When most people think of the Sarbanes-Oxley Act of 2002, they think of a law regulating corporate governance, accounting, and financial disclosure. But public and private companies should remember that Sarbanes-Oxley is also an important employment statute.
The "Whistleblower Protection" provisions of Sarbanes-Oxley shield employees from retaliation when they provide information about real or perceived violations of federal securities laws. Further, the Act requires public companies to set up internal systems to solicit and review employee reports. It features an elaborate enforcement scheme including administrative, civil and criminal provisions, and provides for both corporate and individual liability. Although most of the Act's provisions apply to publicly-held companies, private companies can also be liable for retaliation, where a whistleblower reports violations to a law enforcement officer. In short, employers ignore the whistleblower provisions of Sarbanes-Oxley at their peril.
Until recently, the United States Court of Appeals for the Fifth Circuit-which encompasses Texas, Louisiana, and Mississippi-had not considered any cases under the whistleblower provisions. Then, on January 22, 2008, the court handed down its decision in Allen v. Administrative Review Board, No. 06-60849.
In Allen, three employees brought retaliation claims against their employer, Stewart Enterprises, under Sarbanes-Oxley. They alleged that they had raised various concerns about accounting and computer problems at the company. Specifically, they said that the company's computer system had made faulty interest calculations, that untimely refunds had been issued, and that the billing system was preventing the company from collecting certain balances. After raising these complaints, the employees claimed that they were subjected to a hostile work environment, including exclusion from meetings, undue scrutiny on expense reports, and reassignment to undesirable workspaces. Ultimately, all three employees lost their jobs in a reduction in force.
A Department of Labor administrative law judge reviewed the case and found no merit to the complaints. The employees ultimately appealed to the Fifth Circuit. The appeals court agreed with DOL, and dismissed the claims. The court said that one of the employees, who was an accountant, should have known the errors she alleged did not violate federal securities laws. Further, the court said:
Considering the fact that Stewart [Enterprises] did not intentionally cause the [computer] problem, did not conceal it, and attempted to correct it, a reasonable person could conclude that Stewart's conduct ... did not violate some provision of federal law relating to fraud against shareholders.
Perhaps most importantly, the Court said that-going forward-it would use "both a subjective and an objective standard" to determine whether an employee's mistaken belief that an action violates securities laws is "reasonable."
While Allen was a win for the employer, it demonstrates why compliance with Sarbanes-Oxley's whistleblower provisions can be difficult. Under most employment statutes, an employee will claim he was retaliated against for reporting prior discrimination on the basis of race, sex, or some other protected status. Through common sense and the advice of counsel, an employer can usually tell whether unlawful discrimination or harassment really has occurred.
Under Sarbanes-Oxley, however, common sense is not enough. The question is whether the reported action violates federal securities laws or SEC rules. This is often a complex legal question. Complicating things further, an employer will be liable even if the reported act does not violate the law, provided the employee reasonably believed it was unlawful. And now, under Allen, whether an employee's incorrect belief was "reasonable" depends on the "subjective and objective" knowledge and expertise of the particular employee. In other words, what might be reasonable for a file clerk might not be reasonable for an accountant.
Employers sometimes forget that Sarbanes-Oxley has an important employment law component. Allen reminds us that this not the case, and that all employers-both public and private-should pay careful attention to reports by employees that even remotely implicate securities laws.
