Finance Reform Will Clarify Sox
May 25, 2010 | Leave a Comment
The Restoring American Financial Stability Act of 2010, passed by the Senate last week extends Sarbanes-Oxley Act of 2002 (SOX) whistleblower protections to employees of subsidiaries and affiliates of publicly-treaded companies. Section 929A. This appears to be identical to a provision in the reform legislation the House passed on Dec. 11, 2009. See Section 7607. This will make the Act consistant with a letter from Senator Patrick Leahy, author of the Sarbanes-Oxley whistleblower statute, to the Department of Labor which emphasized that federal whistleblower protection extends to employees of subsidiaries of companies and that the DOL should not interpret the statute to exclude employees working for company subsidiaries.Sarbanes-Oxley created federal whistleblower protections for employees when they disclose information about fraudulent activities within their companies. .
Offer of Judgment Makes SOX Whistleblower a Prevailing Party and Entitles Whistleblower to Attorneys Fees
January 9, 2009 | Leave a Comment
The Fourth Circuit Court of Appeals has held that an employee was an “employee prevailing” on his Sarbanes-Oxley Act (SOX) whistleblower claim when his case was resolved via an offer of judgment pursuant to Federal Rule of Civil Procedure 68. The employee, who worked as a vice president and project manager for a publicly traded commercial real estate developer, filed suit in federal district court asserting he was terminated in retaliation for expressing his concern to company officials that the company had knowingly, in two consecutive reports to the Securities and Exchange Commission, underreported the actual projected cost of a certain project by 18 percent and 12 percent respectively. The employer countered that he was terminated for poor performance. Prior to the close of discovery, the employee accepted the employer’s offer of judgment in the amount of $130,000.00, and the court clerk entered judgment in favor of the employee in that amount. The court then awarded the employee $325,484.08 in attorneys’ fees and costs.
On appeal, the employer asserted that the employee was not eligible for attorneys’ fees and costs under SOX because he did not prevail on the merits of his claim. The Fourth Circuit disagreed. In terms of statutory text, the court concluded that, although SOX does not use the term “prevailing party,” as commonly used in other federal fee-shifting statutes, the jurisprudence developed with respect to that term was applicable in determining whether the employee was an “employee prevailing” on his SOX claim. See Grissom v The Mills Corp.
Fourth Circuit Confirms that Billing Irregularities Not Enough for SOX Whistleblower Protection
December 17, 2008 | Leave a Comment
The Fourth Circuit Federal Court ruled that an employee who was fired after reporting alleged billing irregularities is not protected by the whistleblower provisions of the Sarbanes-Oxley Act of 2002 (“SOX”).
Plaintiff Stacy Platone began working as the manager of labor relations for Atlantic Coast Airlines (“ACA”) in 2002. Previously, she had worked for the Airline Pilots Association (“Union”). Soon after she began at ACA, Ms. Platone learned that the pilots’ union had not made required reimbursements to ACA when pilots missed flights to attend Union meetings. Under the airline’s flight-loss process, the Union must “reimburse[] the airline when its pilots had to miss flights to attend union meetings.” Ms. Platone also discovered that pilots had intentionally scheduled flights for times when there were mandatory union meetings but the pilots were not originally scheduled to work. Thus, the pilots were paid by ACA for days on which they were originally scheduled days off.
Ms. Platone notified a Union official of the reimbursement discrepancy, and the official assured Ms. Platone’s supervisor that the Union would reimburse ACA for the flight loss. Unsatisfied with the Union’s response, Ms. Platone drafted a letter for her supervisor to send to the union, demanding reimbursement. He refused to send it.
Ms. Platone subsequently met with ACA’s Director of Employment Services to discuss the issue. Notes from that meeting do not indicate that Ms. Platone made any allegation of fraudulent activity. Soon after, Ms. Platone was suspended without pay and, ultimately, terminated. ACA’s apparent reason for the termination was her relationship with an ACA pilot.
Ms. Platone filed a Sarbanes-Oxley whistleblower action with the Occupational Safety and Health Administration (“OSHA”), the agency charged with investigating SOX complaints, alleging that ACA, by not demanding reimbursement from the Union, was transferring money to Union officials in hopes of obtaining bargaining concessions. OSHA found that the plaintiff’s complaints to her supervisors did not constitute “protected activity” under SOX’s whistleblower provisions.
Ms. Platone appealed and requested a hearing before a DOL Administrative Law Judge (“ALJ”). The ALJ ruled in the plaintiff’s favor, concluding that her suspicions of fraud were reasonable, and ACA appealed the ALJ’s decision to the DOL’s Administrative Review Board (“ARB”).
The ARB disagreed with the ALJ. According to the ARB, the plaintiff did not allege mail or wire fraud related to conduct “adverse to investors’ interests,” as required by SOX. The ARB also held that her allegations did not specifically relate to the statutory categories of fraud or securities violations set forth in SOX. The plaintiff appealed to the United States Court of Appeals for the Fourth Circuit. And the Court agreed with the ARB.
“It is true that [Platone] alerted ACA management to a billing discrepancy,” Judge Roger L. Gregory wrote on behalf of the Court, “[y]et, a billing discrepancy, without more, does not equal fraud, and Platone failed to identify to ACA why she believed the actions related to the discrepancies would violate securities laws and constitute a fraud.” Thus, the plaintiff did not engage in protected activity under the whistleblower provisions of SOX, the Court concluded.
Judge Gregory emphasized that Platone does not alter the burdens of proof or persuasion for SOX whistleblower actions. “We hold only that a complainant must alert management to more than the fact that the company’s near-term profits were affected by billing discrepancies in order to meet the standard of definitively and specifically alleging mail or wire fraud,” the Court said.
Schwabe Ordered to Reinstate SOX Whistleblowers
October 30, 2008 | Leave a Comment
OSHA has ordered The Charles Schwab Corp. to reinstate and pay back pay and damages to two employees who were fired in violation of the whistleblower provision of the Sarbanes-Oxley Act of 2002. The whistleblower complaint was filed with the Occupational Safety and Health Administration (OSHA) on June 15, 2007, naming The Charles Schwab Corp., Charles Schwab & Co. Inc., Charles Schwab Bank and three individuals as defendants. The complaint alleged that the two employees were terminated because they objected to and refused to participate in a scheme at a branch office to falsify entries in Schwab’s database system. An investigation conducted by OSHA’s Whistleblower Protection Program determined that there was merit to the allegations.“This case sends a clear message that OSHA will not tolerate retaliation against corporate whistleblowers,” said Robert Kulick, OSHA’s regional administrator in New York.
The order issued by OSHA awards the two employees reinstatement to their former positions, back pay, interest, compensatory damages, attorneys’ fees and other relief. Either party to the case can file an appeal to the Labor Department’s Office of Administrative Law Judges, but such an appeal does not stay the preliminary reinstatement order.
DC Court Upholds Constitutionality of SOX
August 25, 2008 | Leave a Comment
As first reported in the SoxFirst blog today. The US Court of Appeals for the District of Columbia Circuit has upheld the constitutionality of Sarbanes-Oxley, and in particular the Public Company Accounting Oversight Board.
The opinion is in response to the appeal filed in 2006 by the Free Enterprise Fund which claimed that the manner of appointing the PCAOB members by the SEC violated the Constitution, because it gives the president the power to make appointments with the consent of the Senate.
The Competitive Enterprise Institute’s Open Market blog called the ruling “illogical”.
The Fourth Circuit Rejects ReInstatement for First Sox Whistleblower
August 12, 2008 | Leave a Comment
The first claimant to win a Sox Whistleblower case suffered another setback in a federal appeals court last week. The 4th U.S. Circuit Court of Appeals refused to reinstate David Welch to his job, ruling that he failed to explain how his employer’s alleged shoddy accounting practices could be considered a violation of federal law. Welch was dismissed as chief financial officer of Cardinal Bankshares Corp. in 2002 after reporting what he said were misclassifications in financial reports that essentially overstated the bank’s earnings by $195,000. Cardinal is the holding company for a bank in southwestern Virginia.
In the case, styled Welch v. Chao, Judge Diana Gribbon Motz wrote that a SOX whistleblower doesn’t have to cite code sections to make out a claim, but he has to identify the specific conduct he “reasonably believes” is illegal. Judge Motz wrote that communications about misclassifications in financial statements could form the basis of a SOX whistleblower claim, but that Welch’s SOX claim failed because his citation of accounting treatises and later-passed laws and regulations could not show how the bank’s accounting practices reasonably could have been perceived as a violation of federal securities laws.
J-SOX
April 12, 2008 | Leave a Comment
Japan recently enacted the Financial Instruments Exchange Law which includes a regulation entitled Management Assessment and Audit of Internal Control over Financial Reporting (”ICFR”). ICFR requires management to provide an assessment of its internal control over its financial reporting. The regulation also requires that the registrant obtain an auditor’s opinion on management’s assessment. The regulation, commonly referred to as “J-SOX” named after Sarbanes-Oxley, is applicable to companies that are publicly registered on Japanese stock exchanges and is effective for registrants’ fiscal years beginning on or after April 1, 2008.
The new law is complex and confusing. ICFR will impact the 3,800 companies listed on Japanese stock exchanges and will also affect the subsidiaries of the listed companies, even if they operate in other parts of the world.
The implementation guidance (published by the FSA) recommending a risk-based, top-down approach to J-SOX implementation twhcih means that that the parent company will begin by evaluating entity level controls (e.g., overall control environment, oversight by the board of directors, etc.) and will work down to specific processes and financial statement accounts.
The Section 1 guidance, which covers the basic framework for internal control, requires a control framework that includes the common COSO elements of:
- Control Environment
- Risk Assessment
- Control Activities
- Information and Communication
- Monitoring
In addition to those five COSO elements, J-SOX also incorporates “Response to IT” as it relates to ICFR as a new component. The Section 2 guidance covers management assessment and reporting of ICFR and includes the following five areas:
- Definition of Financial Reporting
- Scoping of Management Assessment
- Structure for Internal Control Assessment Method and Use of Specialists
- Evaluation of Company Level Controls
- Process Level Controls – Assessment of Operating Effectiveness
The Section 3 guidance covers the audit of ICFR and includes the following four areas:
- The meaning of auditor’s “Indirect Reporting”
- Sample size for testing operating effectiveness
- Use of the work of internal audit and/or others
- Reporting on material weaknesses and other reportable conditions.
Japan’s electronic data regulations and their potential interplay with J-SOX will be the subject of a later post.
Individual Liability for SOX Whistleblower Retaliation
April 9, 2008 | Leave a Comment
Individual Liability for SOX Whistleblower Retaliation. The Sarbanes-Oxley Act of 2002 specifically applies to all officers, employees, contractors, subcontractors, or agents of a covered company. At least one Adminitrative Law Judge has ruled that individuals may be properly named as respondents in SOX whistleblower protection claims under Section 806 of the Act. Granada Entertainment, 2004-SOX-74 (ALJ Oct. 19, 2004).
French Subsidiary May Have Exposure for Retaliation Under Sarbanes-Oxley
April 7, 2008 | Leave a Comment
O’Mahony v. Accenture
Earlier this year, a New York Federal Judge found that a former senior employee of a global consulting firm who was stationed in Paris can sue for damages under the whistleblower protection provision of Sarbanes-Oxley. Rosemary O’Mahony, a British citizen who worked for Accenture in France for 14 years, claimed the company demoted her after she accused it of withholding more than $3 million it owed in French social security payments. The Southern District of New York Judge rejected a motion to dismiss by co-defendants Accenture, which is based in Bermuda, and itsU.S. subsidiary. The co-defendants argued that the provision of Sarbanes-Oxley did not cover employees outside theUnited States. The Court determined that because the alleged “wrongful conduct and other material acts occurred in the United States … the exercise of jurisdiction by this Court to resolve the dispute before it would not implicate extraterritorial application of American law.” This appears to be the first case that applies Sarbanes-Oxley whistleblower protections to an employee working overseas.
The Plaintiff in the case, O’Mahony, was a partner at Accenture’s U.S. subsidiary from 1984 through Aug. 31, 2004, and a partner and employee of its French subsidiary from Sept. 1, 2004, to Oct. 31, 2006. Around September 1992, she left the United States to establish and head a new office for Accenture in France. She worked in France part time for a year, but in September 1993 her assignment was made full time.Accenture’s U.S. subsidiary received a certificate of coverage exempting it from making contributions to the French social security system for five years. But since she worked in Paris for more than five years, O’Mahony claimed that Accenture was obligated to make payments to the system. O’Mahony alleged in her complaint that her former employer owed the French government “in an amount equal to approximately 36 percent of Ms. O’Mahony’s total compensation for the period September 1997 through September 1, 2004. She said that she earned $10.4 million during that period, making the amount owed to the French $3.7 million. O’Mahony said that she notified American executives about the problem, but in September 2004 Accenture’s global financial controller in New York told her that the company had decided that its “‘interests’ would be better served by not making any of the French social security contributions and continuing to affirmatively conceal from the French authorities the fact that [O’Mahony] had been working in France since 1992. O’Mahony responded that she could not violate the law, and brought the matter to the attention to the French authorities. She claimed that Accenture responded by demoting her in November 2004 and reducing her salary by $670,000.
Criminal Exposure of Sarbanes-Oxley
April 4, 2008 | Leave a Comment
Section 1107 of SOX imposes several criminal penalties. The penalties include a fine and/or imprisonment for up to 10 years. Section 1107 does NOT create a private cause of action. See In Re Compact Disc Minimum Advertised Antitrust Litigation, MDL No. 1361 (D.Me.Oct. 2, 2006).
Section 1107 provides that:
“whoever knowingly, with the intent to retaliate, takes 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.”
This section of SOX is not limited to publicly traded employers. It appears to apply broadly to both individuals and corporations. The Section prohibits retaliation against persons who provide to a law enforcement officer “any truthful information” relating to the commission or possible commission of “any Federal offense.” Thus the information is not limited to matters involving corporate fraud or accounting abuses but can involve “any Federal crime“.
Section 1107 could create “land mines” for employers. For example, a report to a law enforcement official that a co-worker or supervisor engaged in any of the following activities would appear to be protected under this Section: (1) willfully creating dangerous working conditions in violation of OSHA laws; (2) violating one of the multitude of environmental laws; (3) copying or using software with out permission; (4) storing and/or transmitting indecent material via a company computer; or (5) the destruction of documents in response to notice of a governmental investigation.
Another concern for employers should be the risk of defending both a civil proceeding and a criminal proceeding under the Act, with a potential early communication to OSHA being the employer’s first required statement on the matter. The substantial resources required to defend against both proceedings simultaneously could result be a drain on the employer’s assets.
The final concern resulting from Section 1107 is the location of its codification at 18 U.S.C. § 1513(e). This section is specifically listed within the definition “racketeering activity” under the Racketeer Influenced and Corrupt Organizations Act (“RICO”). The result of this is that Section 1107 will likely be a basis for asserting civil RICO claims in a whistleblower case.