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Sarbanes-Oxley Act - the Whistleblower Provisions
The Whistleblower Provisions of the Sarbanes-Oxley Act of 2002
The Corporate and Criminal Fraud Accountability Act of 2002, better known as the Sarbanes-Oxley Act, establishes a new federal cause of action, "Whistleblower Protection for Employees of Publicly Traded Companies," designed to shield employees from retaliation when they provide information about what they reasonably believe to be a violation of federal securities law, the rules of the SEC or "any Federal law relating to fraud against shareholders." The legislation weaves a web of complementary provisions encouraging whistleblowers and punishing those who would retaliate against them.
What is particularly striking about Sarbanes-Oxley is that Congress took such an integrated approach to the matter of whistleblowing. Not only does the Act prohibit retaliation against whistleblowers, but it also solicits, encourages and reinforces the very act of whistleblowing. The statute requires public companies not only to adopt a code of business ethics, but also to set up an internal apparatus to receive, review and solicit employee reports concerning fraud and/or ethical violations. The teeth of the statute can be found in an enforcement scheme that includes administrative, civil and criminal enforcement mechanisms and provides for both corporate and individual liability. Sarbanes-Oxley is certainly not the first federal whistleblower protection law, but given its multi-faceted enforcement scheme, its aggressive potential penalties and its broad application, it is arguably the most forceful and the most important.
Who Is Covered?
The statute primarily pertains to public companies and their officers, employees, contractors, subcontractors and agents. Individuals, including officers and other employees of covered companies, are subject to liability in their personal capacities. Depending on how the terms eventually are defined, certain sections of the Act also appear to apply to companies and their agents that do business with publicly traded companies, such as contractors and subcontractors, even if those companies are not publicly traded. For example, an outside auditor making reports on a public company may engage in activities covered under the Act.
The Act places quasi-whistleblower disclosure burdens on in-house attorneys at public companies, and perhaps outside lawyers as well. Finally, both public and privately held companies have obligations under Section 1107 of the Act (discussed below).
What Acts Are Protected?
Section 806 of the Sarbanes-Oxley Act creates a new civil cause of action in favor of employees of public companies who are retaliated against for their covered disclosures concerning fraud against shareholders, including accountancy violations, violations of SEC rules and related matters. Covered disclosures include providing information or assistance in the investigation of conduct that the employee reasonably believes violates securities laws or regulations to a federal regulatory or law enforcement agency, a member of Congress, a congressional committee, any of their supervisors within the company, or any person at the employer with the power to "investigate, discover or terminate misconduct." The statute also protects an employee who "assists in any proceeding actually filed or about to be filed relating to securities fraud or fraud against shareholders."
A separate section of the Act, Section 1107, protects employees of both public and private companies who make truthful reports to a "law enforcement officer," where such disclosures relate to the possible commission of a federal offense. Section 1107 must be distinguished from Section 806 of the Act, which is both more limited (applies to "covered" activities of employees at public companies) and more expansive. Section 806 is triggered not just by reports to law enforcement, but also by reports of wrongdoing to members or committees of Congress and internal reports to company personnel with supervisory or investigative authority. Section 1107 also appears to apply to reports of wrongdoing involving any federal law, not just fraud against shareholders. Furthermore, Section 1107 prohibits any form of intentional retaliation, "including interference with the lawful employment or livelihood of any person." This section covers a multitude of employment actions short of actual discharge and may extend beyond employees to cover independent contractors or the employees of vendors. Of course, the overriding distinction between Sections 806 and 1107 is the potential for prison time. Importantly, Section 1107 also is being codified as an amendment to the federal criminal code section prohibiting retaliation against witnesses, victims or informants, which is a "predicate act" under the federal racketeering statute, RICO. As such, violations of Section 1107 can provide a basis for an affected employee to bring a civil RICO claim against an employer for treble damages.
Interestingly, the Act does not protect employee complaints to the news media. Such reports, by themselves, do not constitute whistleblowing under the Act.
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