Whistleblower Provisions of New Sarbanes-Oxley Act Provide for Civil and Criminal Employer Liability
October 7, 2002
The Sarbanes-Oxley Act of 2002 (the
Act), the wide-ranging corporate reform legislation enacted in the wake of
accounting scandals at Enron, WorldCom and Adelphia Communications, includes two
significant expansions of whistleblower protection laws that could subject
corporate and individual violators to substantial criminal and civil liability.
The Act includes broad new civil
protections for employees of publicly traded companies who report violations of
certain federal security laws. Covered whistleblowers may pursue a private right
of action in addition to Department of Labor enforcement, and may be ordered
reinstated even before judicial proceedings have been completed. More
significantly, a provision added to the bill in conference explicitly imposes
criminal sanctions against companies or individuals who are found to have
retaliated against certain whistleblowers. Under this provision, unique among
federal anti-retaliation statutes, retaliation against a whistleblower of “any
Federal offense” could result in 10 years’ imprisonment and fines of up to
$500,000 for corporations and up to $250,000 for individuals.
Civil Provisions Protecting Whistleblowers of Security Law Violations
Section 806 of the Act prohibits
retaliation by a publicly traded company against whistleblowers in securities
fraud cases and creates a private right of action for aggrieved employees. The
prohibitions also apply to the officers, employees, contractors, subcontractors
and agents of any such companies. The law prohibits any of these persons from
discharging, demoting, suspending, threatening, harassing, or in any other
manner discriminating against an employee in the terms and conditions of
employment because the employee engaged in protected activity.
The Act protects employees who take “lawful” acts to disclose information or
otherwise assist criminal investigators, federal regulators, Congress, their
supervisors (or such other persons working for the employer who have the
authority to investigate, discover or terminate misconduct), or parties in a
judicial proceeding in detecting and stopping actions that they reasonably
believe to be in violation of specific sections of the Securities Exchange Act
of 1934, any SEC rule or regulation, or any provision of federal law relating to
fraud against shareholders. Protection is afforded under the new law as long as
the employee “reasonably believes” the employer’s conduct is a violation of
federal securities law, even if the questioned conduct is later determined to be
lawful. However, since the only acts protected are “lawful” ones, the provision
would not protect illegal actions, such as the improper public disclosure of
trade secret information.
Aggrieved employees may seek relief
by filing a complaint with the Secretary of Labor within 90 days of the alleged
violation. If the Secretary of Labor has not issued a final decision within 180
days, and there is no showing that the delay is due to the bad faith of the
claimant, the employee may bring an action for review in federal district court.
The administrative enforcement
mechanisms of the Act are, by reference, those included within the whistleblower
provisions of the Aviation Investment and Reform Act. This procedure calls for
the filing of a complaint and a written response; an investigation into the
allegations; a determination of reasonable cause by the Secretary of Labor;
issuance of a preliminary order; a hearing on the record, if requested by either
party; and issuance of a final order. The Secretary’s final order may be
appealed by either party to the appropriate U.S. Court of Appeals within 60 days
of issuance.
A particularly problematic aspect of
the enforcement procedure is that upon a preliminary finding by the Secretary
that reasonable cause exists to believe a violation of the Act has occurred, the
statute requires the Secretary to issue a preliminary order granting relief,
including reinstatement of the employee with back pay, compensatory damages,
costs, attorney’s fees and expert witness fees. Consequently, an employer could
be forced to pay damages to and rehire an employee who is later ruled to have
been lawfully discharged.
The following make-whole relief is
provided to prevailing claimants under the Act:
• reinstatement with the same seniority status that the employee would have had,
but for the discrimination
• back pay and interest
• compensation for any special damages sustained as a result of the
discrimination, including litigation costs, expert witness fees and reasonable
attorneys’ fees
On the positive side for employers,
Congress rejected expansion beyond make-whole remedies to include compensatory
and punitive damages, which likely would have resulted in a proliferation of
whistleblower litigation under the Act. In another minor victory for employers,
the Act provides that if a complaint is frivolous or has been brought in bad
faith, the Secretary may award the prevailing employer up to $1,000 in
reasonable attorney’s fees.
Criminal Penalties for Retaliation
Against Whistleblowers
In a little-noticed provision added
while the bill was in conference, Section 1107 of the Sarbanes-Oxley Act creates
a felony for retaliation against certain whistleblowers. The new provision
amends the chapter of the criminal code dealing with obstruction of justice and
specifically amends a section addressing witness tampering. The new section
provides:
Whoever knowingly, with the intent to retaliate, takes any action harmful to any
person, including interference with the lawful employment or livelihood of any
person, for providing to a law enforcement officer any truthful information
relating to the commission or possible commission of any Federal offense, shall
be fined under this title or imprisoned not more than 10 years, or both.
The scope of this provision potentially is tremendously broad. It is important
to recognize that, unlike the civil whistleblower provisions, the criminal
provision is not restricted to protecting employees of publicly traded
companies. Rather, the statute protects “any person” without limitation.
In addition, unlike the civil
provisions, which prohibit retaliatory action against employees who report
violations of securities laws, the criminal provision makes it unlawful to take
retaliatory action against persons regarding the commission of “any Federal
offense.” Neither the Act, nor the federal criminal code, define the term
“Federal offense.” While the term likely is meant to encompass only violations
of criminal laws, it is conceivable the term could be construed to include
violation of civil laws as well.
How “Federal offense” is defined will
have a tremendous influence on the scope of the new criminal penalties. If the
courts interpret the phrase to include noncriminal violations, companies and
individuals could be subject to criminal liability for retaliating against
employees who provide information about, for example, a minor FLSA recordkeeping
violation. The conduct prohibited by the criminal provision is also broad and
vague. The courts will be called upon to determine what constitutes “harmful”
action or “interference” with employment within the meaning of the statute.
Finally, it should also be recognized that the whistleblower protection could
apply even if it is ultimately determined that no federal offense occurred,
since protection applies to any person providing truthful information “relating
to the commission or possible commission of any Federal offense ….”
The law prohibits retaliation against employees who provide the requisite
information to a “law enforcement officer.” The federal criminal code defines
“law enforcement officer” broadly to include not only federal police officers or
FBI agents, but also any office or employee of the federal government, in
addition to any person or consultant, authorized to act on behalf of the
government who is “authorized under law to engage in or supervise the
prevention, detection, investigation, or prosecution of an offense.”
By its terms, the criminal provision only prohibits retaliation against
employees who provide “truthful information” to the appropriate authorities.
Penalties for violation of the
criminal provision are harsh. Violators of the new law may be sentenced to up to
10 years in prison. In addition, companies convicted of violating the law may be
fined up to $500,000, and individuals convicted under the law may be fined up to
$250,000.
The Securities and Exchange
Commission is authorized to promulgate rules and regulations in furtherance of
the Sarbanes-Oxley Act. It remains to be seen, however, whether the SEC will
issue regulations with respect to the whistleblower provisions of the Act.
Conclusion
With the creation of a new felony and new civil protections and procedures, the
Sarbanes-Oxley Act adds an entirely new dimension to employee whistleblower
protections. Given the prospect of criminal liability and substantial fines for
both companies and individuals under the new law, it is important for employers
to be aware of these new provisions and to educate their management and
supervisory personnel of the whistleblower protections contained in the Act.
For more information, contact Todd D. Steenson, toll free at 888-688-8500, or via e-mail at todd.steenson@hklaw.com, respectively.