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

• All internal reporting systems are not created equal.

Why would a widespread bribery scheme, reportedly well-known to Wal-Mart employees and managers in Mexico, fail to be detected and raised to the highest governing authority through existing reporting mechanisms?    We now know that the whistleblower first notified the legal department through email.  But what about all the other employees “in the know” in Mexico and elsewhere in Wal-Mart? Did none of them trust the internal mechanisms enough to raise the alarm? Or if they did, what happened?  And where was the chief compliance officer?  So far it is alleged that the 2005 complaint was “hushed up” by the General Counsel and senior execs, and never made it to the boardroom. That’s alarming indeed, but not surprising.

Creating and maintaining an internal reporting system requires a lot more than hiring a third party vendor, turning on the phone lines and hanging posters.  Yet I continue to be amazed by the number of Boards and senior management teams who live with a false sense of security simply because they have a hotline or other employee reporting mechanism in place.  (See my open letter to boards on this point.)  Beyond the initial set-up, companies that are serious about compliance establish and enforce strict protocols for managing internal reports from initial intake to final consequences, whether discipline or process improvement.  And this is where the rubber meets the road, as powerful company forces often resist the very processes required for an objective, independent investigation.  As I have written elsewhere, Wal-Mart is Exhibit A, B and C for an independent chief compliance officer (i.e. not beholden to the General Counsel or any other corporate officer) who can oversee, among other things, the integrity of the investigation and the overall internal reporting system.  See “The Real ‘Happy Marriage’ Between the GC and the Compliance Officer.”  An independent CCO with a seat at the table would have been a cautionary voice in the exec decision-making process, and would have had direct, unfiltered access to report the matter to the board. If I were asked to advise a friend or a family member on how to raise a concern, I would recommend that they look carefully at the independence and rigor of a compliance program and internal reporting mechanism before ever pulling the trigger internally.
 

• How a company reacts to internal whistleblowers is a good barometer of corporate culture.

That the Wal-Mart whistleblower tip may have been “whitewashed” in an allegedly sham investigation, underscores one of the prime reasons employees consistently give for not reporting perceived misconduct:  the belief that nothing will be done. 

Forget codes of conduct, training, CEO speeches and awards for “most ethical company in the universe.”  If you really want a good barometer of a company’s culture, and the priority it places on accountability, transparency and ethical leadership, look no further than how internal whistleblower reports are treated.  This is tough business for organizations because the natural human reaction to whistleblowers is usually “seek and destroy.”  As in:“I’m all for openness and transparency and for blowing the whistle on wrongdoing.  Except if the guy is on my team, and then he’s a no good traitor.”   The enormous challenge for companies is how to turn this human knee-jerk response into a safe, transparent environment where internal reporting is valued (and not merely tolerated) and tips are expeditiously, confidentially and professionally investigated.  Potential whistleblowers are nothing if not observant.  Just as they notice misconduct, they also see what happens to those around them who raise their hands.  According to the New York Times, after finding the company’s initial interest in his complaint fade away, the Wal-Mart whistleblower said “I thought nobody cares about this.  So I left it behind.”  How companies react when whistleblowers come forward drives the organizational culture in a direct and lasting way.
 

• Wal-Mart, Dodd Frank aftermath and the Grimm Act:  Another bite at the apple?

How Wal-Mart botched the internal whistleblower’s claim is an ironic postscript to the 2011 Dodd Frank whistleblower debate.  

Not too long ago, a long list of veritable who’s who in Corporate America, led by the Chamber of Commerce (of which Wal-Mart is a prominent member), lobbied hard against the then-pending Dodd Frank whistleblower rules,  in particular against the provision that permitted employees to go directly to the SEC without reporting internally first.  The main objection was that the potentially enormous rewards (10-30% of penalties over $1M) would incentivize employees to bypass internal reporting systems,  undermine company compliance programs and otherwise cause the sky to fall.  See “The Sky Has Not Yet Fallen.”  In a smart balancing act,  the SEC rejected those objections, but created incentives to encourage internal reporting.  Now one year later,  that same corporate lobby is attempting another bite at the apple through Grimm Act (House Bill 2483), which would amend the Dodd-Frank whistleblower rules in a second attempt to require internal reporting as a condition to access to the law’s protections and financial rewards. 

The Wal-Mart headlines should give legislators considering the Grimm Act serious pause.  One of the disconnects in this debate has always been the divergent views on the effectiveness of internal reporting systems.  As noted in a 2011 RAND Symposium report on the topic, the corporate lobbyists based their arguments on the premise that these reporting mechanisms were working just fine, thank you very much,  and that Dodd-Frank was going to ruin years, even decades, of all that good work. In stark contrast, whistleblower advocates argued that many internal reporting programs might look good on paper, but in reality are so flawed that they fail in their mission.  Judging by reports so far, Wal-Mart could well be the poster child for the latter view. 

It will be worth revisiting this list of takeaways as more details reach the public domain.  At a minimum, the impact of the Wal-Mart spectacle on current efforts to curtail both the Dodd-Frank whistleblower rules and the Foreign Corrupt Practices Act will be interesting to follow. But for now,  it’s safe to say that companies may have a lot more work to do on their internal reporting systems,  and the controls surrounding investigations and reporting up the chain, before crying “the sky is falling”  about the Dodd Frank whistleblower program.  

For context, the NWC had submitted the qui tam study to the SEC in December 2010 during the heated debate about the proposed whistleblower rules (which did not require reporters to raise their concerns internally first). At the time, the Chamber of Commerce and a list of big name companies, GE included, had vigorously argued that allowing whistleblowers to go directly to the SEC was a very bad, no good, terrible idea, because of the undermining impact it would have on internal compliance programs.

The alarmists feared that the rules would create an army of mercenary employees, lured by the promise of big bounties, to bypass internal reporting systems. A few commentators (myself included) wrote back then that the “the sky is falling” approach was probably hyperbolic. The SEC did the wise thing and declared that whistleblowers would be protected and potentially rewarded for raising their concerns through any channels – internal or external. And so far, it seems the flood of internal bounty hunters hasn’t exactly materialized. Based upon Mr. McKessy’s comment, it appears that Dodd-Frank whistleblowers actually do try to report internally first. Where it gets interesting is what often happens to them when they do that. 

Enter the case of GE’s former Iraq country head, Khaled Asadi, who in the summer of 2010 reported to his supervisor that GE officials had hired an Iraqi official’s relative (“to curry favor” during an electrical bid process), as a potential FCPA violation. In fact, Mr. Asadi did what the entire Chamber of Commerce posse (and presumably the GE Code of Conduct) wanted him to do - he reported internally. So it’s all good, right? Well, not exactly. Mr. Asadi has filed a retaliation suit against GE, seeking Dodd Frank whistleblower protections, because evidently, GE did not care much for the internal report, thank you very much. Mr. Asadi says that after filing his complaint with the GE ombudsperson, he was “pressured to step down” from a role he held since 2006, given an "extremely negative and troubling performance review," and then fired - all before he even thought to proceed with the next step of reporting to the SEC. 

So what’s the message here? The story is still unfolding but this much I know: it is a cold, cruel, perilous world out there for internal whistleblowers. And my hypocrisy radar is starting to beep. Because after all those loud complaints about Dodd Frank’s direct line to the SEC causing compliance programs across the land to blow up, GE now says Mr. Asadi should not get whistleblower protections because – wait for it – he didn’t file with the SEC. Oh, okay. Looks like that internal reporting thing didn’t turn out so well for Mr. Asadi. 

Here are my takeaways so far, after 7 months of the controversial Dodd Frank whistleblower rules. First, as the NWC contends, most employees still report perceived misconduct internally, driven more by a sense of “outrage” than mercenary dreams of a bounty*. Second, some companies have taken the wrong message from Dodd-Frank. Instead of stepping up their programs to bolster management culture and encourage employees to speak up, they’ve gone the opposite way. They are setting up a siege mentality and waging war on whistleblowers. They have let the litigation defense interests of the General Counsel trump the value to the company (and the corporate culture) of the free flow of information. This course is not only ill-advised and illegal – it’s appallingly bad self-governance. But I’m ever the optimist. As the SEC unveils some of its more high-profile Section 922 cases, I’m hoping more companies will decide to travel the right road. It is time for them to finally fix what’s broken in their culture and encourage, rather than punish, participation in their internal reporting systems.

*But see my column on the BNY Mellon/State Street cases organized by Harry Markopolos here.

To understand the court's decision, it is necessary to understand investment companies like Fidelity Mutual. Such funds are covered by the Securities Exchange Act (1934 Act) and are required to file disclosures with the Securities and Exchange Commission (SEC), just like other publicly traded companies. However, they are also organized under the Investment Company Act and the Investment Advisers Act, both of 1940. The court reports that the Fidelity Mutual Fund Board oversees the fund, but that the fund has no employees of its own. Instead, Lawson and Zang worked either for FMR LLC or one of its subsidiaries, Fidelity Brokerage Services, LLC. These are companies that are organized to staff the Funds marketed as Fidelity Investments and registered with the SEC. The SEC said in its amicus brief that the investment adviser industry has “nearly 157,000 employees that manage more than $12 trillion on behalf of investors, potentially outside the scope of SOX’s whistleblower protections.”

Lawson had worked for the Fidelity organization for years, and she raised concerns about its cost accounting methods. These methods obviously affect the reports filed with the SEC. In 2006, while still working for Fidelity, she filed a whistleblower retaliation claim with OSHA. In September 2007, while her complaint was still pending with OSHA, she resigned and claimed that she was constructive discharged by Fidelity. In 2008, she brought her retaliation case to the U.S. District Court in Massachusetts. Zang let his case proceed further to a decision by an Administrative Law Judge (ALJ). He appealed to the Administrative Review Board (ARB) and then brought his case to the same court as Lawson's case. The Fidelity companies made motions to dismiss, which the judge denied. The judge, however, granted special permission for the defendants to appeal before the case proceeded any further.

On appeal, the Secretary of Labor and the SEC both filed amicus briefs urging the Court of Appeals to agree that the Sarbanes-Oxley Act (SOX) covers Lawson and Zang.

During last week's radio show, Talwani explained how the oral argument went. Judge Lynch, the chief judge of the First Circuit, was particularly concerned about the costs companies have to pay even when they win a whistleblower case. Her decision, which Judge Howard joined, reflects that goal of protecting companies from having to answer for their treatment of whistleblowers.

On page 10, the majority decision claims that the whistleblower protection, “is a relatively small part” of SOX. The only authority cited for this claim is the First Circuit's prior decision in Carnero v. Boston Scientific Corp., 433 F.3d 1, 5 (1^st Cir. 2006)(holding that SOX has no application to employees outside the United States). The majority opinion, pp. 36-37, later quoted from Senate Report 107-146 to support its claim that SOX was only meant to cover the employees of publicly traded companies. The majority, however, missed the part of the Senate Report, p. 5, showing that the whistleblower protection would address “a culture, supported by law, that discourage[s] employees from reporting fraudulent behavior not only to the proper authorities . . . but even internally. This ‘corporate code of silence’ not only hampers investigations, but also creates a climate where ongoing wrongdoing can occur with virtual impunity.” On page 2, the Committee called the whistleblower protection a “crucial” component of SOX for “restoring trust in the financial markets by ensuring that corporate fraud and greed may be better detected, prevented and prosecuted.”

The majority opinion next looked at that actual language of the SOX whistleblower protection, from 18 U.S.C. § 1514A(a). This section is also called Section 806 of SOX. The opinion actually underlines the words “contractor” and “subcontractor.” Here is that section:

§ 1514A. Civil action to protect against retaliation in fraud cases

(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)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employeein 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 . . ..

There can be no doubt then that the majority judges saw the words that made us whistleblower advocates think that SOX clearly covers the employees of contractors and subscontractors of publicly traded companies. I still do not understand how this law can allow a contractor to fire its own employees in retaliation for reporting violations. In such a termination of employment, the “contractor” is “discharging” “an employee” “because” the “employee” “provided information.” This violates the plain language of Section 806 of SOX, quoted above. Interestingly, the majority did not underline the word “No” – the first word of the section. Without the “No,” the underlined text says that the contractor “may discharge.” Combined with the report of Judge Lynch's remarks at oral argument, this is another clue about the actual motive for this decision. It is nothing less than a judge's wish that Congress had not passed this law.

On page 12, the majority recognizes that “public companies” is a “shorthand” for more than just those companies that are registered with the SEC. For the majority, the phrase also includes companies required to file reports with the SEC. However, the majority cannot say that it also includes the “contractors” and “subcontractors” of these “public companies.”

On page 13, in a long footnote (number 7), the majority says that the FMR companies “are not acting as agents for employment purposes of the Fidelity mutual funds, which are public companies but have no employees.” The majority cannot cite to any part of SOX for the “agent for employment purposes” language. It is not in Section 806. There can be no doubt that the FMR companies are the agents of the Fidelity funds for the purpose of helping them keep their accounts, prepare their reports and otherwise comply with SOX. Moreover, the majority does not consider the Supreme Court's most recent decision on the issue of agent liability in employee retaliation matters, Staub v. Proctor Hosp., 131 S. Ct. 1186 (2011). Most seriously, however, the majority lost the focus SOX has on the integrity of the reports filed with the SEC. Enron got away with using phony subsidiaries and off-shore transactions until it was too late for the investors. SOX was written to prevent these types of shenanigans. If managers today can structure their organization so that the controversial work is done by contractors, then those contractors will be permitted to retaliate according to the two judges who wrote this opinion.

On page 14, the majority recounts the companies' argument that the word “employee” in Section 806 refers only to employees of the publicly traded company. The opinion underlines “employee of such public company.” One problem for them is that the underlined words are not in the statute as passed by Congress. Of course another problem is that the law does not work as intended with this phrase. Companies will be able to get away with retaliation as long as it is a contractor retaliating against its own employees. This outcome is not consistent with SOX's goal of using whistleblowers to assure the integrity of public reporting.

The majority opinion recognizes that the inclusive meaning of “employee” (to include employees of the contractor) does have some reasonable basis. On page 14, the majority flatly says, “different readings may be given” to the word “employee.” On the next page, the majority says Congress could have made its meaning clearer with just a few words. Strangely, the majority opinion seems to forget these points when it says, “we conclude that the text of § 1514A(a) is unambiguous in limiting whistleblower protection to employees of public companies[.]” P. 30, n. 15. See also, pp. 20 (n. 12), 21, 44, 45. Judge Thompson addressed this point in her dissent. “A statute that is susceptible of multiple interpretations and whose meaning requires over thirty pages to explain is neither clear nor unambiguous by definition.” P. 71. However, I would disagree. The plain words of the statute do cover employees of contractors. The majority is adding words that are not in the statute. On page 15, they nearly admit as much, saying, “principles of statutory interpretation lead us to interpret § 1514A(a) in favor of such a limitation.”

The majority then read the title of Section 806 and notice that it mentions, “employees of publicly traded companies” but does not mention employees of contractors. In the minds of the majority, congressional intent “does become clearer if one looks beyond the immediate phrases in subsection (a).” After reading the title, the majority says that the phrase, “or any officer, employee, contractor, subcontractor, or agent of such company,” is “a list of representatives of such employers” who “are also barred from retaliating[.]” If this is what Congress meant, then there would be no need for the phrase at all. Any “company” is going to be acting through agents, such as officers, employees or contractors. There would be no need to list the types of agents through whom a company might retaliate once Congress prohibited the company itself from retaliating. Judge Thompson, dissenting, noticed how the majority's interpretation makes the word “contractor” in Section 806 entirely superfluous. Dissent, p. 53. Also, the majority fails to notice the word “or.” If Congress had undertaken the entirely unnecessary task of listing the representatives who might retaliate for the company, then a natural preposition would have been “through.” Instead, Congress used “or.” This clearly indicates that the prohibition against retaliation is not limited to those retaliating against the employees of the publicly traded company, but that the contractors and others are also prohibited from retaliating. When they are retaliating against their own employees, they are still retaliating. That is prohibited by the plain words of SOX.

On page 17, the majority questions this logic. The majority says that if all these affiliated entities of publicly traded companies were prohibited from retaliating against their own employees, that would “create anomalies and provides very broad coverage.” Here is another clue about the majority's real motive. Here, they state explicitly that they do not want SOX to have “very broad coverage.” The majority ignores a long line of cases that hold that whistleblower protections naturally have broad coverage to accomplish their remedial goals. NLRB v. Scrivener (1972), 405 US 117, 121-26; English v. General Elec. Co., 496 U.S. 72, 110 S.Ct. 2270, 2277, 110 L.Ed.2d 65 (1990); DeFord v. Secretary of Labor, 700 F.2d 281, 286 (6th Cir. 1983)(the need for broad construction of the statutory purpose can be well characterized as “necessary ‘to prevent the [investigating agency’s] channels of information from being dried up by employer intimidation,’” quoting Scrivener); Bechtel Constr. Co. v. Secretary of Labor, 50 F.3d 926, 932 (11th Cir. 1995) (protecting informal nuclear safety complaints because “it is appropriate to give a broad construction to remedial statutes such as nondiscrimination provisions in federal labor laws”); Wagoner v. Technical Products, Inc., 87-TSC-4, D&O of SOL, p. 6 (November 20, 1990)(the “paramount purpose” behind the whistleblower statutes is the “protection of employees”); Kansas Gas & Elec. Co. v. Brock, 780 F.2d 1505, 1512 (10th Cir. 1985)(“Narrow” or “hypertechnical” interpretations to these laws, are to be avoided as undermining Congressional purposes.). The U.S. Court of Appeals for the Third Circuit has approvingly noted that the courts have “consistently construed” the environmental whistleblower laws “to lend broad coverage” to employees. Passaic Valley Sewerage Comm. v. Department of Labor, 992 F.2d 474, 479 (3rd Cir. 1993). The court there explained:

. . . from the legislative history and the court and agency precedents . . . it is clear that Congress intended the 'whistleblower' statutes to be broadly interpreted to achieve the legislative purpose of encouraging employees to report hazards to the public and protect the environment by offering them protection in their employment.

In Haley v. Retsinas, 138 F.3d 1245, 1250 (8th Cir. 1998), the Court said:

Laws protecting whistleblowers are meant to encourage employees to report illegal practices without fear of reprisal by their employers. These statutes generally use broad language and cover a variety of whistleblowing activities. Accordingly, when the meaning of the statute is unclear from its text, courts tend to construe it broadly, in favor of protecting the whistleblower. This is often the best way to avoid a nonsensical result and “to effectuate the underlying purposes of the law.” United States v. S.A., 129 F.3d 995, 998 (8th Cir. 1997).

When it comes to protecting those who participate in the official proceedings contemplated by statute, courts have explicitly applied the law to extend “exceptionally broad” protection. Pettway v. American Cast Iron Pipe Co., 411 F.2d 998, 1006 n. 18 (5th Cir. 1969). This doctrine applies with equal force to those who “assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation[.]” 18 U.S.C. § 1514A(b) (SOX's participation clause). The majority's limited interpretation decimates this core protection for participation in SOX proceedings by allowing contractors to retaliate against their own employees.

The public policy against retaliation is so strong that the Supreme Court has found protection in laws that do not explicitly provide any remedy for retaliation. Jackson v. Birmingham Board of Education, 544 U.S. 167 (2005) (Title IX); CBOCS West, Inc. v. Humphries, 553 U.S. 442, 128 S. Ct. 1951 (2008) (42 U.S.C. § 1981); Gomez-Perez v. Potter, 553 U.S. 474 (2008) (ADEA). To be clear, the Supreme Court in these cases interpreted the laws as prohibiting retaliation even though there were no words at all in the statute saying so. In the First Circuit, two judges have read a law that explicitly prohibits retaliation by contractors as allowing the contractors to retaliate against their own employees.

Returning to page 17 of the majority opinion, the two judges find it anomalous that the statute would prohibit officers from retaliating against their own personal employees. I see nothing anomalous about this. In the Tyco scandal, CEO Dennis Kozlowski and CFO Mark H. Swartz stole millions for their lavish lifestyles. If one of the caterers at one of their parties had tipped off the SEC about this waste of corporate assets, or about some remartk Kozlowski or Swartz made, this would be right up SOX's alley. How would the remedial purpose of SOX be furthered by denying the caterers protection? The Tyco shareholders could have saved millions of dollars if each of those caterers knew that they would be protected in their jobs if they spoke up about the theft they were witnessing. However, if the caterers are reading this majority opinion, they would be foolish to speak up and risk their careers.

On page 19, the majority opinion cites to cases holding that if there is a conflict between the title and the text of a statute, then the text controls. Brotherhood of R. R. Trainmen v. Baltimore & O. R. Co. 331 U.S. 519, 529 (1947)(“the title of a statute and the heading of a section cannot limit the plain meaning of the text.”). After all, if the title was expected to reflect all the details of the text, then it would just be a repetition of the entire text. Titles are too concise to capture the real effect of the text. Recognizing the logic of following the text, the majority decides that the text of SOX is not in conflict with the title. To me, this is precisely the type of “narrow” and “hypertechnical” interpretation that other courts have rejected for remedial whistleblower protections.

On page 20, in footnote 12, the majority rejects the “rule of lenity” because that rule applies in criminal cases. The rule of lenity flows from the idea that it is unfair to punish people with jail if the language of the crime at issue is vague as to the defendant's conduct. Then, on page 22, the majority compares SOX's criminal retaliation provision to argue that it was broader than Section 806. The majority has forgotten that Congress knows the rule of lenity and accordingly writes the criminal statute with the broader language typical for criminal statutes. As Judge Thompson notes on page 55 of her dissent, the criminal statute “is nothing more than a criminal obstruction-of-justice statute targeted at wrongdoers, not a whistleblower-protection statute targeted at the wronged.”

On pages 21-22, the majority notes how Congress was explicit in provisions that cover attorneys and accountants. The majority argues that if Congress could be explicit in these provisions, then it could also have been more explicit in Section 806. The majority is not willing to say that the attorney and account provisions show that Congress intended to cover the employees of outside contractors.

On page 23, the majority argues that the provisions for regulating accountants “ensure[] the independence of outside auditors.” To me, they could be way more independent if they were covered by the whistleblower protection.

On page 25, the majority addresses what I think is best argument for broad coverage: the remedial purpose of the law. “Not so,” they say. They say:

These distinctions and differentiated approaches to multifaceted problems drawn by Congress, including the coverage limitation in § 1514A(a) to public companies, are consistent with the problems which led to the enactment of SOX.

The first part of this sentence does not make sense to me. The majority does not make clear what is the antecedent for “these distinctions and differentiated approaches to multifaceted problems drawn by Congress.” However, the majority is just wrong to think that “problems which led to the enactment of SOX” were caused only by the employees of publicly traded companies. The Enron scandal was caused by abuses of a convoluted web of subsidiaries and off-shore affiliates. The outside auditors at Aurthur Anderson were also complicit in the overall scam of the investors. The majority opinion continues by claiming, “Congress's primary concern in enacting SOX was not the activities of the advisers to

mutual funds organized under the Investment Company Act, like the Fidelity funds here.” The Senate Committee Report for the SOX whistleblower protection, S. Rep. 107-146, at page 10, made clear that the Committee wanted to protect the “nation's financial markets”:

Unfortunately, as demonstrated in the tobacco industry litigation and the Enron case, efforts to quiet whistleblowers and retaliate against them for being “disloyal” or “litigation risks” transcend state lines. This corporate culture must change, and the law can lead the way. That is why S. 2010 is supported by public interest advocates, such as the National Whistleblowers Center, the Government Accountability Project, and Taxpayers Against Fraud, who have called this bill “the single most effective measure possible to prevent recurrences of the Enron debacle and similar threats to the nation’s financial markets.”

Congress made clear that it wanted to cover all these entities, and their employees, through the whistleblower protection. The whistleblower protection does not work unless it covers all the people who do the work that feeds into the activities reported to the SEC. The plain language of Section 806 does that. The majority takes it upon themselves to say the opposite on page 25 without any citation to the legislative history. The majority ignores the conclusion of every other court to address the issue, including one called the Supreme Court, that whistleblower laws should be construed broadly to accomplish their remedial purposes. Judge Thompson, dissenting at p. 58, did quote the actual legislative history about the purpose of Section 806: “to protect whistleblowers who report fraud

against retaliation by their employers.” S. Rep. No. 107-146, at *1 (2002). She continues with another quote from the same Senate Committee Report:

There is no mention of any limitation on which employers are covered. The breadth of this specific purpose comports with the Act's overall purpose: “to prevent and punish corporate and criminal fraud, protect the victims of such fraud, preserve evidence of such fraud, and hold wrongdoers accountable for their actions.”

On page 26, the majority addresses the nature of investment funds that have no employees. They conclude that since it is well known that such companies have no direct employees, Congress must have known that the SOX whistleblower protection would not cover them. In a footnote, the majority notes that the SEC has prosecuted investment advisers for securities violations. To me, this is all the more reason to include these advisers under the whistleblower protection so they will be encouraged to cooperate with SEC investigations. On the next page, the majority cites to 15 U.S.C. § 7263 as an example where investment companies were exempted. Judge Thompson, dissenting at p. 56, noted the obvious: there is not such exemption in Section 806.

On pages 27-30, the majority compares SOX to AIR 21. SOX explicitly adopts the procedures set out for airline employees in AIR 21. 18 U.S.C. § 1514A(b)(2)(A). This had the advantage of giving SOX whistleblowers the benefit of the enhanced burdens of proof in AIR 21. If the employee shows that the protected activity was a contributing factor in the adverse action, then the employer can win only by showing, by clear and convincing evidence, that it would have taken the same action without the protected activity. 49 U.S.C. § 42121(b)(2)(B)(ii). The majority in Lawson focuses on AIR 21's coverage of an “air carrier or contractor or subcontractor of an air carrier.” At 49 U.S.C. § 42121(e), AIR 21 defines “contractor” as “a company that performs safety-sensitive functions by contract for an air carrier.” To me, if one were to carry this definition over to SOX, then one would apply SOX's whistleblower protection to those employees of a contractor engaged in SOX compliance. That would include Jackie Lawson. However, the two judges of Lawson's majority opinion say that since “contractor” is not defined in SOX, then they cannot use an “unlimited” construction of “employee.” For myself, I see no problem in limiting “employee” to the employees of publicly traded companies and their employees, agents, contractors, subcontractors, affiliates and subsidiaries. On page 29, the majority is clearly working on the unstated premise that “limited” is better. “No such limitation is build into SOX or into the plaintiffs' expansive reading. The Defendants' reading, by contrast, is self-limited.” I appreciate here that the majority recognizes that the language of SOX and the plaintiffs' reading are on the same side.

The majority goes on to note that AIR 21 does not have the problems of “excessive breadth” and “extension of coverage to employees of employees and employees of officers.” Recognizing that SOX's language is broader, the majority concludes that SOX should be construed more narrowly. This is nothing less than Orwellian. Judge Thompson called it “a logical Escher stairway — it's just as nonsensical as it sounds.” Dissent, p. 63, n. 34.

In a footnote on page 30, the majority explains why they did not address the district court's “proposed limiting principle” (as if SOX needs a “limiting principle”). The district court had (erroneously) concluded that SOX would only protect concerns raised “relating to fraud against shareholders.” The Department of Labor's ARB has already explained why this holding is an incorrect reading of SOX. As the ARB explained in Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ No. 2007-SOX-39, 42 (May 25, 2011), pp. 19-21, the phrase applies only to the catch-all provision of “any provision of Federal law relating to fraud against shareholders.”

On page 31, the majority notes that the Energy Reorganization Act and the Pipeline Safety Improvement Act both define “employer” to include contractors. Instead of concluding that this shows Congress meant to include contractors, the majority concludes that that the absence of an explicit definition supports their interpretation that employees of contractors are excluded. The majority is not looking here at the plain text of Section 806(a) which prohibits contractors from retaliating against employees.

On page 32, the majority looks to cases holding that securities laws should be construed narrowly. They cite Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 772 (2008), for the proposition that “the jurisdiction of the federal courts is carefully guarded against expansion by judicial interpretation.” This relates to the court's subject matter jurisdiction, not the scope of coverage of a remedial law. They also cite Pinter v. Dahl, 486 U.S. 622, 653 (1988), for this quote, “The ascertainment of congressional intent with respect to the scope of liability created by a particular section of the Securities Act must rest primarily on the language of that section.” To me, this quote would support a literal application of Section 806 to prohibit contractors from retaliating against any employees, including their own. However, the majority ignores the line of cases I cited above in which the Supreme Court found anti-retaliation claims were viable in three laws that have no such anti-retaliation language at all. So strong is the public policy against retaliation that the Supreme Court does not need any statutory text to find it.

I find it interesting that the majority here would characterize Section 806 as a securities law to support their contention about its narrowness. In Carnero v. Bos. Scientific Corp., 433 F.3d 1, 11 (1^st Cir. 2006), the same court characterized Section 806 as an employment discrimination law to support its limitation to the geographical boundaries of the United States. If Section 806 is really a securities law, then it should have extraterritorial application, just as other provisions of SOX do for any companies that choose to be listed in U.S. stock exchanges. Not so in the First Circuit. (For reasons I have set out elsewhere, SOX should be applied extraterritorially to accomplish its remedial purpose in light of the off-shore abuses of Enron and others.)

The majority goes on to quote legislators who spoke about protecting employees of publicly traded companies without also mentioning the employees of contractors. On page 39, the majority says there is special language governing accountants, but will not include Section 806 as a provision protecting accountants. The majority notices that in 2004, one senator introduced a bill to cover employees of investment companies, but this bill did not pass. In Dodd-Frank, Congress did amend Section 806 to make coverage explicit for employees of subsidiaries. From this language, I envision the majority judges wishing to play a game of cat and mouse with Congress in which Congress reacts to one bad decision by amending the law only to face another bad decision based on Congress's failure to anticipate another bad decision. Too bad the remedial purpose of the law is not enough to accomplish what Congress explicitly wanted.

In a footnote on page 43, the majority make clear that they are giving no weight to the DOL regulations for SOX since Congress did not give DOL substantive rule-making power. On pages 44-49, the majority goes on to explain why they give no deference to the Department of Labor and the SEC. First, let me point out that the First Circuit had no trouble deferring to DOL when it was part of ruling against the whistleblower. Day v. Staples, Inc., 555 F.3d 42, 54 & n. 7 (1st Cir. 2009) (C.J. Lynch, with J. Howard concurring). Only now that the DOL is supporting whistleblowers do these judges decided that no deference is due. On page 45, no. 22, the majority judges explain that the issue was different in Day, and what they said in Day about deferring to DOL was “dicta” that they do not have to follow now. Next, the majority judges have to say that SOX “is not ambiguous” in excluding the employees of contractors. Recall that the majority recognized ambiguity on pages 14-15. The majority goes on to recognize that Congress did give DOL authority to adjudicate SOX retaliation claims, and then says that the regulations are only for DOL's use in handling its own cases. This is, in fact, a basis for giving deference to an agency that has the expertise flowing from a congressional delegation of authority. Deference applies when the “statutory circumstances [show] that Congress would expect the agency to be able to speak with the force of law.” United States v. Mead Corp., 533 U.S. 218, 229 (2001). The majority also used the “dicta” label to reject the ARB's statement in Johnson v. Siemens Building Technologies, ARB No. 08-032, ALJ No. 2005-SOX-015, p. 12 (Mar. 31, 2011). To hold that SOX has always covered the employees of subsidiaries, the ARB stated, “which no deference could be owed, the ARB stated that SOX's legislative history demonstrates that Congress intended to enact robust whistleblower protections for more than employees of publicly traded companies.” On page 48, the same page with this quote, the majority says there is “no ARB decision on point[,]” Finally, the majority rejects the amicus briefs of DOL and the SEC on grounds that they are “not based on the DOL's 'specialized experience.'” For these judges, the extent of deference they give to the government ebbs and flows depending on who is in that government and what the government is saying. Today, when the government speaks up for protecting the whistleblowers who raise concerns about violations of the federal laws they enforce, these judges offer no deference at all.

Judge Thompson's dissent is magnificent. At page 63, she says that the majority opinion is “judicial overreaching of the highest order.” Reading the plain language of Section 806, Judge Thompson found that “Sarbanes-Oxley's whistleblower-protection provision by its terms applies.” P. 51. Next, she noticed how just last November, these three same judges used statutory interpretation much differently than the majority did here for Lawson's case. See United States v. Ozuna-Cabrera, 663 F.3d 496 (1st Cir. 2011). In that criminal case, the judges did not rely on the title, but instead noticed that the plain text had no limitation (in that case, on the types of theft that would be aggravated).

Thankfully, Lawson's attorney, Indira Talwani, has filed a petition for rehearing. The First Circuit will now have an opportunity to correct the deeply flawed decision. They should do so not only to restore consistency in the law, but also to accomplish SOX's remedial purpose.

Available documents:

Lawson v. FMR, LLC, Case No. 10-2240 (1^st Cir. 2012)

Secretary of Labor amicus brief

SEC amicus brief

Petition for Rehearing, February 17, 2012

February 7, 2012, episode of Honesty Without Fear

I quote that final line because of a December 15, 2011 Court of Appeals decision from the Seventh Circuit Court of Appeals, styled “DeGuelle v. Camilli et al”, which is a whistleblower retaliation claim. As reported by Richard Renner, in an article entitled “Major Victory for Whistleblowers in Seventh Circuit Says Retaliation is a RICO Violation”, in the Whistleblowers Protection Blog, the Court of Appeals found valid a claim for damages under the Racketeer Influenced and Corrupt Organizations Act (RICO) for the retaliation against a whistleblower who provides information about corporate fraud to law enforcement officers under Sarbanes-Oxley Act (SOX). SOX itself makes it a felony to retaliate against whistleblowers who bring forward such information.

The SOX provision in question states that Congress made it a crime to:

“knowingly, with intent to retaliate, take[] 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 Federal offense[.]” 18 U.S.C. 1513(e).

The novelty and significance of the Seventh Circuit decision is that it held “When an employer retaliates against an employee, there is always an underlying motivation. In this case, for example, the motivation was to retaliate against DeGuelle for disclosing the tax scheme. Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower.”

This means that any company which terminates or in any other way retaliates against a whistleblower may have engaged in a violation of RICO, which itself is a criminal statute. This becomes relevant to Foreign Corrupt Practices Act (FCPA) whistleblowers through the Dodd-Frank Whistleblowers provision. In excerpts from the final Securities and Exchanges Commission (SEC) comments, they stated “Employees who report internally in this manner will have anti-retaliation employment protection to the extent provided for by Section 21F(h)(1)(A)(iii) of the Exchange Act, which incorporates the broad anti-retaliation protections of Sarbanes-Oxley Section 806, see 18 U.S.C. 1514A(b)(2).” In other words, if a person reports internally to a company or externally to the SEC of a FCPA violation and there is retaliation against that person, a RICO claim may arise.

Ladies and Gentlemen, this is scary stuff so your company had better be ready and have a robust investigative protocol in place when an internal report is made. And train, train, train and really, really, really mean it when your company says that it will not retaliate against an employee for making an allegation of a FCPA violation.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012