VOLUME II Chapter 21 Whistleblower Protection and Litigation Under the Sarbanes-Oxley Act

• Jurisdiction: South Carolina

Chapter 21 Whistleblower Protection and Litigation Under the Sarbanes-Oxley ActTucker S. PlayerPlayer Law Firm, LLC

I. Introduction

In 2002, Congress passed the Corporate and Criminal Fraud Accountability Act of 2002, more commonly referred to as the Sarbanes-Oxley Act (SOX or the Act).¹ SOX was enacted to protect stockholders from fraud committed by publicly traded companies, their subsidiaries, and/or agents. The focus on this chapter will be limited to the introduction of the SOX whistleblower framework, and the legal issues and pitfalls one is likely to encounter in undertaking representation of a party in a SOX whistleblower matter.

The SOX whistleblower framework is similar to other whistleblower statutes under federal law. Congress delegated regulatory and investigative authority to the Occupational and Safety Administration (OSHA), which also is similarly responsible under 13 other whistleblower statutes.² OSHA acts in a capacity similar to the Equal Employment Opportunity Commission (EEOC) in discrimination complaints, with review of the agency determination through an administrative law judge or Administrative Review Board (ARB) of the Department of Labor, or alternatively, the district court in some cases.

SOX is not primarily a whistleblower statute. The majority of provisions within the Act focus on accounting and reporting measures to prevent corporate accounting and shareholder fraud. The only portion of SOX relevant to the discussion in this chapter is found at § 806, codified at 18 U.S.C. § 1514A:

(a) Whistleblower protection for [employees] of publicly traded companies. No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)) including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company, or nationally recognized statistical rating organization (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), or any officer, employee, contractor, subcontractor, or agent of such company or nationally recognized statistical rating organization, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an 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 [18 USCS § 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); or

(2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348 [18 USCS § 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.

(b) Enforcement action.

(1) In general. A person who alleges discharge or other discrimination by any person in violation of subsection (a) may seek relief under subsection (c), by—

(A) filing a complaint with the Secretary of Labor; or
(B) if the Secretary has not issued a final decision within 180 days of the filing of the complaint and there is no showing that such delay is due to the bad faith of the claimant, bringing an action at law or equity for de novo review in the appropriate district court of the United States, which shall have jurisdiction over such an action without regard to the amount in controversy.

(2) Procedure.

(A) In general. An action under paragraph (1)(A) shall be governed under the rules and procedures set forth in section 42121(b) of title 49, United States Code.
(B) Exception. Notification made under section 42121(b) (1) of title 49, United States Code, shall be made to the person named in the complaint and to the employer.
(C) Burdens of proof. An action brought under paragraph (1)(B) shall be governed by the legal burdens of proof set forth in section 42121(b) of title 49, United States Code.
(D) Statute of limitations. An action under paragraph (1) shall be commenced not later than 180 days after the date on which the violation occurs, or after the date on which the employee became aware of the violation.
(E) Jury trial. A party to an action brought under paragraph (1)(B) shall be entitled to trial by jury.

(c) Remedies.

(1) In general. An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole.
(2) Compensatory damages. Relief for any action under paragraph (1) shall include—

(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;
(B) the amount of back pay, with interest; and
(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.

(d) Rights retained by employee. Nothing in this section shall be deemed to diminish the rights, privileges, or remedies of any employee under any Federal or State law, or under any collective bargaining agreement.
(e) Nonenforceability of certain provisions waiving rights and remedies or requiring arbitration of disputes.

(1) Waiver of rights and remedies. The rights and remedies provided for in this section may not be waived by any agreement, policy form, or condition of employment, including by a predispute arbitration agreement.
(2) Predispute arbitration agreements. No predispute arbitration agreement shall be valid or enforceable, if the agreement requires arbitration of a dispute arising under this section.

The portions in bold type were added or amended by the Dodd-Frank Amendment of 2010. This chapter will highlight federal decisions within the Fourth Circuit that apply to the relevant subjects under special subsections entitled "Fourth Circuit Notes."

II. Jurisdiction Under SOX

A. Personal Jurisdiction - Covered Parties

SOX establishes a preliminary three-prong test to determine if an entity is a covered company. A company is covered if it meets the following conditions: (1) the company has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (publicly traded on a national security exchange); (2) the company is required to file reports under Section 15(d) of the Securities Exchange Act of 1934 (dealers and brokers of securities on a national security exchange), or (3) the company is an agent or affiliate of an entity that qualifies under (1) or (2) above.³ However, entities that do not satisfy either prong of this test may still be within the purview of SOX if they qualify as an "officer, employee, contractor, subcontractor, or agent" of a company that does satisfy one of the three preliminary prongs. Non-subsidiary private companies have been held to be covered companies as agents or contractors of a publicly traded entity.⁴ Moreover, the language of the statute provides for individual liability of the person responsible for the prohibited behavior if that person qualifies as an officer, employee, contractor, subcontractor, or agent of a publicly traded company.⁵

The protections of SOX are not limited to the employees of a covered company. The regulations define an "employee" as any person presently or formerly working for a covered company or its representative, applying for work with a covered company or its representative, or whose employment could be affected by a covered company or its representative.⁶ Under this broad definition, there need not be a direct employment relationship between the covered company and the aggrieved employee.⁷ However, SOX does not apply to any extra-territorial employees or companies as its jurisdiction lies solely over those actions arising from employees and companies in the United States.⁸

The Supreme Court weighed in on the SOX Whistleblower Statute in Lawson v. FMR, LLC.⁹ The employees in Lawson sued their employer, a private contractor working as an accounting firm for a publicly traded company, for violations of the Act. The employees reported improper accounting practices of the private company and were subsequently terminated. The issue was whether the employees of the private contractor of a qualified employer under SOX fell within the purview of the whistleblower protections. The Court held that so long as the whistleblower's actions pertain to work done for the publicly traded entity, SOX applied and provided protection.

FOURTH CIRCUIT NOTES:

? Malin v. Siemens Medical Solutions Health Services¹⁰

The complainant sought to include a non-public subsidiary of a publicly traded company as a named party. The court held that unless a plaintiff can establish that a non-public subsidiary acted as a parent company's agent with respect to employment matters in general, or the alleged retaliatory conduct in particular, whistleblower protection provisions of SOX are not applicable to claims of retaliation for whistleblower activity. Malin remains good law for the agency test under SOX, but was decided prior to the 2010 Amendment under the Dodd-Frank Act which specifically expanded jurisdiction to the subsidiaries and affiliates of publicly traded companies.

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