ARB Again Holds that SOX Protects Employees Who Warn of Future Wrongdoing

The U.S. Department of Labor’s Administrative Review Board (ARB) upheld all aspects of a $1.2 million award to a whistleblower in a retaliation case under the Sarbanes-Oxley Act (SOX), echoing a recent Third Circuit decision and lending further authority to the ARB’s landmark Sylvester decision from 2011.

In Barrett v. e-Smart Technologies Inc., the ARB again held that SOX bans retaliation against employees who flag illegal activity that they believe is likely to occur — not just illegal activity that is already occurring.

The ARB’s ruling was almost curt in its interpretation of SOX, showing that the board has settled fully into its Obama-era role as a champion of the law’s purpose, rather than a rear guard that limits the law’s impact via finely tuned technicalities.

Passed in 2002 in the wake of the Enron scandal, SOX sets strict standards for financial behavior by public companies and, as codified in Section 1514A of the U.S. Code, protects employees against retaliation for blowing the whistle on a number of specific violations.

The ARB enforces SOX’s whistleblower provisions. Its ruling in Sylvester v. Parexel marked a turning point, as the board rejected crabbed constructions of SOX and extended its shield of protection — in essence — to any employee who blows the whistle in good faith.

The U.S. Court of Appeals for the Third Circuit recently endorsed Sylvester, including its protection for employees who warn about future wrongdoing.

“It would frustrate [the] purpose [of SOX] to require an employee, who knows that a violation is imminent, to wait for the actual violation to occur when an earlier report possibly could have prevented it,” the Third Circuit held in Wiest v. Lynch.

In Barrett the ARB upheld a large damages award for Richard Barrett, a former top executive at e-Smart, a maker of smart card systems. Mr. Barrett had objected to an internal draft of a report to be filed with the U.S. Securities and Exchange Commission (SEC), proposing many changes to fix what he viewed as misrepresentations.

Mr. Barrett’s boss declined to make all the changes. She quickly stripped Mr. Barrett of many responsibilities; stopped most communication with him; and ultimately stopped paying his salary. Mr. Barrett resigned, claiming constructive dismissal, and later filed the retaliation complaint that led to the current decision.

In response, e-Smart argued that SOX did not protect Mr. Barrett’s objections to the proposed SEC report: Since it was just a draft, no wrongdoing had actually occurred.

But “reporting an actual violation is not required,” the ARB held, citing Sylvester: “A complainant can engage in protected activity when he reports a belief of a violation that is about to occur or is in the stages of occurring.”

The board went on to knock down all of e-Smart’s other arguments against the lower decision, including its plea for a rehearing because of its own counsel’s incompetence at trial.

Tagged: Administrative Review Board (ARB), Enforcement Bodies, Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)