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The National Law Journal Quotes The Employment Law Group® Law Firm About SOX Whistleblower Protection


Employers scoring in whistleblower actions

Tresa Baldas / Staff reporter
October 29, 2007
A law that was designed to protect whistleblowers who reveal corporate fraud has produced robust victories for employers, which have plaintiffs’ lawyers and employee-rights advocates reeling.

Since the passage of the Sarbanes-Oxley Act of 2002  which offers corporate whistleblowers protection from retaliation about 1,000 claims have been filed, but only 17 have been found to have merit, according to U.S. Department of Labor statistics.

And of those 17 cases, only six have kept their wins after full hearings before administrative law judges.

Management-side attorneys believe the law is working just fine, holding that Sarbanes whistleblowers rarely win because they are misusing the law as a weapon in garden-variety workplace disputes.

Raw deal?

Plaintiffs’ lawyers, meanwhile, believe that employees are getting a raw deal.

“I think the retaliation provision of Sarbanes-Oxley is a major disappointment,” said Jason Zuckerman of The Employment Law Group® law firm in Washington, who is handling five Sarbanes-Oxley claims on behalf of employees.

“What’s so problematic for me is that I get calls from clients all the time” usually in the accounting and legal profession” who did the right thing,” Zuckerman said. “They naively believed that they would be rewarded for doing the right thing. They’re now out of work and they come to me and I am in the unfortunate position of having to explain to them how this great law that was enacted only five years ago has been significantly undermined.”

A representative for the U.S. Department of Labor was not available for comment.

Under Sarbanes-Oxley, an employee claiming retaliation for reporting corporate fraud must first file a claim with the Occupational Safety and Health Administration, the agency charged with investigating initial complaints. Employees can proceed to federal court after 180 days or appeal to an administrative law judge, if they disagree with OSHA’s finding.

Lawyers note that a sticking point in these cases is what is considered protected activity. In other words, what did the employee reveal that led to retaliation?

Under Sarbanes-Oxley, the whistleblower’s information must relate to one of three things: a violation of securities laws, a fraud on shareholders or a violation of rules and regulations set by the U.S. Securities and Exchange Commission. The law also specifies that an actual violation does not need to be reported, only that an employee must “reasonably believe” that a violation occurred.

On Nov. 1, a closely watched Sarbanes-Oxley case is scheduled to be heard in the 4th U.S. Circuit Court of Appeals, involving an employee who complained that he was retaliated against after reporting that certain employees were not properly trained in manufacturing a vaccine — a potential violation of federal training requirements. A lower court held that his complaint was not protected under Sarbanes-Oxley. Livingston v. Wyeth, 2006 WL 2129794.

“I think the act has been interpreted by the [Labor Department] and the courts precisely the way it was intended to be interpreted,” said Michael Delikat, who is representing the defendant in Livingston.

Delikat, who chairs Orrick Herrington & Sutcliffe’s employment law practice from the firm’s New York office, rejects the argument that Sarbanes-Oxley isn’t working because employees are losing their cases. He said the statute has been successful in changing corporate conduct, prompting employers to implement whistleblower hotlines and ensure that people who come forward do not face retaliation.

Bradford Newman, who chairs the labor and employment practice in the Palo Alto, Calif., office of Paul, Hastings, Janofsky & Walker and represents management, said plaintiffs are losing their cases because they’re filing a host of claims that aren’t covered under the act. For example, an employee might complain he or she was fired for disclosing an environmental problem, a defective product or discrimination. But those aren’t protected under the act.

“Employees still don’t understand what the act covers and what it doesn’t cover,” Newman said.

Employee rights attorney Lynne Bernabei disagrees. She believes administrative law judges and courts are placing too high a burden of proof on employees, often requiring employees to prove an actual violation or striking down a claim because they believed that shareholder fraud specifically was not proven.

“If you have someone reporting insider trading, you shouldn’t have to say in addition that they’re defrauding shareholders, that should be enough,” said Bernabei of Bernabei & Wachtel, a Washington employee rights firm.

The Financial Times Quotes The Employment Law Group® Law Firm About SOX

Whistleblowers Remain in the Line of Fire

September 12, 2007

When the Securities and Exchange Commission came under congressional fire this year for its handling of an insider trading probe into hedge fund Pequot Capital, Senator Charles Grassley said the episode showed that whistle-blowers were “as welcome as a skunk at a picnic”. The SEC denied suggestions it had blocked a whistle-blower, Gary Aguirre, from pursuing the probe into Pequot – one of the senator’s suspicions at the time.Anyone looking for evidence that the system is still stacked against corporate whistle-blowers might take comfort from a study just out in the US.A University of Nebraska College of Law examination of decisions from “administrative hearings” into cases brought by whistle-blowers in the three years since the passage of Sarbanes-Oxley in 2002 shows that a mere3.6 per cent of cases were won by employees.

Robust anti-retaliation provisions in Sarbox were supposed to have made it easier for whistle-blowers to raise concern over possible accounting and securities fraud after the Enron and WorldCom scandals.

The findings could resonate amid the subprime crisis as regulators are on heightened alert for fraud.

The suspicion is that mortgage originators mis-sold products and securities were improperly packaged and sold to investors.

The study looked at 700 cases where employees experienced retaliation from companies for whistle-blowing.

In the first three years since Sarbox, employees filed 491 complaints with the US Department of Labor’s Occupational Safety and Health Administration, the agency charged with initially investigating such complaints.

Osha resolved 361 of the cases, with only 13 going in favour of staff.

Only 6.5 per cent of whistle-blowers won appeals to the departments’ judges.

Richard Moberly, the study’s author, argues the findings “challenge the hope of scholars and whistle-blower advocates that Sarbanes-Oxley’s legal boundaries and burden of proof would often result in favourable outcomes for whistle-blowers”.

The Government Accountability Group, a non-profit organisation that lobbies for whistle-blowers, described Sarbox in 2002 as “a revolution in corporate governance freedom of speech”. Its president, Louis Clark, now says it is “a disaster”.

Whistle-blowers struggle to win cases because Osha and judges who hear claims and appeals have tended to reject them either on a narrow reading of procedure or after deciding that claims “fail to fit within the exact legal parameters of a Sarbanes-Oxley claim”, the study says.

Jason Zuckerman, a lawyer at The Employment Law Group® law firm which represents Sarbox whistle-blowers, says: “Part of the problem is that investigators misunderstand the relevant legal standards and believe that a complainant must have a smoking gun – that is, unequivocal evidence proving retaliation.”

He also says judgeshave amended thelaw’s “reasonable belief” standard that whistle-blowers need to bring a case of suspected fraud to the point that they “have to report an actual violation” – which can be hard if an employee does not have all the evidence.

Yet lawyers who have acted for companies in such cases say a lot of cases are settled before reaching Osha and should be taken into account in any assessment of Sarbox’s success.

Dan Westman, a partner at Morrison & Foerster, points out that the Nebraska study does not include this. Yet many companies settle with complainants – confidentially.

“My gauge of success is not how many whistle-blowers win their cases because my assumption is only the weakest of cases go to litigation because companies will try to resolve them if they have any strength of merit at all,” he says.

Osha says any calculation of “wins” for whistle-blowers should include occasions where a whistle-blowersettles a case after submission to the department,but before investigations begin.

That takes the number of cases “with outcomes favorable to complainants” this fiscal year to 18 per cent.

The agency believes Sarbox has made it easier for people to bring claims based on retaliation for disclosing corporate fraud.

“Prior to the enactment of Sarbanes Oxley’s whistle-blower protection provisions, employees who exposedcorporate fraud wereprotected under a patchwork of various state laws,”it said.