Whistleblower Protection Blog : Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistleblower Protection, Fraud Claims : Washington DC

On May 25, 2011, the Department of Labor's Administrative Review Board (ARB) issued a major decision in favor of whistleblowers. In Sylvester v. Parexel International, ARB Case No. 07-123 (ARB May 25, 2011), the ARB held that a whistleblower only needs a "reasonable belief" of a violation to engage in protected activity under the 2002 Sarbanes-Oxley Act (SOX). The ARB makes clear that a whistleblower does not have to wait for a violation to actually happen, and need not inform management of the basis of that reasonable belief. Indeed, since SOX prohibits companies from violating rules of the Securities and Exchange Commission (SEC), a whistleblower can have a reasonable belief about a violation that has nothing to do with any fraud against shareholders. The ARB also rejects the idea that a SOX violation has to be "material" to form the basis of a whistleblower's "reasonable belief." The ARB has also freed whistleblowers of the unnecessary hurdle of "pleading" their claims under the high "Iqbal" standard.

The Sylvester decision is a significant departure from the decision of the prior administration. All those decisions that required protected activity to "definitively and specifically" implicate a violation of law are now out-of-date. Indeed, in separate concurring opinions, three of the four ARB judges specifically rejected the "definitively and specifically" standard since it is not in the statute.

When considered together with Brown v. Lockheed Martin Corp, ARB No. 10-050, ALJ No. 2008-SOX-49 (ARB Feb. 28, 2011) (no fraud against shareholders need be shown), and Johnson v. Siemens Building Technologies, Inc., ARB Case No. 08-032 (ARB Mar. 31, 2011) (SOX covers the employees of subsidiaries), the Sylvester decision marks a decided turn in favor of recognizing whistleblowers as servants of the public purpose and deserving of strong protection. The ARB is clearing away the hurdles that made SOX so difficult for whistleblowers during its first eight years.

Pictured above are Stephen M. Kohn, Kathy Sylvester and her attorney E. Patrick McDermott. Stephen Kohn co-wrote amicus briefs with me on behalf of the National Whistleblowers Center and Douglas Evans. Congratulations to Kathy Sylvester, her co-complainant Theresa Neuschafer, and their attorney, Patrick McDermott of Annopolis, Maryland. They have helped breath new life into SOX on behalf of future generations of whistleblowers.

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Today the U.S. Securities and Exchange Commission (SEC) issued its final rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. By a vote of 3-2, the SEC approved these final rules this morning. The SEC has released a fact sheet summarizing the new rules.

The outcome is a major victory for whistleblowers.  The SEC rejected proposals put forward by corporate attorneys asking that whistleblowers be barred from rewards unless they made their first disclosures about the violations to company officials. The SEC rules also protect whistleblowers from retaliation no matter whether they made their disclosures internally or externally.

The National Whistleblowers Center (NWC) has led a public advocacy campaign for months to urge the SEC to reject the industry proposals to gut Dodd-Frank. When the SEC's proposed rules were first published, the NWC issued an emergency Action Alert to mobilize opposition to what could have been the gutting of a landmark whistleblower protection act. Numerous citizens and organizations pounded the SEC with demands that they protect whistleblowers. The result is evident in today's final rule. The SEC cited NWC comments 44 times -- more than it cited to the comments of any other group.

In response, each of the Commissioners opened their doors to personally meet with the NWC staff attorneys and supporting experts we invited. The NWC also filed nine extensive formal comments refuting the Chamber of Commerce's misinformation and explaining how many of the proposed rules undermined whistleblower protection. The Commission listened.

Stephen M. Kohn, Executive Director of NWC, said, "The SEC refused to buckle under tremendous pressure from Wall Street lobbyists (led by the Chamber of Commerce) who worked overtime trying to undermine historic corporate whistleblower protections contained in the Dodd-Frank Act." Mr. Kohn's full statement today follows in the continuation of this blog entry.
 

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In a major setback for whistleblowers, a panel of the Ninth Circuit U.S. Court of Appeals has decided that going to the media can never be protected activity under the Sarbanes-Oxley Act (SOX).

The decision, issued in the case of Tides v. Boeing Corporation, upheld the firing of two Boeing employees, Nicholas P. Tides (a compliance specialist) and Matthew C. Neumann (an auditor) after they provided the Seattle Post-Intelligencer with credible allegations of unethical activity and fraud.

The National Whistleblowers Center (NWC) filed an amicus curiae ("friend of the court") brief on behalf of the whistleblowers. The employees were represented by Seattle attorney John J. Tollefsen, of Tollefsen Law PLLC.

According to Stephen M. Kohn, Executive Director of the NWC: "This ruling is a major setback. Permitting companies to fire workers who talk to the press will have a chilling effect on whistleblowers, and stifle the ability of the government to learn about misconduct."

Mr. Kohn added, "The ruling is illogical. Under this decision, corporate insiders can discuss fraud among themselves, but if an employee attempts to alert investors or the news media, they can be fired. The news media has historically played a vital role in informing government officials and the public about potential wrongdoing. We hope that Nicholas Tides and Matthew Neumann appeal this ruling."

Loyola Law School professor Michael Waterstone told the Los Angeles Times that this decision, "certainly makes it less likely that [employees will] report behavior to journalists or members of the media."

I am disappointed that the panel did not even mention the prior Ninth Circuit cases that adopted a balancing test to determine if employee disclosures are protected under other laws.  See Wrighten v. Metropolitan Hosp., Inc., 726 F.2d 1346, 1355 (9th Cir. 1984) (protecting a press conference under Title VII); O’Day v. McDonnell Douglas Helicopter Co., 79 F.3d 756 (9th Cir. 1996) (ADEA). On page 8, footnote 6, the Tides court says that it would not consider whether going to the media might be protected under 18 U.S.C. § 1514A(a)(2). The court now points practitioners to raise media disclosure cases under § 1514A(a)(2), Hopefully, though, the rest of the Ninth Circuit will be moved to correct this unfortunate panel decision before any new cases reach the court.

CASE UPDATE:  On May 16, 2011, attorneys for Nicholas Tides and Matthew Neumann filed a petition for rehearing en banc. This means that the other judges of the Ninth Circuit will have a chance to vote on whether they want to reconsider this terrible panel decision that denied protection for disclosures to the media.  Hopefully, the other judges of the Ninth Circuit will remember the Wrighten and O'Day decisions and apply their holding here for the benefit of Tides and Neumann.

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