Section 806 of the Sarbanes-Oxley Act (“SOX”) prohibits publicly-traded companies from retaliating against employees who report various acts of wrongdoing to their employers. Employers have consistently attempted to narrow the protections afforded employees under this section, arguing that SOX covers only reports of conduct amounting to a fraud on the company’s shareholders. Now, a recent Tenth Circuit opinion, Lockheed Martin Corp. v. Admin. Review Bd., U.S. Dep’t of Labor, 11-9524, 2013 WL 2398691 (10th Cir. June 4, 2013), has held that the employers’ narrow reading is wrong and that Section 806 is significantly broader, essentially finding that a report identifying any fraud or violation of an SEC regulation, even if it does not impact shareholders, triggers SOX’s protections. Although attorneys representing management have suggested that this opinion will not change the way employers deal with whistleblowers, it should.
In Lockheed, Andrea Brown, a Director of Communications for Lockheed, brought an action for retaliation under Section 806, claiming that she had been constructively discharged after complaining to the company about the conduct of its Vice President of Communications, Wendy Owen. Brown notified Lockheed’s Human Resource Department that Owen had engaged in sexual relations and other inappropriate conduct with various soldiers who participated in Lockheed’s pen pal program, including using company funds to purchase a laptop for one of the soldiers and paying for hotel rooms and limousines. Brown also complained that Owen had been less available to discuss work issues during the time that she was involved with these soldiers. After speaking to Brown, Lockheed conducted an investigation and apparently withheld Owen’s bonus based on the complaint. Brown told Owen she was the source of the complaint; thereafter, Brown was subject to various acts of retaliation, eventually culminating in her constructive discharge.
Brown filed a complaint for retaliation under SOX Section 806 with the Occupational Safety and Health Administration. Brown’s complaint was upheld after a hearing and then on administrative review. On appeal to the Tenth Circuit, Lockheed sought to overturn the administrative findings based on the argument that the conduct about which Brown had complained was not “protected activity” under Section 806 because Brown did not allege shareholder fraud as required by SOX. The Circuit rejected Lockheed’s argument. As the Tenth Circuit explained, Section 806 provides that no publicly traded company or its officers or employees may retaliate against an employee for providing:
information … or otherwise asssit[ing] in an investigation regarding conduct which the employee reasonably believes constitutes a violation of … [18 U.S.C. §§] 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders ….
Lockheed, 11-9524, 2013 WL 2398691, at *4. According to the Court, the plan language of the statute makes it clear that not all complaints are limited by the need to “relat[e] to fraud against shareholders”; rather, only the portion of the statute that refers to “any provision of Federal law” is qualified by that requirement. As the Circuit explained, since the statutes enumerated within Section 806 (i.e., 18 U.S.C. §§ 1341, 1343, 1344, or 1348) “are all clearly provisions of federal law, Lockheed’s reading of the statute would render their enumeration in [Section 806] wholly superfluous.” Id. at *5. As the Court found, had Congress wanted to limit the protections against SOX retaliation to instances of reports of shareholder fraud, it needed to include only the final provision providing for protection for complaints about “violation of any provision of federal law relating to fraud against shareholders.” Id.
Thus, contrary to many attorneys’ beliefs, SOX’s retaliation provision can be used to provide more protection for employees than initially expected, and the impact of this broader protection should not go unheeded by employers. Prior to the decision in Lockheed, it would not have been uncommon for publicly-traded companies to have their Human Resource department handle run-of-the-mill sexual harassment claims. However, numerous sexual harassment complaints can implicate employee fraud. For example, as in Lockheed, employers’ funds may be used to support the logistics of an inappropriate sexual relationship, and concealment of the use of these funds inevitably would entail mail or wire fraud, including the transfer by wire of the expense report or the mailing or direct deposit of the fraudulently obtained expense reimbursement check. In-house counsel, therefore, should now be diligent in their review of even what appears to be even the most routine complaints of employee misconduct to determine if any portion of the complaint entails a claim of wrongdoing that falls within the statutes enumerated under Section 806 or SEC regulations, and be prepared to face a claim of retaliation under SOX if the employer intends to take an adverse employment action against the employee who lodged the complaint.
From The Insider Blog: White Collar Defense & Securities Enforcement.