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U.S. Supreme Court to Hear Sox Whistleblower Case Involving Contractors

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secunda-paulThis past Friday, the United State Supreme Court granted cert. in the case of Lawson v. FMR LLC. The case concerns whether the Sarbanes-Oxley Act (SOX), which protects employees of publicly traded companies from retaliation for reporting financial improprieties, also protects the employees of private contractors of those companies. In the case, two fund investment advisors blew the whistle on a publicly-traded mutual fund which contracted for their services. The First Circuit found that the fund advisors were not covered by SOX protections.

The Court had asked the U.S. Solicitor General’s views on the case, and the SG recommended that the Court bypass the case in order to allow the issue to percolate among more circuit courts.  The case, however, was granted.

Among the issues to be decided: whether protecting the employees of contractors is mandated under the plain meaning of SOX and whether a finding of no coverage for such employees will discourage whistleblowers from bringing financial fraud allegations to the attention of the public. It should also be an interesting case because it is one of the first to examine the whistleblower protections of SOX and will likely provide guidance on how broadly or narrowly SOX should be interpreted to protect whistleblowers in the financial services industry.

This article was originally printed on Workplace Prof Blog on May 22, 2013.  Reprinted with permission.

About the Author: Paul Secunda is an associate professor of  law at Marquette University Law School.  Professor Secunda is the author of nearly three dozen books, treatises, articles, and shorter writings. He co-authored the treatise Understanding Employment Law and the case book Global Issues in Employee Benefits Law.  Professor Secunda is a frequent commentator on labor and employment law issues in the national media.  He co-edits with Rick Bales and Jeffrey Hirsch the Workplace Prof Blog, recently named one of the top law professor blogs in the country.


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Dodd-Frank Bill Provides Robust Whistleblower Protections

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jason zuckermanRecognizing that robust whistleblower protection is critical to preventing another financial crisis, Congress included in the Dodd-Frank financial services reform bill (H.R. 4173) numerous provisions designed to encourage whistleblowing and to provide robust protection from retaliation.  These provisions create monetary awards for whistleblowers who provide original information to the SEC or CFTC, strengthen the whistleblower protection provisions of the Sarbanes-Oxley Act and the False Claims Act, and create additional whistleblower retaliation causes of action.

Reward for Whistleblowing to the SEC and Prohibition Against Retaliation (Section 922). Under Section 922, the SEC will be required to pay a reward to individuals who provide original information to the SEC which results in monetary sanctions exceeding $1 million.  The award will range from 10 to 30 percent of the amount recouped and the amount of the award shall be at the discretion of the SEC.   Factors to be considered in determining the amount of the award include the significance of the information provided by the whistleblower, the degree of assistance provided by the whistleblower, the programmatic interest of the SEC in deterring violations of the securities laws by making awards to whistleblowers, and other factors that the SEC may establish by rule or regulation.  If the amount awarded is less than 10 percent or more than 30 percent of the amount recouped, a whistleblower may appeal the SEC’s determination by filing an appeal in the appropriate federal court of appeals within 30 days of the determination.

Section 922 prohibits the SEC from providing an award to a whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information; who gains the information by auditing financial statements as required under the securities laws; who fails to submit information to the SEC as required by an SEC rule; or who is an employee of the DOJ or an appropriate regulatory agency, an SRO, the PCAOB or a law enforcement organization.

Section 922 creates a new private right of action for employees who have suffered retaliation “because of any lawful act done by the whistleblower– ‘(i) in providing information to the Commission in accordance with [the whistleblower incentive section]; (ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002,’” the Securities Exchange Act of 1934, and “‘any other law, rule, or regulation subject to the jurisdiction of the [SEC].’”  The action may be brought in federal court and remedies include reinstatement, double back pay with interest, as well as litigation costs, expert witness fees, and reasonable attorney’s fees.

New Whistleblower Protection for Financial Services Employees (Section 1057). Section 1057 creates a robust private right of action for employees in the financial services industry who suffer retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service.  The scope of coverage is quite broad in that Section 1057 applies to organizations that extend credit or service or broker loans; provide real estate settlement services or perform property appraisals; provide financial advisory services to consumers relating to proprietary financial products, including credit counseling; or collect, analyze, maintain, or provide consumer report information or other account information in connection with any decision regarding the offering or provision of a consumer financial product or service.

Section 1057 prohibits retaliation against an employee who has engaged in any of the following protected acts:

• Provided, caused to be provided, or is about to provide or cause to be provided, to an employer, the newly created Bureau of Consumer Financial Protection (Bureau), or any other government authority or law enforcement agency, information that the employee reasonably believes relates to any violation of any provision of Title X of the bill, which establishes new consumer financial protections, or any rule, order, standard or prohibition prescribed or enforced by the Bureau;

• Testified or will testify in a proceeding resulting from the administration or enforcement of any provision of Title X;

• Filed, instituted, or caused to be filed or instituted any proceeding under any federal consumer financial law; or

• Objected to, or refused to participate in any activity, practice, or assigned task that the employee reasonably believes to be a violation of any law, rule, standard, or prohibition subject to the jurisdiction of, or enforceable, by the Bureau.

Remedies include reinstatement, backpay, compensatory damages, and attorney’s fees and litigation costs, including expert witness fees.  Where reinstatement is unavailable or impractical, front pay may be awarded.

Section 1057 employs a burden-shifting framework that is favorable to employees.  A complainant can prevail merely by showing by a preponderance of the evidence that her protected activity was a contributing factor in the unfavorable action. A contributing factor is any factor which, alone or in connection with other factors, tends to affect in any way the outcome of the decision.  Once a complainant meets her burden by a preponderance of the evidence, the employer can avoid liability only if it proves by clear and convincing evidence that it would have taken the same action in the absence of the employee’s protected conduct.

The procedures governing Section 1057 claims are substantially similar to those governing retaliation claims brought under the Consumer Product Safety Improvement Act of 2008, 15 U.S.C. § 2087.  The statute of limitations is 180 days and the claim must be filed initially with the Occupational Safety Health Administration (OSHA), which will investigate the complaint and can order preliminary reinstatement.  Once OSHA issues its findings, either party can request a hearing before a Department of Labor (DOL) administrative law judge.  If the DOL has not issued a final order within 210 days of the filing of the complaint, the complainant has the option to remove the claim to federal court and either party can request a trial by jury.  Section 1057 claims are exempt from mandatory arbitration agreements.

Reward for Whistleblowing to the CFTC (Section 748). Section 748 amends the Commodity Exchange Act, 7 U.S.C. § 1 et seq., to create a whistleblower incentive program and whistleblower protections similar to those in section 922, including a new private right of action.  One notable difference between sections 748 and 922 is the ability of a commodity whistleblower to appeal any determination regarding an award made by the Commodity Futures Trading Commission (CFTC) within 30 days.  Protected conduct under section 748 includes providing information to the CFTC in accordance with the whistleblower incentive provision and “assisting in any investigation or judicial or administrative action of the [CFTC] based upon or related to such information.”

Strengthening Sarbanes-Oxley’s Whistleblower Protection Provision (Sections 922 and 922A). Sections 922 and 929A contain important amendments to the Sarbanes-Oxley act (SOX) that broaden the scope of coverage, increase the statute of limitations, exempt SOX whistleblower claims from mandatory arbitration, and clarify that SOX claims removed to federal court can be tried before a jury.

Section 929A clarifies that the whistleblower protection provision of the Sarbanes-Oxley Act (SOX), 18 U.S.C. § 1514A, applies to employees of subsidiaries of publicly-traded companies “whose financial information is included in the consolidated financial statements of [a publicly] traded company.”  This amendment eliminates a significant loophole that some courts have read into SOX that has substantially narrowed the scope of SOX coverage.  Elevating form over substance, some judges have permitted publicly-traded companies to avoid liability under SOX merely because the parent company that files reports with the SEC has few, if any, direct employees, and instead employs most of its workforce through non-publicly traded subsidiaries.

As Judge Levin pointed in Morefield v. Exelon Servs., Inc., ALJ No. 2004-SOX-002 (ALJ Jan. 28, 2004), this loophole is contrary to the purpose of SOX in that “[a] publicly traded corporation is, for Sarbanes-Oxley purposes, the sum of its constituent units; and Congress insisted upon accuracy and integrity in financial reporting at all levels of the corporate structure, including the non-publicly traded subsidiaries . . . [Congress] imposed reforms upon the publicly traded company, and through it, to its entire corporate organization.”  Section 922(b) further expands the coverage of section 806 of SOX to include employees of nationally recognized statistical ratings organizations (NRSROs), including A.M. Best Company, Inc., Moody’s Investors Service, Inc., and Standard & Poor’s Ratings Service.

Section 922(c) increases the statute of limitations for SOX whistleblower claims from 90 to 180 days and clarifies that SOX retaliation plaintiffs can elect to try their cases in federal court before a jury.  In addition, section 922(c) declares void any “agreement, policy form, or condition of employment, including a predispute arbitration agreement” which waives the rights and remedies afforded to SOX whistleblowers.

Strengthening the False Claims Act’s Whistleblower Protection Provision (Section 1079B). Section 1079B amends the anti-retaliation provision of the False Claims Act, 31 U.S.C. § 3730(h), by expanding the definition of protected conduct to include “lawful acts done by the employee, contractor, or agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of [the False Claims Act],” thereby protecting against associational discrimination and covering a broad range of activities that could further a potential qui tam action or could stop a violation of the FCA.  Section 1079B clarifies that the statute of limitations for actions brought under section 3730(h) is three years, which brings much-needed clarity in the wake of the Supreme Court’s decision in Graham County Soil & Water Conservation Dist. v. U.S. ex rel. Wilson, 545 U.S. 409 (2005) holding that the most closely analogous state statute of limitations applies to FCA retaliation claims.

“This article was originally posted on http://employmentlawgroupblog.com/”


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