Whistleblower Law Blog

TELG Principal Quoted in Law360 on Landmark ARB Decision for SOX Whistleblowers

June 16, 2011

Law360 quoted The Employment Law Group® Principal Jason Zuckerman in an article regarding the U.S. Department of Labor’s Administrative Review Board’s en banc decision in Sylvester v. Parexel International on May 25, which clarified the broad scope of protected conduct for Sarbanes-Oxley Act (SOX) whistleblowers.

 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.

District Court Judge Rules Three Year Statute of Limitations for False Claims Act Against D.C.

June 07, 2011

In Saunders v. District of Columbia [link to opinion], Judge Colleen Kollar-Kotelly for the United States District Court for the District of Columbia held that the Federal False Claims Act has a three year statute of limitations when bringing a lawsuit against the District of Columbia.  Congress recently passed the Dodd-Frank Act, which included a provision setting the statute of limitations of the False Claims Act to three years.  However, the court did not address whether this provision retroactively applied to the pending case.  Instead, the court used the old method of applying the statute of limitations of the most similar state law to the Federal False Claims Act.  The court found the D.C. False Claims Act was nearly identical to the Federal False Claims Act, and therefore applied the three year statute of limitations of the D.C. law to the present Federal False Claims Act lawsuit.  Whistleblowers Theresa Saunders, who blew the whistle on deficiencies in how the Office of Chief Technology was using federal funding, may proceed to trial.

Law360 Quotes TELG Attorney on DOL ARB Decision Clarifying Broad Scope of Protected Conduct for SOX Whistleblowers

May 31, 2011

Law360 Quoted The Employment Law Group® principal attorney Jason Zuckerman on the DOL ARB’s decision in Sylvester v. Parexel International LLC, which held that the Twombly/Iqbal heightened pleading standards do not apply to SOX claims initiated with OSHA and that a complainant need only express a “reasonable belief” of a violation to engage in SOX-protected activity.   See the earlier post on the other holdings of the ARB in Sylvester.  Mr. Zuckerman stated that SOX was turning into a “robust remedy for whistleblowers,” pointing to the ARB’s decisions in Sylvester and Johnson v. Siemens Building Techs. and the recent Dodd-Frank Act amendments to SOX.  “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,” Zuckerman said.  For more information about the Sarbanes-Oxley Act, click here.

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)

DOL ARB Clarifies Broad Scope of Protected Conduct for SOX Whistleblowers in Sylvester v. Parexel International LLC

May 27, 2011

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
• The Employment Law Group Attorney Quoted in Law360 Article on DOL ARB Decision Broadening the Scope of Coverage under SOX
• DOL ARB Holds Sarbanes-Oxley Covers Claims by Employees of Subsidiaries of Publicly-traded Companies
• DOL ARB Affirms Reinstatement of Sarbanes-Oxley Whistleblower at DOD Contractor

SEC Adopts Favorable Rules for Whistleblowers

May 26, 2011

The Securities and Exchange Commission is being praised by whistleblower advocates for issuing finalized rules that will effectively incentivize employees to disclose fraud and other securities law violations.  The Dodd-Frank Act – enacted in July of 2010 – established a new whistleblower program within the SEC, requiring the SEC to reward whistleblowers who provide original information with between 10% and 30% of the amount recovered by the SEC.

The rules do not require whistleblowers to report fraudulent or illegal activity internally to their employer as a prerequisite to eligibility for an award – a position advocated by many corporations – but instead allow whistleblowers to blow the whistle directly to the SEC.  Allowing employees to report information directly to the SEC will not diminish the strong incentive for employees to blow the whistle internally because employees can still be rewarded for reporting internally so long as the employee also provides the same information to the SEC within 120 days.

The SEC wisely chose not to require all employees to report fraud internally.  Internal compliance programs failed miserably to avert the financial crisis.  Where fraud is pervasive in upper management, it would be futile for an employee to blow the whistle internally, and it is in the best interest of shareholders for the whistleblower to disclose fraud directly to the SEC.  But where companies have implemented effective programs that are not merely a tool of management to cover-up violations, employees will want to use those internal compliance programs.

For more information on reporting fraud, click here.

Related articles

• TELG Quoted by Investment News About Proposal to Weaken SEC Whistleblower Reward Program (employmentlawgroupblog.com)
• Rules offer big cash awards to whistle-blowers (usatoday.com)
• Corporate America Not Totally Thrilled With New Whistleblower Rules(blogs.wsj.com)

SEC Issues Rules Favorable to Whistleblowers

May 26, 2011

The Securities and Exchange Commission is receiving praise from whistleblower advocates for issuing finalized rules that do not require whistleblowers to report fraudulent or illegal activity internally to their employer, but instead allow whistleblowers to blow the whistle direct to the SEC. The Dodd-Frank Act established a new whistleblower program at the SEC, requiring the SEC to reward whistleblower who provides original information with between 10% and 30% of the amount recovered by the SEC. Allowing employees to report information directly to the SEC does not diminish the strong incentive for employees to blow the whistle internally, because employees can still get a reward so long as the employee provides the same information to the SEC within 120 days.

Internal compliance programs failed miserably to avert the financial crisis. Where fraud is pervasive in upper management, it would be futile for an employee to blow the whistle internally and it would be in the best interest of shareholders for the whistleblower to disclose fraud directly to the SEC. But where companies have implemented effective programs that are not merely a tool of management to cover up violations, then employees will use those programs. Unfortunately, far too many find their company’s internal compliance program is deficient and in some cases a tool for management to retaliate against whistleblowers.

The new reward program is already beginning to bear fruit. Similar whistleblower rewards under the False Claims Act where extremely effective at inducing employees t report fraud to the government, leading to the recovery of over 27 billion dollars.

TELG Quoted by Investment News About Proposal to Weaken SEC Whistleblower Reward Program

May 16, 2011

Investment News reported that Rep. Michael Grimm, R-N.Y. circulated draft legislation that would require a whistleblower to first report fraud through an internal compliance program as a prerequisite to recovering an award before the whistleblower would be eligible for a reward from the SEC under the whistleblower reward provision of the Dodd-Frank Act.  TELG opposes such a requirement because blowing the whistle in a company where fraud is pervasive or where the internal compliance function is not independent is not only futile, but can undermine the SEC’s ability to combat the fraud.  Indeed, TELG has found that many whistleblowers who come forward in good faith through an internal compliance program suffer retaliation.   Jason Zuckerman, a Principal atThe Employment Law Group® law firm, told Investment News that he hopes that the SEC’s final rules implementing the whistleblower reward provisions of Dodd-Frank will offer strong to whistleblowers, and notes that “In order to put your job on the line, there has to be a real financial incentive.”

Related articles

• Fiscal Times Quotes TELG Attorney About Dodd-Frank Whistleblower Provisions (employmentlawgroupblog.com)
• TELG Attorney Quoted on CFO.com regarding Dodd-Frank Whistleblower Program (employmentlawgroupblog.com)
• Banker & Tradesmen Quotes TELG Attorney on SOX Ruling in Pezza(employmentlawgroupblog.com)
• Voices for Corporate Responsibility Hosts Whistleblower Seminar on Dodd-Frank Act SEC Whistleblower Reward Provision(employmentlawgroupblog.com)
• Law360 Quotes TELG Attorney on In-House Attorney Turned Whistleblowers (employmentlawgroupblog.com)

House Republicans Propose Weakening SEC Whistleblower Reward Program

May 16, 2011

InvestmentNews.com reported that Rep. Michael Grimm, R-N.Y., presented legislation that would require whistleblowers to first report fraud trough their employer’s internal compliance program before they would be eligible for a reward from the SEC under the Dodd-Frank Act. During a House Financial Services Subcommittee on Capital Markets hearing, the drafters related a concern that whistlblowers would universally avoid reporting fraud through employer compliance programs and instead report fraud directly to the Securities and Exchange Commission in order to collect reward.

House Republicans Propose Weakening SEC Whistleblower Reward Program

In my experience representing whistlblowers, they are primarily concerned about keeping their jobs and protecting their careers. The whistleblowers intimately familiar with their employer’s corporate culture and the scope of the fraud – not politicians divorced from the situation – are in the best position to judge whether using their employer’s compliance program has any hope of remedying the situation. Reporting internally at companies where the corruption is at its very core, such as Enron or Madoff Investment Securities, would at best slow down the SEC and at worst tip off the fraudsters and lead to evidence destruction.

When whistleblowers report their employer’s illegal activities, their entire career is jeopardized. Placing any amount of uncertainty on whether or not a whistleblower will be rewarded will most certainly chill whistleblower speech, the opposite result of what Congress intended when enacting the whistleblower provisions of the Dodd-Frank Act last year. Jason Zuckerman, a principal attorney at The Employment Law Group® law firm, said he hopes that the SEC will come out with strong whistleblower protections. “In order to put your job on the line, there has to be a real financial incentive,” Mr. Zuckerman said.

SDNY Decision Broadly Construes Dodd-Frank Whistleblower Protection Provision

May 10, 2011

The U.S. District Court for the Southern District of New York issued a good decision for whistleblowers providing much needed clarity on the scope of the anti-retaliation provision in Section 922(h), which prohibits retaliation for the following acts: (1) “providing information to the Commission in accordance with this section;” (ii) “initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information;” or (iii) “making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), the Securities Exchange Act of 1934, 15 (15 U.S.C. 78a et seq.), including section 10A(m) of such Act (15 U.S.C. 78f(m)), section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”  There has been some ambiguity as to whether or not the anti-retaliation provision in Section 922 of Dodd-Frank (the provision that rewards whistleblowing to the SEC)  protects solely disclosures to the SEC.  The confusion stems in part from the definition of “whistleblower” as “any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” 15 U.S.C. § 78u-6(a)(6) (emphasis added).

Judge Sand held that protection is afforded whistleblowers who make internaldisclosures falling into one of four categories: “disclosures that are required or protected under the Sarbanes-Oxley Act . . . the Securities Exchange Act of 1934 . . . section 1513(e) of title 18, United States Code, and any other law, rule, or regulation subject to the jurisdiction of the Commission.”  And while Judge Sand held that Section 922’s protection of disclosures to the SEC does not cover internal reporting, he also held that the plaintiff may be protected for acting jointly with outside counsel in providing information to the SEC, i.e., initiating an internal investigation that results in the company or its counsel providing information to the SEC could be protected conduct.  Plaintiff’s theory of coverage is based on the  Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 75 Fed. Reg. 70488 (Nov. 17, 2010), which states that “You are a whistleblower if, alone or jointly with others, you provide the Commission with information relating to a potential violation of the securities laws.” 75 Fed.Reg. at 70519 (to be codified at 17 C.F.R. 240.21F-2(a)).

Law360 Quotes TELG Attorney on Ruling Expanding Scope of SOX-Protected Conduct

April 21, 2011

Ben James wrote an article titled DOL Broadly Reads Protected Activity in SOX Case in which he discusses the Brown v. Lockheed Martin Corp. ruling by the DOL where the Administrative Review Board found that Lockheed Martin Corp. violated the Sarbanes-Oxley Act (SOX). Andrea Brown, Lockheed employee had complained to management that the vice president of communications acted unethically by using a pen pal program between Lockheed employees and U.S. soldiers to send X-rated materials to troops overseas and to schedule sexual encounters with U.S. soldiers during working hours. According to brown’s lawsuit, management retaliated by demoting her and eventually constructively firing her.

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.”