Morris Jones of Capital Insider interviewed The Employment Law Group® law firm attorney Adam Augustine Carter on the recent changes in whistleblower and employment law that will affect employees in 2012.

The points Mr. Carter makes are that:

1. There are almost 2 million home health aides and in-home care providers working in our country. Now with new regulations these workers will get overtime and minimum wage protections.
2. There are now in effect regulations that implement the amendments to the Americans With Disabilities Act (ADAAA) that broaden the definition of who is covered as having a disability and the key change is that an impairment does not need to prevent or severely or significantly restrict a major life activity to be considered to be “substantially limiting” the activity.
3. Revisions to the Sarbanes-Oxley whistleblower regulations clarify and improve the procedures for handling Sarbanes-Oxley whistleblower complaints and implement statutory changes enacted into law as part of the 2010 Dodd-Frank Wall Street Reforms.
4. The Department of Labor’s Administrative Review Board has changed the landscape in 2011 for whistleblowers under Sarbanes-Oxley and the new Dodd Frank amendments to make these laws more powerful for whistleblower claims to succeed and for whistleblowers to be protected so that they don’t have to choose between their job and doing the right thing.

Related articles

• TELG Principal Quoted in Law360 Regarding New Sarbanes-Oxley Whistleblower Regulations (employmentlawgroupblog.com)
• TELG Principal Attorney Adam Augustine Carter Quoted in Bloomberg Article (executivecounselblog.com)
• U.S. DOL ARB Ends Landmark Year Holding Summary Decision Improper Unless Employer Proves Sarbanes-Oxley Act Does Not Apply (employmentlawgroupblog.com)

The United States Court of Appeals for the Seventh Circuit reversed a lower court decision dismissing whistleblower Michael DeGuelle’s lawsuit against his former employer, S.C. Johnson & Son, Inc. (SCJ) and members of management.  The Court recounted the facts alleged by DeGuelle that gave rise to the lawsuit:

[While working in SCJ’s tax department,]DeGuelle discovered that SCJ improperly received over $5 million in foreign tax credits.  In January of 2001, DeGuelle reported his findings to [Daniel Wenzel, SCJ’s Global Tax Counsel,] and asked how these errors should be remedied.  Wenzel responded that they should wait and “[t]his is why I go to church on Sundays.”  Wenzel reported DeGuelle’s findings to Robert Randleman, Vice President and Corporate Tax Counsel, but not to the IRS.  Instead Wenzel directed DeGuelle to alter or destroy records so that the errors would not be detected.  Subsequently, altered reports were submitted to the IRS. . . .

In 2002, Wenzel instructed DeGuelle and a fellow employee to structure a transaction so that SCJ could claim a tax deduction by exploiting tax accounting rules.  Wenzel told DeGuelle and his fellow employee to fabricate a business purpose for the transaction and then destroy associated business records in case “the IRS examines this transaction in the future.” DeGuelle believes SCJ received a benefit in excess of $2 million in the form of reduced tax liability as a result of this structured transaction. Further, Wenzel received a significant discretionary bonus for his role.

In February of 2005, Wenzel directed DeGuelle to fraudulently alter an income statement, which would result in approximately $3.7 million in financial benefits for SCJ.  DeGuelle refused to alter the statement.  He discussed his concerns with Donald Pappenfuss, a supervisor within the tax department, who instructed DeGuelle to alter the form pursuant to Wenzel’s instructions.  Wenzel approved the altered income statement and submitted it to the IRS by mail.

. . .

In March of 2008, Wenzel told DeGuelle to bring any concerns about issues in the tax department to appropriate department personnel instead of taking such concerns to accounting or human resources.  Wenzel was loud and physically aggressive toward DeGuelle during this meeting.  Wenzel also made disparaging comments about DeGuelle in front of other SCJ employees.  That same month, DeGuelle received a negative six-month performance review even though such mid-year reviews were not routine, and despite the fact that DeGuelle received an Officer’s Award in recognition of his superior job performance in January of that year.

. . .

On September 23, 2008, Wenzel and DeGuelle had another verbal altercation and DeGuelle received a negative “needs improvement” performance review from Wenzel.  DeGuelle contacted [Kristen Camilli, Director of human Resources,] and alleged that his review was retaliation for his whistleblowing activities.  Camilli informed DeGuelle on October 10, 2008, that the negative review would be investigated.

. . .

On December 18, 2008, DeGuelle met with [another manager, Gayle Kosterman,] and Camilli.  They informed DeGuelle that the negative review was retaliatory in nature and it would be revoked. . . .  Kosterman directed DeGuelle to drop his complaints of tax fraud, but DeGuelle stated he would file a whistleblower complaint with the Department of Labor.  Later that day, Kosterman and Camilli contacted DeGuelle by telephone and. . . offered to make a partial payment of DeGuelle’s attorney’s fees if DeGuelle agreed to sign a release of claims and confidentiality agreement.

. . .

DeGuelle continued to contact federal agencies about SCJ’s tax fraud.

. . .

On March 19, 2009, DeGuelle provided SCJ counsel with a five-page memorandum detailing his concerns about tax fraud within the company. . . . Kosterman met with DeGuelle and offered him the opportunity to resign with one year of salary and benefits if he signed a confidentiality agreement and released all claims.  Again, DeGuelle refused SCJ’s offer.

DeGuelle was subsequently terminated by SCJ.  DeGuelle’s complaint alleges that Wenzel, Randleman, and Pappenfuss engaged in tax fraud in order to receive significantly higher discretionary bonuses, and that management retaliated against him for disclosing the fraud to the government – a violation of the Racketeer Influence and Corrupt Organizations Act (RICO).

Sec. 1962(c) of RICO makes it unlawful for an employee of an enterprise engaged in interstate commerce “to conduct or participate, directly or indirectly, in the conduct of such enterprise’s racketeering activity . . . .”  Violations of RICO can include mail fraud, tax fraud, the destruction of records, and whistleblower retaliation.

The district court erroneously determined that the alleged tax fraud and alleged retaliation were patently unrelated for purposes of RICO, because the schemes “involved different actors, motives, and victims.”  The Seventh reversed the district court and agreed with DeGuelle’s argument that the Sarbanes-Oxley Act’s addition of Sec. 1513(e) as a RICO predicate act allows his claim to proceed.  Under RICO, violations of Sec. 1513 constitute “racketeering activity.”  Congress enacted the Sarbanes-Oxley Act or SOX to address growing concerns about the reliability and accuracy of disclosures made by publically-traded corporations.

Applying a relatively broad relationship standard, the Seventh Circuit stated:

When an employer retaliates against an employee, there is always an underlying motivation.  In this case, for example, the motivation was to retaliate against DeGuelle for disclosing the tax scheme.

. . .

We believe the district court erred in finding that the retaliatory actions taken against DeGuelle were unrelated to the ongoing tax fraud scheme.

The case is DeGuelle v. Camilli.

Related articles

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• U.S. DOL ARB Ends Landmark Year Holding Summary Decision Improper Unless Employer Proves Sarbanes-Oxley Act Does Not Apply (employmentlawgroupblog.com)
• OSHA Sues Whole Foods for Terminating Whistleblower (employmentlawgroupblog.com)

On December 16, 2011, the United States Department of Labor’s Administrative Review Board issued important decision for whistleblowers and their advocates to end a year of landmark Sarbanes-Oxley Act of 2002 (SOX) decisions by the ARB, including:

• Vannoy v. Celanese, ARB No. 09-118, ALJ No. 2008-SOX-064 (ARB September 28, 2011) (holding that whistleblower disclosures containing employer confidential information are protected under SOX when those disclosures contain original information evidencing the purported securities law violation);
• Menendez v. Halliburton, ARB Nos. 09-002, 09-003, ALJ No. 2007-SOX-005 (ARB September 13, 2011) (affirming whistleblowers are protected under SOX even when mistaken, holding the employer’s disclosure of the whistleblower’s identity to constitute an adverse employment action, and finding that whistleblowers establish causation by showing their whistleblowing activity was merely a contributing factor in the employer’s decision to take the adverse action);
• Sylvester v. Parexel Int’l LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-039, -042 (ARB May 25, 2011) (holding that the heightened pleading standard of federal courts does not apply to SOX claims before the Department of Labor and affirming that allegations of shareholder fraud are not a requirement under the SOX whistleblower provisions);
• Johnson v. Siemens Bldg. Techs, Inc., ARB No. 08-032, ALJ No. 2005-SOX-015 (ARB March 31, 2011) (clarifying that the whistleblower protection provisions of SOX extend to employees of subsidiaries of publicly-traded companies even if those subsidiaries are privately owned); and
• Brown v. Lockheed Martin Corp., ARB No. 10-050, ALJ No. 2008-SOX-049 (ARB February 28, 2011) (applying an appropriately broad reading of SOX where whistleblowers are not required to allege shareholder fraud to receive SOX’s protection – an allegation of mail or wire fraud is sufficient).

In the ARB’s final SOX decision for 2011, Charles v. Profit Inv. Mgmt., ARB No. 2009-SOX-40 (ARB December 16, 2011), the ARB overturned an Administrative Law Judge’s (ALJ) premature summary decision in favor of the employer.  The ALJ believed erroneously that whistleblower Lisa Charles’s employer (Profit Investment Management) could not be subject to the whistleblower provisions of SOX.

Profit Investment Management employed Charles from 2004 to 2008, terminating her employment after she reported SEC violations to the CEO.  Charles then filed a SOX complaint with the U.S. Department of Labor in August 2008, resulting in the employer’s motion for summary decision.

The ALJ granted the employer’s motion for summary decision and dismissed the case at least in part on the basis that Charles’s former employer was not a covered employer under SOX, because it is a privately owned company.

The SOX whistleblower protection provision (Section 806) states:

(a) WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES. No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company, . . . or any officer, employee, contractor, subcontractor, or agent of such company, . . .  may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee  –

(1)  to provide information, cause information to be provided, or otherwise assist in any investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire, radio, TV fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by – [a Federal regulatory or law enforcement agency, a supervisor, or in support of a related proceeding.]

The ARB noted that the burden lies with the moving party to demonstrate the absence of any material fact genuinely in dispute in order to prevail on a motion for summary decision.  In this case, there is a genuine issue of fact regarding whether Profit Investment is a covered employer under SOX.  Profit Investment failed to establish a record showing that it was not a subsidiary, contractor, or agent of a public company.  The ARB states:

The plain language of Section 806(a) identifies several categories of potentially covered entities beyond the registration and reporting requirements of SOX (i.e., “any officer, employee, contractor, subcontractor, or agent of such company”).  The Second and Sixth Circuits have concluded that the use of the term “any” preceding the listing of the several entities identified in Section 806(a) is an indication that Congress intended the clause “officer, employee, contractor, subcontractor, or agent” to be interpreted in an allencompassing manner.

(Internal citations omitted).

The ARB also cited its decision in Johnson, supra, in which it found that “. . . Congress intended to enact robust whistleblower protections for more than employees of publically traded companies.”  Congress also intended to not only protect whistleblowers who work for publically traded companies, but also “employees of private firms that work with, or contract with, publically traded companies.”

The ARB concluded that in this case the ALJ’s summary decision was improper.  Much of the factual record of the case remains in dispute: particularly the nature of the contractual relationship between Profit Investment Management and a publically traded firm to which it is connected.  Consequently, whistleblowers will more easily prevail against motions for summary decision based on employer coverage, unless the employer proves it has no connections to a public company that might give rise to Section 806 liability.

Related articles

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Among the changes in the interim final rules is a provision allowing SOX whistleblower complaints to be submitted in either oral or the traditional written format, though corporate attorneys have called the new regulation permitting oral complaints unfair, attorneys who represent employees see the new approach as consistent with Supreme Court precedent.  Law360 reports:

Attorney Nick Woodfield of The Employment Law Group®, a firm that represents employees, said the rule was simply following the reasoning of the U.S. Supreme Court’s March ruling in Kasten v. Saint-Gobain Performance Plastics Corp., which held that the Fair Labor Standards Act shielded workers from retaliation for verbal as well as written complaints.

Arguing that the regulations should interpret the term “complaint” in a manner that’s inconsistent with the Supreme Court doesn’t make sense, and gripes about allowing SOX claimants to bring oral complaints “would have been a lot better taken before the Kasten decision,” Woodfield said.

“While it’s lowering the bar to get into the administrative hearing process, it’s really just making it consistent with other threshold civil rights complaint pleading standards,” he said.

Broader protections for whistleblowers under Dodd-Frank Amendments

Significantly, Dodd-Frank extended protection for employees against workplace retaliation by credit rating agencies and other “nationally recognized statistical rating organizations” as defined in the Securities Exchange Act of 1934. 15 U.S.C. § 78c.  The new OSHA rules adopt this definition and, similarly, modify the definition of “company” to mirror the definition under the Sarbanes-Oxley Act.

Extended complaint filing period and acceptance of oral complaints

Additionally, the regulations have been changed to reflect statutory changes to complaint filing procedures, extending the filing period for retaliation complaints under Sarbanes-Oxley from 90 to 180 days after either the violation occurs or after the date on which the employee became aware of the violation. Most notably, the new rules clarify that oral complaints to OSHA are permitted, whereas previously the rules indicated that only written complaints are allowed. This change is consistent with OSHA procedural requirements under other whistleblower statutes. If a complaint is made orally, OSHA will create a written record of the complaint.  Moreover, complaints may be filed in any language if the complainant is unable to file in English, and others may file on the behalf of the employee if the employee has given consent. Finally, the complainant may provide notice of withdrawal of a complaint orally or in writing.

OSHA notes that allowing oral complaints is consistent with Administrative Review Board (ARB) decisions that have long allowed oral complaints under certain environmental and asbestos statutes.  Also influencing OSHA’s decision is the Supreme Court’s ruling in Kasten v. Saint-Gobain Performance Plastics Corp., 131 S. Ct. 1325 (2011), which held that oral complaints of regulatory violations are protected under the anti-retaliation provision of the Fair Labor Standards Act.  SOX does not prescribe any particular form for complaints filed under the statute.

Dodd-Frank Amendments right to review in federal district court

Another change to Sarbanes-Oxley made by Dodd-Frank and reflected in the rule changes relates to the right to a jury trial in actions brought under the Sarbanes’ “kickout” provision. 18 U.S.C. § 1514A (b)(1)(B). This provision gives the complainant a right to bring a de novo action in federal district court, regardless of the amount in controversy, if the Secretary of Labor fails to issue a final decision within 180 days of a complaint being filed, provided that the delay is not the result of bad faith on the part of the complainant.

More thorough review of parties’ positions during investigation

The interim rules section pertaining to the investigation of complaints brings investigative procedures under SOX in line with procedures under other OSHA whistleblower statutes. The new rules require that during the investigatory process OSHA provide the complainant with a copy of the responding party’s submission so that the complainant has an opportunity to respond.  According to OSHA, this change will enhance its ability to conduct full and fair investigations and allow more thorough assessments of the respondents’ defenses.

Broader relief available for whistleblowers

The new rules omit the provision in SOX which deemed reinstatement inappropriate where the respondent demonstrates that the complainant is a security risk.   OSHA’s explains in the interim rules that the issue of whether reinstatement is appropriate should be made “on the basis of the facts of each case and the relevant case law;” therefore, it is unnecessary to define the precise situations in which reinstatement is inappropriate. The rules also state that OSHA may order “economic reinstatement,” which is similar to an order of “front pay” under the Federal Mine Safety and Health Act of 1977 and may be granted instead of the typical preliminary reinstatement when reinstatement may not be appropriate or inadvisable.  Economic reinstatement requires that the employer pay the employee wages without the employee having to return to work.  Employers are not entitled to choose economic reinstatement, nor do they have any basis for recovering the costs of economic reinstatement in the event that the employer eventually prevails in the adjudication.

Non-substantive changes in terminology

OSHA has made certain non-substantive changes to terminology to ensure consistency with procedural rules under other statutes. Specifically, cases under the whistleblower provision of Sarbanes-Oxley are now referred to as actions alleging “retaliation” and no longer “discrimination,” individuals previously referred to in such complaints as “named persons” are now called “respondents,” and “unfavorable personnel actions” are now called “adverse actions”.

The interim final rules are currently available here.  Interested parties are invited to comment by January 3, 2012. Comments may be submitted electronically at http://www.regulations.gov or by fax or mail with further instructions found here.

Whistleblower Matthew Vannoy noticed potential weaknesses in his employer’s credit card reimbursement program and reported those weaknesses internally and to the IRS.  Some of the documents Vannoy sent to the IRS included confidential employer information such as employee home addresses and social security numbers.   The ARB held that disclosures containing employer confidential information are protected disclosures under the SOX whistleblower provisions so long as those disclosures contain original information evidencing the purported securities law violation.

R. Scott Oswald of the Employment Law Group, which represents employees, said that with the exception of the May 25 decision in Sylvester v. Parexel, the Vannoy decision was the most significant ruling to come out of the ARB in 2011.

* * *

“It will facilitate cooperation between whistleblowers and the law enforcement agencies that Congress has designated to root out fraud in the corporate sector,” Oswald said of the Vannoy ruling.

According to Oswald, the Vannoy decision eviscerates the argument that using or supplying information that an employer deems confidential to a government body may serve as the basis for disciplinary action.

How the ALJ will rule is still an open question, but if there’s a nexus between the documents Vannoy accessed and his tax fraud allegations, that would be enough to trigger the protections of SOX, he said.

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The Employment Law Group® attorney R. Scott Oswald discusses the landmark Menendez decision with LawyersUSA in an article titled SOX whistleblower decision creates employer problems.  The Department of Labor Administrative Review Board (ARB) ruled that a failure of management to maintain the confidentiality of a whistleblower is a violation of the anti-retaliation provision of the Sarbanes-Oxley Act (SOX).  Mr. Oswald outlines the positive consequences of the decision for whistleblowers:

According to R. Scott Oswald, the managing partner of Washington, D.C.-based law firm The Employment [Law]Group, “this is a very significant ruling [because] for the first time, the act itself of revealing a whistleblower’s identity can be an adverse action under the statute.”

Whistleblowers may now feel safer coming forward to report information, he said, knowing their identity will be kept confidential.

* * *

Oswald said the decision adds “teeth” to existing confidentiality policies.

Most companies have a policy that they will maintain a whistleblower’s confidentiality, he said. “But in reality, many corporations do not maintain adequate internal controls over their disclosure protocols.”

The Menendez decision provides additional incentives to employers to maintain confidentiality going forward, in part because the ARB said that damages may be available.

Menendez could receive “special damages” under Sarbanes-Oxley, said Oswald, which could include recovery for the damage to his reputation as well as emotional distress.

In addition to establishing that the act of breaching confidentiality is actionable, the decision also changes the standard for what constitutes an adverse action.

The ARB “articulated a more favorable iteration of adverse action than defined under other whistleblower statutes,” explained Oswald.

As a practical matter, this more generous standard will allow more cases to survive summary judgment, he said.

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Whistleblower Matthew Vannoy filed a complaint with the Department of Labor on January 25, 2008, alleging his employer, Celanese Corporation, violated the whistleblower protection provisions of the violated the Sarbanes-Oxley Act (SOX) when placing him on paid administrative leave and subsequently terminating him.  Celanese is an international publicly traded company that manufactures and distributes industrial chemicals.

Vannoy noticed potential weaknesses in the company’s credit card reimbursement program and reported those weaknesses internally and to the IRS.  Some of the documents Vannoy sent to the IRS included confidential employer information such as employee home addresses and social security numbers.

The ARB held that SOX whistleblowers are not only protected when disclosing information to the SEC or Department of Justice, but they are also protected when making disclosures to the IRS.  Applying the Williams standard, the ARB also held that the use of paid administrative leave could constitute an adverse employment action when forced upon a SOX whistleblower.  Lastly, the ARB found:

There is a clear tension between a company’s legitimate business policies protecting confidential information and the whistleblower bounty programs created by Congress to encourage whistleblowers to disclose confidential company information in furtherance of enforcement of tax and securities laws. Passage of these bounty provisions demonstrate that Congress intended to encourage federal agencies to seek out and investigate independently procured, non-public information from whistleblowers such as Vannoy to eliminate abuses in the tax realm under the IRS Whistleblower program and now in the securities realm with the SEC Whistleblower program recently enacted in 2010. In 2010, the Dodd-Frank Act established the SEC Investor Protection fund, which is to be used to pay whistleblower claims and is funded with monetary sanctions that the SEC collects in a judicial or administrative action, or through certain disgorgements under the Sarbanes-Oxley Act of 2002. Similar to the IRS Whistleblower bounty program that Vannoy pursued, Section 21F(b) of the Dodd-Frank Act provides that the SEC “shall pay” a whistleblower who voluntarily provides original information to the SEC that leads to the successful enforcement of a covered judicial or administrative action and results in certain monetary sanctions.

Under the SEC bounty program, the whistleblower is entitled to an award of between 10 percent and 30 percent of what the SEC collects in monetary sanctions. However, the whistleblower must provide “original information to the SEC relating to a violation of the securities law.” 15 U.S.C. 78u-6 (b)(1) (emphasis added). The Act defines original information as information that: (i) “is derived from the independent knowledge or analysis of the whistleblower;” (ii) “is not known to the SEC from any other source, unless the whistleblower is the original source of the information;” and (iii) the information “is not derived exclusively from an another allegation contained in a judicial or administrative hearing, in a governmental report, hearig, audit or investigation, or from the news media, unless the whistleblower is a source of the information.” 15 U.S.C. 78u-6(a)(3).

Under the terms of the SEC whistleblower bounty program, Congress anticipated that the whistleblower would provide independently garnered, insider information that would be valuable to the SEC in its investigation. Indeed, the recently issued final rule implementing the SEC bounty program contains a provision prohibiting employers from enforcing or threatening to enforce confidentiality agreements to prevent whistleblower employees from cooperating with the SEC. 17 C.F.R. § 240.21F-17(a).

The IRS whistleblower bounty program Vannoy used, like the SEC program recently established, reflects Congressional recognition of the notable contributions to law enforcement provided by whistleblowers with non public, inside information. Vannoy’s allegations must be viewed in light of these significant enforcement interests. Evidence of record supports Vannoy’s allegations that he procured employee data in 2005 and in 2007 as part of his efforts to facilitate his complaint with the IRS as to Celanese’s accounting practices. In doing so he sent confidential information by e-mail and created compact discs containing confidential information concerning Celanese employees without the company’s permission. Indeed the record shows that some of this information was transferred to a personal computer at Vannoy’s home. See supra at 4. Thus the crucial question for the ALJ to resolve with a hearing on remand is whether the information that Vannoy procured from the company is the kind of “original information” that Congress intended be protected under either the IRS or SEC whistleblower programs, and whether the manner of the transfer of information was protected activity within the scope of SOX. These are mixed questions of law and fact for the ALJ to determine in the first instance.

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On September 13, 2011, the Department of Labor Administrative Review Board (ARB) issued an opinion in Menendez v. Halliburton, Inc., another opinion in a long line of opinions this year and last year that affirm broad protections for Sarbanes-Oxley Act (SOX) whistleblowers.   The ARB reversed the decision of the Administrative Law Judge, finding that the reporting of questionable accounting practices in this case was a protected activity even when the whistleblower was mistaken.  The ARB also ruled that the disclosure of the whistleblower’s identity – even though coworkers would eventually find out anyway – was an adverse employment action.  In addition, the whistleblower need only show that the protected activity was a contributing factor in the employer’s decision to take the adverse action – a very low hurdle.

Importantly, the ARB further expanded protections for whistleblowers by removing from consideration Title VII case law that may have produced narrow exceptions to whistleblower protection.  The ARB formally adopted the Williams standard, which states that any nontrivial unfavorable employment action is an adverse action, but curiously the ARB also retained the Title VII Burlington Northern standard as a persuasive interpretive tool. 

Background

Halliburton, Inc. hired Anthony Menendez in March 2005 as Director of Technical Accounting Research & Training to support Halliburton’s Finance & Accounting (F&A) organization.  He initially reported directly to Halliburton’s Chief Accounting Officer (CAO) Mark McCollum.

Within a few months, Menendez approached McCollum with his belief that Halliburton was engaging in questionable accounting practices – namely, that Halliburton could not recognize revenue on certain products prior to their delivery into the physical possession of the customer.  Halliburton and its external auditor, KPMG, disagreed with Menendez’s recognition concern.

Following the disagreement, Menendez made confidential disclosures to the SEC that Halliburton, with the knowledge of its external auditor, was engaging in defective accounting practices with respect to revenue recognition.  He also reported the practices to Halliburton’s Audit Committee, making substantially the same claim and expecting his complaint to remain confidential as required under the Sarbanes-Oxley Act (SOX) and Halliburton’s stated policy.

In violation of SOX and Halliburton’s stated policy, Menendez’s complaint to Halliburton’s Audit Committee was forwarded to KPMG, the CFO, and McCollum.  Even more damning – an email was sent to Menendez and fifteen of his direct coworkers publically outing Menendez as the SEC whistleblower.

When Menendez returned to work the following week after used accumulated leave, he received no phone calls, few emails, and his coworkers generally avoided him.  KPMG’s auditors, with whom Menendez normally worked closely, also refused to interact with him.

The SEC formally notified Halliburton on September 19, 2006, that no enforcement action was being recommended.  Halliburton’s Audit Committee concluded the same.

Menendez was then instructed to report to the director of external reporting for the F&A group instead of reporting directly to McCollum.  On October 17, 2006, Menendez resigned, stating that he believed Halliburton had demoted him by requiring him to report to a lower ranking officer. 

Sarbanes-Oxley Act (SOX)

On May 8, 2006, Menendez filed a complaint with the Department of Labor under Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002, Title VIII of SOX, accusing the company of using improper accounting practices to distort its financial statements and mislead investors.  Menendez further claims Halliburton retaliated against him in violation of the SOX whistleblower provisions after he reported his concerns to the SEC and Halliburton’s Audit Committee.

Section 806 of SOX, 18 U.S.C. Sec. 1514(A), provides that:

No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee –

(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information or assistance is provided to or the investigation is conducted by –

(A) a Federal regulatory or law enforcement agency;

* * * *

(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).

The plain language of the statute prohibits employers from discriminating against whistleblowers who report to the SEC or other regulatory or law enforcement agency what the whistleblower “reasonably believes” constitutes a violation of a securities law or of “any rule or regulation” of the SEC.

To prevail on a SOX whistleblower retaliation claim, whistleblowers must prove by a preponderance of evidence that:

1. he or she engaged in a protected activity;
2. he or she suffered an adverse action; and
3. the protected activity was a contributing factor in the resulting adverse action.

The Department of Labor (DOL) Administrative Law Judge (ALJ) dismissed Menendez’s claim; however, the Administrative Review Board (ARB) reviewed the ALJ’s decision, reversing in part, affirming in part, and remanding back to the ALJ to make further findings.

Protected Activity – Reasonableness Standard

The ARB affirmed the ALJ’s finding that the Menendez engaged in protected activity when he alleged violations of SEC rules concerning potentially questionable accounting practices to his supervisors, the SEC, and Halliburton’s Audit Committee.  To be engaged in a protected activity, the whistleblower must reasonably believe that their employer is committing fraud that violates a securities law or any rule or regulation of the SEC.   The necessary reasonableness is based on the knowledge available to a reasonable person in the same circumstances as the whistleblower and with the same training and experience.

Material violation not a requirement

The ARB held that there is no requirement that the whistleblower allege material violations of the law, noting that the whistleblower is seeking protection under SOX and not actually suing the employer for committing fraud.

…Section 806’s plain language contains no materiality requirement for whistleblower complaints.  As we explained recently in Sylvester v. Parexel, a complainant need not allege the substantive elements of fraud, including materiality, to warrant Section 806 protection; the complainant need only have a reasonable belief that the activity alleged constitutes fraud.

Menendez v. Halliburton, Inc. ARB No. 09-002, 09-003, ALJ No. 2007-SOX-005, slip op. at 13 (ARB Sep. 13, 2011) (citing Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-39 and 42 (ARB May 25, 2011)).

Vindication not a Requirement

The ARB held that the reasonableness of Menendez’s position on the questionable accounting practices is not undermined by the SEC ultimately approving the accounting practices.  An employee’s reasonable but mistaken belief in employer wrongdoing constitutes protected activity under SOX.

Congress purposely selected a broad reasonableness standard unfettered by the limitations of the materiality or vindication requirements in order to encourage whistleblowers to report potential fraud and to report that fraud in its infancy.  Placing the burden on the whistleblower to prove with legal certainty that an employer is indeed committing a vast fraud would deter those whistleblowers who sense wrongdoing but do possess a smoking gun from ever coming forward with the valuable knowledge they do possess.

Adverse Action

Menendez alleged the following adverse actions: (1) breach of whistleblower confidentiality; (2) isolation; (3) removal of job duties; (4) demotion; and (5) constructive discharge.  The ALJ held that none of the above enumerated instances constituted an adverse action.  The ARB disagreed, holding that the breach of whistleblower confidentiality was an adverse action levied against Menendez and stating:

Indeed, the facts of this case exemplify the very reason why Congress mandated that publically-traded firms set up confidential avenues to report wrongdoing.

Menendez, slip op. at 26.

Breach of whistleblower confidentiality

Section 301 of SOX, 15 U.S.C. Sec. 78j-1(m)(4), requires that publicly-traded companies such as Halliburton establish procedures for:

(A) the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; and

(B) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.

Strict confidentiality of whistleblower complaints is essential to protecting whistleblowers from almost certain retaliation by the supervisor that whistleblower likely implicates in a fraud committed against shareholders.

The reason for requiring audit committees to create confidential and/or anonymous disclosure procedures is evident. Employee whistleblowers are one of the most effective sources of information concerning questionable accounting and auditing matters as well as fraud and corporate crime. Since employees are more willing to identify misconduct if they can do so anonymously, it stands to reason that anonymous and/or confidential reporting mechanisms encourage internal reporting of corporate misconduct. Furthermore, the confidentiality that Section 301 provides allows employees to report problems directly to the independent audit committee and thus effectively to their employer, while at the same time permitting the whistleblowing employee to avoid possible retaliation from supervisors or high-ranking company managers who may be defensive about wrongdoing in which they might be implicated.  Congress well recognized the importance of encouraging the reporting of accounting irregularities and potential fraud by means of confidential disclosures.

Menendez, slip op. at 23.

Williams and Burlington Northern tests for adverse actions

While the ARB had previously adopted the Burlington Northern test for adverse actions, the ARB now formally adopts the Williams test:

Citing this Board’s adoption of the Supreme Court’s Burlington standard in AIR 21 cases, the ALJ held Title VII’s definition of adverse action, likewise applies to SOX whistleblower claims. However, in Williams v. American Airlines, this Board recently clarified that Burlington’s adverse action standard, while persuasive, is not controlling in AIR 21 cases.  As we discuss below, we similarly hold that Burlington is a particularly helpful interpretive tool, but the plain language of Section 806’s adverse action provision controls.

Menendez, slip op. at 15; Williams v. American Airlines, Inc. ARB No. 09-018, ALJ No. 2007-AIR-004, slip op. (ARB Dec. 29, 2010); Burlington Northern & Santa Fe Railway Co. v. White, 548 U.S. 53 (2006).

The Burlington Northern test, borrowed from Title VII anti-discrimination Supreme Court case law, defines an adverse action as any action that would dissuade a reasonable employee from engaging in the protected activity.  The Williams test alternatively defines adverse actions as unfavorable employment actions that are more than trivial, either as a single event or in combination with other deliberate employer actions.

The ARB has decided to officially depart from Title VII case law by adopting Williams as the controlling standard and relegating Burlington Northern to persuasive authority or an “interpretive tool.”   This departure is intended to resolve inconsistencies caused by substantial differences in statutory language between the Title VII provisions and the SOX anti-retaliation provisions.  The move is in all likelihood a victory for whistleblowers and whistleblower advocates, because it forecloses arguments by the opposition manipulating Title VII case law in an attempt to unfairly narrow the broad protections Congress originally intended to provide SOX whistleblowers.

Unlike either Title VII provision, Section 806 states that no company “may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee.” As explained above this language explicitly proscribes non-tangible activity, which evinces a congressional intent to prohibit a very broad spectrum of adverse action against SOX whistleblowers. This difference in statutory construction convinces us that adverse action under SOX Section 806 must be more expansively construed than that under Title VII.

Considering these differences in statutory language, in Williams, we held that the intended protection of AIR 21 extends beyond any limitations in Title VII and can extend beyond tangibility and ultimate employment actions.  Because of its similarity to the adverse action language construed in Williams and for reasons explained below, we adopt the Williams standard of actionable adverse action as likewise applicable to Section 806 cases. Under this standard, “the term ‘adverse actions’ refers to unfavorable employment actions that are more than trivial, either as a single event or in combination with other deliberate employer actions alleged.”  Nevertheless, the Supreme Court’s reasoning in Burlington addressing the contours of adverse action under Title VII’s anti-retaliation provision is compelling and serves as a helpful guide for the analysis of adverse acts under SOX.

Menendez, slip op. at 17.

In some ways, the Williams standard provides broader protections than the Burlington Northern one.  In Williams, the ARB wrote that certain actions, such as termination, demotion, and suspension are per se adverse actions.  The ARB also lists examples of trivial actions: petty slights, minor annoyances, personality conflicts, snubbing by supervisors and coworkers, but further remarks that these actions could be nontrivial in the aggregate.

This is likely not the end of the application of Burlington Northern by the ARB to whistleblower cases.  The ARB in Menendez applied the Burlington Northern test, finding that the employer’s breach of whistleblower confidentiality would dissuade a reasonable employee from engaging in protected activity.  Even the Williams court applied both its standard and Burlington Northern test to the facts of that case.

Anything that would dissuade a reasonable employee from engaging in protected activity seems like it would always constitute an unfavorable employment action that is more than trivial.  The Williams test seems to engulf the Burlington Northern test, while broadening whistleblower protections by exalting certain unfavorable employment actions to a per se status, and foreclosing the application of any narrowing language from Title VII case law.  For this reason, Burlington Northern will likely remain extremely persuasive authority, particularly for close cases. 

No tangible consequences requirement

The ARB reversed the ALJ’s conclusion that the emails breaching Menendez’s confidentiality were not adverse actions under SOX because they merely identified Menendez to a group of people who would have known it was him in any case.  The ARB held that the tangible consequences of an adverse action merely affects the amount of damages ultimately awarded the whistleblower, not the adverse action determination.  Because Section 301 of SOX requires publically-traded companies to establish procedures for the confidential, anonymous submission of concerns regarding questionable accounting matters, Menendez’s right to confidentiality was a “term and condition” of employment that Halliburton unquestionably denied him.

Causation 

The ARB held that a whistleblower need only show by a preponderance of evidence that the protected activity was a contributing factor in the employer’s decision to take the resulting adverse action.  The protected activity does not have to be the only factor or even a determining factor- it need only be a contributing factor.

Proving a motive is not a necessary element in determining causation.  Requiring the whistleblower to prove that the employer harbored a retaliatory or discriminatory motive would impose a higher evidentiary standard than what Congress has put forth in the statute.

Conclusion

Menendez should be a clarion call to publicly traded corporations that the ARB has aligned whistleblower protections with the original language and broad interpretation Congress originally intended to protect SOX whistleblowers.

Related articles

• NWC, NELA, and The Employment Law Group Submit Brief in Support of SOX Whistleblowers Abroad (employmentlawgroupblog.com)

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The U.S. Department of Labor ordered Bank of America (BoA)  to reinstate and pay $930,000 to a former employee who BoA is accused of unlawfully retaliating against. The unidentified employee worked for Countrywide Financial Corp. before it merged with Bank of America in 2008.

After conducting an internal investigation, the former employee found “widespread and pervasive wire, mail and bank fraud involving Countrywide employees.” She reported her findings to Countrywide’s Employee Relations Department but shortly after Bank of America acquired Countrywide she was fired purportedly due to her “management style.”

The Department of Labor’s Occupational Safety and Health Administration and the former employee  maintain that “Bank of America used illegal retaliatory tactics against this employee” because she had the integrity to report potential fraud.  Reporting corporate wrongdoing involving wire, mail, and bank fraud are protected activy under the whistleblower protection provision of the Sarbanes-Oxley Act.

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The National Whistleblower Center, National Employment Lawyers Association, and The Employment Law Group® law firm filed an amicus brief in Villanueva v. Core Laboratories NV, a case before the Department of Labor Administrative Review Board (ARB).  Our amicus brief argues that whistleblowers at overseas subsidiaries remain protected under the Sarbanes-Oxley Act (SOX) when the protected activity includes emails to the U.S., and the decision to fire the whistleblower is made in the U.S.

Whistleblower William Villanueva was CEO of Saybolt Columbia, a subsidiary of Core Laboratories NV – a publicly traded company based in Houston, Texas.  In 2008, Villanueva warned executives in Houston that other executives were engaging in illegal tax schemes.  After Villanueva refused to sign a false tax return, Core fired him.  The Sarbanes-Oxley Act prohibits publicly traded companies and their subsidiaries from retaliating against an employee that reports wrongdoing related to:

1. Mail, wire, bank, or securities fraud;
2. Fraud against shareholders; or
3. Violations of any Securities and Exchange Commission rule or regulation.

Related articles

• TELG Principal Quoted in Law360 on Landmark ARB Decision for SOX Whistleblowers (employmentlawgroupblog.com)
• S.E.C. Recoups Bonus of Former Beazer Executive(dealbook.nytimes.com)
• Summary Decision Overturned for Whistleblower in Failure to Hire Case(employmentlawgroupblog.com)

 Jason Zuckerman, a principal at The Employment Law Group, which represents employees, said the Sylvester decision was in contrast to past ARB rulings that had erected barriers to complainants.

“The current ARB is applying the statute as Congress intended, and in light of the recent financial crisis, it could not be clearer that robust protection of whistleblowers is a crucial bulwark against corporate fraud,” Zuckerman said.

The ARB held that the heightened pleading standards established in federal courts did not apply to SOX claims initiated with OSHA, and that an allegation of shareholder fraud was not a necessary component of protected activity under SOX.  The Sylvester decision will likely lead to more claims surviving initial motions to dismiss or summary judgment than in the past.

Related articles

• DOL ARB Clarifies Broad Scope of Protected Conduct for SOX Whistleblowers in Sylvester v. Parexel International LLC(employmentlawgroupblog.com)
• Law360 Quotes TELG Attorney on Ruling Expanding Scope of SOX-protected Conduct (employmentlawgroupblog.com)
• DOL ARB Holds Sarbanes-Oxley Covers Claims by Employees of Subsidiaries of Publicly-traded Companies(employmentlawgroupblog.com)

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The DOL Administrative Review Board has issued a very significant en banc decision on the whistleblower provision of the Sarbanes-Oxley Act (SOX) that significantly strengthens the statute by clarifying the broad scope of protected conduct.  The ARB’s opinion in Sylvester v. Parexel International LLC, ARB No. 07-123, ALJ Nos. 2007-SOX-039, 042 (May 25, 2011) represents a substantial departure from the extraordinarily narrow construction of SOX in the opinions issued by the ARB appointed by Secretary Chao.  Read in conjunction with the ARB’s recent Johnson v. Siemens Bldg. Techs. decision broadening the scope of SOX coverage and the recent Dodd-Frank amendments to SOX (exempting SOX whistleblower claims from mandatory arbitration, clarifying that SOX claims can be tried before a jury, broadening the scope of coverage, and increasing the statute of limitations), SOX is becoming a robust remedy for whistleblowers.  The primary effect of Sylvester will be a significant increase in the number of SOX retaliation claims that get past motions to dismiss and motions for summary judgment.  The ARB has now removed ridiculous hoops that SOX complainants were required to jump through, which hoops were plainly inconsistent with the plain meaning of the statute.  And the decision will enable OSHA to rule for more complainants during the investigative stage.  Hopefully, federal courts will accord Chevron deference to the decision.  The ARB held:

1. Twombly/Iqbal heightened pleading standards do not apply to SOX claims initiated with OSHA.
2. A complainant need only express a “reasonable belief” of a violation to engage in SOX-protected activity,
3. The reasonable belief standard requires an examination of the reasonableness of a complainant’s beliefs, but not whether the complainant actually communicated the reasonableness of those beliefs to management or the authorities.
4. Protected activity need not describe an actual violation of law.  A whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern and consistent with this line of authority, an employee’s whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer’s conduct constitutes a violation of one of the six enumerated categories of law under Section 806.
5. The holding in Platone that an employee’s communication must “definitively and specifically” relate to the listed categories of fraud or securities violation under Section 806 “has evolved into an inappropriate test and is often applied too strictly.”  Instead, the focus should be on whether the employee reported conduct that he or she reasonablybelieves constituted a violation of federal law.
6. SOX protected conduct is not limited to disclosures about shareholder fraud and instead includes disclosures about mail fraud, fraud by wire, radio, or television, and bank fraud.  When an entity engages in mail fraud, wire fraud, or any of the six enumerated categories of violations set forth in Section 806, it does not necessarily engage in immediate shareholder fraud. Instead, the violation may be one which, standing alone, is prohibited by law, and the violation may be merely one step in a process leading to shareholder fraud.  Additionally, a reasonable belief about a violation of “any rule or regulation of the Securities and Exchange Commission” could encompass a situation in which the violation, if committed, is completely devoid of any type of fraud.
7. A SOX complainant need not establish the various elements of criminal fraud to prevail on a Section 806 complaint.  A complainant can have an objectively reasonable belief of a violation of the laws in Section 806, i.e., engage in protected activity under Section 806, even if the complainant fails to allege, prove, or approximate specific elements of fraud, which would be required under a fraud claim against the defrauder directly. In other words, a complainant can engage in protected activity under Section 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation.  The purposes of the whistleblower protection provision will be thwarted if a complainant must, to engage in protected activity, allege, prove, or approximate that the reported irregularity or misstatement satisfies securities law “materiality” standards, was done intentionally, was relied upon by shareholders, and that shareholders suffered a loss because of the irregularity.

There are two concurring opinions.  Judges Corchado and Royce opine that thePlatone “definitive and specific requirement” is incompatible with the plain meaning of the statute and therefore should be abandoned.  Judge Brown opines that (i) Rule 12(b)(6) does not apply to SOX complaints, but ALJs can use OALJ summary decision procedure (29 C.F.R. § 18.40) to test the sufficiency of the complainant’s evidence; (ii) the Platone “definitive and specific requirement” should not be applied to SOX but the complainant must establish a basis for concluding that the employer’s conduct of concerns relates to the laws listed under Section 806; (iii) violations of SOX need not relate to fraud against shareholders; and (iv) a SOX complainant alleging that he disclosed shareholder fraud need not prove the specific elements of fraud.

Related articles

• Law360 Quotes TELG Attorney on Ruling Expanding Scope of SOX-protected Conduct (employmentlawgroupblog.com)
• The Employment Law Group Attorney Quoted in Law360 Article on DOL ARB Decision Broadening the Scope of Coverage under SOX(employmentlawgroupblog.com)
• DOL ARB Holds Sarbanes-Oxley Covers Claims by Employees of Subsidiaries of Publicly-traded Companies(employmentlawgroupblog.com)
• DOL ARB Affirms Reinstatement of Sarbanes-Oxley Whistleblower at DOD Contractor (employmentlawgroupblog.com)

Ordering Brown reinstted and awarding her $75,000 in damages, the ARB held that shareholder fraud is not required to prove the existence of protected whistleblower activity under SOX and that allegations of mail or wire fraud are sufficient. The article quotes Jason Zuckerman, a principal attorney at The Employment Law Group® law firm, stating that the broad reading of the SOX whistleblower provisions was just what Congress intended:

“Some federal judges and ALJs ignored the plain meaning of the statute and held that protected conduct is limited solely to disclosures concerning shareholder fraud,” Zuckerman said.
…
The ARB under former Secretary of Labor Elaine Chao weakened SOX by creating loopholes that ran counter to congressional intent, but that’s no longer the case, Zuckerman said. Now, the ARB is “willing to apply the plain meaning of the statued and to construe SOX in light of its remedial purpose.”