications to SOX that would help achieve its original ob-
jective. These recommendations center on the movement of enforcement
to the Securities and Exchange Commission (SEC), the expansion of the
time available to file a complaint, and the addition of incentives both to the
employee to blow the whistle and the employer to remedy the problem.
8
See JOHN BOSTLEMAN,SARBANES-OXLEY DESKBOOK,Background: Twelve months Leading Up to the
SOA 2–32 (Practicing Law Institute 2004) (discussing the addition of Section 806 to the bill).
9
See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002) (codified in scat-
tered sections of U.S.C.) [hereinafter SOX]. Title VIII of SOXis also called the Corporate and
Criminal Fraud Accountability Act of 2002. Id. Providing whistleblower protection, Section
806 (Protection for Employees of Publicly Traded Companies Who Provide Evidence of
Fraud) is codified at 18 U.S.C. § 1514A (2002).
2007 / The Mirage of Whistleblower Protection Under Sarbanes-Oxley 3

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