Supreme Court Revisits the Scope of SOX

What does a fisherman’s criminal destruction of undersized fish have to do with the scope of federal whistleblower laws? The U.S. Supreme Court will soon tell us, after hearing oral arguments last week in Yates v. United States.

In deciding whether a fish is a “tangible object” as that term is used in the Sarbanes-Oxley Act (SOX), the justices will again signal how broadly they’re willing to apply SOX — a topic they last visited in March in Lawson v. FMR LLC, a sweeping decision that turned one section of SOX into something like a general-purpose whistleblower protection law.

Passed in 2002 in the wake of the Enron scandal, SOX sets strict standards for financial behavior by publicly traded companies. Its whistleblower provision, Section 1514A of the U.S. Code, protects employees of many companies — both public and private — against retaliation for blowing the whistle on various types of fraud.

Yates concerns Section 1519, the law’s criminal provision against destruction of evidence. The case stems from an incident in 2007, when a Florida official inspecting John Yates’s fishing boat suspected that 72 red grouper in his catch were too small to meet the legal limit. Mr. Yates was issued a citation and ordered to bring the fish to port the next day for seizure by federal officials. Instead, the government charged, he directed his crew to toss the undersized fish overboard and replace them with fish that met the legal limit.

Unusually, Mr. Yates was charged and convicted under SOX, which penalizes anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object” to impede a federal investigation. As with the civil whistleblower provision in Section 1514A, the text of Section 1519 isn’t obviously limited to Enron-style wrongdoing — and indeed, the government argued on November 5 that it’s a broad law limited only by the literal meaning of its words.

Congress deliberately used broad language (“any … tangible object”) because it intended to create a general law against evidence destruction, argued Roman Martinez, an assistant to the U.S. Solicitor General, stressing that Congress was trying to close loopholes in federal law.

No, argued Mr. Yates’ lawyer John Badalamenti: Congress was primarily concerned with the type of document-shredding at the center of the Enron scandal. In that context, he said, “tangible object” must mean only a device used to record information, such as a computer hard drive or a digital camera. A broader interpretation would make Section 1519 much too far-reaching, he said.

The Court balked at Mr. Badalamenti’s proposed limits, however, foreshadowing a Lawson-type decision in favor of Section 1519’s broad scope. For example, Justice Ruth Bader Ginsburg warned that under Mr. Badalamenti’s interpretation, a suspected murderer could be indicted under SOX for destroying a letter written by his victim — but not for destroying the murder weapon.

Justice Ginsburg also noted that Congress could have written Section 1519 to cover any “tangible object used to preserve information,” if that’s what it meant. That it did not, she said, suggests that Congress contemplated  no such limitation.

Justice Kennedy saw practical issues with Mr. Badalamenti’s approach, too, suggesting that it creates “more problems with determining what [Section 1519’s] boundaries are than the government’s test.”

In the end, most justices seemed unwilling to narrow the scope of Section 1519, agreeing instead that it is a broad statute that should never have been used against Mr. Yates. “What kind of a mad prosecutor would try to send this guy up for 20 years?” asked Justice Antonin Scalia. The maximum sentence for destruction of evidence under SOX is 20 years, although the judge in Mr. Yates’s case sentenced him to 30 days.

None of the justices could offer a limitation on Section 1519 that would stop prosecutors from applying it for trivial offenses, but Lawson indicates that the Court will trust lower tribunals to apply discretion. The Lawson majority conceded that “overbroad applications” of Section 1514A were possible, too, but essentially said that the text of the law can’t be denied.

A similar decision seems likely in Yates, and will be further proof of the Court’s reluctance to apply limits to SOX.

Tagged: Sarbanes-Oxley Act (SOX), Whistleblower Laws (Federal)