In the 1990s and the 2000s, big Wall Street firms and corporate executives perpetrated massive accounting, banking and securities frauds that crashed the economy, caused the Great Recession and and cost millions of Americans their jobs and life savings. Congress held hearings to find out how this could have happened. Congress learned that fraudsters had succeeded in large part due to a culture of retaliation – a culture that discouraged employees from reporting fraudulent behavior to their supervisors, to auditors, and to law enforcement and regulatory agencies. Congress passed the Sarbanes-Oxley Act (“SOX”) and the Dodd-Frank Wall Street Reform Act (“Dodd-Frank”) to protect corporate whistleblowers from retaliation and to create incentives for them to report their information to persons up the chain and to government agencies.
The whistleblower provisions of SOX and Dodd-Frank apply to all (1) companies with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. § 78l ), (2) companies that are required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. § 78o (d)), including (3) any subsidiary or affiliate whose financial information is consolidated with such companies, and (4) any officer, employee, contractor, subcontractor, or agent of such companies.
Protected activities under SOX and Dodd-Frank include all communications to a federal agency, or a supervisor, or another employee with authority to investigate fraud, about any conduct that the employee reasonably believes falls within the ample reach of the anti-fraud laws (mail fraud, wire fraud, bank fraud, securities or commodities fraud, any rule or regulation of the SEC, or any provision of federal law relating to fraud against shareholders). SOX and Dodd-Frank protect whistleblowers even when they are mistaken. So long as the whistleblower had a sincere and reasonable belief that a fraud had been, was being or was about to be committed, her communication is protected against retaliation.
If a whistleblower’s protected activity contributes in any way to a discharge, demotion, suspension, threat, to harassment, or to any other adverse act or omission against an employee that is more than trivial, the covered person or entity broke the law.
Remedies for Retaliation
SOX provides full make-whole remedies to whistleblowers. These remedies include lost wages and benefits (and sometimes double this amount), reinstatement (or front pay if reinstatement is not feasible), compensatory damages for emotional distress, harm to reputation and other intangible harms, and attorney fees, litigation expenses and pre-judgment interest.
- • Earnings Management. Earnings management is the intentional manipulation of a company’s revenues and/or expenses through the use of accrual or reserve accounts. This involves some combination of shifting current expenses to future periods, shifting current income to future periods and shifting future expenses to the current period.
- • Cherry Picking. Cherry picking involves boosting income with one-time gains and failing to record or disclose all liabilities.
- • Channel Stuffing. Channel stuffing is the practice of pushing inventory into the “channel,” which generally consists of a network of distributors or resellers, and improperly inflating reported revenue.
- • Top siding. Top siding is making unsupported entries in a company’s books.
- • Concealing information that, if known, would decrease the company’s stock price.
- • Distributing false information that inflates the company’s stock price.
- • Falsification, alteration or manipulation of financial records, supporting documents, or business transactions.
- • Intentional omissions or misrepresentations of events, transactions, accounts or other information from which financial statements are prepared.
- • Misapplication of accounting principles, policies, or procedures used to measure, recognize, report and disclose economic events and business transactions.
- • Omissions of disclosures or presentation of inadequate disclosures regarding accounting principles and polices and related financial amounts.
Other Protected Communications
Complaints about deficiencies in internal controls, auditing procedures, the absence of appropriate supporting documentation will typically be protected.
Congress assigned whistleblower protection largely to the Department of Labor (DOL). See 78 Fed. Reg. 3918 (2013). The Secretary has delegated investigatory and initial adjudicatory responsibility over claims under a number of these provisions, including § 1514A, to DOL’s Occupational Safety and Health Administration (OSHA). OSHA’s order may be appealed to an administrative law judge, and then to DOL’s Administrative Review Board (ARB). 29 CFR §§ 1980.104 to 1980.110 (2011).
In common with other whistleblower protection provisions enforced by DOL, see 77 Fed. Reg. 3912 (2012), the ARB’s determination on a § 1514A claim constitutes the agency’s final decision and is reviewable in federal court under the standards stated in the Administrative Procedure Act, 5 U.S.C. § 706. If, however, the ARB does not issue a final decision within 180 days of the filing of the complaint, and the delay is not due to bad faith on the claimant’s part, the claimant may proceed to federal district court for de novo review. 18 U.S.C. § 1514A(b).