Amicus Brief argues for SOX coverage for Villanueva

Posted on August 25, 2011 by Richard Renner

The National Whistleblowers Center (NWC) and the National Employment Lawyers Association (NELA) filed an amicus brief this week in Villanueva v. Core Laboratories NV, a case pending at the U.S. Department of Labor's Administrative Review Board (ARB). The brief argues that SOX should protect whistleblower William Villanueva, even though he worked for Core's subsidiary in Columbia.

Core Laboratories NV is a publicly traded company based in Houston, Texas.  It provides services to the petroleum industry. For 16 years, William Villanueva worked as CEO of Saybolt Columbia, Core's subsidiary.

In 2008, Villanueva sent emails to corporate executives in Houston reporting how other company executives were engaged in tax transfer schemes that falsely transferred profits to low-tax Curacao, an island in the Caribbean Sea. He also reported that Core accountants in Columbia were making false claims to evade the Columbian value added tax (VAT). After Villanueva refused to sign a false tax return, Core fired him.

Villanueva file a complaint with the Department of Labor (DOL) claiming that he was fired in retaliation for raising his concerns. He claimed that his discharge violated the 2002 Sarbanes-Oxley Act (SOX). An administrative law judge (ALJ) granted Core's motion to dismiss on grounds that Villanueva worked outside the U.S. Villanueva appealed to the ARB.  Earlier this Summer, the ARB asked for amicus briefs on whether SOX can apply to the employees of off-shore subsidiaries. It also asked for discussion about the effect of the U.S. Supreme Court's decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (2010).

Our amicus brief argues that Villanueva's case does not raise issues of extraterritorial application of SOX since his protected activity consisted of emails sent to the U.S., and the decision to fire him was made in the U.S. In the alternative, it argues that the very nature of SOX (enacted after Enron and other companies abused off-shore subsidiaries to defraud shareholders) requires that SOX apply to all subsidiaries of companies traded in the U.S. stock markets. This argument builds on the ARB's decision in Johnson v. Siemens Building Technologies, ARB No. 08-032, ALJ No. 2005-SOX-0151 (ARB March 31, 2011). In Johnson, the ARB held that SOX has always protected the employees of subsidiaries of publicly traded companies.

Many thanks go to R. Scott Oswald and Nicholas Woodfield of The Employment Law Group for leading the research and writing for this brief, and also to Rebecca Hamburg of NELA for working with the team that includes Stephen M. Kohn and myself of NWC. This brief will hopefully assist the ARB in expanding SOX's coverage so that it can be effective in protecting our stock markets from frauds committed anywhere in the world. In the meantime, it would be wise for whistleblowers with extraterritoriality issues to preserve their claims until the ARB issues its decision here.

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IRS Guidelines Discourage Whistleblowers

Posted on August 11, 2011 by Lindsey Williams

Today, Tax Analysts published an article about how Internal Revenue Service (IRS) guidelines can result in whistleblower awards being unfairly reduced. The Government Accountability Project, No FEAR Coalition and National Whistleblowers Center sent a letter to IRS Commissioner Shulman on August 10, 2011 requesting that the IRS immediately revise their Internal Revenue Manual’s factors for determining whether a whistleblower should have a reduced award because the whistleblower “planned and initiated” an action.

The IRS whistleblower law was designed to protect and encourage individuals to report tax fraud. The IRS whistleblower law was modeled after the False Claims Act , which recognized that it “takes a rouge to catch a rouge.” Congress correctly recognized that not everyone stepping forward would have the cleanest hands - they may have participated in the fraud on the lowest levels. However, you need these individuals who have detailed inside knowledge in order to expose the masterminds of the scheme.

The IRS whistleblower law allows the IRS to offer reduced award amounts to a whistleblower who “planned and initiated” a tax evasion. Therefore, how the IRS determines whether a whistleblower is a planner or initiator is very important. These factors will determine if a whistleblower receives his or her reward.

The group letter explains that the “planned and initiated” factors created by the IRS depart significantly from traditional understanding as reflected in Congessional intent, caselaw, and clear stautory language. The factors provide that “anyone who contributes or advises” or "knew or should have known that the activity may lead to tax noncompliance” could be found to have planned and initiated an action. This precariously wide net could “conceivably capture every whistleblower” and would “eviscerate the policy of encouraging whistleblowers.”

Dean Zerbe, national managing director at Alliantgroup LP and Special Counsel at the National Whistleblowers Center, correctly stated to Tax Analysts that “the limitation on whistleblower awards for somone who planned and initiated only applies to an individual who is the chief architect or chief wrongdoers – the Bernie Madoffs of the world,” and by, “giving a straight-arm to the most valuable whistleblowers,” the IRS has undermined the success of the law. Reuben A. Guttman of Grant & Eisenhofer PA agreed and stated that, “there is a difference between someone carefully designing an evasive tax structure and a second-year associate who merely helps carry out the plan.”

The IRS factors for determining who is a planner or initiator should be immediately revised to focus on the “principal architects” or “chief wrongdoer” of the fraud scheme.

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