SOX and Whistleblowing

Whistleblowers famously helped publicize the corporate scandals that gave rise to Sarbanes-Oxley: think Sherron Watkins at Enron and Cynthia Cooper at WorldCom—two of Time Magazine’s “Persons of the Year” for 2002. Given the importance of these employee disclosures, Congress considered it necessary to break the “corporate code of silence” that discouraged potential whistleblowers from coming forward. Indeed, SOX utilizes a unique holistic approach aimed at encouraging employees to disclose information about corporate wrongdoing.

First, and most prominently, Congress created an anti-retaliation provision to protect whistleblowers in publicly-traded companies from adverse employment actions (§ 806). Second, the Act requires that corporations create a whistleblower disclosure “hotline” for employees to report misconduct anonymously to the audit committee of the corporate board of directors (§ 301). Third, SOX contains criminal penalties for retaliating against employees who “blow the whistle” to law enforcement authorities about violations of federal law (§ 1107). Finally, SOX also requires corporate attorneys to report corporate fraud “up the ladder” to the officers and directors of the corporation (§ 307), and the Act’s regulations permit attorneys to report continuing fraud to the SEC (17 C.F.R. § 205.3(d)(2)).

At a minimum, SOX represents a positive effort to encourage employees to become valuable corporate monitors because the Act reduced two of the primary reasons employees do not report misconduct: fear of retaliation and concern that nothing will change even if they complain.

· Fear of Retaliation. Prior to the Act, employees were rightfully fearful of retaliation for blowing the whistle: private employees were protected from retaliation only sporadically, if at all, because state whistleblower laws were inconsistent and no federal law broadly protected corporate employees. SOX’s civil remedies and criminal penalties against retaliators potentially serve as a substantial deterrence to retaliation against whistleblowers, which should reduce employees’ fears of retaliation.

· Concern That Nothing Will Change. Studies consistently demonstrate that employees do not disclose wrongdoing because they do not believe anything will be done about their report. The disclosure hotline could address this concern because whistleblower disclosures will go directly to the people who have the ability and the legal incentive to correct disclosed illegalities: the Board’s audit committee. These hotlines will bypass the corporate managers who consistently blocked and filtered whistleblower disclosures during the corporate scandals. (I write about SOX’s disclosure channel requirement in a recently published article in the BYU Law Review.)

Tomorrow the post will address whether these changes have actually reduced the amount of corporate fraud.

Comments

[Kevin O'Brien]

This post identifies two primary reasons employees do not whistleblow: (1) fear that they will not be protected against retaliation by the employer and (2) concern that no change will result from the whistleblowing. Before SOX, employees indeed had little expectation that they would be protected. While most states protect whistleblowers in limited circumstances by recognizing the tort of wrongful discharge under the public policy exception, the whistleblower typically faced years of litigation and attorney fees to seek compensation for the retaliation. In contrast, as long as the employee brings a meritorious complaint within 90 days of the retaliatory action, SOX provides the hope that the Department of Labor will expeditiously seek compensatory damages and, if applicable, job reinstatement. Consequently, the employee is spared the burden of pursuing directly expensive long-term litigation against the employer under the tort of wrongful discharge under the public policy exception.

As an exception to the employment at will doctrine, the tort of wrongful discharge under the public policy requires the employee to show the following difficult elements of the tort: (1) the employer directed an employee to perform an illegal act; (2) the action directed constitutes public policy usually involving a statute designed to protect the public; (3) the employee was terminated for refusing to perform the illegal act or for whistleblowing; and (4) the employer was aware that employee’s refusal or whistleblowing was based upon reasonable belief that the act was illegal. Interestingly, since this action lies in tort, the employee is allowed to pursue punitive damages as well. In contrast, SOX limits recovery under the act to compensatory damages. However, SOX explicitly allows any others damages allowed under state law such as the tort of wrongful discharge and thus the related possibility of punitive damages.

Regarding the other primary reason employees do not whistleblow, it is not surprising that employees would not wish to risk retaliation if no change would result from the whistleblowing. Furthermore, taking into account the perceived consequences of the whistleblowing—to the employee and to actual change--would be the ethical thing to do. The contemporary ethicist, Richard DeGeorge, actually makes this reason the last factor on whether an employee should whistleblow from a moral perspective when he stated in his book “Business Ethics”: “The employee must have good reason to believe that by going public the necessary changes will be brought about. The chance of being successful must be worth the risk one takes and the danger to which one is exposed.”

[Laser Haas]

On the "whistle-blowing" issue(s) when does / did the "anti-retaliation" provisions become effective?


Starting at "x" date, as a legal premise, can such time restriction be utilized against the whistle blower by stating that though the whistle blower "blew" the whistle post "x" date, the act of egregiousness actually occurred "pre" "x" and is therefore moot?

[Laser Haas]

A public entity going bankrupt creates an additional question.


An entity files bankruptcy, the entity either a Chptr 11 or 7, has as part of the confirmed PLAN a "dissolving" of the public equities.


So if a person employed of the entity or by the "estate" through the Code of 327(a) finds that fraud had or is occurring, in "blowing the whistle" on such finds the Court and U S Trustee unavailing.


Then such person or entity is terminated, in order to "cover up" the issue(s) of malfeasance.

Is the efforts to protect the whistle blowing made moot by a) bankruptcy, b) intent to dissolve public entity, c) if not intent to dissolve but actual date of dissolve is such date confirmed PLAN date or case closing date? and d) or is such moot if the Court and US Trustee refuse to address the issue OR if they did address the issue, they did NOT address all issues?