Show posts for: Sarbanes-Oxley Act

  • | Jason M. Knott

    Tell the Securities and Exchange Commission (SEC). That’s the message the United States Supreme Court sent to whistleblowers with its decision yesterday in Digital Realty Trust, Inc. v. Somers.

    As we previously covered here, the Digital Realty case involved a key issue under the Dodd-Frank Act’s anti-retaliation provision: does the provision apply to a whistleblower who reported internally, but did not provide information to the SEC?

  • | Jason M. Knott

    When Congress passed the Dodd-Frank Act in 2010, it bolstered protections for whistleblowers who report certain kinds of misconduct, such as violations of securities law. At the time, the Sarbanes-Oxley Act already provided many of these whistleblowers with a cause of action for retaliation. But the new Dodd-Frank cause of action included a longer statute of limitations, a more generous damages remedy, and a right to proceed straight to federal court rather than first bringing the claim to the Department of Labor (as Sarbanes-Oxley requires).

    Sarbanes-Oxley provides protection for individuals who blow the whistle internally. But courts have struggled with whether Dodd-Frank provides that same protection, or if Dodd-Frank protects only individuals who report misconduct to the Securities and Exchange Commission (SEC) directly.

  • | Jason M. Knott

    When Congress passed the Sarbanes-Oxley and Dodd-Frank Acts, it included protections for employees who blow the whistle on wrongdoing by their employers. However, those whistleblower protections don’t apply to every report of wrongdoing. Rather, they come into play only when an employee reports particular types of misconduct.

    For example, in a recent decision (Erhart v. BofI Holding, Inc.), a federal court in California dismissed claims by an internal auditor (Erhart) against his employer (BofI Holding), ruling that Erhart didn’t plausibly allege that he had been engaged in the "protected activity" necessary to qualify for the whistleblower protections of those statutes.

  • | Jason M. Knott

    In our last post, we discussed the case of Wiest v. Tyco, in which the Third Circuit held that an employer’s investigation of unrelated wrongdoing by an employee insulated it against the employee’s Sarbanes-Oxley whistleblower retaliation claim. Now, we tackle another piece of the Wiest decision: the court’s holding that Wiest’s protected activity did not contribute to the adverse action against him.

    To establish a Sarbanes-Oxley claim, an employee must show that there was a causal connection between his or her whistleblowing and an adverse employment action. If the employee can’t show that link, then he or she can’t prevail. In the Wiest case, the court assumed that Wiest did in fact engage in protected whistleblowing activity. But it held that Wiest didn’t have evidence to show that the whistleblowing caused the employer to take action against him.

  • | Jason M. Knott

    An employee who has blown the whistle on wrongdoing is not immune from discipline or termination simply because she has engaged in protected activity.

    The Third Circuit’s recent decision in Wiest v. Tyco Electronics provides a good example of how an employer can terminate an employee without legal repercussions, even when it is undisputed that the employee was protected against whistleblower retaliation.

  • | Jason M. Knott

    Section 1514A of the Sarbanes-Oxley Act shields a whistleblower from retaliation if he reports “conduct [that he] reasonably believes” violates certain laws, including Securities and Exchange Commission regulations.  Last month, the Sixth Circuit held that the question of a whistleblower’s “reasonable belief” is a “simple factual question requiring no subset of findings that the employee had a justifiable belief as to each of the legally-defined elements of the suspected fraud.”  Rhinehimer v. U.S. Bancorp Investments, Inc., No. 13-6641 (6th Cir. May 28, 2015).  Based on this principle, the court affirmed a $250,000 verdict in favor of the plaintiff, Michael Rhinehimer.

    According to the Court’s opinion, Rhinehimer was a financial planner for U.S. Bancorp who helped his elderly customer, Norbert Purcell, set up a trust and a brokerage account.  In November 2009, Rhinehimer went on disability leave, and asked a colleague not to conduct any transactions with Purcell.  The colleague didn’t follow the instructions, and instead put Purcell into investments that Rhinehimer believed were unsuitable.  (Unsuitability fraud under the securities laws occurs when a broker knows or reasonably believes certain securities to be unsuitable to a client’s needs, but recommends them anyway.)    Rhinehimer complained about the trades, but his superiors warned him that he should “stay out of the matter” and stop criticizing the colleague.  After Rhinehimer hired a lawyer, he was placed on a performance improvement plan and fired after he failed to meet it.

  • | Graeme W. Bush

    Section 304 of the Sarbanes-Oxley Act of 2002 requires the CEO and CFO of an issuer that has restated its financial statements to reimburse the company for any incentive or equity-based compensation, and for the profits on any stock sales of the company’s stock, during the 12-month period following the first issuance of the offending financial statements.   Although this provision has been used sparingly by the SEC, the recent settlement of SEC investigatory charges by Saba Software, in which executives who were not charged with any wrongdoing agreed to repay bonuses and stock profits, is a cautionary tale for CEOs and CFOs of publicly traded companies.  

    Saba Software became the subject of an SEC investigation and enforcement action arising out of an alleged scheme to overstate revenues by overbooking and pre-booking time statements of international consultants in order to meet pre-arranged time estimates.  As part of the settlement of the SEC charges in the fall of 2014, Saba was required to restate its financial records for the years 2009 through part of 2012.  In a contemporaneous settlement, Saba’s CEO agreed to reimburse the company for over $2.5 million in incentive and equity compensation and profits from stock sales earned following the issuance of the financial statements the company restated.  http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543035992#.VOtSdC6LXfc.

  • | Jason M. Knott

    The Sarbanes-Oxley Act’s whistleblower protection provision, 18 U.S.C. § 1514A, allows a wrongfully terminated whistleblower to recover “all relief necessary to make [her] whole.”  18 U.S.C. § 1514A(c)(1).  The statute then goes on to say that compensatory damages include reinstatement, back pay, and “special damages,” including expert fees and reasonable attorneys fees.  In an opinion issued this week, the Fourth Circuit held that Sarbanes-Oxley damages don’t just include these enumerated damages.  Rather, an employee can obtain other compensation for harm, including emotional distress damages.  Jones v. SouthPeak Interactive Corp. of Delaware, Nos. 13-2399, 14-1765 (4th Cir. Jan. 26, 2015).

    The plaintiff in the case, Andrea Gail Jones, was the former chief financial officer of SouthPeak, a video game manufacturer.  According to the opinion, in 2009, SouthPeak wanted to buy copies of a video game for distribution, but didn’t have the cash to buy the games up front.  Instead, SouthPeak’s chairman, Terry Phillips, personally fronted Nintendo over $300,000.  When SouthPeak didn’t record this debt, Jones raised a stink, eventually telling the company’s outside counsel that the company was committing fraud.  The same day, the company’s board fired her. 

  • | Jason M. Knott

    Who doesn’t love the year-end countdown?  We’re here to offer you one of our own – our most-read posts in 2014 about executive disputes.  The posts run the gamut from A (Alex Rodriguez) to Z, or at least to W (Walgreen).  They cover subjects from sanctified (Buddhists and the Bible) to sultry (pornographic materials found in an executive’s email).  Later this week, we’ll bring you a look at what to expect in 2015.

    Without further ado, let the countdown begin!

    8.            The Basics: Dodd-Frank v. Sarbanes-Oxley

    This post is an oldie but a goodie.  It includes a handy PDF chart that breaks down the differences in the Dodd-Frank and Sarbanes-Oxley whistleblower laws.  Each of these laws continues to be a hot-button issue for plaintiffs and employers.

    7.            When Employment Relationships Break Bad

    America may have bidden adieu to Walter White and his pals on Breaking Bad, but employment relationships continue to spin off in some very unpleasant ways.  Such was the case with Stephen Marty Ward, who ended up in federal prison after he threatened his employer with disclosure of its trade secrets, as we covered in this post.

  • | Jason M. Knott

    In yesterday's post, we covered the background of Tuesday's Supreme Court decision in Lawson v. FMR, LLC, and took an in-depth look at Justice Ginsburg's majority opinion.  Today, we look at what the other Justices had to say.

    Justice Scalia, joined by Justice Thomas, signed on to Justice Ginsburg's opinion in principal part, but also authored his own opinion.  Justice Scalia and Justice Thomas subscribe to the position that a judge, in reading and interpreting a statute, should not examine what Congress said in places other than the statutory language, such as in committee reports and floor speeches.  Based on that judicial philosophy, Justice Scalia criticized Justice Ginsburg for her “occasional excursions beyond the interpretative terra firma of text and context, into the swamps of legislative history.” 

  • | Jason M. Knott

    On Tuesday, the Supreme Court issued an opinion that may have sweeping implications for whistleblowers and employers.  In Lawson v. FMR LLC, the Court decided that the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1514A) allows an employee to bring a claim even if that employee works for a private contractor or subcontractor of a public company.  The Court’s decision could lead to a wide range of Sarbanes-Oxley lawsuits by outside counsel, private accountants, cleaning services, and others.

    Lawson was a split decision.  Justice Ginsburg, joined by Chief Justice Roberts, Justice Breyer, and Justice Kagan, and by Justices Scalia and Thomas “in principal part,” wrote for the majority.  Justice Scalia wrote a separate concurrence, joined by Justice Thomas.  And in an unusual grouping, Justice Sotomayor authored the dissent, joined by Chief Justice Roberts and Justice Alito.  Today, we'll tackle Justice Ginsburg's opinion; tomorrow, we'll take a look at what Justices Scalia and Sotomayor had to say.

    But first, a little background.

  • | Jason M. Knott

    For those of us who follow whistleblower law, Wednesday was a big day – and a good one for employers.  In two separate federal appellate decisions, courts affirmed the dismissal of whistleblower actions based on very different issues.  For potential whistleblowers and employers alike, the decisions demonstrate yet again the importance of the particular requirements and scope of the law that a whistleblower relies on to support his claim.

    The first decision, Villanueva v. Department of Labor, No. 12-60122 (5th Cir. Feb. 12, 2014), comes to us from the Fifth Circuit. It involves William Villanueva, a Colombian national who worked for a Colombian affiliate of Core Labs, a Netherlands company whose stock is publicly traded in the U.S.  Villanueva claimed that he blew the whistle on a transfer-pricing scheme by his employer to reduce its Colombian tax burden, and that his employer passed him over for a pay raise and fired him in retaliation for his whistleblowing.

  • | Jason M. Knott

    On December 10, 2013, Suits by Suits contributing editors Ellen D. Marcus and Jason M. Knott will present a live webinar titled “Whistleblower Watch: Big Issues in the Latest Whistleblower Cases Under Dodd-Frank, Sarbanes-Oxley, and the Internal Revenue Code.”  During the webinar, Ms. Marcus and Mr. Knott will discuss the whistleblower and anti-retaliation provisions of the Dodd-Frank and Sarbanes-Oxley Acts, the Internal Revenue Code, and other federal statutes.  Their presentation will address the types of businesses and conduct that can be targeted by whistleblowers, the procedures that whistleblowers must follow to pursue and preserve a claim, the remedies available to whistleblowers, and more.  Ms. Marcus and Mr. Knott will also examine the pressing issues under these laws that are being debated in the courts. This includes contradictory decisions about whether the Sarbanes-Oxley Act’s whistleblower provision covers employees of privately-held companies, such as investment advisers—an issue that is currently before the U.S. Supreme Court in the case of Lawson v. FMR LLC, which we have previously covered in various posts.  To register for the webinar, click here.

  • | Jason M. Knott

    On Tuesday, the Supreme Court heard oral argument in Lawson v. FMR LLCAs we explained in this post, Lawson presents the question of whether Sarbanes-Oxley’s whistleblower anti-retaliation provision (Section 806 of Sarbanes-Oxley, codified at 18 U.S.C. § 1514A) shields employees of privately-held contractors of public companies such as the plaintiffs, who are employees of investment advisers for Fidelity mutual funds.  We editors of Suits by Suits don’t often get the chance to report live on the cases we cover, but an argument at One First Street was too tempting to pass up, even on a blustery Washington day.  Here are five major takeaways that we drew from the argument (with the caveat that reading the tea leaves from an oral argument is always a difficult proposition):

    1.      The Court is uncomfortable with the scope of potential Sarbanes-Oxley claims that would result from the Fidelity employees’ interpretation of the statute.

    A number of Justices pressed Eric Schnapper, who argued for the Fidelity employees, and Nicole Saharsky, arguing for the United States in support of the employees, as to how the Court could limit the reach of the statute if it holds that Sarbanes-Oxley allows employees of private companies to bring whistleblower retaliation claims.  Justice Breyer posed a hypothetical involving an employee of a privately-held gardening company who reports on mail fraud by his employer, is fired, and then brings a whistleblower anti-retaliation claim, arguing that he is covered by Sarbanes-Oxley because his company has gardening contracts with public companies.  Schnapper argued that the statute as written would cover the gardener, but the Justices were less convinced that Congress intended this kind of reach for Sarbanes-Oxley.  Justice Breyer even commented that the fear of expanding the statute to cover “any fraud by any gardener, any cook, anybody that had one employee in the entire United States” was the “strongest argument” against the Fidelity employees’ position.

  • | Jason M. Knott

    On Tuesday, November 12, the Supreme Court will hear argument in the most-watched case of this Term (at least for those of us who edit this blog).  The case, Lawson v. FMR LLC, presents the question of whether an employee of a privately-held contractor of a public company can bring a whistleblower retaliation claim against his or her employer under the Sarbanes-Oxley Act of 2002.  The plaintiffs in the case, and the parties who have appealed to the Supreme Court, are Jackie Lawson and Jonathan Zang. 

    In their lawsuit, Lawson and Zang claim that their employers – a group of privately-owned Fidelity subsidiaries that serve as “investment advisers” to publicly-held Fidelity mutual funds – retaliated against them for raising concerns about fraud.  Here’s a handy chart from Fidelity’s brief that illustrates the relationship between the parties:

    The First Circuit dismissed Lawson and Zang's claims, holding that Sarbanes-Oxley’s anti-retaliation provision only protects employees of public companies.  Because Lawson and Zang worked on the blue side of the chart, and not the yellow side, they couldn’t bring a claim for retaliation.  (The mutual funds on the yellow side have no employees; they do their business through their contractors on the blue side.)

    What do Lawson and Zang argue?

    The parties spend a lot of time parsing the language of the Sarbanes-Oxley anti-retaliation provision (18 U.S.C. § 1514A).  In their opening and reply briefs, Lawson and Zang argue that the plain text of the law shows that Congress intended to shield employees of contractors of public companies from retaliation for reporting corporate misconduct.  If Congress didn’t mean to protect those employees, they say, it wouldn’t have prohibited retaliation by “any officer, employee, contractor, subcontractor, or agent” of “such [public] company.”  Under Fidelity’s reading of this provision, the language about contractors would only come into play if a contractor retaliated against a public company employee, and because that doesn’t happen in the real world, the use of the term “contractor [or] subcontractor” would be meaningless.

  • | Jason M. Knott

    The Dodd-Frank and Sarbanes-Oxley whistleblower laws are hot topics right now.  A split of authority is developing in the federal courts over how an employee can qualify as a whistleblower and bring a retaliation claim under Dodd-Frank.  And the Supreme Court will hear argument next Tuesday in a case, Lawson v. FMR LLC, that will require it to decide whether private employers can be subject to Sarbanes-Oxley retaliation claims by their employees.

    As we at Suits by Suits continue to watch these issues, we thought it would be helpful to step back for a broader view of these important whistleblower laws.  In the table linked here, we have summarized the important facets of each law.  This table will serve as a reference point for new developments, placing them in the broader context of these whistleblower protections.  

  • | Jason M. Knott

    As we’ve covered here and here, the Supreme Court will decide this term whether a whistleblower can pursue a Sarbanes-Oxley claim for retaliation by a privately-owned employer.  Jackie Lawson and Jonathan Zang, former employees of Fidelity investment advisory companies, say yes.  The First Circuit said no.

    Lawson and Zang have now filed their opening brief in their attempt to persuade the Supreme Court to disagree with the First Circuit and reinstate their claim.  And they have even included a non-gratuitous George Clooney reference.  (Hat tip to scotusblog.com for making this and numerous other Supreme Court resources available.) 

    Lawson and Zang’s argument involves the interpretation of 18 U.S.C. § 1514A, the provision of Sarbanes-Oxley that allows whistleblower claims.  They argue that the plain language of Section 1514A applies to protect not only employees of publicly-traded companies and mutual funds, but also employees of contractors of those companies, such as the Fidelity investment advisers at issue in their case.  The statute bars contractors from retaliating against an “employee”: Lawson and Zang contend that this should be read to refer to those contractors’ “own employees,” in addition to the employees of public companies with whom the contractors work.  Br. at 15.  They argue that it wouldn’t make any sense to only prohibit retaliation by contractors against others’ employees, since it would be very difficult, if not impossible, for a contractor to terminate someone else’s employee.  Br. at 22.

  • | Jason M. Knott

    2013 has been a banner year for followers of the Sarbanes-Oxley whistleblower protection provision, 18 U.S.C. § 1514A.  As we’ve previously discussed on Suits by Suits, the Supreme Court will decide in its next term whether Sarbanes-Oxley protects employees of privately-owned corporations, in Lawson v. FMR, LLC.  The Third Circuit also recently held, in Wiest v. Lynch, that an employee does not have to allege that he “definitively and specifically” reported a known legal violation in order to state a Sarbanes-Oxley claim.

    Most recently, on Tuesday, the Tenth Circuit held that an employee is protected under Sarbanes-Oxley for reporting misconduct even when the misconduct does not involve a fraud against shareholders (Lockheed Martin Corp. v. Administrative Review Board, Department of Labor).

    The facts of Lockheed involve tawdry letters, military affairs, and humiliation in the workplace. 

  • | Jason M. Knott

    Yesterday, the Supreme Court announced that it will hear the case of Jackie Hosang Lawson and Jonathan Zang, two former Fidelity employees who seek to reverse the dismissal of their Sarbanes-Oxley whistleblower claims.  In this post last week on Suits by Suits, we outlined Lawson and Zang’s petition to the Court and described the long odds that petitioners face when they ask the Supreme Court to review their cases.  The U.S. government also didn’t do Lawson and Zang any favors when it told the Court that it shouldn’t take their case.  Now that Lawson and Zang have bucked the odds, they might be feeling like they bought that lucky PowerBall ticket.

    The Court has outlined the question presented by Lawson and Zang’s case as follows: 

    Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, forbids a publicly traded company, a mutual fund, or “any ... contractor [or] subcontractor ... of such company [to] ... discriminate against an employee in the terms and conditions of employment because of” certain protected activity. (Emphasis added). The First Circuit held that under section 1514A such contractors and subcontractors, if privately-held, may retaliate against their own employees, and are prohibited only from retaliating against employees of the public companies with which they work.

    . . .

    Is an employee of a privately-held contractor or subcontractor of a public company protected from retaliation by section 1514A?

    To prevail, Lawson and Zang must convince the Court that the answer is yes.

  • | Jason M. Knott

    Only a handful of employment cases make it all the way to the Supreme Court’s august chambers at One First Street.  That’s largely because the Court has discretion whether or not to review cases decided by lower courts of appeals.  Thousands of unhappy litigants file petitions for writ of certiorari every year, asking for review from the highest court in the land.  Almost all are turned away.

    Tomorrow, the Court will consider whether to accept an appeal by Jonathan Zang and Jackie Lawson in a case that has significant implications for the Sarbanes-Oxley whistleblower protection provision, 18 U.S.C. § 1514A.  Section 1514A, which was passed as a response to the Enron and other financial scandals of the early 2000s, prohibits public companies, as well as “any other officer, employee, contractor, subcontractor, or agent of such company,” from retaliating against “an employee” for protected activity.  The issue in Zang and Lawson’s case is whether Section 1514A protects employees of privately-held companies, if those companies are working as contractors for public companies.

We cover a broad range of issues that arise in employment disputes. Occasionally, we also spotlight other topics of relevant legal interest, ranging from health care to white-collar defense to sports, just to keep things interesting.

Led by Jason Knott and Andrew Goldfarb, and featuring attorneys with deep knowledge and expertise in their fields, Suits by Suits seeks to engage its readers on these relevant and often complicated topics. Comments and special requests are welcome and invited. Before reading, please view the disclaimer.

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Jason M. Knott
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Email | 202.778.1813


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Andrew N. Goldfarb
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