Section 806 of the Sarbanes-Oxley Act (2002) protects employees of public companies who 'blow the whistle' by reporting conduct that they reasonably believe constitutes a violation of federal law relating to financial, securities or shareholder fraud. Recent decisions interpreting the act have addressed:
the requirement that a claimant must have a 'reasonable belief' that the reported conduct constitutes a violation of an enumerated law;
whether the 90-day limitation period for filing a claim under the act may be equitably tolled; and
the act's application to non-public investment advisers for publicly traded mutual funds.
In addition, the provisions of the Sarbanes-Oxley Act have been broadened by the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (for further details please see "Dodd-Frank Act expands whistleblower protections").
Section 806 of the act prohibits retaliation against an employee who reports any conduct that the employee "reasonably believes constitutes a violation" of:
federal criminal law provisions prohibiting mail, wire or bank fraud;
any rule or regulation of the Securities and Exchange Commission; or
any provision of federal law relating to fraud against shareholders.(1)
To qualify as having engaged in 'protected activity' under the act, a whistleblower must establish, by a preponderance of evidence, that he or she had a reasonable belief that the acts complained of violated the laws specified in the act.
In a recent decision the Second Circuit Court of Appeals affirmed the dismissal of a lawsuit under the act that alleged that the defendant terminated an in-house IP attorney for reporting that the company had fraudulently obtained several patents.(2) The Second Circuit held that while the complaint claimed that the defendant had obtained the patents by fraud and then valued them at $50 million, the plaintiff did not allege that the value the company assigned to the patents was ever reported to the public or shareholders. Thus, the plaintiff failed to state that he reasonably believed he was reporting securities fraud, as opposed to patent-related malfeasance.
Recently, the Eleventh Circuit Court of Appeals joined several other circuit courts in holding that the act requires a whistleblower to demonstrate both a subjective belief and an objectively reasonable belief that the company's conduct violated an enumerated law.(3) In so ruling, the court agreed with the Department of Labour's finding that the plaintiff did not actually believe the company's activities to be illegal or fraudulent. The court pointed to statements by the plaintiff indicating his lack of subjective belief. For example, although the plaintiff "expressed reservations" about a proposed broker training programme, he did not know at the time whether the company's practices were prohibited by regulatory rules or the law. Likewise, although the plaintiff testified that an incident made him feel "really uncomfortable" and "uneasy", he admitted that he did not know at the time whether the company's conduct was illegal; nor did he communicate to anyone that he felt it was illegal. Based on the conclusion that plaintiff had no subjective belief that his employer was engaging in any illegal or fraudulent conduct prohibited under the act, the court affirmed the granting of summary judgment to the defendant on the whistleblower claim.
The Sarbanes-Oxley Act requires that a complaint be filed with the Department of Labour "not later than 90 days after the date on which the violation occurs".(4) Several recent cases have addressed the issue of whether this short deadline may be modified or tolled under certain circumstances. In Hyman v KD Res Inc,(5) the claimant was permitted to proceed with his claims under the act even though he had filed his complaint with the department nearly 70 days after the 90-day time limitation had expired.
Finding that the 90-day deadline is "not jurisdictional in the sense that noncompliance serves as an absolute bar to administrative action", the Department of Labour's administrative review board held that the filing deadline is "subject to equitable modification, ie, tolling or estoppel". The board found in Hyman that in the months following the claimant's termination of employment, the respondent's officials and agents led the claimant reasonably to believe that:
he would be returned to his former employment or given a one-year consulting agreement;
he would be financially compensated for having been wrongfully terminated; and
the company would resolve the compliance issues under the act that he had raised.
Those facts supported application of equitable estoppel to toll the running of the 90-day limitation period.
By contrast, in Warner v Xcel Energy(6) the administrative review board refused to toll the limitations period based on the claimant's argument that his employer misled him regarding the reasons for his discharge and delayed providing him with a copy of his personnel file. The board found that the employer concealed no retaliatory action from the claimant and the delayed production of the personnel records did not justify extending the filing deadline where the claimant waited 21 months after receiving those records to file his complaint with the Department of Labour.
Finally, in Reid v The Boeing Co(7) an administrative law judge rejected the claimant's argument that his time to file his complaint should be equitably tolled due to psychiatric issues exacerbated by Boeing's conduct. The judge concluded that the evidence did not establish that the claimant's medical condition constituted an 'exceptional circumstance' preventing him from filing his complaint with the Department of Labour on a timely basis.
Liability under the act may attach not only to a publicly traded employer, but also to any officer, employee, contractor, sub-contractor or agent of any such entity.(8) Recently, a federal judge took the rare step of certifying the question as to whether whistleblower protection under the act applies to an employee of a contractor or sub-contractor of a public company when:
that employee reports activity that he reasonably believes violates the laws enumerated in the act; and
such a violation relates to fraud against shareholders of the public company.(9)
In Lawson, two former employees of Fidelity Investments - investment advisers for the Fidelity family of mutual funds - brought claims under the act. The named defendants were privately owned organisations that provided management and administrative functions for the operation of the mutual funds, which were publicly held companies supervised by a board of trustees that had no employees. In April 2010 the same judge had denied the defendants' motion to dismiss the lawsuits. The defendants then asked that the dispositive issues of the act's applicability be certified for interlocutory appeal to the First Circuit Court of Appeals.
For further information on this topic please contact Kevin B Leblang or Robert N Holtzman at Kramer Levin Naftalis & Frankel LLP by telephone (+1 212 715 9100), fax (+1 212 715 8000) or email (firstname.lastname@example.org or email@example.com).
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