ALTHOUGH MANY OF THE LAW ENUMERATED IN SECTION 1514A CONTAIN MATERIALITY REQUIREMENTS, THE SOX WHISTLEBLOWER PROVISION DOES NOT CONTAIN AN INDEPENDENT MATERIALITY REQUIREMENT
In Welch v. Chao, No. 07-1684 (4th Cir. Aug. 5, 2008), the Fourth Circuit stated that although many of the laws listed in § 1514A of SOX contain materiality requirements, nothing in § 1514A indicates that § 1514A contains an independent materiality requirement. A statement or omission must concern a material fact to violate § 10(b) of the Securities Exchange Act and SEC Rule 10b-5. SeeLivingston v. Wyeth, Inc., 520 F.3d 344, 355 (4th Cir. 2008).
PROTECTED ACTIVITY; ARB RULING THAT A COMMUNICATION MUST DEFINITIELY AND SPECIFICALLY RELATE TO A LAW LISTED UNDER § 1515A DOES NOT REQUIRE THAT A COMPLAINANT COMPLAIN OF AN ACTUAL VIOLATION
The ARB's ruling in Platone v. FLYi, Inc., ARB Case No. 04-154, slip op. at 17 (ARB Sept. 29, 2006), that a communication must "definitively and specifically relate" to a law listed under § 1514A in order to be protected activity, does not require that an employee complain of an actual violation. Rather,§ 1514A protects an employee's communications based on a reasonable, but mistaken, belief that conduct constitutes a securities violation. Welch v. Chao, No. 07-1684 (4th Cir. Aug. 5, 2008).
PROTECTED ACTIVITY; MISCLASSIFICATION OF ITEMS IN FINANCIAL STATEMENT THAT DOES NOT AFFECT THE BOTTOM LINE
In Welch v. Chao, No. 07-1684 (4th Cir. Aug. 5, 2008), the Complainant alleged that the Respondent had misrepresented its net worth to investors because a loan recovery in the amount of $195,000 had been erroneously reported as income rather than placed in the loan reserve account in violation of GAAP. The ARB held, as a matter of law, that the Complainant could not have had an objectively reasonable belief that the reporting violated relevant law, reasoning that even if the Respondent erroneously reported the cash recovery as income, the erroneous entries still showed that "Cardinal had in fact recovered $195,000 that it previously did not have," and that therefore the Complainant could not have had an objectively reasonable belief that the loan entries might mislead investors. The ARB suggested that the misclassification of items in a financial statement can never "present[ ] potential investors with a misleading picture of [a company's] financial condition," so long as the misclassification does not affect the "bottom line." On appeal, the Fourth Circuit disagreed:
As the SEC has explained in its amicus brief, "‘[t]he individual items, subtotals, or other parts of a financial statement may often be more useful than the aggregate to those who make investment, credit, and similar decisions.'" Statement of the SEC, Amicus Curiae, in Support of Neither Side at 3 (quoting the Financial Accounting Standards Board, Statement of Financial Accounting Concepts No. 5, Recognition and Measurement of Financial Statements of Business Enterprises 15-16, ¶ 22 (Dec. 1984)) (emphasis omitted). Thus, as the Department of Labor now concedes, communications about misclassifications in financial statements may, in some circumstances, form the basis for a Sarbanes-Oxley whistleblower action, and the ARB erred to the extent that it held to the contrary.
Slip op. at 13.
PROTECTED ACTIVITY; COMPLAINANT MUST SHOW HOW THE ALLEGED CONDUCT OF THE RESPONDENT COULD REASONABLY BE REGARDED AS VIOLATING ANY OF THE LAW LISTED IN § 1514A; EXPLANATION PROVIDED BEFORE THE COURT OF APPEALS IS UNTIMELY
In Welch v. Chao, No. 07-1684 (4th Cir. Aug. 5, 2008), the Complainant had complained to his Employer about a number of accounting irregularities, such as the asserted misreporting of cash received in a loan recovery as income rather than being placed in the loan reserve account, the practrice of allowing persons without accounting experience to make ledger entries, and failure to correct a quarterly 10-QSB report. The ARB ruled that such complaints had not been shown to be protected activity under SOX where the Complainant failed to show how the alleged conduct could reasonably be regarded as violating any of the laws listed in § 1514A. Although the Complainant advanced several arguments before the ARB, he supported these arguments only with irrelevant and inapposite authority or conclusory, general statements. The Fourth Circuit Court of Appeals found no error with the ARB's ruling, and stated:
To the extent that Welch now explains his position and cites to relevant authority in his filings before this court, he attempts to raise new arguments relying on newly identified authorities. Welch has forfeited these new arguments by failing to raise them before the ARB. ...
Of course, we do not suggest that a whistleblower must identify specific statutory provisions or regulations when complaining of conduct to an employer, nor do we address the burden upon the parties in the proceedings before the ALJ. See 29 C.F.R. §§ 1980.103-109 (2007). We simply hold that Welch completely failed to raise any relevant arguments before the ARB and may not now raise new arguments before this court.
Slip op. at 15 (citation omitted).
PROTECTED ACTIVITY; ALLEGATION THAT DEFENDANT MADE MISREPRESENTATIONS TO PURCHASERS IS NOT, STANDING ALONE, SUFFICIENT TO STATE A CAUSE OF ACTION UNDER SOX
In Heaney v. Prudential Real Estate Affiliates, Inc., No. 05-820 (E.D.La. July 3, 2008) (case below ARB No. 05-039, ALJ No. 2004-SOX-72), the court granted summary summary against the Plaintiff on his SOX whisteblower claim where the Plaintiff failed to sufficiently assert facts to show that he reasonably believed that there had been a violation any of the six enumerated categories covered by section 1514A. Rather, the Plaintiff had only claimed that the Defendant allegedly made misrepresentations to purchasers in the course of selling real estate. The court found that this allegation did not present an action cognizable under SOX.
PROTECTED ACTIVITY; ACCOUNTING DISPUTE; MUST IMPLICATE FRAUD TO BE PROTECTED ACTIVITY
In Skidmore v. ACI Worldwide, Inc., No. 08:08CV1 (D.Neb. June 18, 2008) (case below ALJ No. 2007-SOX-77), the Plaintiff had been instructed by his supervisor to book an estimated tax rate for the forecasted budget for the end of the first quarter of the fiscal year, which the Plaintiff refused to do without supporting information because he believed the actual numbers did not justify the estimated tax rate. When the Plaintiff attempted to submit a written report of the incident to the Defendant's General Counsel and Chief Compliance Officer, the report was refused. The Plaintiff was terminated shortly thereafter, and the Plaintiff filed a SOX whistleblower complaint. The Defendant moved for summary judgment.
The court found that "[i]n order for a SOX claim to survive a Rule 12(b)(6) motion to dismiss, a complaint must state a cause of action where an employee reasonably believed that the reported conduct was violating the provisions of §§ 1514A relating to shareholder fraud." The court found that the Plaintiff had not alleged any facts supporting his contention that booking an estimated tax rate, not backed by supporting information, related to fraud against shareholders. The court also found that when the Plaintiff informed the General Counsel of his concerns, he did not tell the General Counsel that he believed that the Defendant was engaging in any type of fraud. The court found that the Plaintiff's complaint alleged was an accounting dispute. The court noted that the Plaintiff had referenced 15 U.S.C. § 7218 (applicable accounting standards) and 15 U.S.C. § 7264 (code of ethics for senior financial officers) in his complaint as part of how the Defendant's actions were a violation of a rule or regulation of the SEC. The court, however, found that "[t]hese statutory provisions can only be implicated under a SOX whistleblower claim if plaintiff's disclosure of ACI's activity revealed anything that relates to fraud against the shareholders."
PROTECTED ACTIVITY; PLAINTIFF FAILED TO ESTABLISH THAT HE ENGAGED IN PROTECTED ACTIVITY UNDER SOX WHERE TO SO FIND REQUIRED A SPECULATIVE, MULTI-STEPPED REASONING PROCESS
In Livingston v. Wyeth, Inc., No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit affirmed the district court's order granting summary judgment against the Plaintiff on his SOX complaint where he failed to produce evidence that he provided information or made a complaint to the Defendant about conduct which a reasonable employee in his position could have believed at the time constituted a violation of securities laws. The Plaintiff had alleged that the Defendant had retaliated against him because he had complained to management that the Defendant was in danger of failing to adequately implement a training program on "good manufacturing production" at a facility in compliance with an earlier consent agreement reached with the FDA and that such deficiencies might be misrepresented or covered up by local employees to internal compliance auditors and the FDA. The court found that to find that the Plaintiff engaged in protected activity under SOX would require speculative, multi-step reasoning that failed at several suppositional levels: he had not shown that the Defendant misrepresented or concealed anything; he had not shown that the consent decree had been violated; he had not shown in his complaint to management that the Defendant had, or even intended to, mislead shareholders; he had not shown any material misstatement had been made in violation of SEC Rule 10b-5. One Circuit Judge dissented principally on the ground that the majority had failed to state the facts in the light most favorable to the Plaintiff, as it was required to do when ruling on a motion for summary judgment.
PROTECTED ACTIVITY; SOX WHISTLELOWER PROVISION REGARDING VIOLATION OF SEC RULE INCLUDES ELEMENT OF FRAUD
In Livingston v. Wyeth, Inc., No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held that the reference in section 1514A to "any rule or regulation of the Securities and Exchange Commission" refers to regulations prohibiting fraud. The court concluded that "[t]o conclude otherwise would absurdly allow a retaliation suit for an employee's complaints about administrative missteps or inadvertent omissions from filing statements. Moreover, the ambiguity is fully clarified by the context of the whistleblower provision in the Sarbanes-Oxley Act and by the legislative history that indicates that whistleblowing is protected by § 1514A when it relates to ‘‘fraud.'" Slip op. at n.1 (citations omitted).
PROTECTED ACTIVITY; REASONABLE BELIEF INCLUDES BOTH SUBJECTIVE BELIEF IN VIOLATION AND REASONABLY OBJECTIVE BELIEF; BELIEF MUST BE OF AN EXISTING VIOLATION, NOT SOMETHING THAT IS ABOUT TO HAPPEN UPON SOME FUTURE CONTINGENCY
In Livingston v. Wyeth, Inc., No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held:
To "reasonably believe" that company conduct "constitutes a violation" of law, as those terms are used in § 1514A(a)(1), Livingston must show not only that he believed that the conduct constituted a violation, but also that a reasonable person in his position would have believed that the conduct constituted a violation. It would make no sense to allow Livingston to proceed if he himself did not hold the belief required by the statute, and the language of the statute itself requires that the belief be a "reasonable" one. 18 U.S.C. § 1514A(a)(1). Thus, §1514A requires both a subjective belief and an objectively reasonable belief that the company's conduct constitutes a violation of the relevant law.
Moreover, the statute requires Livingston to have held a reasonable belief about an existing violation, inasmuch as the violation requirement is stated in the present tense: a plaintiff's complaint must be "regarding any conduct which [he] reasonably believes constitutes a violation of [the relevant laws]." 18 U.S.C. § 1514A(a)(1) (emphasis added). In an analogous context, we have construed the reasonable belief of a violation to allow for a reasonable belief that the violation not only (1) "has happened" but also (2) "is in progress." Jordan v. Alternative Resources Corp., 458 F.3d 332, 340-41 (4th Cir. 2006) (construing the retaliation provision in Title VII, 42 U.S.C. § 2000e-3(a)), cert. denied, 127 S. Ct. 2036 (2007). As we amplified in Jordan, "the employee must have an objectively reasonable belief that a violation is actually occurring based on circumstances that the employee observes and reasonably believes." Id. at 341. We rejected the claim, however, that a reasonable belief that a violation has occurred or is in progress can include a belief that a violation is about to happen upon some future contingency. See id. at 340-41.
Slip op. at 13 (footnote omitted). One Circuit Judge sought to clarify in a dissent that the existing violation rule is based on the notion that an employee's belief is unreasonable and unprotected if based entirely on unsupported conjecture about hypothetical future events; a reasonable belief must relate to activity that a reasonable person could conclude is or is about to become a violation. The dissent also clarified that an actual violation by the Defendant is not required, but only the employee's reasonable belief of such.
PROTECTED ACTIVITY; MATERIAL MISREPRESENTATION OR OMISSION
In Livingston v. Wyeth, Inc., No. 06-1939 (4th Cir. Mar. 24, 2008) (case below M.D.N.C. No. 1:03-cv-00919, ALJ No. 2003-SOX-25), the Fourth Circuit held that in order for the SOX Plaintiff to justify his belief that the Defendant committed securities fraud, he would have had to reasonably believed that the Defendant "(1) made a material misrepresentation (or omission) (2) with scienter (3) in connection with the purchase or sale of a security (4) on which the seller or purchaser reasonably relied, (5) causing economic loss." Slip op. at 16 (citations omitted). Moreover, the Plaintiff would have needed to establish –– to show a violation of SEC Rule 10b-5 –– that the matter concerned a material fact. The court wrote: "The Supreme Court has noted that to fulfill the materiality requirement, ‘‘there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.' Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (internal quotation marks omitted)." Slip op. at 17.
PROTECTED ACTIVITY; A STOCK ANALYST'S STATEMENT AT A REVIEW MEETING THAT SHE WOULD REFUSE TO CHANGE A STOCK RATING WAS NOT PROTECTED ACTIVITY WHERE SHE DID NOT VOICE A BELIEF THAT A CHANGE WOULD VIOLATE A SECURITIES LAW AND SHE WAS NOT DIRECTED TO CHANGE THE RATING
In Getman v. Administrative Review Board, USDOL, No. 07-60509 (5th Cir. Feb. 13, 2008) (unpublished), the court affirmed the ARB's holding that the Complainant, a research analyst for a securities company, had not engaged in protected activity under SOX when she refused to recommend a high rating for a stock she reported on. A review committee had questioned her rating and asked for her reasoning. At the end of the meeting, the Complainant told the committee that they could change the rating but that she would not sign on to the change. She did not, however, inform the committee that she believed that changing the rating would violate any securities law. Moreover, none of the committee members told her to change the rating.
PROTECTED ACTIVITY; SOX PROTECTS AGAINST RETALIATION BASED UPON THE WHISTLEBLOWER'S REPORTING OF FRAUD UNDER ANY OF THE ENUMERATED STATUTES REGARDLESS OF WHETHER THE MISCONDUCT RELATES TO "SHAREHOLDER" FRAUD
In O'Mahony v. Accenture Ltd., No. 1:07-CV-07916 (S.D.N.Y. Feb. 5, 2008), the court agreed with authority ruling that protected activity must implicate the substantive law protected in Sarbanes-Oxley definitively and specifically. However, the court did not agree with authority ruling that § 1514A limits the activity to be protected only to reporting conduct that involves "fraud against shareholders." The court wrote:
The Court finds that the plain language of § 1514A is unambiguous. Section 1514A states, in pertinent part, that a publicly traded company may not retaliate against an employee who provides information that the employee "reasonably believes constitutes a violation of section 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." 18 U.S.C. § 1514A(a)(1). Section 1514A contains six provisions that enumerate six specific forms of misconduct which, if reported by an employee, protect the whistleblower from employer retaliation: (1) § 1341 (mail fraud); (2) § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. The first four provisions are statutes that, as written by Congress, are not limited to types of fraud related to SOX. By listing certain specific fraud statutes to which § 1514A applies, and then separately, as indicated by the disjunctive "or", extending the reach of the whistleblower protection to violations of any provision of federal law relating to fraud against securities shareholders, § 1514A clearly protects an employee against retaliation based upon the whistleblower's reporting of fraud under any of the enumerated statutes regardless of whether the misconduct relates to "shareholder" fraud.
Slip op. at 26-27.
PROTECTED ACTIVITY; COMPLAINANT'S ASSISTANCE IN INVESTIGATION OF WHETHER DOCUMENTS SUBJECT TO A GRAND JURY SUBPOENA
WERE BEING PROPERLY PRESERVED
In Miles v. Wal-Mart Stores, Inc., No. 5:06-CV-05162, slip op. at n.4 and surrounding text (W.D.Ark. Jan. 25, 2008),
the court found that the Plaintiff had created a geniune issue of material fact as to whether she engaged in protected activity under the SOX where she had provided assistance to the FBI and an Assistant U.S. Attorney in
connection with Defendant's response to a grand jury subpoena calling for production of documents concerning union-related labor relations and the investigation of a former executive for suspected fraud. The Complainant had
objected to an instruction to shred certain documents being digitized in her labor relations department which might have been subject to the subpoena. The Defendant argued that the Plaintiff had only aided an "investigation"
as opposed to a "proceeding." The court found that under the circumstances, a geniune issue of material fact existed as to whether the Complainant engaged in protected activity.
PROTECTED ACTIVITY; SOX COMPLAINT MUST DEFINITIVELY AND SPECIFICALLY RELATE TO ONE OF THE SIX ENUMERATED CATEGORIES FOUND IN SECTION 1514A
In Allen v. Administrative Review Bd., USDOL, No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals affirmed
... the ARB’s legal conclusion that an employee’s complaint must "definitively and specifically relate" to one of the six enumerated categories found in § 1514A: (1) 18 U.S.C. § 1341 (mail fraud); (2) 18 U.S.C. § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. See Platone v. FLYI, Inc., ARB Case No. 04-154, 2006 WL 3246910, at *8 (ARB Sept. 29, 2006) ("[A]n employee’s protected communications must relate definitively and specifically to the subject matter of the particular statute under which protection is afforded.") (internal quotation marks omitted); see also Harvey v. Home Depot USA, Inc., ARB Case No. 04-114, 2006 WL 3246905, at *11 (ARB June 2, 2006) ("[A]n employee’s complaint must be directly related to the listed categories . . . .").
Slip op. at 11-12.
PROTECTED ACTIVITY; AN EMPLOYEE’S REASONABLE BELIEF MUST BE SCRUTINIZED UNDER BOTH A SUBJECTIVE AND OBJECTIVE STANDARD
WHERE THE COMPLAINANT IS AN EXPERIENCED ACCOUNTANT, OBJECTIVE REASONABLENESS IS EVALUATED FROM THE PERSPECTIVE OF AN ACCOUNTING EXPERT
In Allen v. Administrative Review Bd., USDOL, No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals observed that SOX prohibits a publicly-traded company from retaliating against an employee who reports information to a supervisor "regarding any conduct which the employee reasonably believes constitutes a violation" of one of the six enumerated categories, 18 U.S.C. § 1514A(a)(1), and specifically agreed with the ARB’s legal conclusion that "an employee's reasonable belief must be scrutinized under both a subjective and objective standard." Slip op. at 12. The court wrote:
The objective reasonableness of a belief is evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee. ... Importantly, an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected. ...
The "objective reasonableness" standard applicable to SOX whistleblower claims is similar to the "objective reasonableness" standard applicable to Title VII retaliation. ... In Title VII retaliation cases, the objective reasonableness of an employee’s belief can be decided as a matter of law in some cases. ... However, the objective reasonableness of an employee’s belief cannot be decided as a matter of law if there is a genuine issue of material fact. ... If "[r]easonable minds could disagree on this issue," the objective reasonableness of an employee’s belief should not be decided as a matter of law, and the fact-finder’s resolution of the issue is entitled to deference on appeal. ...
Slip op. at 12-13 (citations and footnotes omitted). In Allen, one of the Complainants had alleged that she reasonably believed that the Respondent was violating an SEC rule or regulation when she expressed concerns to her supervisors that the Respondent was not complying with SEC Staff Accounting Bulletin 101 ("SAB-101"), which instructed that publicly-traded companies should not recognize sales revenue before they deliver merchandise to the customer. The court found that a SAB (which is only guidance and not a rule with the force of law) could fall within the fifth enumerated category found in section 1514A to the extent that it assists a company in complying with existing SEC financial accounting rules. However, the Complainant’s concerns related only to internal financial documents not submitted to the SEC, and the Complainant - as an accountant - knew that these internal documents did not need to be SAB-101 compliant. Thus, the court affirmed the ARB’s and ALJ’s conclusion that the Complainant did not have an objectively reasonable basis for her complaint. The court declined to express an opinion as to whether this complaint would have been protected activity if made by a layperson without extensive accounting knowledge.
PROTECTED ACTIVITY; SIXTH ENUMERATED CATEGORY OF PROTECTED ACTIVITY UNDER SOX INCLUDES ELEMENT OF SCIENTER
In Allen v. Administrative Review Bd., USDOL, No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals held that the sixth enumerated category of protected activity found in § 1514A, "any provision of federal law relating to fraud against shareholders" --
... indicates that some form of scienter related to fraud against shareholders is required. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976) (defining scienter in the securities fraud context as "a mental state embracing intent to deceive, manipulate, or defraud"). Mere negligence on the part of the employer does not constitute a violation of federal law relating to fraud against shareholders. See id. at 199; see Tellabs, Inc. v. Makor Issues&Rights, Ltd., 127 S. Ct. 2499, 2504 (2007). In cases involving the sixth "catch-all" category, we conclude that the employee must reasonably believe that his or her employer acted with a mental state embracing intent to deceive, manipulate, or defraud its shareholders. However, as stated previously, an employee's reasonable but mistaken belief that the employer violated some "provision of Federal law relating to fraud against the shareholders" is protected. See Halloum, 2006 WL 3246900, at *5.
Slip op. at 16-17 (footnote omitted). In a footnote, the court noted that it was not expressing an opinion on whether the first five enumerated categories of protected activity found in § 1514A require some form of scienter related to fraud against shareholders. The court indicated, however, that there was a spilt in authority, and also noted that several ALJs had "held that fraud is an essential element of all whistleblower claims arising under § 1514A, which necessarily includes an element of intentional deceit." Slip op. at n.8 (citations omitted).
In Allen, the court found that substantial evidence supported the ARB’s and ALJ’s conclusions that the Respondent had not acted with the requisite scienter when it made unsuccessful attempts to remedy a computer application problem with calculating interest, was slow in issuing refunds, and did not address a concern raised by some of the Complainants concerning whether the way bills were presented might make it difficult to collect unpaid balances. In each instance, the court found that a reasonable person could conclude that the Respondent had caused the problems, did not conceal their existence, and attempted to remedy them. The court found that, at most, the Respondent "inadequately responded to three unintended problems that arose in the regular course of business, and substantial evidence supports the ALJ’s and ARB’s factual finding that [the Respondent] did not intend to defraud its shareholders in failing to disclose these problems."
PROTECTED ACTIVITY; WHETHER ELEMENTS OF RULE 10b-5 CLAIM ARE NECESSARILY PART OF EVALUATION OF OBJECTIVE REASONABLENESS
In Allen v. Administrative Review Bd., USDOL, No. 06-60849, ___ F.3d ___, 2008 WL 171588 (5th Cir. Jan. 22, 2008) (case below ARB No. ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62), the Fifth Circuit Court of Appeals concluded that the Complainants had tried to shoe-horn their complaint that the Respondent had intentionally failed to disclose accounting and billing into the sixth enumerated category of protected activity found in § 1514A ("any provision of federal law relating to fraud against shareholders"). The court wrote:
It appears that this generic fraudulent omission claim is essentially a watered-down Rule 10b-5 claim. In cases involving an alleged fraudulent omission in violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, the objective reasonableness of the employee's belief is evaluated in part through reference to the elements of a Rule 10b-5 claim. ... Although an employee who makes a complaint concerning an alleged fraudulent omission does not need to prove that an actual violation of federal law occurred, the employee does need to prove that his or her belief was objectively reasonable under the circumstances.
Slip op. at n.9 (citations omitted). Because it affirmed the ARB and ALJ on other grounds, however, the court did not reach the question of whether the objective reasonableness of all generic fraudulent omission complaints must be evaluated in part through reference to the elements of a Rule 10b-5 claim.
PROTECTED ACTIVITY; CHEMIST'S DISCLOSURE OF PURPORTED VIOLATION OF FDA CONSENT DECREE, FDA AND EU REGULATIONS, AND OTHER DRUG
MANUFACTURING GUIDELINES WAS NOT PROTECTED ACTIVITY UNDER SOX WHERE THE PLAINTIFF NEVER EXPLICITLY REFERENCED VIOLATION OF A
FEDERAL LAW RELATED TO FRAUD AGAINST SHAREHOLDERS
In Portes v. Wyeth Pharmaceuticals, Inc., No. 06-CV-2689 (S.D.N.Y. Aug. 20, 2007)
(case below 2005-SOX-98), the court assumed as true for purposes of deciding a summary judgment motion that the Complainant was
a chemist, and the principle project manager for a "Sustainable Compliance Initiative" that was established as the result of a consent
decree entered into with the FDA after the Defendant had failed to comply with certain FDA regulations, including
good manufacturing practices for the production of pharmaceutical and biological products. The Plaintiff uncovered problems
with his direct supervisor's work, leading him to believe that the Defendant was in violation of the consent decree, and certain federal
and EU regulations. He communicated his findings to a higher level supervisor, who allegedly retaliated against him. After
being placed on a PIP, the Complainant filed additional complaints through various channels at the Defendant alleging violations
of regulations relating to the manufacture of pharmaceuticals and complaining of "whistleblower" retaliation. The Plaintiff was
eventually terminated as a result of those disclosures and complaints. The Defendant moved for summary judgment based on a
contention that the Plaintiff did not engage in protected activity under the SOX because none of his reports were
sufficiently related to securities fraud or any violation enumerated in section 1514A(a)(1). The court agreed.
The court closely followed the analysis from Fraser v. Fiduciary Trust Co. Int'l, 417 F.Supp.2d 310 (S.D.N.Y.2006), which
protects disclosures under SOX only when they "implicate the substantive law protected in Sarbanes-Oxley 'definitively and
specifically.'" Slip op. at 7 (citations omitted). The Plaintiff argued that if the Defendant had violated regulations,
it faced fines and other penalties that might have significantly affected share prices. He also asserted that,
in light of prior references to the consent decree in financial reports, he had a reasonable belief that the company was
obligated to report the violations to the FDA, SEC, and shareholders. He did not, however, allege that he explicitly referred
to fraud, shareholders, securities, statements to the SEC, or SOX in his disclosures to his superiors at the Defendant. The court
stated that the purported violations involved the consent decree, FDA and EU regulations, and other drug manufacturing guidelines, and
not federal law related to fraud against shareholders. Thus, the court found that the disclosures were not sufficiently
related to shareholder fraud to constitute protected activity. The circumstances did not suggest a concern that the Defendant was
being unfair to its investors, that its lack of compliance with FDA regulations might have implications for its reports to investors
and the SEC, or that it was otherwise engaged in conduct that would have alerted it that the Plaintiff believed that the
Defendant was violating a federal rule or law related to fraud against shareholders.
The court observed that the Plaintiff was employed as a chemist and project manager implementing standards for drug manufacturing,
and not as an investment analyst. Thus, the court would not infer that the Plaintiff was concerned with shareholder fraud
based on the nature of his job responsibilities or his work.
PROTECTED ACTIVITY; ALLEGED WHISTLEBLOWING ACTIVITY MUST INCRIMINATE OR ACCUSE, AND NOT MERELY IMPLY VIOLATION OF THE SUBSTANTIVE LAW PROTECTED BY SOX
In Van Asdale v. International Game, Technology, No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate Judge looked to Bozeman v. Per-Se Tech., Inc., 456 F. Supp. 2d 1282, 1359 (N.D. Ga. 2006) and similar authority to conclude that under SOX, an employee's act must implicate securities fraud definitively and specifically. The court found that "implicate" in this context does not mean merely to "imply," but "'to bring into intimate or incriminating connection' See Webster's Third New International Dictionary, Unabridged, 1135 (entry for 'implicate')." Slip op. at 10. The Magistrate Judge stated that a better synonym for "implicate" in this context would be "incriminate" or "accuse."
In Van Asdale, the Plaintiffs, who were in-house intellectual property attorneys for the Respondent, alleged that they met with the Defendant's General Counsel to express their views on the invalidity of a patent held by a company which the Defendant was considering acquiring by merger, and to express concern that fraud had occurred. The Magistrate Judge granted summary judgment against the Plaintiffs on this alleged act of protected activity because the deposition testimony of one of the Plaintiffs indicated that the potential for "fraud" related to fraud against the patent office rather than fraud against shareholders. Citing the "sham" affidavit rule, the Magistrate refused to permit the Plaintiffs to create a genuine issue of material fact by submitting a declaration stating that the Plaintiff whose deposition testimony had been cited had referenced a need to investigate for fraud on the shareholders. The Magistrate Judge also was not willing to infer that the Plaintiff implied that shareholder fraud had occurred and the General Counsel understood the implication.
In Van Asdale v. International Game, Technology, No. 3:04-CV-00703-RAM (D.Nev. Aug. 10, 2007) (Order [denying reconsideration]), the Plaintiffs argued on motion for reconsideration that the Defendant's General Counsel was an extremely sophisticated recipient of the information, and must have understood that they were alleging shareholder fraud. The Magistrate Judge stated that although an inference could be drawn that he so understood, the law requires that a whistleblower do more than imply that a SOX violation occurred.
PROTECTED ACTIVITY; COMPLAINT MADE TO SAME SUPERVISOR WHO WAS ALLEGED TO HAVE CONDONED ILLEGAL ACTIVITY
In Van Asdale v. International Game, Technology, No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate Judge rejected the Defendant's argument that a wrongful termination suit fails where the alleged retaliation is based on a report to the same supervisor alleged to have been condoning and enforcing illegal activity. The Magistrate Judge found that the Defendant's argument was based on a California law that was not applicable to SOX whistleblower claims.
PROTECTED ACTIVITY; REASONABLE PERSON STANDARD; SOX DOES NOT REQUIRE – IN ORDER FOR A PLAINTIFF'S ACTIONS TO BE PROTECTED – AN INVESTIGATION TO RULE OUT NON-FRAUDULENT EXPLANATIONS PRIOR TO RAISING THE ISSUE OF POSSIBLE FRAUD
In Van Asdale v. International Game, Technology, No. 3:04-CV-00703-RAM (D.Nev. June 13, 2007), the Magistrate Judge followed authority from other courts, the legislative history of SOX, and several ALJ decisions in finding that SOX provides that
the whistleblower must "reasonably believe" that there has been a SOX violation,
the reasonableness threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence,"
the "reasonable person" standard should be applied,
in order for an employee to reasonably believe that a violation occurred, he or she must have a subjective and objectively reasonable belief that fraud occurred,
under the subjective portion of the reasonableness requirement the employee must actually believe that the employer was in violation of the relevant law or regulations,
under the objective portion of the reasonableness requirement the employee's belief must be objectively reasonable,
reasonableness is "determined on the basis of the knowledge available to a reasonable person in the circumstances with the employee's training and experience."
Slip op. at 14-15. In Van Asdale, the Plaintiffs, who were in-house intellectual property attorneys for the Respondent, alleged that they met with the Defendant's General Counsel to express their views on the invalidity of a patent held by a company which the Defendant was considering acquiring by merger, and to express concern that fraud had occurred. In regard to the objectively-reasonable belief element, the Magistrate rejected the Defendant's argument that fraud would have only occurred if the target company had intentionally failed to disclose documents bearing on the invalidity of the patent, and that the Plaintiffs therefore could have only had an objectively reasonable belief if they ruled out other non-fraudulent explanations for the non-disclosure. The Magistrate found that SOX does not require an attorney whistleblower "to investigate and rule out other possible explanations for what appears to be fraud before ever reporting the apparent fraud to any one at the company." Slip. at 16.
PROTECTED ACTIVITY; REASONABLENESS OF PLAINTIFF'S BELIEF IN ACCOUNTING VIOLATION; DEFENDANT'S INTERNAL INVESTIGATION AS A RESULT
In Johnson v. Stein Mart, Inc., No. 3:06-cv-00341 (M.D.Fla. June 20, 2007) (case below 2006-SOX-52), the Plaintiff had been hired as a Buyer at the Defendant's corporate headquarters, and was later promoted to be a Planner, in which capacity she complained to management about (1) the collection of markdown allowances from vendors, (2) the changing of season codes on older inventory, and (3) the accounting for the value of inventory. The Defendant argued that the Plaintiff failed to establish a prima facie case on the element of protected activity because she did not have a reasonable belief that these practices were illegal because she had no accounting background and had no knowledge of the Defendant's accounting practices. The Defendant argued that its vendor markdown allowances and season code changes were in line with general industry practices. The district court rejected this argument because the Defendant had treated the Plaintiff's complaints reasonable enough to have warranted an internal investigation.
PROTECTED ACTIVITY; REPORTS OF MAIL OR WIRE FRAUD NEED NOT BE LINKED TO FRAUD AGAINST SHAREHOLDERS TO BE PROTECTED UNDER THE SOX
In Reyna v. Conagra Foods, Inc., No. 3:04-CV-00039 (M.D.Ga. June 11, 2007), the Plaintiffs (who were employees in the Defendant's HR Department) contended that the Defendant violated the whistleblower provision of the Sarbanes-Oxley Act when they were terminated for reporting two incidents of fraud: (1) a fraudulent insurance scheme in which a supervisor falsely requested that individuals he identified as his wife and son (who were in fact his sister and nephew) be added to his company-provided health insurance as dependents, and (2) an instance in which a HR supervisor and a benefits coordinator provided a fake social security card for an employee in order to satisfy the I-9 requirements of the immigration law. The Plaintiffs contended that these fraudulent activities necessarily involved the use of mail or the internet, and thus the reporting of the activities was protected under the SOX. The Defendant filed a motion for summary judgment arguing that the reporting was not protected activity because the reports of mail fraud and wire fraud did not relate to "fraud against shareholders." Employing principles of statutory interpretation, the court denied summary judgment, holding:
The statute clearly protects an employee against retaliation based upon that employee's reporting of mail fraud or wire fraud regardless of whether that fraud involves a shareholder of the company. The Court rejects Defendants' interpretation that the last phrase of the provision, "relating to fraud against shareholders," modifies each of the preceding phrases in the provision. Defendants seek to redraft the statute to read that the employee is protected only if he reasonably believes that the conduct constitutes a "violation of section 1341 [mail fraud] ‘relating to fraud against shareholders,' section 1343 [wire fraud] ‘relating to fraud against shareholders,'" etc.
Slip op. at 39.
PROTECTED ACTIVITY; MERELY EXPRESSING CONCERN OR SUPPORT FOR A WHISTLEBLOWER IS NOT PROTECTED ACTIVITY
In Mahony v. Keyspan Corp., No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24), the Plaintiff alleged that he engaged in protected activity when, inter alia, he had conversations with the Defendant's in-house counsel regarding the Director of Accounting Research's claims of accounting irregularities and the detrimental effect they could have on the company, and when he had a conversation with the Defendant's outside counsel in which he informed outside counsel that he was concerned about the Director of Accounting Research's health and that the Director was a "good man." The court held that these claims failed as a matter of law: "Merely expressing concern or support for a whistleblower cannot be considered to be protected activity under SOX. Plaintiff's conversations with [the attorneys] did nothing to advance the investigation. Indeed, [the attorneys] already knew about [the Director's] allegations when they spoke to Plaintiff. Whether a whistleblower provides information to or assists in an investigation, a plaintiff must point to affirmative acts that advance the investigation. Accordingly, there is no interpretation of SOX under which Plaintiff's conversations with [the attorneys] constitute providing information, causing information to be provided, or otherwise assisting in an investigation." Id., Slip op. at 9-10.
PROTECTED ACTIVITY; ASSISTING A WHISTLEBLOWER IN OPENING A CHANNEL OF COMMUNICATION WITH UPPER MANAGEMENT IS PROTECTED ACTIVITY
In Mahony v. Keyspan Corp., No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24), the Defendant filed a motion for summary judgment arguing that the Plaintiff could not show that he engaged in protected activity under SOX. The Plaintiff alleged that he engaged in protected activity when, inter alia, he urged the CEO to attend a meeting with the Director of Accounting Research, in-house counsel, and the Defendant's outside counsel, to ensure that the Director's concerns about accounting irregularities were heard by the Defendant's highest corporate officer. The court found this contention persuasive. The court observed that if the Director experienced difficulties having his concerns addressed or heard by officers, then the Plaintiff's assistance by opening a channel of communication with the company's CEO would constitute assistance to the investigation. In fact, the Director had sought out the Plaintiff's assistance because of his close relationship with the CEO. The court wrote:
In order to reach the conclusion that Defendant wishes this Court to reach, this Court would have to hold that SOX applies only to those who blow the whistle but not to those who make the whistle audible. This interpretation not only flies in the face of the plain language of the statute, which clearly includes those who assist in an investigation, but also leads logically to a point that isolates the whistleblower in a way that Congress could not have intended. SeeHendrix v. American Airlines, Inc., 2004-AIR-10, 2004-SOX-23 (Dec. 9, 2004). Given that SOX is a statute designed to promote corporate ethics by protecting whistleblowers from retaliation, it is reasonable to construe the statute broadly. See 149 Cong. Rec. S1725-01, S1725, 2003 WL 193278 (Jan. 29, 2003)("The law was intentionally written to sweep broadly, protecting any employee of a publicly traded company who took such reasonable action to try to protect investors and the market"). Therefore, although Plaintiff's actions clearly did not rise to the level of Enron whistleblower Sherron Watkins, the "mere fact that the severity or specificity of [his] complaints does not rise to the level of action that would spur Congress to draft legislation does not mean that the legislation it did draft was not meant to protect [him]." Collins v. Beazer Home USA, Inc., 334 F.Supp.2d 1365, 1375-76 (N.D.Ga.2004). As a result, Defendant cannot establish that, as a matter of law, Plaintiff did not assist in an investigation.
Id., Slip op. at 11-12.
PROTECTED ACTIVITY; REASONABLE BELIEF; NO REQUIREMENT THAT WHISTLEBLOWER HAVE ACCOUNTING EXPERTISE
In Mahony v. Keyspan Corp., No. 06CV00554 (E.D.N.Y. Mar. 12, 2007) (case below 2004-SOX-24), the Defendant filed a motion for summary judgment arguing that the Plaintiff did not engage in protected activity because he could not have reasonably believed that the Defendant was engaging in fraud. The court denied the motion. Although the Plaintiff had admitted that "he had neither personal knowledge of the fraud nor the educational background to discover the fraud on his own, there is no requirement that a whistleblower have any particular expertise. Plaintiff understood the basic accounting principles that [the Director of Accounting Research] believed were violated while compiling a fraudulent financial statement. Plaintiff's lack of expertise was supplemented by the credibility [the Director of Accounting Research] derived from his position as director of financial accounting. Further, Plaintiff was shown emails which confirmed [the Director of Accounting Research]s allegations. In short, a fair and reasonable juror could find that Plaintiff reasonably believed that the company was engaging in accounting practices that needed to be corrected before its financial statements misled shareholders." Slip op. at 12.
PROTECTED ACTIVITY; ALLEGATION THAT COMPLAINANT NEVER SPECIFICALLY ALLEGED SECURITIES OR ACCOUNTING FRAUD AND THAT THE COMPLAINTS WERE TOO VAGUE; REASONABLE BELIEF TEST
In Collins v. Beazer Homes USA, Inc., __ F.Supp.2d __, 2004 WL 2023716 (N.D.Ga. Sept. 2, 2004), the Defendants moved for summary judgment alleging that the Plaintiff did not engage in protected activity within the meaning of the SOX whistleblower provision where the Plaintiff never specifically alleged securities or accounting fraud and where the complaints were allegedly too vague. The Defendants cited in contrast the type of disclosures made by Sherron Watkins regarding Enron's accounting practices. In response, the Plaintiff pointed to four specific disclosures which were allegedly exposed "attempts to circumvent the company's system of internal accounting controls and therefore state a violation of Section 13 of the [Securities] Exchange Act." The allegations were that the Respondent knowingly overpaid invoices to an advertising agency, that the ad agency was being used because of a personal relationship between management and the agency, that sales agents who were friends of the Director of Sales were being overpaid, and that kickbacks were being paid to lumber suppliers.
The court, although acknowledging that it was a close case, found that a genuine issue of material fact existed as to whether the Plaintiff had engaged in protected activity (especially given the lack of caselaw guidance and the broad remedial purpose of the SOX). The mere fact that they did not rise to level of the complaints raised by Ms. Watkins regarding Enron was not determinative. Rather, the test was a "reasonable belief" test. The court rejected the Defendant's assertion that the complaints were too vague to constitute protected activity, noting that the Defendants had taken the allegations seriously and investigated the claims, citing in that respect legislative history to the effect that "any type of corporate or agency action taken based on the information would be strong indicators of a reasonable belief." The court found that since reasonable jurors could find by a preponderance of the evidence that the Plaintiff engaged in protected activity, the Defendants were not entitled to summary judgment as a matter of law.
PROTECTED ACTIVITY; REVEALING OR REITERATING INVOLVEMENT IN AN INVESTIGATION MONTHS AFTER THE INVESTIGATION WAS CONCLUDED FOUND NOT TO BE PROTECTED ACTIVITY UNDER SOX
In Sussberg v. K-Mart Holding Corp., No. 05-70378 (E.D.Mich. Nov. 15, 2006), the court did not reach the issue of whether the Plaintiff's reporting of allegations that the Defendant's Vice-President for Ladies' Wears was accepting kickbacks from vendors was protected activity under SOX because it granted summary judgment based on failure to establish that such activity was a contributing factor in his termination. The court did, however, hold that the Complainant's revealing or reiterating to managers that he had a part in the investigation of the Vice-President, five months after the Vice-President had been fired, could not "be said to be related to protecting shareholders from fraud…." Slip op. at 17.
PROTECTED ACTIVITY; ANTICIPATED TESTIMONY BEFORE THE SEC IS POSSIBLY PROTECTED ACTIVITY UNDER SECTION 1514A(a)(2)
In Romaneck v. Deutsche Asset Management, No. C-5-2473 (N.D.Cal. Aug. 17, 2006), the Defendant sought summary judgment on the ground that the Plaintiff could not establish that he engaged in protected activity based on his anticipated testimony before the SEC, relying on the ARB's decision in Henrich v. Ecolab, Inc., ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), in which the ARB held that "[W]here a complainant refuses to act but does not relate such refusal to a concern about potential fraud or another possible SOX violation, such refusal does not necessarily ‘provide information' about a SOX violation." The court denied the motion, finding that the ARB's holding only went to the "provide information" prong of the SOX whistleblower provision at 18 U.S.C. § 1514A(a)(1), and that the SOX also protects employees who "file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of" securities laws, 18 U.S.C. § 1514A(a)(2).
PROTECTED ACTIVITY; ACTUAL VIOLATION NEED NOT BE SHOWN, BUT GENERAL INQUIRIES ARE INSUFFICIENT; MUST IMPLICATE SUBSTANTIVE LAW PROTECTED IN SOX "DEFINITELY AND SPECIFICALLY"
Although decided on other grounds, the court in Bozeman v. Per-Se Technologies, Inc., 1:03-CV-3970 (N.D.Ga. Sept. 12, 2006), described the nature of protected activity under SOX:
SOX protects employees who provide information, which the employee "reasonably believes constitutes a violation" of any SEC rule or regulation. 18 U.S.C. § 1514A(a)(1); Collins, 334 F.Supp.2d at 1376. While a plaintiff need not show an actual violation of law by his employer, or cite a code section he believes was violated, "general inquiries . . . do not constitute protected activity." Id.; Bechtel Constr. Co. v. Sec'y of Labor, 50 F.3d 926, 931 (11th Cir. 1995); seealsoLerbs v. Buca Di Beppo, Inc., 2004-SOX-8, 2004 DOLSOX LEXIS 65, at *33-34 (Dep't Labor June 15, 2004) ("[I]n order for the whistleblower to be protected by [SOX], the reported information must have a certain degree of specificity [and] must state particular concerns, which, at the very least, reasonably identify a respondent's conduct that the complainant believes to be illegal.") (citing Bechtel, 50 F.3d at 931); Bishop, 2006 WL 1460032, at *5 ("An employee can engage in § 1514A protected activity even if the reported conduct did not actually constitute a violation of one of the laws or regulations enumerated in § 1514A(a)(1)."). Protected activity must implicate the substantive law protected in Sarbanes-Oxley "definitively and specifically." American Nuclear Res., Inc. v. United State Dep't of Labor, 134 F.3d 1292, 1295-96 (6th Cir. 1998). It is sufficient that "the individuals to whom [the complaints] were addressed understood the serious nature of [the employee's] allegations." Collins, 334 F.Supp.2d at 1377-78.
Slip op. at 166-167.
PROTECTED ACTIVITY; FRAUD IS AN INTEGRAL ELEMENT OF SOX WHISTLEBLOWER CAUSE OF ACTION; REQUIREMENT OF REASONABLE, OBJECTIVE BASIS FOR SUSPECTING SUCH FRAUD; MATERIALITY
In Livingston v. Wyeth, No. 1:03-CV-00919 (M.D.N.C. July 28, 2006), the court found that protected activity under the SOX whistleblower provisions necessarily includes an element of fraud against shareholders. The court wrote:
Sarbanes-Oxley was enacted to address corporate fraud on shareholders. One way it does so is by protecting employees who report violations of laws that relate to shareholder fraud. It is clear from the plain language of the statute and its legislative history that fraud is an integral element of a whistleblower cause of action. To be protected, the whistleblower must not only subjectively believe that the reported conduct may constitute fraud on shareholders, there must also be a reasonable, objective basis for suspecting such fraud. See, e.g., S. Rep. No. 107-146, 2002 WL 863249, at *18- 19 (May 6, 2002). The "reasonableness" test used under Sarbanes-Oxley is the same test as that generally used in a variety of legal contexts. See Cong. Rec. S7418, S7420 (daily ed. July 26, 2002), reprinted at 2002 WL 32054527.
* * *
To be protected under Sarbanes-Oxley, an employee's disclosures must be related to illegal activity that, at its core, involves shareholder fraud. It may be that the employee need not know precisely what securities law is about to be violated, but there must be some basis for an objectively reasonable belief, considering the employee's experience and knowledge, that the corporation is about to commit wrongdoing.
* * *
Information must be sufficiently material to a company's financial picture before it will form the basis for securities fraud. Under Supreme Court authority, for information to be material, there must be "a substantial likelihood that a reasonable shareholder would consider [the matter] important to his decision to invest." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); see alsoBasic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988). Given the importance of "materiality" under the securities laws, Administrative Law Judges have rejected whistleblower retaliation claims where the information disclosed would not be sufficiently material to shareholders.
Slip op. at 19, 21, 22-23. In regard to the materiality requirement, the court took notice of the ALJ decisions in Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005) (complaint about poor air quality); Nixon v. Stewart & Stevenson Servs., Inc., 2005-SOX-1 (ALJ Feb. 16, 2005) (failure to disclose potential violations of environmental regulations); and Harvey v. Safeway, Inc., 2004-SOX-21 (ALJ Feb. 11, 2005) (complaint of wage irregularities under the FLSA). In Livingston, the Complainant had complained to company officials that the Defendant's certification of training programs to the FDA required under a consent decree concealed training deficiencies. The court found that the Plaintiff's concerns were not reasonable for an employee in his position, who knew that the deficiencies could be adequately addressed if a legacy plan were adopted for closing any compliance gaps. In addition, the court found that the Plaintiff's contention that the potential financial impact of the training deficiencies should have been reported to shareholders were not sufficiently material to the Defendant's financial picture to form the basis for securities fraud. Finally, the court found that even assuming that the Plaintiff had a subjective belief that training gaps might increase the chances of adulterated product being released to the public, that belief was not objectively reasonable based on the evidence adduced.
PROTECTED ACTIVITY; MUST IMPLICATE THE SUBSTANTIVE LAW PROTECTED IN SOX DEFINITIVELY AND SPECIFICALLY; MERE ALLEGATION OF FAILURE TO FOLLOW PLAINTIFF'S INVESTMENT ADVICE DOES NOT MEET SINE QUA NON OF AN ALLEGATION OF WRONGDOING
In Fraser v. Fiduciary Trust Co., 417 F.Supp.2d 310 (S.D.N.Y. 2006), the court described protected activity under SOX as follows:
SOX protects employees who provide information, which the employee "‘reasonably believes constitutes a violation'" of any SEC rule or regulation or "‘Federal law relating to fraud against shareholders'." Id. (citing 18 U.S.C. § 1514A(a)(1)). While a plaintiff need not show an actual violation of law, id, or cite a code section he believes was violated (June 23, 2005 Decision and Order, at 16), "‘general inquiries . . . do not constitute protected activity'." Id. (citing cases); see also Lerbs v. Buca Di Beppo, Inc., 2004-SOX-8, 2004 DOLSOX LEXIS 65, at **33-34 (Dep't Labor June 15, 2004) ("[I]n order for the whistleblower to be protected by [SOX], the reported information must have a certain degree of specificity [and] must state particular concerns which, at the very least, reasonably identify a respondent's conduct that the complainant believes to be illegal." (citation omitted). Thus, "[p]rotected activity must implicate the substantive law protected in Sarbanes-Oxley ‘definitively and specifically'" (June 23, 2005 Decision and Order, at 16 (citation omitted)).
Slip op. at 17. In Fraser, the Plaintiff contended that he engaged in protected activity when he prepared and sent a confidential memo to the H.R. Department when he sent e-mails to other company officials suggesting that large losses across accounts could have been avoided if a portfolio manager for an ERISA account had heeded the Plaintiff's advice for investment strategy and not taken a cavalier attitude toward the Plaintiff's credit research. The confidential memo also accused the portfolio manager of wanting to conceal and falsify year end performance results. Similarly, the Plaintiff contended that he engaged in protected activity when he sent an e-mail to company officials contending that investment performance had suffered because of a failure to implement the Plaintiff's recommendation to establish a long/short high-yield investment fund for clients. The court found that such conduct did not alert the Defendants that the Plaintiff believed the company was violating any federal rule or law related to fraud on shareholders. Slip op. at 18-19. The court found that these activities did not rise to the level of whistleblowing, and were "more reflective of Fraser's complaints that Defendants did not follow his investment advice. They cannot be read as allegations of wrong-doing, the sine qua non of whistleblowing." Slip op. at 23.
The court, however, did permit the Plaintiff to proceed on the portion of his complaint alleging that he had complained to the company President that an e-mail he had sent recommending reduction of holdings of WorldCom stock be distributed firm wide had been ignored. The court found that the Defendants could not establish as a matter of law that this conduct was not protected activity in view of the fact that only clients of the New York office received the prudent advice to timely sell WorldCom stock, whereas Los Angeles clients suffered losses relating to that holding. The court considered it a close call, but held that this e-mail was sufficient to satisfy the pleading requirements for a SOX whistleblowing claim. The court noted that the Plaintiff had contended that this instance related to a provision of the Investment Advisers Act of 1940 which prohibits fraudulent conduct against shareholders.
PROTECTED ACTIVITY; COMPLAINT MUST PLEAD FACTS THAT WOULD OBJECTIVELY SUPPORT A BELIEF THAT FRAUD HAD OCCURRED TO SURVIVE A 12(b)(6) MOTION
In Bishop v. PCS Administration (USA), Inc., No. 1:05-CV-05683 (N.D.Ill. May 23, 2006), the Defendants filed a motion to dismiss under FRCP 12(b)(6). Accepting the facts as alleged in the complaint as true for purposes of ruling on the motion, the court considered whether the Plaintiff, an in-house attorney who had been informed that she would be made the Compliance Officer for the Defendant, engaged in protected activity under the SOX whistleblower provision when she advocated for a compliance program that would directly involve upper management based on her interpretation of the Federal Sentencing Guidelines. The Plaintiff contended that creating a sham compliance program would perpetrate a fraud on shareholders. The court, however, found that the Plaintiff had not pleaded facts that would objectively support a belief that fraud had occurred – thus she had not engaged in protected activity and the cause of action must be dismissed.
The court described protected activity under SOX:
An employee can engage in § 1514A protected activity even if the reported conduct did not actually constitute a violation of one of the laws or regulations enumerated in § 1514A(a)(1). It is sufficient that the employee "reasonably believes" the conduct constituted such a violation…. This reasonableness test "is intended to impose the normal reasonable person standard used and interpreted in a wide variety of legal contexts…. The threshold is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence." … The reasonable belief must be both subjectively believed and objectively reasonable…. The employee's access to information, experience, and background are considerations in determining whether he or she had a reasonable belief….
Slip op. at 14-15 (citations omitted). The court distinguished several ALJ decisions cited by the Plaintiffs: (1) Morefield v. Exelon Services, Inc., 2004-SOX-2 (ALJ Jan. 28, 2004) (ALJ's ruling was that actions did not loose protection because the whistleblower was successful in stopping the fraud before it was perpetrated on shareholders, whereas here the Plaintiff's activity only involved legal disagreements over how to establish procedures for preventing and discovering fraudulent conduct); (2) Getman v. Southwest Securities, Inc., 2003-SOX-8 (ALJ Feb. 2, 2004) (ALJ's decision was overturned on appeal by the ARB; dictum in ARB decision indicated that an actual violation was not necessary as long as the employee reasonably believed that the corporation was about to commit fraud against shareholders or some other securities violation). The court noted that the ALJ decision in Marshall v. Northrup Gruman Synoptics, 2005-SOX-8 (ALJ June 23, 2005), supported requiring that there be a relationship to an actual violation of one of the laws or regulations enumerated in the SOX whistleblower statute. The court concluded:
The plain language of § 1514A(a)(1) refers to providing information that is reasonably believed to "constitute[ ] a violation" of one of the enumerated statutes or regulations. The word "constitute" should be understood to mean an actual violation has occurred, which could include an attempt (in the criminal sense). To the extent there is a reasonable (but incorrect) belief, it must be a reasonable belief that an actual violation has occurred or is being attempted. A reasonable belief that implementing certain procedures will be insufficient to prevent violations is not, by itself, a reasonable belief that a violation has occurred or been attempted. Plaintiff must rely on something more than just complaints that the compliance program itself was legally deficient so that the potential and risk of violations or penalties was present.
Slip op. at 21 (footnote omitted). The court stated in regard to the case sub judice that "[i]f the law itself does not establish that a deficient compliance program is a violation of the pertinent statutes or regulations concerning fraud, then the subjective belief of plaintiff (an attorney practicing before the SEC) was not objectively reasonable." Slip op. at 22. The court found nothing in the SOX or the Sentencing Guidelines that mandated ex ante any particular form of corporate compliance program, and concluded that failure to adopt the provisions of the Federal Sentencing Guidelines compliance program could not objectively be regarded as fraudulent within the meaning of Section 1514A. The court summarized by focusing on the need for the pleading of fraud against shareholders:
All the statutes and regulations referenced in § 1514A(a)(1) are ones setting forth fraud. The phrase "relating to fraud against shareholders" in this provision must be read as modifying each item in the series, including "rule or regulation of the Securities and Exchange Commission." … Although other aspects of the retaliation claim need not be pleaded with particularity, Rule 9(b) does require that the fraud violation itself be pleaded with particularity.
PROTECTED ACTIVITY; COMPLAINT ALLEGING THAT COMPANY POLICY CAUSED DISCRIMINATION AGAINST HANDICAPPED EMPLOYEES; REASONABLE BELIEF STANDARD
The Complainant's letter to the Respondent's outside counsel complaining that the Respondent was violating its code of conduct and the Americans With Disabilities Act by requiring persons who needed service animals to work from home was not protected activity under SOX because it did not allege any of the enumerated fraud or securities violations prohibited under the SOX. Brookman v. Levi Strauss & Co., ARB No. 07-074, ALJ No. 2006-SOX-36 (ALJ July 23, 2008). In Brookman, the ARB rejected the Complainant's argument that he was only required to demonstrate that he reasonably believed that an actual SOX violation had occurred. The ARB held that the Complainant had failed "to explain why an objectively reasonable employee in his situation would view a complaint regarding a company's discrimination against disabled employees as a violation of the fraud or securities violation provisions of SOX."
PROTECTED ACTIVITY; RAISING GENERAL CONCERNS
In Gale v. World Financial Group, ARB No. 06-083, ALJ No. 2006-SOX-43 (ARB May 29, 2008), the ARB found that the ALJ properly granted summary decision against the Complainant where the Complainant had only expressed "concerns" about a parent company's business operations, and certain of the Respondent's practices and policies, but indicated in deposition testimony that he did not believe that the Respondent had engaged in any illegal or fraudulent activity. Because protected activity is a material element of a SOX whistleblower claim, to avoid summary decision the Complainant was required to produce some evidence that he reasonably believed that there had been a violation of the fraud statutes, SEC rules or regulations, or a Federal law concerning fraud against shareholders.
PROTECTED ACTIVITY; GENERAL ALLEGATIONS OF QUESTIONABLE CORPORATE ACTIONS, PRACTICES, DECISIONS, OR EXPENDITURES IS NOT, STANDING ALONE, PROTECTED ACTIVITY
In Levi v. Anheuser Busch Companies, Inc., ARB Nos. 06-102, 07-020, 08-006, ALJ Nos., 2006-SOX-27 and 108, 2007-SOX-55 (ARB Apr. 30, 2008), the Complainant had written letters making general claims of poor business decision making by the Respondent and tolerance of racial discrimination, and raising concerns over workplace safety, but not specifically any of the categories of fraud and securities violations covered by the SOX. The ARB wrote:
…although a company that tolerates discriminatory practices or unsafe conditions may not be acting in the best interests of its shareholders, a SOX-protected activity must involve an alleged violation of a federal law directly related to fraud or securities violations. As we said in Harvey, "while Title VII protects individuals against discrimination, SOX protects shareholders from inaccurate reporting of a publicly held corporation's financial condition . . . . Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws . . . standing alone, is not protected conduct under the SOX." Harvey, slip op. at 14. To bring himself under the protection of the act, the information the employee provides must directly relate to the listed categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a); 29 C.F.R. §§ 1980.104(b), 1980.109(a).
USDOL/OALJ Reporter at 10-11.
PROTECTED ACTIVITY; REASONABLE BELIEF REQUIREMENT
In Reed v. MCI, Inc., ARB No. 06-126, ALJ No. 2006-SOX-71 (ARB Apr. 30, 2008), the Complainant alleged that he was retaliated against in violation of the SOX when he refused to "commit felonies" – i.e., refused to use pirated software in his employment as a software engineer. The Complainant theorized that the Respondent's profits were based partly on its use of stolen software and thus the Respondent defrauded shareholders because such practice could expose it to fines and loss of good will. The Respondent filed a motion for summary decision on the ground that the Complainant had not engaged in protected activity. The ARB stated that "To defeat summary decision, Reed must produce evidence that he engaged in SOX-protected activity because he reasonably believed that using the stolen software defrauded shareholders. Speculation or a mere possibility that shareholders would be defrauded because he used the software, however, does not satisfy the reasonable belief requirement." The ARB found that the Complainant had not produced evidence of such a reasonable belief, and granted summary decision.
PROTECTED ACTIVITY; ALLEGATION OF SYSTEMIC RACIAL DISCRIMINATION AND THREAT TO FILE DISCRIMINATION CLAIM
In Smith v. Hewlett Packard, ARB No. 06-064, ALJ Nos. 2005-SOX-88 through 92 (ARB Apr. 29, 2008), the Complainant had complained to a supervisor that the Respondent was engaged in systemic racial discrimination through its employee performance rating system and, because the Respondent's response to the alleged discrimination was inadequate in his view, he would take his concerns to the appropriate federal agency. The ARB held that the complained of conduct did not even remotely relate to the SOX categories of mail fraud, wire, radio, TV fraud, or bank fraud. Moreover, applying the principles enunciated in Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006) and Harvey v. Home Depot U.S.A., Inc., ARB Nos. 04-114, 115, ALJ Nos. 2004-SOX-20, 36 (ARB June 2, 2006), the ARB held that the Complainant's "allegation of systemic racial discrimination and threat to file a discrimination claim with the federal government do not directly implicate corporate fraud or a securities violation. Smith did not allege, as he must, that Hewlett Packard engaged in securities fraud by misrepresenting (or omitting) any material fact in connection with the purchase or sale of a security, that Hewlett Packard violated a SEC rule or regulation, or that Hewlett Packard violated any Federal law relating to fraud against shareholders. Platone, slip op. at 17, 21, 22; Harvey, slip op. at 14-15, 16. Therefore, Smith did not engage in protected activity in this instance."
The Complainant also alleged that he had been put on administrative leave and eventually fired because he had contacted the EEOC and made an appointment for later in the month. The ARB observed that the SOX does cover a complaint made to an outside agency – but that it must be a complaint about conduct covered under the SOX. The ARB found that the Complainant's complaints to the EEOC did not directly implicate securities fraud, a violation of a SEC rule or regulation, or a violation of any Federal law relating to fraud against shareholders, and were not protected activity under SOX.
[SOX Digest XIII E] PROTECTED ACTIVITY; COMPLAINT ABOUT MISMANAGEMENT IS NOT PROTECTED ACTIVITY ABSENT SHOWING OF ATTEMPT TO DEFRAUD INVESTORS
In Stojicevic v. Arizona-American Water, ARB No. 05-081, ALJ No. 2004-SOX-73 (ARB Oct. 30, 2007), the Complainant argued that the ALJ erred in his legal conclusion that the Complainant had not engaged in protected activity under the SOX on the theory that the Respondent's failure to inform the stockholders of the Complainant's complaints about mismanagement and violations of SDWA and local regulations constituted misrepresentations. The Board rejected this argument, writing:
However, as we held in Harvey v. Home Depot[, U.S A., Inc., ARB Nos. 04-114, 115, ALJ Nos. 2004-SOX-20, 36, slip op. at 14 (ARB June 2, 2006)]:
Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is not protected conduct under the SOX. To bring himself under the protection of the act, an employee's complaint must be directly related to the listed categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a); 29 C.F.R. §§ 1980.104(b), 1980.109(a). See Getman, slip op. at 9-10 (requiring that the employee articulate the nature of her concern). A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.
At most in this case, Stojicevic demonstrated that AAW's poor management could adversely affect its financial condition. Accordingly, since Stojicevic did not demonstrate that AAW defrauded, or attempted to defraud, its investors, or violated any rule or regulation of the SEC, he has not shown that he engaged in protected activity under the SOX.
Slip op. at 13-14 (footnote omitted).
PROTECTED ACTIVITY; MAIL FRAUD; ISSUE IS NOT
WHETHER RESPONDENT ACTUALLY VIOLATED MAIL FRAUD LAW, BUT WHETHER COMPLAINANT
REASONABLY BELIEVED THAT THERE WAS A VIOLATION AND CONVEYED THAT BELIEF TO THE
RESPONDENT PRIOR TO THE ADVERSE EMPLOYMENT ACTION
In Nixon v. Stewart & Stevenson
Services, Inc., ARB No. 05-066, ALJ No. 2005-SOX-1 (ARB Sept. 28, 2007),
the Complainant was the environmental manager for a federal defense contractor.
Among other allegations, the Complainant alleged that he engaged in protected
activity because the Respondent engaged in mail fraud under 18 U.S.C.A. § 1341
when it sent letters to a state commission falsely asserting that it was immune
from environmental penalties. The ALJ had granted summary decision in favor of
the Respondent because the Complainant failed to show that the letters were
part of a “scheme or artifice to defraud, or for obtaining money or property,”
as required by 18 U.S.C.A. § 1341, and that there was no evidence that the
Complainant, prior to his termination, considered the Respondent’s conduct to
constitute mail fraud. On appeal, the ARB indicated that the ALJ had partly
mischaracterized the issue because under the SOX whistleblower provision, an
employee is not required to provide information about an actual violation of
Section 1341, but only to show that he reasonably believed that there was a
violation and conveyed that belief to his employer. The ARB, however, affirmed
the ALJ’s grant of summary decision because he had correctly found that there
was no evidence that the Complainant actually communicated his Section 1341
concerns to the Respondent prior to his termination. Rather, the first mention
of the mail fraud statute was in response to a conference call during which the
ALJ had asked if there was any other basis for the Complainant’s complaint
beyond an SEC rule violation alleged in the complaint.
PROTECTED ACTIVITY; REASONABLE BELIEF TEST
In Welch v. Cardinal Bankshares Corp., ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant – who was the Respondent's CFO - expressed concerns that the Respondent had overstated income in a quarterly SEC report because it had improperly treated $195,000 in loan recoveries as income when they should have been allocated to the "loan reserve" account. The Complainant argued that error improperly inflated the Respondent's income by 13.7%, and therefore could have materially misled investors. The ARB reversed the ALJ's finding that this was protected activity. The ARB wrote:
The "reasonable belief" standard requires Welch to prove both that he actually believed that the SEC report overstated income and that a person with his expertise and knowledge would have reasonably believed that as well. Furthermore, "[b]ecause the analysis for determining whether an employee reasonably believes a practice is unlawful is an objective one, the issue may be resolved as a matter of law."
USDOL/OALJ Reporter at 10 (footnotes omitted). The ARB found that an experienced CPA/CFO like the Complainant could not have reasonably believed that the quarterly SEC report presented a misleading picture of the Respondent's financial condition because whether reported as income or as a credit to expenses, the fact remained that the Respondent had $195,000 that it previously did not have.
PROTECTED ACTIVITY; VIOLATION OF GAAP AND FFIEC ACCOUNTING STANDARDS IS NOT IPSO FACTO A VIOLATION OF FEDERAL SECURITIES LAW
In Welch v. Cardinal Bankshares Corp., ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant – who was the Respondent's CFO - expressed concerns that when the Respondent misclassified loan recoveries as income rather than crediting the loan loss account, it violated GAAP accounting standards and accounting rules that the Federal Financial Institutions Examination Council (FFIEC) developed for banks. The Complainant essentially argued that violation of those accounting standards constituted a violation the clear mandate of Sarbanes-Oxley, and therefore such errors were ipso facto violations of federal securities laws. The ARB found that this argument amounted to wholesale re-writing of SOX's section 1514A, and it would not accept such a contention in the absence of citation of legal authority.
PROTECTED ACTIVITY; CFO'S COMPLAINT OF INSUFFICIENT ACCESS TO AN OUTSIDE AUDITOR
In Welch v. Cardinal Bankshares Corp., ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant – who was the Respondent's CFO – complained that he had been denied sufficient access to an outside auditor, who instead chose to communicate with the company's CEO. The ARB found that such complaints were not protected activity under SOX. The ARB wrote: "But Welch did not prove by a preponderance of evidence how his unhappiness about access to [the outside auditor] constituted a reasonable belief that Cardinal was violating or might violate the enumerated fraud statutes, any SEC rule or regulation, or any federal law relating to fraud against shareholders. To be protected, an employee's SOX complaint must definitively and specifically relate to the listed categories of fraud or securities violation." USDOL/OALJ Reporter at 13 (footnote omitted).
PROTECTED ACTIVITY; REJECTION OF CFO'S ADVICE ON ACCOUNTING MATTERS IS NOT INHERENTLY A VIOLATION OF FEDERAL SECURITIES LAW
In Welch v. Cardinal Bankshares Corp., ARB No. 05-064, ALJ No. 2003-SOX-15 (ARB May 31, 2007), the Complainant – who was the Respondent's CFO – complained that the Respondent had deficient internal accounting controls because persons without accounting expertise had unrestricted access to the general ledger. The Complainant argued that when he briefed Respondent's staff about the problem, and they disregarded his advice, such disregard became fraud because failure to follow the CFO's advice was reflective of an intent to leave things in a deceptive state. The ARB rejected this argument, finding that the Complainant had failed to cite any legal authority to support "the proposition that rejecting the CFO's advice on accounting matters violates or could reasonably be regarded as violating the federal securities laws." USDOL/OALJ Reporter at 14.
PROTECTED ACTIVITY; DICTA SUGGESTING THAT COMPLAINANT NEED NOT BE THE FIRST TO RAISE THE ISSUE, OR BE BASED ON A COMPLAINANT'S BELIEF THAT HE IS REPORTING FRAUD; SOX COVERS NOT JUST FRAUD BUT PROVISION OF INFORMATION REGARDING VIOLATION OF ANY SEC RULE OR REGULATION
In Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), the Board remanded the matter for the ALJ to make findings on whether the Complainant had engaged in protected activity. In this respect, the Board observed that
[C]ontrary to the Respondents' arguments, we do not believe that activity is protected only when the complainant is the first to raise the issue, or when the communications relate to published information, or when the complainant believes he is reporting "fraud." SOX protection applies to the provision of information regarding not just fraud, but also "violation of … any rule or regulation of the Securities and Exchange Commission." 18 U.S.C.A. § 1514A(a)(1). ... A complainant need not express a concern in every possible way or at every possible time in order to receive protection, so long as the complainant's actual communications "provide information, cause information to be provided, or otherwise assist in an investigation" regarding a covered violation. 18 U.S.C.A. § 1514A(a)(1).
USDOL/OALJ Reporter at 17. The ARB observed that the Complainant's concerns about in-transit inventory suggested, at a minimum, incompetence in his Employer's internal controls that could affect the accuracy of its financial statements. The Board stated that the Complainant's "communications thus related to a general subject that was not clearly outside the realm covered by the SOX, and it certainly is possible that Klopfenstein could have believed that the problems were a deficiency amounting to a 'violation.' See, e.g., Collins v. Beazer Homes USA Inc., 334 F. Supp.2d 1365, 1378 (N.D. Ga. 2004) (holding that "allegations … of violations of the company's internal accounting controls … were within the zone of protection afforded by" the SOX)." The ARB did not make a finding on whether the Complainant's concerns about inventory accounting were reasonable, but directed the ALJ to make relevant findings on remand.
[Editor's note: Compare Bishop v. PCS Administration (USA), Inc., No. 05-C-5683 (N.D. Ill. May 23, 2006), in which the District Court for the Northern District of Illinois indicated that an element of fraud is necessarily pleaded in a SOX complaint. Bishop, slip op. at 23-24 (also available at 2006 WL 1460032 at *9).]
PROTECTED ACTIVITY; CONCERNS THAT ARE NEVER EXPRESSED ARE NOT PROTECTED ACTIVITY
In Henrich v. Ecolab, Inc., ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), the ARB observed that "[a] would-be whistleblower must actually express his concerns in order for his activity to be considered protected." Slip op. at 11 (citation omitted).
PROTECTED ACTIVITY; SOX REQUIRES THAT A COMPLAINANT "PROVIDE INFORMATION" ABOUT A POTENTIAL SOX VIOLATION; MERE REFUSAL TO DO AN ACT WITHOUT AN EXPLANATION WHY IS NOT PROTECTED ACTIVITY
In order to establish protected activity under the SOX, a complainant must prove that he "provided information" about conduct that he reasonably believed constituted one of the six violation types enumerated under SOX (potential fraud or other SOX violation). Thus, in Henrich v. Ecolab, Inc., ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), the ALJ did not err in not making a finding that the Complainant's alleged refusal to approve write offs of certain inventory was protected activity where, other than his own testimony, the record contained no evidence that the Complainant had actually "refused" to write off the inventory as opposed to failing to perform a task. Even if he had refused, there was no showing that the Complainant told his superior why he was refusing. The ARB found, therefore, that even if the refusal occurred, it was not protected activity because the Complainant did not "provide information" to his supervisor about a potential SOX violation.
PROTECTED ACTIVITY; COMPLAINANT MUST HAVE EXPRESSED HIS CONCERN; MERE FACT THAT SUPERVISORS SHARED CONCERN IS INSUFFICIENT PROOF TO SHOW AWARENESS OF PROTECTED ACTIVITY
In Henrich v. Ecolab, Inc., ARB No. 05-030, ALJ No. 2004-SOX-51 (ARB June 29, 2006), the ARB found that the Complainant's alleged refusal to approve write offs of certain inventory was not protected activity because, even if it occurred, there was no proof that the Complainant informed his superior why he was refusing. The Complainant then appeared to argue that proof that the Respondent's executives were aware of inventory accounting issues proved that they were aware of the Complainant's protected activity. The ARB observed that, for activity to be protected under the SOX whistleblower provision, a complainant must demonstrate that the activity included an expression of concern – that he actually blew the whistle. The ARB therefore held that "[p]roof that Ecolab supervisors shared Henrich's concern does not necessarily prove that any supervisor learned about the concern from Henrich, and thus does not prove that Henrich expressed concern." Slip op. at 15.
PROTECTED ACTIVITY; FAILURE TO ALLEGE ACTIVITY PROTECTED UNDER SOX CONSTITUTES A FAILURE TO STATE OF CLAIM FOR RELIEF UNDER SOX; MERE POSSIBILITY THAT CHALLENGED PRACTICES MIGHT AFFECT THE FINANCIAL CONDITION OF THE COMPANY IS NOT SUFFICIENT
In determining whether the Complainant's letters to the Secretary of Labor, the Assistant Secretary for ESA, and Wage and Hour Administrator constituted a timely complaint under the SOX whistleblower provision, the ARB in Harvey v. Home Depot U.S.A., Inc., ARB Nos. 04-114 and 115, ALJ Nos. 2004-SOX-20 and 36 (ARB June 2, 2006), looked to whether the letters demonstrated that the Complainant engaged in SOX-protected activity prior to his discharge. In respect to a letter written to the Secretary in which the Complainant had complained about alleged constitutional, civil rights and FMLA violations he had voiced to the Respondent's Board of Director and Executives, the Board wrote:
[The Complainant's] letters to the Board of Directors and Executives must have provided information regarding Home Depot's conduct that [the Complainant] reasonably believed constituted mail, wire, radio, TV, bank, or securities fraud, or violated any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders. Providing information to management about questionable personnel actions, racially discriminatory practices, executive decisions or corporate expenditures with which the employee disagrees, or even possible violations of other federal laws such as the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is not protected conduct under the SOX. To bring himself under the protection of the act, an employee's complaint must be directly related to the listed categories of fraud or securities violations. 18 U.S.C.A. § 1514A(a); 29 C.F.R. §§ 1980.104(b), 1980.109(a). See Getman, slip op. at 9-10 (requiring that the employee articulate the nature of her concern). A mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.
USDOL/OALJ Reporter at 14. Because the Complainant's letter to the Secretary did not express his reasonable belief that Home Depot was defrauding shareholders or violating security regulations, the ARB affirmed the ALJ's determination that the letter was not a timely claim for relief under the SOX. Similarly, the Complainant's letters claiming overtime and FMLA violations by the Respondent were not protected activity under the SOX because they did not involve the listed categories of fraud or securities violations. Even reading all the letters collectively failed to state a SOX whistleblower violation because the Complainant had not alleged that he raised specific concerns about corporate fraud or securities violations with the Respondent or that those concerns were a contributing factor in his termination.
PROTECTED ACTIVITY; LACK OF PROOF THAT COMPLAINANTS REASONABLY BELIEVED THAT COMPUTER PROGRAMMING PROBLEM CONSTITUTED A FRAUD ON SHAREHOLDERS
In Allen v. Stewart Enterprises, Inc., ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006), the Complainants argued that they engaged in protected activity when they complained to supervisors about the Respondent's failure to correct its computer programming to correctly calculate interest when customers had made a prepayment on principal and requested payoff before the end of the contract term. The ARB observed that "[r]eporting that a company violated its internal accounting controls may constitute SOX-protected activity. Whether a whistleblower's belief is reasonable depends on the knowledge available to a reasonable person in the same circumstances and with the employee's training and experience." Slip op. at 10 (footnotes omitted). The ARB affirmed the ALJ's finding that the Complainants did not reasonably believe that the Respondent's delay in reprogramming constituted a fraud on shareholders. The Complainants knew that the problem was programming related, that the Respondent was actively working on the problem, that manual calculations were used as temporary back ups, and that the Respondent had at one time believed that the problem had been fixed. The ARB also affirmed the ALJ's finding that the Respondent had not been trying to keep the problem a secret.
PROTECTED ACTIVITY; PROVIDING INFORMATION ON VIOLATIONS OF STATE LAW IS NOT, STANDING ALONE, PROTECTED ACTIVITY UNDER SOX
Providing information to management concerning violations of state law, standing alone, is not protected activity under the SOX. Allen v. Stewart Enterprises, Inc., ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006) ( Complainants had argued that certain refund delays violated the state laws of Texas and Missouri, but did not express any concern about violations of any federal fraud statutes or regulations).
PROTECTED ACTIVITY; REPORTING OF MERE POSSIBILITY THAT ACT OR OMISSION COULD AFFECT FINANCIAL CONDITION OF THE COMPANY IS NOT SUFFICIENT TO ESTABLISH PROTECTED ACTIVITY UNDER SOX
In Allen v. Stewart Enterprises, Inc., ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006), the Complainants argued they engaged in protected activity when they provided information to management that certain refund delays allegedly violated the laws of two states, and could result in a state's revoking the Respondent's license to operate and thus affect shareholders. The ARB held that "the mere possibility that an act or omission could adversely affect [the Respondent's] financial condition and thus affect shareholders is not enough to bring the Complainants' concerns under the SOX's protection." Slip op. at 12 (citation omitted).
PROTECTED ACTIVITY; FAILURE TO ESTABLISH REASONABLE BELIEF OF VIOLATION OF FEDERAL FRAUD STATEMENT OR SEC RULE OR REGULATION
In Allen v. Stewart Enterprises, Inc., ARB No. 06-081, ALJ Nos. 2004-SOX-60 to 62 (ARB July 27, 2006), the ARB affirmed the ALJ's finding that the Complainants did not engage in protected activity when they reported to management that a problem with the Respondent's computer system that failed to recognize balances on a customer's invoice that third parties owed resulting in the customer receiving an invoice showing an zero balance. The ARB also affirmed the ALJ's finding that one Complainant did not engage in protected activity when she allegedly reported that the Respondent was violating a SEC bulletin prohibiting the recognition of sales revenue before delivery to the customer. In regard to the second concern, the ARB also affirmed the ALJ's finding that one Complainant had not sufficiently complained or raised concerns about the problem to reach the level of protected activity, and that the Complainant herself testified that her concern was based on "internal consolidated financial statements" and that she was not aware of any SEC rule or regulation requiring the filing of such internal documents.
[Editor's note: In Allen, in both instances, the ALJ found that the Complainants beliefs about these problems were not reasonably grounded in a belief that the Respondent was violating a federal fraud statute or "an SEC rule related to fraud against shareholders." Slip op. at 12 and 13. In contrast, in Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), the ARB held that SOX protection applies to the provision of information regarding not just fraud, but also "violation of … any rule or regulation of the Securities and Exchange Commission."]
PROTECTED ACTIVITY; FEDERAL MAIL AND WIRE FRAUD STATUTES; ALLEGED FRAUD MUST BE OF TYPE ADVERSE TO INVESTOR'S INTERESTS
In Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB held that when a SOX whistleblower complaint is grounded in Federal mail and wire fraud statutes, "the alleged fraudulent conduct must at least be of the type that would be adverse to investor's interests." USDOL/OALJ Reporter at 15 (footnote omitted). The ARB cited in support of this holding the fact that the preamble to the SOX states: "To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. Sarbanes-Oxley Act of 2002, Pub L. No. 107-204, 116 Stat. 745 (2002) (emphasis added)."
PROTECTED ACTIVITY; REQUIREMENT THAT COMPLAINANT'S COMMUNICATIONS "DEFINITELY AND SPECIFICALLY" RELATE TO FRAUD OR SECURITIES VIOLATIONS
In Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB held that
In defining the scope of protected activity under other Federal whistleblower protection provisions, the Board has held that an employee's protected communications must relate "definitively and specifically" to the subject matter of the particular statute under which protection is afforded. The Corporate and Criminal Fraud Accountability Act of 2002 does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills. Rather, under the SOX, the employee's communications must "definitively and specifically" relate to any of the listed categories of fraud or securities violations under 18 U.S.C.A. § 1514A(a)(1). Thus, for example, an employee's disclosure that the company is materially misstating its financial condition to investors is entitled to protection under the Act.
USDOL/OALJ Reporter at 17 (footnote omitted). In Platone, the Complainant's actions in raising a possible issue that might affect the Respondent's ability to collect a debt, working with a senior manager to try to resolve the billing problem, and continued efforts to address the billing issues -- none of which provided specific information regarding fraud against shareholders -- were not protected activity
PROTECTED ACTIVITY; WHAT WAS ACTUALLY COMMUNICATED TO THE RESPONDENT, RATHER THAN WHAT WAS ALLEGED IN THE COMPLAINT, DETERMINES WHETHER THERE WAS PROTECTED ACTIVITY
In Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB indicated that in determining whether a complainant engaged in protected activity, the relevant inquiry is not what was alleged in the complaint, but what was actually communicated to the respondent prior to the adverse action. In the instant case, the ARB determined that contrary to what the Complainant alleged in her OSHA complaint, she had not informed managers"the company had created, or had acquiesced in, a scheme to funnel improper payments to members of the union's master executive council." Rather, reviewing the evidence of e-mails and conversations contained in the record, it was demonstrated that the Complainant did not provided her employer with specific information regarding "any conduct the employee reasonably believes constitutes a violation of 18 U.S.C.§§ 1341[mail fraud], 1343 [wire fraud], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders."
PROTECTED ACTIVITY; ALLEGED SEC RULE 10B-5 VIOLATION MUST IMPLICATE BASIC ELEMENTS OF SECURITIES FRAUD, AND POTENTIAL LOSS MUST BE MATERIAL TO A REASONABLE SHAREHOLDER
In Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), the ARB held that the Complainant's allegation that the Respondent had violated SEC Rule 10b-5 was baseless where her revelations about a potential billing problem did not even approximate any of the basic elements of a claim of securities fraud [i.e., a material misrepresentation (or omission), scienter, a connection with the purchase, or sale of a security, reliance, economic loss and loss causation], where she did not identify a fraudulent scheme "in connection with the purchase or sale of any security," and where she testified to less than $1,500 in potential losses (which would be unlikely to be considered "material" by a reasonable shareholder).
PROTECTED ACTIVITY; FAILURE TO SHOW THAT INFORMATION HAD BEEN PROVIDED REGARDING FRAUD OR VIOLATION OF SEC RULE OR REGULATION
The Complainant, a medical transcriptionist, sent three e-mails to a regional manager complaining that local managers had "zapped" the line count of her transcriptions resulting in underpayment to the Complainant. The regional manager cancelled her contract after the third e-mail, the Complainant filed a SOX complaint, OSHA denied the complaint, and after the Complainant requested a hearing, the Respondent filed a motion for summary judgment before the ALJ on the ground that the Complainant had not made a showing of protected activity. The ALJ granted the motion and the ARB affirmed because the Complainant never explained how the e-mails "provided information about conduct she reasonably believed constituted a violation of the federal fraud statutes, or an SEC rule or regulation, or any other federal law relating to shareholder fraud." Reddy v. Medquist, Inc., ARB No. 04-123, ALJ No. 2004-SOX-35 (ARB Sept. 30, 2005).
PROTECTED ACTIVITY; REFUSAL TO CHANGE STOCK RATING NOT PROTECTED ACTIVITY UNLESS ANALYST COMMUNICATED CONCERN THAT EMPLOYER'S CONDUCT CONSTITUTED A VIOLATION OF LAW
In Getman v. Southwest Securities, Inc., ARB No. 04-059, ALJ No. 2003-SOX-8 (ARB July 29, 2005), the Complainant was a stock analyst appearing before a company stock review committee. The ARB held that the Complainant's refusal to change her stock rating, done in the presence of her managers, was not protected activity. The Board wrote:
In our view, her unspecified "refusal" [to sign her name to a "strong buy" recommendation] was not sufficient to "provide information" to a person with supervisory authority relating to a violation. In the context of a review committee meeting between an analyst and her supervisor, where disagreement over a rating may be a normal part of the process, the analyst must communicate a concern that the employer's conduct constitutes a violation in order to have whistleblower protection. While there may be times where only refusal is sufficient to provide information, reviewing Getman's evidence in the light most favorable to her, it was not in this case.
In drafting whistleblower protection laws, Congress, after all, has drawn the distinction between notifying the employer of a violation and refusing to commit a violation. See, e.g., Energy Reorganization Act (ERA), 42 U.S.C.A. § 5851(a)(1)(A), (B) (West 2003) (extending coverage to an employee who "notified" his employer of an alleged violation or "refused" to engage in an unlawful practice if the employee has "identified the alleged illegality to the employer"); Surface Transportation Assistance Act (STAA), 49 U.S.C.A. § 31105(a)(1) (West 1997) (providing protection for an employee who files a "complaint" related to a motor vehicle safety regulation or "refuses to operate" a vehicle because it would violate a safety regulation or the employee reasonably believes the vehicle is unsafe). If Congress had wanted to protect a refusal as distinct from providing information, it could have done so in drafting the SOX. We therefore conclude that Getman's unexplained refusal to change her recommended rating of the Cholestech stock was not protected activity.
USDOL/OALJ Reporter at 9-10.
PROTECTED ACTIVITY; COMPLAINANT'S MISTAKEN, BUT REASONABLE BELIEF THAT THERE HAD BEEN A SECURITIES VIOLATION
In Halloum v. Intel Corp., ARB No. 04-068, 2003-SOX-7 (ARB Jan. 31, 2006), the ARB affirmed the ALJ's finding that the Complainant's complaints to the SEC and management officials of the Respondent constituted protected activity under the SOX. The Complainant had alleged that he had been instructed to delay payment on invoices to increase cash on the Respondent's balance sheet to meet Wall Street expectations. The SEC and the Respondent took these allegations seriously enough to investigate, but ultimately found the contentions to be unfounded.
The ARB noted that the SOX protects the provision of information that the employee reasonably believes constitutes a violation of any federal law relating to fraud against shareholders. Although the Complainant was mistaken in several ways about his allegations, the ARB found that the record contained sufficient support for a finding that the Complainant reasonably believed that there was a securities violation.
PROTECTED ACTIVITY; COMPLAINT ABOUT CHANGE OF REVENUE FORECASTING FORMULA DURING CORPORATE ACQUISITION; ACTUAL VIOLATION NEED NOT BE PROVED, BUT ONLY REASONABLE BELIEF BY EMPLOYEE IN COMPLAINANT'S POSITION
In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), the Complainant complained to management that a new formula which increased revenue projections tenfold during a time when the company was being acquired by another company could defraud investors. The ALJ found that, although the record did not establish that the company reckless or fraudulently inflated its revenue forecasts for the purpose of drawing a higher purchase offer from the acquiring company, the Complainant was not required to prove an actual violation of securities law. Because the Complainant was a salesman with no specialized training or expertise in the area of corporate acquisitions, and there was no evidence that the Complainant did not actually believe that the revised revenue forecast overstated expected income, the ALJ found it not unreasonable for a person in the Complainant's position to believe that the new formula presented investors with a materially misleading picture of the company's financial condition. The ALJ found, therefore, that the Complainant engaged in protected activity.
PROTECTED ACTIVITY; EMPLOYEE'S CONTACT WITH THE SEC IN CONNECTION WITH A REASONABLE BELIEF OF A VIOLATION OF SECURITIES LAW FOUND TO BE PROTECTED EVEN IF THE SEC DID NOT INSTITUTE A FORMAL PROCEEDING
In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), the Complainant, a salesman, testified that he called an SEC attorney to get information after he read about the "arrest" by the SEC of a person who had dealings with his employer relating to his accounts. The Complainant reported to the SEC attorney his concerns about anomalous activity and GAAP violations, and inquired whether other arrangements were legal. The Complainant, however, specifically refused to provide any evidence, opting instead to pursue his concerns internally with the Respondent. The ALJ wrote: "On these facts, one might conclude that Grove's contact with the SEC is not protected because he never initiated or participated in any proceeding before that agency. In my view, however, this would require a narrow and overly technical reading of the Act that would run counter to the legislative history which reflects that 'the law was intentionally written to sweep broadly, protecting any employee of a publicly traded company who took such reasonable action to try to protect investors and the market'" Slip op. at 23-24 (citation omitted). The ALJ noted that the ARB had recognized that whistleblower laws should be interpreted liberally, and had suggested in a ERA case that an employee's contact with a government agency for the purpose of obtaining a legal opinion related to the employee's raising of protected concerns is protected activity. Accordingly, the ALJ held that "when an employee contacts the SEC in connection with a reasonable belief of a securities law violation within the scope of Sarbanes-Oxley ... that action is protected even if no formal SEC proceeding is ever initiated."
PROTECTED ACTIVITY; PLEADING OF ACTUAL FRAUD AGAINST SHAREHOLDERS IS NOT REQUIRED, BUT RATHER ONLY A REASONABLE BELIEF OF VIOLATION OF A LAW RELATING TO FRAUD AGAINST SHAREHOLDERS
In Smith v. Corning, Inc., No. 06-CV-6516 (W.D.N.Y. July 12, 2007), the court denied the Defendants' motion to dismiss the Plaintiff's SOX suit under FRCP 12(b)(6). The motion was based on a contention that the Plaintiff did not engage in protected activity when he raised concerns that PeopleSoft 8.8, an enterprise resource planning software application, was being implemented in a way that was not correctly reporting financial data with resultant impact on the integrity of quarterly reports.
The court rejected the Defendants' contention that the complaint was deficient because the Plaintiff had not alleged an actual fraud against shareholders. The court found that § 1514A only requires a plaintiff to have reasonably believed that the problem constituted a violation of a provision of Federal law relating to fraud against shareholders. The court found that the Plaintiff's complaint met this standard insofar as it alleged that the Plaintiff reasonably believed that the company was violating 15 U.S.C. § 78m(b)(2)(B)(ii), and that he believed that § 78m(b)(2)(B)(ii) was related to fraud against shareholders. In other words, the Plaintiff alleged that the company was implementing a financial reporting system that was not GAAP compliant in violation of § 78m(b)(2)(B)(ii), and that the company was refusing to correct problems with the program, which would have resulted in the issuance of incorrectly quarterly reports which could have misled investors. Moreover, the court indicated that the submission of quarterly reports that were not prepared in accordance with GAAP would also violate a SEC rule, namely 17 C.F.R. § 210.4-01(a)(1), citing Richards v. Lexmark Int'l, Inc., 2004-SOX-49 (ALJ June 20, 2006).
The court also rejected the Defendants' contention that the Plaintiff's complaints were not protected in that they involved an internal accounting dispute, and only pertained to a potential for fraud occurring in the future. The court distinguished cases cited by the Defendants because in those cases the plaintiffs had not alleged violation of any law covered by § 1514A, whereas in the instant case, the Plaintiff had alleged that the Defendants repeatedly refused to address a problem that was resulting in incorrect financial information being reported to the company's general ledger – a sufficient allegation to survive a Rule 12(b)(6) motion.
Finally, the court rejected the Defendants' contention that the Plaintiff's complaint was deficient because he only complained about the PeopleSoft application, and therefore could not allege a basis for reasonably believing that the company's entire system of accounting controls was so inadequate as to violate § 78m(b)(2), which speaks to systems rather than portions of accounting systems. The court found that based on facts alleged in the complaint and at this stage in the litigation, it could not say as a matter of law that it was unreasonable for the Plaintiff to believe that the company was violating § 78m(b)(2)(B)(ii) when it refused to address problems with PeopleSoft.
PROTECTED ACTIVITY; ELEMENTS -- SUBJECTIVE AND OBJECTIVE REASONABLE BELIEF; INTENT TO DEFRAUD; MATERIALITY OF INFORMATION DISSEMINATED TO INVESTORS; INTERNAL CONTROLS
In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29, 2007), the ALJ reviewed the still evolving law on what constitutes protected activity under SOX. The ALJ started by observing that the law includes a "reasonable belief" test, which must be scrutinized under both subjective and objective standards: the complainant must have actually believed that the employer was in violation of the relevant law or regulations, and that belief must be reasonable. Reasonable belief is determined based on the knowledge available to a reasonable person in the circumstances with the employee's training and experience. The ALJ then observed that fraud is an integral element under the SOX whistleblower provision, which in the securities area, may include dissemination of false information in to the market on which a reasonable investor may rely. The intent to deceive is implicit. The ALJ noted a split in authority over whether SOX whistleblower protection is limited to fraud "against shareholders," and after reviewing the nature of that split, found that his conclusion was consistent with that of the ARB – that an allegation of "shareholder fraud" is an essential element of a cause of action under SOX. The ALJ concluded, therefore, that materiality was required for alleged conduct to rise to the level of shareholder fraud. In summation, the ALJ wrote:
Therefore, under subjective and objective standards, Complainant must actually and reasonably believe, based on the knowledge available to a reasonable person, that Respondent intentionally acted fraudulently, and that such conduct was sufficiently material so as to constitute fraud against the shareholders. In cases where allegations of shareholder fraud are based on potential or actual dissemination of fraudulent information, there must exist a "substantial likelihood" that the disclosure of the omitted or misstated information would have been viewed by the reasonable investor as having significantly altered the ‘total mix' of information made available.
Slip op. at 50. Finally, the ALJ addressed specifically the issue of internal controls, writing,
In securities fraud cases, it has been observed that inadequacy of internal accounting controls "are probative of scienter [defendant's intent to deceive, manipulate, or defraud] . . . and can add to the strength of a case based on other allegations." Crowell v. Ionics, Inc., 343 F.Supp.2d 1, 12, 20 (D. Mass. 2004). Therefore, a significant deficiency in internal controls, at least when combined with other significant issues, would constitute a circumstance likely to be "viewed by the reasonable investor as having significantly altered the ‘total mix' of information made available." As a company's management is under a statutory duty to disclose significant deficiencies in internal control, a willful attempt to conceal such deficiencies or subvert the published attestation of auditors concerning internal controls, would constitute "shareholder fraud" for purposes of protected activity under the Act.
Slip op. at 51. In the instant case, the ALJ considered whether any of the internal control deficiencies complained of by the Complainant constituted protected activity, either singularly or collectively, and found that they did not. The ALJ found that the only potential financial impact of the alleged fraudulent activity was an additional expense of $200,000 (also observing that varying computations in the record showed a lower amount). The ALJ found this amount arguably not material when compared with the Respondent's overall revenue and losses. The only evidence introduced to suggest that this amount would be material to shareholders was the Complainant's subjective opinion. External auditors chose not to adjust the expense by the final determined amount of $60,000 because they considered it not to be material. An audit committee engaged a law firm to investigate allegations raised by the auditor; this investigation included some of the Complainant's contentions. The ALJ found that this action indicated that auditor and audit committee considered issues raised by the audit to be significant, but did not lead to the conclusion that the concerns acted upon were those raised by the Complainant.
[Editor's note: See also Frederickson v. The Home Depot, U.S.A., Inc., 2007-SOX-13 (ALJ July 10, 2007) for a similar summary of the element of protected activity in a SOX whistleblower case.].
PROTECTED ACTIVITY; ALLEGED FRAUDULENT POLICY OF SINGLE STORE FOUND NOT TO HAVE BEEN OF SUFFICIENT MAGNITUDE TO MATTER TO A REASONABLE INVESTOR
In Frederickson v. The Home Depot, U.S.A., Inc., 2007-SOX-13 (ALJ July 10, 2007), the ALJ found that the Complainant failed to establish a prima facie case of a SOX whistleblower complaint where he did not, under the facts presented, show that he had a reasonable belief of actionable fraudulent activity. Specifically, the Complainant maintained that he had a reasonable belief of fraud relating to the recording of items as damaged rather than for "store use," whereby refunds for such merchandise were wrongfully extracted from vendors (the Complainant had used some hooks in his department, and was instructed to record them in the store computer as damaged). The ALJ found, however, that the Complainant had no reasonable basis to believe that this policy extended beyond the store at which he worked, and that such an alleged fraudulent policy, isolated to a single store, even if true, would not have been of sufficient magnitude to believe that a reasonable investor would rely on such information.
PROTECTED ACTIVITY; AUDITOR WHO IS MERELY PERFORMING ASSIGNED DUTIES VERSUS AUDITOR WHO GOES BEYOND ASSIGNED DUTIES TO REPORT REASONABLY PERCEIVED PROBLEMS TO UPPER MANAGEMENT
In Robinson v. Morgan Stanley, 2005-SOX-44 (ALJ Mar. 26, 2007), the Complainant was a senior internal auditor for Morgan Stanley/Discover. Frustrated based on her perception that her concerns about identifiable deficiencies in the company's financial operations were not reaching higher levels of management, the Complainant submitted a detailed memorandum to senior executives at Discover setting out numerous failures in audit controls and examples of management fraud. Based on the circumstances and nature of the memorandum, the Complainant contended that the report was a protected activity under SOX, despite her employment status as an internal auditor.
The ALJ detailed the holding of the ARB in Platone v. FLYi, Inc., ARB No. 04-154 (Sept. 29, 2006), and the Sixth Circuit in Sasse v. USDOL¸ No. 04-3245 (6th Cir. May 31, 2005) (cases below ARB No. 02-077 and ALJ No. 1998 CAA 7), and summarized the components that the Complainant would need to establish in order to prove that she engaged in protected activity under SOX:
First, the report or action must relate to a purported violation of a federal law or SEC rule or regulation relating to fraud against shareholders. Second, the complainant's belief about the purported violation must be subjectively and objectively reasonable. Third, the complainant must communicate her concern to either her employer, the federal government, or a member of Congress. Fourth, the report or complaint must involve actions outside the complainant's assigned duties.
Slip op. at 115-116. In regard to the element of relatedness/reasonableness, the ALJ found that most of the items in the Complainant's memorandum failed to fit within the laws enumerated in SOX or other law related to fraud against shareholders. The ALJ found that a few items may have implicated allegations of fraud, but that the Complainant had not presented sufficient evidence to allow the ALJ to identify a specific federal law that may have been violated. The ALJ found that items related to several hundred dollars of unreported misuse of company cell phones and calling cards did not rise to the level of materiality in regard to fraud against shareholders. The ALJ did, however, find that one item in the memorandum – that audit management dropped her finding that Discover was not complying with banking regulations in regards to the prompt charge off of credit card bankruptcies and failed to take corrective action – fit the definition of protected activity under SOX (even though a resultant internal investigation led to no significant findings of impropriety).
The ALJ then turned to the question of whether the Complainant's action in sending the memorandum to upper management was exempt from SOX protection based on the Complainant's role as an auditor. The ALJ found that the Complainant's discovery of the bankruptcy reporting problem and presentation of her findings to audit management was not a SOX protected activity because she was merely discharging her auditor duties (i.e., under Sasse, she bore no employment risk in reporting the deficiency as an auditor). However, the ALJ found that the Complainant engaged in protected activity when she went beyond her assigned duties as an auditor by presenting the bankruptcy issue in a memorandum to the Discover President and CFO based on her belief that the issue was not getting to a sufficiently high level of management for necessary corrective action. The ALJ ultimately found, however, that the Complainant failed to prove that this protected activity contributed to her discharge.
PROTECTED ACTIVITY; EMPLOYER'S KNOWLEDGE; REPORTING WITHIN JOB DUTIES; WHETHER COMPLAINANT MUST EXPRESSLY IDENTIFY THE COMPLAINED OF ACTIONS AS ILLEGAL
In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29, 2007), the Respondent contended that the Complainant's SOX whistleblower complaint was barred because his allegations fell within his job responsibilities and because he failed to communicate to the Respondent that he believed the conduct to be illegal. In support of the first contention, the Respondent cited several decisions in which it was found that finding irregularities as part of one's job duties cannot constitute protected activity – that the employer must be put on notice that the reporting is being done to expose illegal acts rather than merely warning of the consequences of its conduct. The ALJ distinguished the decisions as arising under other laws with different contexts, and returned to the purposes of SOX in interpreting the respondent's knowledge element of protected activity. The ALJ concluded that restricting protected activity to exclude job duties would be contrary to Congressional intent. The ALJ pointed out that the legislative history of SOX explicitly discusses the case of Sherron Watkins, whose job responsibilities at Enron arguably included reporting accounting fraud. The ALJ also pointed out that, to be actionable, a SOX whistleblower complaint requires the respondent's knowledge of protected activity, and an adverse job action to which protected activity is a contributing factor – as the actor, the respondent is necessarily aware of an adverse action and its motivation for such action.
In regard to the Respondent's second contention that a complainant must expressly state that he considers the conduct to be illegal, the ALJ found that an examination must be made of the context in which and to whom the statements were made. In the instant case, the statements were made to the controller, auditors, and an investigating law firm, all of whom should logically have recognized fraudulent behavior if the Complainant described it to them, and that publishing of fraudulent statements with the SEC was illegal. Thus, the ALJ found that the Complainant was not required to specifically state to the Respondent that the activity of which he complained was illegal.
PROTECTED ACTIVITY; COMPLAINANT'S PRESENTATION OF ADVICE THAT WOULD LEAD TO BETTER MANAGEMENT OF INVENTORY WITHOUT EXPRESSING CONCERN ABOUT VIOLATION OF LAWS COVERED BY SOX IS NOT PROTECTED ACTIVITY
In Richards v. Lexmark International, Inc., 2004-SOX-49 (ALJ June 20, 2006), the Complainant had been assigned to work on a team tasked with managing inventory better; one aspect of the project involved how to reduce write offs in terms of obsolete inventory. Shortly before he was terminated from employment, the Complainant met with his supervisor concerning his preliminary findings on the inventory project, and suggested that metrics being used had the potential to misrepresent and understate the number of days items remained in inventory, resulting in misrepresentations in management reports. The ALJ found that this was not protected activity. Although acknowledging that the testimony indicated that such data had the potential for reaching the public and influencing decisions made by investors or shareholders, the Complainant had not suggested to his supervisor "that there was anything fraudulent about the manner in which … the … metrics were calculated, nor did he go so far as establish that the methods were contrary to [Generally Accepted Accounting Principles] or SEC filing requirements. Furthermore, he has not established that he believed there were intentional misrepresentations in the financial data reported either internally or externally, or that any laws or SEC regulations were violated." Slip op. at 33. The ALJ found that, although the Complainant believed that his advice would result in better inventory management, the Complainant's testimony as a whole did not establish that he actually believed that any false information had been reported to anyone, or that there was a violation of law.
PROTECTED ACTIVITY; SOX DOES NOT CONTAIN A MATERIALITY STANDARD FOR PROTECTED ACTIVITY
In Richards v. Lexmark International, Inc., 2004-SOX-49 (ALJ June 20, 2006), in a footnote, the ALJ noted that she rejected the Respondent's argument that the inventory write-off at issue was immaterial because it had only a less than 1% effect on the "days of inventory" calculation for the year in question. The ALJ wrote: "As Complainant has asserted (Brief at 43-46), there is no materiality requirement for recovery under the Act. See generally Morefield v. Excelon Services, Inc., 2004-SOX-2 (ALJ Levin, Jan. 28, 2004) (the Act "places no minimum dollar value on the protected activity it covers" and "[t]he mere existence of alleged manipulation, if contrary to a regulatory standard, might not be criminal in nature, but it very well might reveal flaws in the internal controls that could implicate whistleblower coverage for seemingly paltry sums.")" Slip op. at n.44.
PROTECTED ACTIVITY; ALLEGATIONS OF ACCOUNTING COVER UP OF A LOAN FROM A CONTRACTOR AND INSURANCE FRAUD
In Rzepiennik v. Archstone Smith, Inc., 2004-SOX-26 (ALJ Feb. 23, 2007), the Complainant had been employed by the Respondent, an apartment investments and operations company, as a Production Officer whose duties included reviewing and approving payment requisitions from general contractors. The Respondent used a contractor to provide construction services. After his termination, the Complainant brought to the attention of high ranking officials for the Respondent allegations of fraudulent accounting on several projects, one to cover up a loan to the Respondent from the aforementioned general contractor, and one involving alleged insurance fraud. For purposes of deciding a motion for summary judgment, the ALJ found that these activities constituted protected activity under the SOX whistleblower provision, including the provisions on alleged violation of federal mail and wire fraud laws and violation of SEC rules and regulations requiring accurate reporting and adequate internal controls. The ALJ found, viewing the evidence most favorably to the Complainant that he had informed several of the Respondent's officers of what he reasonably believed to be fraudulent activity in violation of the SOX.
PROTECTED ACTIVITY; FOCUS ON ACTIONS ACTUALLY TAKEN RATHER THAN LATER CHARACTERIZATION; CHARGING MATERIAL HARM AGAINST SHAREHOLDERS IS NOT, STANDING ALONE, PROTECTED ACTIVITY, WHICH MUST INCLUDE CHARGES OBJECTIVELY COGNIZABLE AS MISREPRESENTATION AND FRAUD AGAINST SHAREHOLDERS
In Neuer v. Bessellieu, 2006-SOX-132 (ALJ Dec. 5, 2006), the Complainant met with a consultant hired by an official with the publicly traded parent company to help him understand the organization of the subsidiary and make any necessary changes. The Complainant made some recommendations and observations, including inter alia that one manager, although competent, was over tasked and could not meet reasonably expected service delivery goals, that the subsidiary's president's marketing director was incompetent and filled a redundant position, and that the subsidiary was performing poorly due to cronyism and redundancies. Before the ALJ, the Complainant argued that the subsidiary's president had been motivated by self-interest when he made the business and personnel decisions that caused the problems he identified in the meeting with the consultant. The Complainant argued that the president's conduct was against the company's code of conduct, unethical, and a violation of fiduciary responsibilities imposed on managers and directors under SOX; that in reporting their compliance with company policy to the SEC, the president's actions represented a material inconsistency between actual business activities and SEC filings; and that the president had engaged in self dealing because he hired senior managers based on his relationships with them rather than the best interests of the subsidiary.
The ALJ found, in ruling on a motion for summary decision, that while the Complainant may have subjectively held the belief that the president was putting himself before the business welfare of the subsidiary, he had not raised such a concern with the consultant. The ALJ found that the Complainant had not mentioned at the meeting with the consultant that he believed that the president's actions were a misrepresentation and inconsistent with the company's SEC filings. In other words, that the Complainant believed that subsidiary's president's hiring practices violated company had not been communicated to the consultant in such a manner as to leave her with an objectively reasonable basis to conclude that the president was engaging in conduct prohibited by the SEC. The ALJ cited in this respect the ARB's ruling in Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006), that the relevant inquiry in determining whether an employee engaged in protected activity is not the allegations made in the OSHA complaint, but what the employee actually communicated to his employer prior to the adverse employment action.
The Complainant also argued before ALJ that the subsidiary's president's actions and management amounted to fraud on shareholders because it deprived shareholders of the intangible right to "honest services" (i.e., the service of more qualified senior employees) and that the marketing director's incompetence required disclosure to shareholders. In ruling on the motion for summary decision, taking these assertions to be true, the ALJ found that "material harm to shareholders is not the only requisite element to show … fraud against shareholders." Slip op. at 8-9. Rather, "as noted by the ARB in Platone, misrepresentation and fraud are necessary elements of protected communications under SOX." Slip op. at 9. The Complainant's comments to the consultant charged the president with poor business, organizational, and personnel decisions; but such charges standing alone do not objectively indicate misrepresentation or illegal activity or fraud against shareholders.
PROTECTED ACTIVITY; COMPLAINT THAT REPORT SENT TO CUSTOMERS AND SHAREHOLDERS CONTAINED INACCURACIES IS NOT PROTECTED ACTIVITY WHERE SUCH INACCURACIES WERE NOT MATERIAL TO THE REPRESENTATION OF THE RESPONDENT'S FINANCIAL CONDITION
In Giurovici v. Equinix, Inc., 2006-SOX-107 (ALJ Nov. 15, 2006), the Respondent's activities included data centers supplying internet exchange services and an uninterrupted power supply to its customers, who maintained their server and network equipment on site. The Respondent's agreements with its customers provided for 100 percent reliability with respect to power, cooling and other factors. The Complainant alleged under the SOX whistleblower provision that he had been terminated in retaliation for having reported to management officials that the company report, sent to customers and shareholders, concerning a power outage at one of the Respondent's facilities, was false in several respects. The Complainant believed that the report was inaccurate because the Respondent did not want to hurt its reputation and share price, since higher management had stock options. The ALJ found that the Complainant's allegations may have amounted to a reasonable belief that the Respondent violated 15 U.S.C. § 7241, section 302 of the SEA, which requires corporate officers to certify that corporate reports do not contain untrue statements of material fact and fairly present, in all material respects, the financial condition of the corporation. The ALJ, however, concluded that the Complainant had not established that any factual inaccuracies in the report sent to customers and shareholders were actually "material" to the representation of the Respondent's financial condition. Nor had he identified a fraudulent scheme in connection with the purchase or sale of any security. Accordingly, the ALJ found that the Complainant failed to establish that he engaged in protected activity or that the Respondent had any knowledge of protected activity.
PROTECTED ACTIVITY; FAILURE TO REPORT MISCONDUCT IS NOT PROTECTED ACTIVITY
In Cook v. Ceridian Tax Services, Inc., 2006-SOX-102 (ALJ Jan. 9, 2007), the Complainant was a Director of Tax Operations in one of the Respondent's local offices, and was discharged for failing to handle and respond to complaints about the conduct of one of his staff whose conduct in preparing abatement letters to the IRS was found, after investigation by a higher level supervisor, not to conform to the Respondent's standards, thereby exposing the Respondent to preventable inquiries, audits and penalties. The Respondent moved for summary decision on the ground that the Complainant did not engage in protected activity, and supported the motion with the Complaint's admission on deposition that he was not aware of illegal conduct in his department. The Complainant failed to come forward with any admissible evidence to raise an issue of fact in response to the motion. The ALJ considered the allegations made in the Complainant's response – that he was not terminated for voicing some protected activity but "for not appropriately reporting misconduct" – and found that the Complainant's own allegations showed that he did not engage in protected activity.
PROTECTED ACTIVITY; MERE SUSPICION WITHOUT ANY SUPPORTING EVIDENCE CANNOT FORM THE BASIS FOR A REASONABLE BELIEF THAT LAWS ENUMERATED IN SECTION 806 HAD BEEN VIOLATED
In Riedell v. Verizon Communications, 2005-SOX-77 (ALJ Aug. 14, 2006), the ALJ granted summary decision in favor of the Respondent based on a finding that the Complainant had failed to provide any evidence that he had the kind of factual information to support a reasonable belief that the laws detailed in section 806 of the SOX were being violated. The ALJ acknowledged that some of the Complainant's allegations could at least theoretically be related to violations of some of those laws. For example, if, as the Complainant alleged, a Verizon employee was showing favoritism in awarding contracts, such actions it might have included acts of mail or wire fraud, or accounting fraud. The ALJ ruled, however, that "[a]lthough the Complainant's knowledge of the alleged favoritism might have led him to develop a suspicion that mail or wire fraud could have occurred, a suspicion is simply speculation and cannot logically be regarded as a reasonable belief [that such fraud had occurred]." Slip op. at 10. The Complainant made a number of similar allegations about the Respondent, but none of the allegations were shown to have any factual basis.
PROTECTED ACTIVITY; THE COMPLAINANT'S EXPRESSION OF LACK OF COMFORT WITH CERTAIN PRACTICES IS NOT PROTECTED ACTIVITY WHERE HE DID NOT ALLEGE OR BELIEVE THAT THE RESPONDENT HAD BEEN ENGAGED IN ANY ILLEGAL OR FRAUDULENT ACTIVITY
In Gale v. World Financial Group, 2006-SOX-43 (ALJ June 9, 2006), the Complainant voiced "concerns" about the sale of certain projects, and "felt" that a program was "impermissible," and was "uncomfortable" with the rescission of a broker's fee. In none of his allegations, however, did he identify a specific law or regulation that may have been violated, nor did he allege that the Respondent had misrepresented its financial status to the SEC or shareholders or investors. He admitted in deposition that, although he was uncomfortable with some practices, he did not believe that the Respondent had engaged in any kind of illegal or fraudulent activity during his employment. The ALJ therefore found that the Complainant had not engaged in protected activity under the SOX whistleblower provision.
PROTECTED ACTIVITY; FRAUD AGAINST A CLIENT OR ANOTHER ENTITY IS NOT FRAUD AGAINST SHAREHOLDERS; MERE SPECULATION OF VIOLATION OF LAWS SPECIFIED IN SOX IS INSUFFICENT TO CONSTITUTE PROTECTED ACTIVITY; VIOLATION OF NASD OR NYSE RULES ARE NOT COVERED
In Mozingo v. The South Financial Group, Inc., 2007-SOX-2 (ALJ Dec. 6, 2006), the Complainant was a financial analyst who raised a concern about a co-worker's possibly fraudulent transfer of a deceased client's mutual fund account under his broker number. The ALJ granted summary decision in favor of the Respondent on the ground that this was not protected activity under SOX. The ALJ concluded that "[w[hile this activity may possibly constitute fraud against Bank of America or even [the client's] heirs, it is not fraud against the Respondent Institution's shareholders or investors." Slip op. at 11. Although the Complainant had stated that he believed that other fraudulent conduct involving the deceased client's account may have occurred – or may occur in the future - based on the improper transfer of her account, he provided no facts or evidence in support. The ALJ concluded, therefore, that allegations were mere speculation. The Complainant also asserted that there had been violations of several NASD and NYSE rules. The ALJ found that, although the SEC has the authority to review and approve those rules, they are rules made by self-regulatory organizations.
PROTECTED ACTIVITY; REPORTING THE USE OF UNLICENSED COMPUTER SOFTWARE BY RESPONDENT'S EMPLOYEES
In Reed v. MCI, Inc., 2006-SOX-71 (ALJ June 20, 2006), the ALJ granted summary decision in favor of the Respondent where he found that the Complainant had not engaged in protected activity when he reported to the Respondent that employees were using unlicensed computer software. The Complainant's theory was that the Respondent defrauded stockholders by reporting profits partly based on use of pirated software, that the penalty per incident could be as high as $150,000, and that thousands of incidents may have occurred. The Complainant also noted that the Respondent was potentially risking loss of good will in using pirated software. The ALJ held that while the Complainant may have believed that the Respondent was violating copyright laws, there was nothing in the complaint or pleadings indicating that the Complainant reasonably believed that the Respondent was violating any of the security laws enumerated in SOX or that the Respondent was committing a fraud on shareholders.
PROTECTED ACTIVITY; REFUSAL TO VIOLATE STATE LAW IS NOT PROTECTED ACTIVITY UNDER SOX
In Williams v. Sirva, Inc., 2006-SOX-6 (ALJ Feb. 13, 2006), the Complainant was an insurance adjuster who alleged that she was provided with a list of questions and answers to use when the California Department of Insurance called to randomly investigate the Respondent's insurance and fraud prevention methods. The Complainant believed that some of the answers were incorrect and refused to participate in the telephone calls. The ALJ granted summary decision in favor of the Respondent because, as a matter of law, SOX does not provide protection to employees who report only violations of state statutes or laws. Here, the Complainant presented no evidence that her participation in the telephone questioning would have been a violation of federal law.
PROTECTED ACTIVITY; MERELY QUESTIONING BUSINESS DECISIONS WITHOUT ALLEGING CRIMINAL FRAUD, VIOLATION OF SEC RULES, OR FRAUD AGAINST SHAREHOLDERS IS NOT PROTECTED ACTIVITY; RAISING CONCERNS ABOUT TITLE VII TYPE DISCRIMINATION OR WORKPACE SAFETY IS NOT PROTECTED ACTIVITY UNDER SOX IF IT DOES NOT RISE TO THE LEVEL OF MATERIALITY TO THE RESPONDENT'S FINANCIAL CONDITION
In Levi v. Anheuser-Busch Companies, Inc., 2006-SOX-37 (ALJ May 3, 2006), the Complainant's SOX complaint was filed with OSHA outside the 90-day limitations period from the date that notice was given that he had been suspended with intent to discharge, and thus was facially untimely. The Complainant earlier had written a series of letters to the Secretary of Labor, company officials, and others, and contended that they should have been treated as SOX complaints. The ALJ thoroughly analyzed the content of those letters, and found that they presented three general categorizes of reported concerns. First, the Complainant expressed numerous concerns with business decisions, omissions, and management determinations which, if objectively accurate, might relate to adverse impact on the value of shareholder's holdings in the Respondent; however, they did not involve any criminal fraud offenses, violations of an SEC rule or regulation, or any federal law relating to fraud against shareholders.
Second, the Complainant expressed concerns about racial discrimination, sexual harassment and intimidation in his work environment. The ALJ found that it could be argued that a company which permits discriminatory practices, harassment and intimidation is acting contrary to the best interests of its shareholders, but that SOX protected activity must involve an allegation of violation of a federal law directly related to fraud against shareholders. Title VII establishes rights and procedures to address illegal employment discrimination, but was not enacted to preclude fraud against shareholders. The ALJ considered whether Section 302 of SOX, which mandates accuracy in corporate disclosures, might be implicated. The ALJ observed that Section 302 requires accuracy in reporting of material facts and had the two key components of accurate accounting and a corporation's financial condition. The ALJ concluded that "[a] manager's failure to fully investigate individual acts of discrimination, sexual harassment, and intimidation has a very marginal connection with those two components." The ALJ acknowledged that failure to disclose a class action lawsuit based on systemic race discrimination or sexual harassment with the potential to sufficiently affect the financial condition of a corporation might support SOX protected activity if the individual complained about the failure to disclose that situation, but that individual discrimination does not reach the materiality threshold in terms of a corporation's financial condition. In the instant case, the Complainant's complaints focused on the alleged existence of discrimination, harassment and intimidation rather than the failure to report it.
Third, the Complainant expressed concerns about the safety of boiler operations and workplace violence, but the ALJ found that they did not rise to the necessary level of materiality that failure to disclose them might represent fraud against shareholders.
PROTECTED ACTIVITY; IMPLIED OR RAMBLING ALLEGATIONS OF FRAUD ARE INSUFFICENT TO ESTABLISH RAISING CONCERNS OF FRAUD AGAINST SHAREHOLDERS OR INVESTORS
In Townsend v. Big Dog Holdings, Inc., 2006-SOX-28 (ALJ Feb. 14, 2006), the ALJ granted the Respondent's motion for summary decision on the ground, inter alia, that the Complainant did not present a genuine issue material fact for trial showing that she had engaged in protected activity under the SOX. First, the Complainant's request for copies of her paycheck due to a discrepancy between the income she reported on her tax return and the income reported by the Respondent was related to a personal audit by the IRS, and did not contain an allegation of fraud or other conduct by the Respondent that might be covered under SOX. The Complainant had sent a "notice" letter to all agents, employees, officers and shareholders of the Respondent, purporting to copy a number of state, federal and local authorities, and others, in which she attempted to notify recipients that the Respondent had recently escalated the damage and victimization it had caused her over the years, that she had communicated with various federal agencies, and was now protected. The letter was disjointed, full of generalizations and legalese and generally very difficult to comprehend. Although it mentioned fraud on several occasions, it did not describe any specific conduct nor indicate any securities fraud law or regulation that may have been violated. The ALJ found that even if the Complainant's allegations of general fraud were true, he could find no relationship between such allegations and fraud relating to investors or shareholders.
PROTECTED ACTIVITY; REPORTING POTENTIAL FRAUD OF CUSTOMER DOES NOT STATE CAUSE OF ACTION UNDER SOX
In Johnson v. Mechanics and Farmers Bank, 2006-SOX-19 (ALJ June 9, 2006), the ALJ granted summary decision in favor of the Respondent where the Complainant failed to show that he had a reasonable belief that the Respondent was involved in fraudulent activity. Rather, the Complainant had reported his suspicion that certain loan applications might be fraudulent. The bank investigated, and denied the applications due to the applicant's fraudulent behavior. Thus, even assuming that the Complainant's factual assertions were true, there was no cause of action under SOX.
PROTECTED ACTIVITY; WHETHER REPORTING OF VIOLATION OF SEC RULE OR REGULATION MUST RELATE TO FRAUD AGAINST SHAREHOLDERS
In Walton v. NOVA Information Systems, 2005-SOX-107 (ALJ Mar. 29, 2006), the ALJ rejected the Respondent's argument that, to be protected activity under the SOX, the Complainant's allegation of a violation of a SEC rule or regulation must be related to fraud against shareholders. The ALJ found that to rule otherwise would be to in effect remove the phrase "any rule or regulations of the Security and Exchange Commission" from the SOX. The ALJ noted that none of the ALJ decisions cited by the Respondent involved an allegation of violation of an SEC rule, and that the district court's decision in Collins v. Beazer Homes USA, Inc., 334 F.Supp.2d 1365 (N.D.Ga. 2004), was contrary to the Respondent's position.
PROTECTED ACTIVITY; ALLEGATION THAT COMPLAINANT'S REPORT OF DATA SECURITY LAPSES SHOULD HAVE BEEN INCLUDED IN MANAGEMENT CERTIFICATION REQUIREMENTS OF §§ 302, 404 and 906; COMPLAINANT WHO IS JUST DOING HER JOB
In Walton v. NOVA Information Systems, 2005-SOX-107 (ALJ Mar. 29, 2006), the Respondent, a credit card processor, argued that it should be granted summary decision because the Complainant had only complained of internal dissatisfaction with the internal structure of the Respondent's IT department. The ALJ, however found that the complaint was much more than that – rather the Complainant complained that her disclosures of security lapses in databases should have been revealed to external auditors, and failure to do so violated the management certification requirements of §§ 302, 404 and 906 of the SOX and other laws, and SEC rules. The ALJ found such actions could reasonably be within the zone of protection afforded by SOX, citing Collins v. Beazer Homes USA, Inc., 334 F.Supp.2d 1365 (N.D.Ga. 2004), as authority consistent with his interpretation. The ALJ rejected the Respondent's argument that recognizing this kind of protected activity would create a private right of action not intended by Congress in enacting SOX. The ALJ also rejected the Respondent's contention that the Complainant's disclosures were not protected because she was doing nothing more than performing her job as a database administrator with security responsibilities.
PROTECTED ACTIVITY; OBJECTIVE REASONABLENESS OF BELIEF THAT RESPONDENT'S CONDUCT WAS A MATERIAL FACT THAT SHOULD HAVE BEEN INCLUDED IN A SECTION 302 REPORT; WHETHER REPORTING THE COMPLAINANT'S OWN MISCONDUCT MAY CONSTITUTE PROTECTED ACTIVITY
In Tice v. Bristol-Myers Squibb Co., 2006-SOX-20 (ALJ Apr. 26, 2006), the Complainant, a sales representative for a drug company, alleged that she was terminated for raising concerns regarding inaccurate sales call reporting by the Respondent and the pressure the Respondent's management placed on representatives to misrepresent sales calls. In support, the Complainant admitted to falsely recording 22 sales calls and stated that other representatives had also falsified calls. She also alleged that her supervisor demanded that his representatives record 10 sales calls a day, which exceeded the Respondent's goal. The Complainant asserted that she believed that this alleged activity constituted fraud against shareholders because she believed that the Respondent would be subject to a substantial financial penalty if it did not meet the sales call quota set forth in a co-promotional contract it had with another drug company.
The ALJ began his analysis by noting that the Complainant's allegations did not implicate any of the criminal fraud or SEC rules types of fraud enumerated in SOX; accordingly, the Complainant's complaint would be analyzed to determine whether the Complainant reasonably believed that the Respondent violated a federal law related to fraud against shareholders. The Complainant argued that she had a reasonable belief that the Respondent had violated 15 U.S.C. § 7241, section 302 of the SOX, which requires corporate officers to certify that corporate reports do not contain untrue statements of material fact and fairly present, in all material respects, the financial condition of the corporation.
In regard to the Complainant's allegations of management pressure to misrepresent sales call data, the ALJ found that the Complainant failed to establish that it was objectively reasonable to believe that a statement of her supervisor at a sales meeting in regard to the sales call requirement that "If they want little red fire trucks, we give them little red fire trucks," was a directive to falsify sales data, and therefore a fraud against shareholders.
In regard to the allegation that other representatives falsified sales call reports, the ALJ observed that the Complainant had declined to identify those representatives to the official that the Respondent had appointed to investigate her claim. At the hearing, the Complainant named her former partner. The ALJ, however, found that this one incident failed to meet the materiality threshold of section 302.
In regard to the Complainant's admission that she herself had falsified reports, the ALJ found that one's own misconduct can constitute protected activity under SOX (distinguishing SOX's provision that the reporting of the misconduct must be lawful). Nonetheless, the ALJ found that the level of false reporting admitted to by the Complainant also did not meet the materiality threshold of section 302. Even when combining the alleged misconduct of her former partner and the Complainant's admitted misconduct, the ALJ still found it objectively unreasonable to conclude that such behavior constituted a material fact that misrepresented the Respondent's financial condition. Moreover, the lack of an objectively reasonable link between the supervisor's metaphor and a directive to falsify calls resulted was found to constitute a lack of additional support for the objective reasonableness of the Complainant's belief.
PROTECTED ACTIVITY; REPORTING ACCOUNTING DISCREPANCIES IS NOT PROTECTED ACTIVITY WHERE THE COMPLAINANT DID NOT INDICATE ANY BELIEF THAT THE RESPONDENT WAS VIOLATING ANY OF THE LAWS ENUMERATED IN THE SOX WHISTLEBLOWER PROVISION
In Williams-Wilson v. NDC Health Corp., 2005-SOX-97 (ALJ Jan. 31, 2007), the Complainant was a financial analyst whose duties included review of account contracts, invoices, amendments, billing documents and computerized account entries, and reporting discrepancies to her immediate supervisor. Prior to filing her SOX complaint, the Complainant routinely found account discrepancies and reported them to management. However, in so reporting she never indicated to her supervisors that she believed that the discrepancies constituted a fraud on shareholders or any other illegal activity proscribed by the SOX. The Respondent's managers first learned of that assertion when it received a copy of the Complainant's SOX complaint. The ALJ ruled:
Specific reports of questionable financial actions by a company only rises to "protected activity" under the Act when there is both (1) a specific description of the perceived questionable financial actions by the company, and (2) reasonable identification of the financial action to a perceived violation of one of the six protected areas of the Act. see Henrich v ECOLAB, Inc., ARB No. 50-030, infra; Bozeman v Per-Se Technologies, WL 2947533 (N.D. Ga, 2006); Fraser v. Fiduciary Trust Co. International, 417 F. Supp. 2d 310 (S.D. NY, 2006) Here the Complainant gave specific description in her August 20, 2004 report, of what she perceived as questionable financial actions by Respondent. However, this was her duty as a financial analyst. Without the additional indication by her that she believed that these discrepancies involved a violation of one of the six protected areas of the Act, her reporting activities did not rise to the level of "protected activity" under the Act. Here there was no such indication made by her until Respondent received a copy of the filed September 24, 2004, SOX complaint. Accordingly, this Administrative Law Judge finds that the activity upon which the original complaint in this case is founded is not "protected activity" under the Act and the Complainant is not entitled to relief on this complaint under the Act. Thus, further issue analysis is not required.
Slip op. at 14.
PROTECTED ACTIVITY; GENERIC ALLEGATIONS OF ACCOUTING ERRORS; LACK OF REASONABLE BELIEF OF SOX VIOLATIONS AT TIME OF REPORTING; LACK OF MATERIALITY
In Wengender v. Robert Half International, Inc., 2005-SOX-59 (ALJ Mar. 30, 2006), the Complainant was a salesperson for a "temp" firm, who alleged that he was constructively discharged because he reported what he believed to be an accounting violation in the inappropriate assignment of unearned commissions. The ALJ granted summary decision in favor of the Respondent because, inter alia, the Complainant had not engaged in protected activity under the SOX. First, the Complainant first alleged that the reassignment of commissions was a violation of securities or federal regulations or laws when he filed his objections to the OSHA findings and requested an ALJ hearing. Previously, he had characterized the reassignment as an accounting violation, against GAAP, and in terms of general allegations of fraud. The ALJ observed that "SOX does not apply to generic allegations of accounting violations, violations of GAAP, or general allegations of fraud," citing Marshall v. Northrop Grumman Synoptics, 2005-SOX-8, slip op. at 5 (ALJ June 22, 2005). Moreover, the Complainant presented no evidence of intent to deceive shareholders. Rather, the evidence tended to show that the supervisor's reason for reassigning the credits was to provide an incentive to new employees. Second, the ALJ found that the Complainant plainly did not hold a reasonable belief that the reassignment was a violation of securities law or regulations relating to fraud against shareholders at the time he raised the objections; rather, he told his supervisor that he was not against reassigning credits, but that he just didn't want his contribution to the credits to go unrewarded. Although a complainant need not establish an actual violation, he must show that he reasonably or actually believed that the reported activity was a violation. Third, the ALJ found that the estimated dollar amount of the reassigned credits, $12,500, would have been lost in the rounding in form 10-k of the Respondent's financial disclosures, management discussions and other disclosures, and thus did not rise to the level of materiality required under SOX.
PROTECTED ACTIVITY; RELEVANT INQUIRY IS NOT WHAT WAS ALLEGED IN RESPONSE TO MOTION FOR SUMMARY DECISION BUT WHAT WAS ACTUALLY COMMUNICATED TO THE EMPLOYER AT THE TIME OF THE REPORTING ACTIVITY
In Espinoza v. Sysco Corp., 2005-SOX-25 (ALJ Dec. 27, 2006), the Complainant was the lead diesel mechanic at one of the Respondent's facilities. Another employee had reported to the HR department that vehicles belonging to company managers were being repaired in the facility on company time. When the Complainant was asked if the allegations were true, he confirmed them and provided additional details. Several months later the Complainant was demoted, and a few months after that, terminated from employment. The Complainant filed a SOX complaint. OSHA dismissed based on a finding that the Complainant's report of unauthorized vehicle repairs was not protected activity under the SOX. Before the ALJ, the Respondent filed a motion for summary judgment. The ALJ reviewed similar ALJ decisions, and the then recent ARB decision in Platone v. FLYi, Inc., ARB No. 04-154, ALJ No. 2003-SOX-27 (ARB Sept. 29, 2006). The ALJ observed that the ARB had
confirmed that Sarbanes-Oxley "does not provide whistleblower protection for all employee complaints about how a public company spends its money and pays its bills." Platone, 2003-SOX-27, at 17. In defining the scope of protected activity under Sarbanes-Oxley, the ARB explained that the employee's communications must "definitively and specifically" relate to any of the listed categories of fraud or securities violations under 18 U.S.C. § 1514A(a)(1). Id. The ARB also stated that in determining whether the complainant engaged in protected activity, "the relevant inquiry is not what she alleged in her [OSHA complaint], but what she actually communicated to her employer prior to [her] termination." Id.
Slip op. at 4. In his opposition to the motion for summary decision, the Complainant argued that his disclosure to the HR department about the repairs on manager's personal vehicle was covered under SOX because he reasonably believed that this was a fraud on shareholders. The Complainant explained how each of his disclosures related to the federal laws specified in the SOX whistleblower provision. The ALJ, however, found that the characterizations in the response to the motion for summary decision were not relevant. Rather, the issue was what the Complainant actually communicated to the Respondent, and "whether his communications 'definitively and specifically' related to any of the listed categories of fraud or securities violations under 18 U.S.C. § 1514A(a)(1)." Slip op. at 4 (citation omitted). The ALJ observed that the Complainant in his sworn deposition testimony indicated that he believed that he had been retaliated against for working on personal vehicles in the company shop, not for providing information about those activities, although other statements by the Complainant were at least suggestive of an allegation of retaliation for reporting. The ALJ found that regardless of what he now alleged, the Complainant did not, at the time he provided the information to the HR department, hold the belief that the conduct he referred to violated the laws listed in the SOX. Reviewing the Complainant's testimony, the ALJ found that the Complainant merely felt that it wasn't right to have personal vehicles repaired by company mechanics, not that he believed that such activities constituted a fraud against shareholders. Finally, the ALJ wrote: "Even if the servicing personal vehicles cost the company the value of labor performed, it does not translate into any sort of transaction involving fraud against shareholders or intentionally deceitful statements made to actual or potential investors about the value of the company, or anything else that could reasonably and objectively be deemed a fraud against shareholders." Slip op. at 7.
In McClendon v. Hewlett Packard, Inc., 2006-SOX-29 (ALJ Oct. 5, 2006), Complainant alleged that he engaged in protected activity by, inter alia, reporting co-employment violations and related attempts to conceal those violations. The ALJ held that Complainant's reporting of co-employment violations to various supervisors, and his warnings to his supervisors of potential consequences of such violations, were not protected activity under the Act. Complainant contended that the alleged violations would result in significant consequences including an IRS or OSHA investigation and possible violations of the FLSA or ERISA. He argued that such consequences would concern a reasonable shareholder. McClendon, slip op. at 72. The ALJ held "that a mere possibility of a co-employment violation and the potential withholding of the effects of co-employment on the financial condition of a corporation are not enough to secure the protection of the SOX whistleblower provisions." Id. at 72. In his finding, the ALJ relied on the ARB's decision in Harvey v. Home Depot, ARB No. 04-114, 04-115 (ARB June 2, 2006), in which the Board specified that "‘[a] mere possibility that a challenged practice could adversely affect the financial condition of a corporation, and that the effect on the financial condition could in turn be intentionally withheld from investors, is not enough.'" Id.
In addition, the ALJ held that "[a] co-employment violation by itself is not a violation of any SEC rule or regulation, or any Federal law pertaining to fraud against shareholders." Id. Again, the ALJ relied on the Harvey case, and specifically the ARB's holding "that SOX only protects activities ‘directly related to the listed categories of fraud or securities violations.'" Id., citing to Harvey v. Home Depot, ARB No. 04-114, 04-115 (ARB June 2, 2006).
The ALJ further held that Complainant was unable to prove by a preponderance of the evidence that Respondent tried to conceal the alleged co-employment violations. See McClendon, slip op. at 72-74.
PROTECTED ACTIVITY; REPORTING H-1B VISA VIOLATIONS
In McClendon v. Hewlett Packard, Inc., 2006-SOX-29 (ALJ Oct. 5, 2006), Complainant alleged that he engaged in protected activity by, inter alia, reporting H-1B Visa noncompliance. The ALJ held that Complainant's H-1B visa complaint was not protected under SOX because it does not relate to one of the categories of fraud or securities violations. The ALJ cited in this regard the ARB decision in Harvey v. Home Depot, ARB No. 04-114, 04-115 (ARB June 2, 2006), in which the ARB held that the Complainant's claim of overtime pay violations was not protected under SOX because it did not involve a securities or fraud violation. McClendon, slip op. at 74, citing to Harvey at 15.
PROTECTED ACTIVITY; FILING OF PRIOR SOX WHISTLEBLOWER CLAIMS
In McClendon v. Hewlett Packard, Inc., 2006-SOX-29 (ALJ Oct. 5, 2006), Complainant alleged that he engaged in protected activity by, inter alia, filing and appealing two SOX whistleblower claims. The ALJ held that Complainant's filing of two SOX claims was protected activity under the Act, and that Respondent was aware that these claims were filed.
PROTECTED ACTIVITY; THREAT TO FILE COMPLAINTS WITH EEOC, DOL AND OTHER AGENCIES FOR RESPONDENT'S ALLEGED SYSTEMIC RACE DISCRIMINATION IS NOT, STANDING ALONE, SUFFICIENT TO ESTABLISH FRAUD AGAINST SHAREHOLDERS
In Smith v. Hewlett Packard, 2005-SOX-88 to 92 (ALJ Jan. 19, 2006), the ALJ found that the Complainant did not engage in protected activity under the whistleblower provision of the SOX when he told an Employee-Relations manager that if he did not see appreciable effort by the Respondent to address longstanding and institutional discriminatory practices he would bring the issue to the attention of the EEOC, the Department of Labor and other appropriate agencies. Citing Harvey v. The Home Depot, Inc., 2004-SOX-20 (ALJ May 28, 2004), the ALJ noted that protected activity under the SOX must involve an alleged violation of a federal law directly related to fraud against shareholders. There had been rumors of a class-action law suit against the Respondent. The ALJ observed that had such a suit actually been filed, and if the Respondent had prevented that information from reaching shareholders, and if the Complainant had learned of this omission and reported it, then he would have engaged in protected activity under SOX. However, in the instant case, "[m]ere knowledge that an employee-evaluation process adversely affected minorities (without knowing whether this result was intentional), coupled with an insider's access to disgruntled employees' conversations about 'external' resolutions, is not enough." Slip op. at 10. The ALJ noted that "[f]raudulent disclosures to shareholders about a company's diversity or opportunities for those within protected classes could very well impact a company's value on the public market. Socially responsible investors may move their money upon learning of a company's discriminatory practices." However, in the instant case the Complainant's allegations did not establish the making of a report related to fraud against shareholders.
PROTECTED ACTIVITY; VIOLATION OF STATE LAW NOT COVERED
In Williams v. Sirva, Inc., 2006-SOX-6 (ALJ Feb. 13, 2006), the Complainant alleged that the Respondent violated the whistleblower provision of the SOX when it took adverse actions against her and constructively discharged her after she refused to participate in random telephone questioning by the California Department of Insurance about insurance fraud prevention methods. The Complainant believed that a script provided by her supervisor gave incorrect answers. The Respondent filed for summary judgment on the ground that the Complainant's decision not to participate in the telephone questioning had no relationship to federal securities law or any other federal law relating to fraud against shareholders -- rather her decision related only to possible state insurance law violations. The Complainant presented no evidence to the contrary, and the ALJ, finding that SOX does not provide protection to employees who only report violations of state statutes or laws, granted summary decision in favor of the Respondent.
PROTECTED ACTIVITY; DISTINCTION BETWEEN COMPLAINANT'S MISTAKEN, BUT REASONABLE BELIEF AND A COMPLAINANT'S BELIEF THAT WAS UNREASONABLE FROM THE OUTSET
The Complainant did not engage in protected activity when he accused the company's CEO of insider trading where the Complainant's suspicions where not based on a reasonable belief from the outset. The Complainant thought that the CEO had been attempting to purchase company stock based on advance knowledge of the results of a lawsuit that would bring a large amount of cash into the company. The ALJ, however, found that the Complainant's belief was based on very thin evidence -- a draft press release found in the trash that referred to the company's success in the litigation, a snippet of a telephone conversation the Complainant overheard in which the CEO was asking someone how he could buy 10,000 shares of something, and a rumor that a member of the Board of Directors had advance knowledge that the litigation had been resolved in Respondent's favor. The ALJ found that the Complainant did not consider the CEO could have been talking about anything. The ALJ distinguished instances where the Complainant has a reasonable belief that later turns out to be wrong from instances where the Complainant's belief was unreasonable from the outset. The ALJ also took into consideration the Complainant's own conduct -- he had not followed the company's standards of conduct procedure for making allegations regarding insider trading, and did not relate his suspicions to the head of audit committee. Although the Complainant might have believed that the head of the audit committee was involved in disseminating the insider information, he nonetheless did not alert any other Board member either. The ALJ also noted that the subject of insider trading had not been mentioned during the OSHA investigation or in response to the ALJ's order directing the Complainant to identify the bases for his SOX complaint. Bechtel v. Competitive Technologies, Inc., 2005-SOX-33 (ALJ Oct. 5, 2005).
PROTECTED ACTIVITY; MUST IMPLICATE FRAUD
In Tuttle v. Johnson Controls Battery Division, 2004-SOX-76 (ALJ Jan. 3, 2005), the Complainant's SOX whistleblower complaint was grounded in the allegation that he was terminated due to complaints to the Respondent that significant numbers of its batteries were defective. The ALJ granted summary judgment against the Complainant because the complaint did "not address any kind of fraud or any transactions relating to securities. Moreover, there has been no allegation that the activities complained of involved intentional deceit or resulted in a fraud against shareholders or investors." Slip op. at 3-4. The ALJ wrote:
The legislative history of the Act makes it clear that fraud is an integral element of a cause of action under the whistleblower provision. See, e.g. S. Rep. No. 107-146, 2002 WL 863249 (May 6, 2002) (explaining that the pertinent section "would provide whistleblower protection to employees of publicly traded companies who report acts of fraud to federal officials with the authority to remedy the wrongdoing or to supervisors or appropriate individuals within their company.") The provision is designed to protect employees involved "in detecting and stopping actions which they reasonably believe are fraudulent." Id. In the securities area, fraud may include "any means of disseminating false information into the market on which a reasonable investor would rely." Ames Department Stores Inc., Stock Litigation, 991 F.2d 953, 967 (2d Cir. 1993) (addressing SEC antifraud regulations). While fraud under the Act is undoubtedly broader, an element of intentional deceit that would impact shareholders or investors is implicit.
Protected activity is defined under SOX as reporting an employer's conduct which the employee reasonably believes constitutes a violation of the laws and regulations related to fraud against shareholders. While the employee is not required to show the reported conduct actually caused a violation of the law, he must show that he reasonably believed the employer violated one of the laws or regulations enumerated in the Act. Thus, the employee's belief "must be scrutinized under both subjective and objective standards." Melendez v. Exxon Chemicals Americas, ARB No. 96-051 (July 14, 2000).
PROTECTED ACTIVITY; ENVIRONMENTAL CLAIM NOT RELATED TO SHAREHOLDER FRAUD IS NOT PROTECTED ACTIVITY
The ALJ found that the Complainant was not engaged in protected activity under the SOX where her reports concerned air quality and had nothing to do with fraud or the protection of investors. The ALJ was not convinced otherwise by the Complainant's speculation that poor air quality might ultimately result in financial loss to the Respondent. The ALJ granted summary judgment to the Respondent based on the Complainant's failure to establish an essential element of a prima facie case. Minkina v. Affiliated Physician's Group, 2005-SOX-19 (ALJ Feb. 22, 2005).
PROTECTED ACTIVITY; COMPLAINANT'S PERSONAL WAGE PAYMENT PROBLEMS DID NOT RISE TO LEVEL OF CAUSING A MATERIAL INACCURACY IN THE RESPONDENT'S FINANCIAL REPORTS
In Harvey v. Safeway, Inc., 2004-SOX-21 (ALJ Feb. 11, 2005), the Complainant contended that his complaints about shortages in his pay constituted protected activity under the whistleblower provision of the Sarbanes-Oxley Act. The ALJ concluded that, "while complaints of systemic violation of the [the Fair Labor Standards Act] might reach the necessary magnitude to effectively perpetuate a fraud on shareholders," slip op. at 30, Section 302 of the SOX (corporate officer certification of financial disclosure) "establishes a requirement for the accuracy of material facts relating to finances." Id. at 31 (emphasis as in original). The ALJ concluded that "[t]his provision demonstrates Congress' intention to protect shareholders by requiring accurate reporting of significant information concerning a corporation's financial condition." Id. (emphasis as in original). The ALJ concluded that the Complainant's reports of underpayment of his wages failed to reach the requisite level of materiality -- even if uncorrected -- they "would have a microscopic, if any, effect on any financial report prepared by [the Respondent] for the benefits of its shareholders." Id. The ALJ also found that the Respondent had attempted to remedy the underpayments in a timely manner, and therefore its financial reports were not likely to have been affected by the temporary wage shortages. The Complainant alleged that underpayments were systematic - thereby increasing the Respondent's profits from unpaid wages. The ALJ, however, found that the Complainant had not presented an objectively reasonable factual foundation for this allegation.
PROTECTED ACTIVITY; DISCLOSURE TO PERSON WITH AUTHORITY TO INVESTIGATE AND ACT; COMPANY'S DEALINGS WITH UNLICENSED BROKER RELATING TO PRIVATE PLACEMENT; DIRECTION TO TURN OVER FILE TO AUDITORS; REFUSAL TO ATTEND MEETING
In Jayaraj v. Pro-Pharmaceuticals, Inc., 2003-SOX-32 (ALJ Feb. 11, 2005), the Complainant was Vice-President of Investor Relations for a small biotech company working to increase volume and price of publicly traded stock and engaged in a private placement offering. The Complainant was fired because she raised concerns about an unlicensed broker's activities relative to the private placement. The ALJ found that the Complainant had a reasonable basis for concluding that this was not proper (the ALJ not reaching the issue of whether it actually was improper), and that she engaged in protected activity when she directed the Chief Operating Officer (COO) to turn the unlicensed broker's file over to auditors.
Under the corporate structure, the COO was the Complainant's peer rather than her supervisor. The ALJ found nonetheless that the COO had sufficient authority and involvement in investor relations, auditing and private placement to conclude that she was a person with authority to investigate, discover and terminate misconduct related to securities law under 18 U.S.C. § 1514A(a)(1)(C), and therefore a person to whom disclosures of potential securities law violations are protected.
The ALJ also found that the Complainant's refusal to meet with the unlicensed broker and persons that he was referring to the company also was protected activity. The Complainant had informed the CEO that she did not want to attend the meeting because it was with the unlicensed broker's referrals.
PROTECTED ACTIVITY; THREE COMPONENTS - PURPORTED VIOLATION OF LAW RELATING TO FRAUD AGAINST SHAREHOLDERS - OBJECTIVELY REASONABLE BELIEF IN PURPORTED VIOLATION - COMMUNICATION OF CONCERN; ACTIONS CAUSING LOSSES TO CLIENTS AS PROTECTED ACTIVITY
In Hughart v. Raymond James & Associates, Inc., 2004-SOX-9 (ALJ Dec. 17, 2004), the ALJ looked at similar case law developed in environmental and nuclear safety whistleblower cases, and determined that a protected activity under SOX has three components:
the report or action must involve a purported violation of a Federal law or SEC rule or regulation relating to fraud against shareholders.
the complainant's belief about the purported violation must be objectively reasonable.
the complainant must communicate his concern to either his employer, the Federal Government or a member of Congress.
In the instant case, the ALJ found that the Complainant engaged in protected activity when aggressively presenting concerns regarding his belief that the Respondent was not taking sufficient steps to protect clients' unclaimed property from being escheated by the state government, was improperly permitting the withholding of foreign taxes from clients' investments funds, and was permitting improper over-the-counter trades of limited partnership shares.
PROTECTED ACTIVITY; PARTICIPATION IN INVESTIGATION OF ACTIVITY REASONABLY PERCEIVED TO BE FRAUD ON SHAREHOLDERS
In Hendrix v. American Airlines, Inc., 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2004), the ALJ found that the Complainant engaged in protected activity under the Sarbanes Oxley Act when he participated in the investigation of an employee whom the Complainant reasonably believed was committing fraud against the Respondent and its shareholders by creating art objects for personal gain out of company material, on company time. The Respondent asserted that the Complainant was only a "witness" to a manager's protected activity because it was that other manager who reported the alleged fraudulent activity to upper management. The ALJ, however, found that the Sarbanes Oxley Act protects an employee who provides information or otherwise assists in the investigation of fraudulent activity. The ALJ found that although the Complainant never identified a particular code section he believed had been violated, the Sarbanes Oxley Act merely requires that a complainant have a reasonable belief that he is blowing the whistle on fraud and protecting investors.
PROTECTED ACTIVITY; ALLEGED FRAUD ON NASA COULD ALSO BE A FRAUD ON SHAREHOLDERS UNDER THE RIGHT CIRCUMSTANCES -- THEREFORE SUMMARY DECISION NOT APPROPRIATE
In Mann v. United Space Alliance, LLC, 2004-SOX-15 (ALJ Feb. 18, 2005), the ALJ declined to grant summary judgment to the Respondents on the issue of protected activity because the Complainant's allegation of a perpetration of a fraud on NASA by improperly favoring certain vendors in violation of federal acquisition regulations, although less than direct, could also perpetrate a fraud on stockholders under certain circumstances.
PROTECTED ACTIVITY; COMPLAINANT'S REASONABLE BELIEF THAT RESPONDENT WAS ENGAGED IN AN ILLEGAL AND CRIMINAL ACT
In Taylor v. Wells Fargo, Texas, 2004-SOX-43 (ALJ Feb. 14, 2005), the ALJ found that the Complainant was engaged in protected activity under the SOX when she notified the Respondent of her supervisor's practice of backdating letters of credit. The ALJ found that the Complainant met the "threshold standard, demonstrating by a preponderance of the evidence that she reasonably believed that when backdating the letters of credit, Respondent was falsifying a bank document, which she believed would constitute an illegal and criminal act." Slip op. at 11.
PROTECTED ACTIVITY; SEC RULE REQUIRING REPORTING OF LEGAL PROCEEDINGS; MAIL FRAUD; COMPLAINANT'S BELIEF AT THE TIME OF THE ALLEGEDLY PROTECTED COMMUNICATION
In Nixon v. Stewart & Stevenson Services, Inc., 2005-SOX-1 (ALJ Feb. 16, 2005), the ALJ granted the Respondent's motion for summary decision where the Complainant originally alleged that his cause of action was based on SEC Regulatory S-K item 103, which mandates reporting of material pending legal proceedings, but where the Complainant presented no evidence that there was such a pending legal proceeding or that any governmental legal proceedings were being contemplated. The Complainant argued that the Respondent had a history of illegal environmental, health and safety activities that would eventually lead to legal proceedings, but the ALJ found that, while this may be true in the long run, at the time the Complainant made the communications he asserted were protected under the SOX whistleblower provision, legal proceedings were neither pending nor contemplated by government agencies; the Complainant's belief that such proceedings would soon be contemplated was not the same as a belief that the government actually was contemplating proceedings.
The Complainant, following discovery, amended his complaint to allege that he also reasonably believed that the Respondent was engaged in mail fraud. The ALJ, however, found that mail fraud includes a scheme or artifice to obtain money or property, of which there was no evidence. Moreover, the ALJ found that there was no evidence that the Complainant considered the Respondent's conduct to have constituted mail fraud at the time he made his communication; rather, the first time this assertion was made was following a conference call in which the ALJ had asked if there was any other basis for the complaint beyond the alleged SEC rule.
PROTECTED ACTIVITY; RAISING A CONCERN ABOUT ACCOUNTING OR FINANCES IS NOT, IN ITSELF, PROTECTED ACTIVITY UNDER SOX; MUST RELATE TO FRAUD AGAINST SHAREHOLDERS
In Marshall v. Northrup Grumman Synoptics, 2005-SOX-8 (ALJ June 22, 2005), the ALJ granted the Respondent's motion for summary decision on the ground that the Complainant's raising of concerns that certain accounting practices violated the Respondent's internal and ethics policies did not qualify as protected activity under the SOX whistleblower provision. The Complainant had alleged that certain managers and the Respondent's controller had willfully misclassified labor hours, depreciation and capital expenses. The ALJ, however, found that the Complainant's concerns, even if true, did not demonstrate fraud against shareholders or actual violations of federal law, but only a grievance with internal company policy. The ALJ wrote that "[r]aising a concern about a violation of an ethics policy is not protected activity. The fact that the concerns involved accounting and finances in some way does not automatically mean or imply that fraud or any other illegal conduct took place." Slip op. at 5 (citation omitted).
PROTECTED ACTIVITY; NO REQUIREMENT THAT THE RESPONDENT WAS NOT ALREADY AWARE OF THE INFORMATION PROVIDED BY THE COMPLAINANT
In Allen v. Stewart Enterprises, Inc., 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ rejected the Respondent's contention that to be protected activity, a complainant must provide information that was not already known by the company. The ALJ found no support for such an assertion in the either the SOX or its legislative history.
PROTECTED ACTIVITY; FRAUD AS INCLUDING AN ELEMENT OF INTENT
In Allen v. Stewart Enterprises, Inc., 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ found that SOX conveys protection to whistleblowers who report activity reasonably believed to be fraudulent in nature, and that "a fraudulent activity cannot occur without the presence of intent." Slip op. at 84. The ALJ stated that "[u]nder the subjective and objective standards applied to the Act, Complainants must actually believe Respondent acted fraudulently and that belief must be reasonable 'based on the knowledge available to a reasonable [person].' SeeLerbs [v. Buca Di Beppo, 2004-SOX-8 (ALJ June 15, 2004)]." Slip op. at 84-85.
The ALJ found that the Complainants had not engaged in protected activity in reporting a variety of accounted irregularities. For example, he found that one Complainant testified that she did not believe that the Respondent had acted intentionally with respect to incorrect interest calculations resulting from an unintentional mistake within the computing system. Moreover, that ALJ found that the Complainants could not show a reasonable belief that the Respondent was engaged in fraud because the record demonstrated that the Respondent already knew about the problem before the Complainant reported it and was making it a priority to remedy the problem.
PROTECTED ACTIVITY; REPORT OF VIOLATION OF STATE LAW
In Allen v. Stewart Enterprises, Inc., 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ found that a Complainant's concerns about possible violations of state laws that could result in sanctions and revocation of the Respondent's state licenses were not protected activity under the SOX, which only provides protection to employees who report violations of federal laws.
PROTECTED ACTIVITY; MAKING AN INQUIRY ABOUT COMPLIANCE WITH A REGULATOR BUT NOT RAISING A CONCERN THAT THE RESPONDENT WAS VIOLATING THE REGULATION
In Allen v. Stewart Enterprises, Inc., 2004-SOX-60, 61 and 62 (ALJ Feb. 15, 2005), the ALJ found that a Complainant's inquiry into whether the Respondent was taking steps to comply with a securities regulation in regard to prior years' accountings was not protected activity because she did not raise a complaint or concern that the Respondent had violated the law in reference to those prior years. The ALJ also found that even if she had raised such a complaint, it was not protected activity because she would not have harbored a reasonable belief of a violation of a SEC rule; the documents involved were internal working documents not for submission to the SEC; the Complainant testified that she was not aware of any law making the SEC rule applicable to internal working documents and she testified that she did not believe that there had been any intentional violation of the SEC rule.
PROTECTED ACTIVITY; COMPLAINANT'S BELIEF NOT REASONABLE WHEN ALL THE OBJECTIVE EVIDENCE OF RECORD WEIGHED AGAINST SUCH A BELIEF
In Barnes v. Raymond James & Associates, 2004-SOX-58 (ALJ Jan. 10, 2005), the ALJ found that the Complainant could not be found to have had a reasonable belief that her supervisor was engaged in unethical conduct when the only objective evidence of record weighed against such a belief. The Complainant had told a manager that she believed that her supervisor was engaging in improper switches involving mutual funds thereby generating unnecessary fees for his clients. The record, however, contained no evidence of a single improper transaction by the supervisor. The Complainant's own testimony tended to undercut her claim. In addition, managers reviewed the supervisor's accounts following the Complainant's accusation and found no evidence of impropriety, and an annual internal audit conducted only days after the Complainant made the allegation revealed no evidence of any such activity.
PROTECTED ACTIVITY; PROOF OF REASONABLE BELIEF; FACT THAT COMPANY INVESTIGATED IS NOT, BY ITSELF, PROOF THAT THE COMPLAINANT'S BELIEF WAS REASONABLE
In Grant v. Dominion East Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005), the ALJ observed that the mere fact that a company investigates a complaint does not establish that the complainant had a reasonable belief of illegal conduct. Rather, "[i]n this age of high profile corporate scandal, corporate watchdogs, and since the term 'whistleblower' has become routine headline, it is in any company's best interest to investigate each and every allegation of wrongdoing no matter how insignificant or ludicrous." Slip op. at n.35.
PROTECTED ACTIVITY; REASONABLENESS OF BELIEF; RELEVANCE OF EXPERT TESTIMONY
In Grant v. Dominion East Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005), the Complainant proffered the testimony of a forensic accounting witness as expert testimony. The ALJ permitted the witness to testify and reserved a ruling on whether such testimony would be considered expert.
The ALJ acknowledged that the witness had qualifications that may qualify as expert; however, she noted that expert testimony is only relevant when it will help the trier of fact understand the evidence or determine a fact in issue. In the instant case, the issue was whether the Complainant reasonably believed that the Respondent was violating one of statutes or regulations enumerated in the whistleblower provision of the SOX. The ALJ noted that SOX does not require proof that an actual accounting fraud took place; nor is the standard whether an accounting expert reasonably believes that fraud occurred. Rather the Complainant must show that he had a reasonable belief that accounting fraud had occurred. The ALJ found that the forensic accounting witness' opinion added nothing to the relevant inquiry.
The ALJ noted that there may be circumstances in which the issue of protected activity may be appropriate for expert testimony, but that facts in evidence in the case before her did not lend themselves to a need for an expert to explain the reasonableness of the Complainant's belief.
The ALJ also found that the witness did not have thorough knowledge of the facts of the case, nor was his testimony particularly relevant to the reasonable belief issue before her. Thus, she declined to grant the witness "expert" status under 29 C.F.R. § 18.702, and afforded his testimony little-to-no evidentiary weight.
PROTECTED ACTIVITY; MERELY QUESTIONING OR REQUESTING EXPLANATIONS OF COMPANY PRACTICES IS NOT PROTECTED ACTIVITY; THERE MUST BE A COMMUNICATION REFERENCING FRAUD
In Grant v. Dominion East Ohio Gas, 2004-SOX-63 (ALJ Mar. 10, 2005), the ALJ found that the Complainant had not engaged in protected activity where he had simply voiced discontent and requested explanations about projects, accounting, and software that he did not understand, and never made any reference to fraud or implied that the company had acted intentionally to mislead shareholders or misstate the company's bottom line. The ALJ wrote: "To be sure, an accounting error does not amount to fraud under the Act. And simply raising questions and lodging complaints without any reference to or suspicion about fraud against shareholders is not protected activity." Slip op. at 40 (footnote omitted). The ALJ found that the purpose of the Act does not support a conclusion that any time a complaint "raises a question about the company's accounting programs or procedures, or about anything else regarding the everyday functioning of the company, he would be engaging in protected activity." Id. In a footnote, the ALJ explained that fraud is an integral element of a SOX cause of action, and that such fraud includes an element of intentional deceit that would impact shareholders or investors. Id. at n.40, citing Hopkins v. ATK Tactical Systems, 2004-SOX-19 (ALJ May 27, 2004). The ALJ also noted that the reported information needs to have a certain degree of specificity to be protected.
The ALJ summarized:
The limited scope and application of the Sarbanes-Oxley Act does not cover the complaints and allegations lodged by Complainant here. Sarbanes-Oxley is a corporate governance statute designed to ensure ethical and legal corporate practices by providing protection from retaliation or discrimination to employees who report reasonable beliefs based in articulable fact of illegal activity designed to defraud shareholders. The Act does not protect an employee who simply raises questions about virtually everything with which he disagrees or does not understand. The Act also does not protect an employee who simply assumes a company has retaliated against him because he raised a lot of questions, lodged a lot of complaints, and labels himself a "whistleblower." The Act affords protections only to so-called whistleblowers who blow the whistle about something covered by the Act.43/ Stated another way, an employer's "retaliation" or "discrimination" is only a violation under the Act if it is in response to that employee's reasonable and articulated belief of fraud related to shareholders or a violation of one of the statutes enumerated in the Act. Here, Complainant has provided no evidence satisfying the requirements of the Act in that regard.
_________ 43/ Quite frankly, there is nothing in the Act that prohibits a company from firing or otherwise retaliating against an employee just because that employee lodged a number of general complaints, or is otherwise a "loose cannon"....
Slip op. at 43-44 (emphasis as in original).
PROTECTED ACTIVITY; COMPLAINANT'S BELIEF IN FRAUDULENT ACTIVITY, EVEN IF REASONABLE, MUST BE COMMUNICATED
In Trodden v. Overnite Transportation Co., 2004-SOX-64 (ALJ Mar. 29, 2005), the Respondent was a transportation services business; in the industry companies differentiated themselves with good on-time percentages. The ALJ found that the Complainant, a terminal manager, had a realistic belief that the SEC had been provided an inflated on-time percentage which may have led to an inflated stock price. The ALJ also found, however, that there was no evidence that the Complainant had ever told a superior, a member of Congress, or a federal officer that the Respondent was engaging in questionable activities. Thus, the Complainant did not engage in protected activity -- in effect, he never "blew the whistle."
[Editor's note: In the ALJ's findings of fact, he noted that the Complainant had ceased providing inflated on-time delivery statistics for a two-month period; this cessation, however, was motivated by an attempt to highlight problems at the terminal such as understaffing. The Complainant returned to the practice of reporting inflating statistics after allegedly being harassed and threatened with replacement.]
PROTECTED ACTIVITY; COMPLAINT THAT THE RESPONDENT MADE FINANCIALLY UNSOUND CHOICES IS NOT THE SAME AS A COMPLAINT OF FRAUD AGAINST SHAREHOLDERS
In Stojicevic v. Arizona-American Water Co., 2004-SOX-73 (ALJ Mar. 24, 2005), the ALJ found that the Complainant did not engage in protected activity under the SOX when he complained to his superiors about poor project decisions. In his pretrial statement, the Complainant stated that the Respondent's considerable end-of-the-year earnings were the result of a failure to make necessary capital investments rather than good business management. The ALJ wrote that "[a]n allegation that Respondent made financially unsound choices ... is quite distinct from an allegation that Respondent engaged in fraud. Regardless of Respondent's 2003 earning statement, Complainant has not offered any proof that Respondent made false statements or misrepresentations to its shareholders and investors regarding its earnings, such that its conduct constituted fraud." Slip op. at 7.
PROTECTED ACTIVITY; REASONABLE BELIEF ESTABLISHED WHERE THE COMPLAINANT WAS IN-HOUSE COUNSEL AND HAD DOCUMENTARY EVIDENCE TO BACK-UP ALLEGATIONS OF IMPROPER ACTIVITIES
In Kalkunte v. DVI Financial Services, Inc., 2004-SOX-56 (ALJ July 18, 2005), the Respondent DVI Financial was in financial trouble and eventually filed for bankruptcy. The ALJ found that the Complainant's allegation that the Respondent's senior management had altered delinquency reports and incorporated those reports into disclosure statements filed to the public was a protected activity as a report of blatant fraud against shareholders. The Complainant also alleged that following default the Respondent improperly commingled funds with a subsidiary. The ALJ found that this allegation was also protected activity, as commingling of funds was an overt violation of SEC regulations. The ALJ found that the Complainant had a reasonable belief that these were violations. Complainant was in-house counsel, and understood that these activities were potential violations of SOX; in addition, the allegations were not based on mere conjecture, but backed up with documentary evidence.
PROTECTED ACTIVITY; WORKPLACES DISPUTES; BANK FRAUD
In Heaney v. GBS Properties LLC, 2004-SOX-72 (ALJ Dec. 2, 2004), the Complainant was a real estate agent. The ALJ held that Complainant's vocal concern over a purchaser's use of an unlicensed home inspector was not protected activity under the Sarbanes Oxley Act whistleblower provision (neither the Complainant nor the Respondent had anything to do with the choice of the inspector). Likewise, the ALJ held that the Respondent's refusal to intervene in a dispute between the Complainant and another agent was not protected activity. The ALJ,. however, found that the Complainant's concerns over a condominium project allegedly built in violation of certain codes within the knowledge of the Respondent was arguably a bank fraud against mortgage lenders and therefore protected activity under the Sarbanes Oxley Act.
PROTECTED ACTIVITY; PARTICIPATION IN INVESTIGATION OF ACTIVITY REASONABLY PERCEIVED TO BE FRAUD ON SHAREHOLDERS
In Hendrix v. American Airlines, Inc., 2004-AIR-10, 2004-SOX-23 (ALJ Dec. 9, 2003), the ALJ found that the Complainant engaged in protected activity under the Sarbanes Oxley Act when he participated in the investigation of an employee whom the Complainant reasonably believed was committing fraud against the Respondent and its shareholders by creating art objects for personal gain out of company material, on company time. The Respondent asserted that the Complainant was only a "witness" to a manager's protected activity because it was that other manager who reported the alleged fraudulent activity to upper management. The ALJ, however, found that the Sarbanes Oxley Act protects an employee who provides information or otherwise assists in the investigation of fraudulent activity. The ALJ found that although the Complainant never identified a particular code section he believed had been violated, the Sarbanes Oxley Act merely requires that a complainant have a reasonable belief that he is blowing the whistle on fraud and protecting investors.
PROTECTED ACTIVITY; MATERIALITY STANDARD
In Henrich v. Ecolab, Inc., 2004-SOX-51 (ALJ Nov. 23, 2004), the Complainant raised issues relating to whether certain inventory was improperly accounted for as "good bulk" rather than "inventory at risk" thereby inflating the value of the inventory. The Respondent argued, inter alia, that the Complainant's alleged whistleblowing activity was immaterial to the company's accounting procedures because the inventory at issue had a relatively low value in terms of the company's overall revenue ($300,000 as compared to approximately $4 to 4.5 billion a year in sales) and auditing standards ($20 million materiality standard to trigger an outside audit). The ALJ found that OSHA had considered a materiality standard during notice and comment rulemaking, but found it inappropriate to "specify a percentage or formula for use in defining protected activity." 69 Fed. Reg. 163 (Aug. 24, 2004) (discussion of § 1980.102). The ALJ reviewed the case law precedent and found that it provides, albeit indirectly, the complainants do not need to meet a materiality requirement as to the extent of alleged SOX whistleblower violation. Rather, the standard is that a complainant must show a reasonable belief that a law had been violated and must plead specific incidents and material facts that give rise to the alleged violation.
PROTECTED ACTIVITY; MEANING OF "PROVIDED INFORMATION TO THE EMPLOYER"
In Gonzalez v. Colonial Bank, 2004-SOX-39 (ALJ Aug. 20, 2004), the Complainant informed two executive employees of the Respondent bank (a regional CEO and a regional president) that a lending company they had formed possibly violated banking laws, was a fraud against shareholders, and violated employment contracts with the Respondent that prohibited them from engaging in business in competition with the Respondent. The Respondent moved for summary decision before the ALJ based on the assertion that the Complainant did not "provide information" to the regional CEO because he already knew about it. The ALJ found that while the CEO clearly knew about the lending company he had formed, the Complainant had advised him to sell it or shut it down because of possible violations of banking and mail fraud laws, and that this type of communication was protected by the SOX whistleblower provision. The ALJ found that the same was true of the Complainant's communications to the regional bank president.
PROTECTED ACTIVITY; COMPLAINANT'S REPORT OF APPARENTLY FRAUDLENT UNION DUTY CLAIMS BY UNION OFFICIALS WHICH IMPACTED ON RESPONDENT'S BOTTOM LINE
In Platone v. Atlantic Coast Airlines, 2003-SOX-27 (ALJ Apr. 30, 2004), the ALJ found that the Complainant was engaged in protected activity under the whistleblower provision of the Sarbanes-Oxley Act where she reported suspicions to her supervisor that the company, a regional air carrier, was complicit in a scheme to permit pilots to fraudulently make flight loss claims (the process whereby pilots were reimbursed for being called away from flight duties to attend to official union business). Essentially, the Complainant believed that the company looked the other way in regard to apparent misuse of flight loss claims filed by union officials in order to gain leverage in upcoming contract negotiations where the pilots were going to be asked to make significant concessions because of post-911 financial woes. The ALJ found that "[s]uch a scheme, by its very nature, would involve the use of the mail and wires, and could constitute fraud on ... shareholders." The ALJ noted that the cost of the claims cost the employer between $20,000 and $25,000 a month.
PROTECTED ACTIVITY; BLOWING THE WHISTLE ON ALLEGEDLY IMPROPER MANIPULATION OF INTERNAL REPORTS; VIOLATION OF ACCOUNTING PRINCIPLES AND INADEQUACY OF INTERNAL CONTROLS AS RELATED TO FEDERAL LAWS RELATING TO FRAUD AGAINST STOCKHOLDERS; NO MINIMUM DOLLAR VALUE MATERIALITY REQUIREMENT
In Morefield v. Exelon Services, Inc., 2004-SOX-2 (ALJ Jan. 28, 2004), the Respondents contended that the complaint must be dismissed prior to hearing because the whistleblowing concerned alleged manipulations of financial information in internal reports, budgets and forecasts, and it is not a violation of any law for the management of a subsidiary to deceive the parent as long as the external financial reports and statements are not effected. The Respondents' argued that no third party was misled or defrauded and therefore no federal interest was implicated. The Respondents also noted that the questions raised by the Complainant only involved less than .0001% of the parent's revenues and therefore he had no reasonable basis for believing that his concerns were material. The Respondents also noted that the Complainant had not identified the law that the alleged manipulation would have violated. The ALJ found that dismissal was not warranted on these grounds prior to hearing, finding that there was no support for the proposition that manipulations must appear in an external report, and that SOX provides "ample latitude to include rules governing the application of accounting principles and the adequacy of internal accounting controls implemented by the publicly traded company in compliance with [federal rules and regulations 'relating to fraud against stockholders']." The ALJ also agreed with the Complainant that SOX places no minimum dollar value on the protected activity it covers.
PROTECTED ACTIVITY; REASONABLE BELIEF THAT REPORTED CONDUCT WAS ILLEGAL, EVEN WHERE INVESTIGATION LATER ESTABLISHED THAT IT WAS NOT
In Halloum v. Intel Corp., 2003-SOX-7 (ALJ Mar. 4, 2004), the Complainant told the SEC that he had been instructed to delay the payment of invoices to subsequent quarters to increase cash on Intel's balance sheet. Because of intense news coverage at the time of Enron's creative accounting, he believed that the instructions amounted to a fraud on Intel's investors. Subsequently, an internal investigation required by the SEC, and accepted by that agency after review, exonerated Intel. Nonetheless, the ALJ found that the Complainant believed that he had been asked to delay invoices (although he actually was working with receiving notices rather than invoices). Citing case law from other whistleblower cases adjudicated by DOL, the ALJ observed that "[a] belief that an activity was illegal may be reasonable even when subsequent investigation proves a complainant was entirely wrong. The accuracy or falsity of the allegations is immaterial; the plain language of the regulations only requires an objectively reasonable belief that shareholders were being defrauded to trigger the Act's protections." Slip op. at 15 (footnote omitted).
PROTECTED ACTIVITY; REASONABLE BELIEF THAT RESPONDENT VIOLATED THE LAW; FINANCIALS OVERSTATED INCOME; RESTRICTIONS ON ACCESS OF CFO TO EXTERNAL AUDITORS; UNTRAINED PERSONNEL MAKING JOURNAL ENTRIES
In Welch v. Cardinal Bankshares Corp., 2003-SOX-15 (ALJ Jan. 28, 2004), the ALJ concluded that under the SOX whistleblower provision, the "Complainant is not required to show the reported conduct actually constituted a violation of the law, but only that he reasonably believed Respondent violated one of the enumerated laws and regulations. . . . The standard for determining whether Complainant's belief is reasonable involves an objective assessment. See, e.g., Minard v. Nerco Delamar Co., 92-SWD-1 (Sec'y Jan. 25, 1995), slip op. at 8." The ALJ found that the Complainant had raised five alleged protected activities, and upon analyzing the facts concluded that at least three of the five allegations were based on a reasonable belief that violations were being committed (the ALJ did not reach the last two allegations). First, the Complainant (Respondent's Chief Financial Officer) refused to sign the Respondent's third quarter certification because he believed that two journal entries appearing in the Respondent's financial statements totaling $195,000 overstated income by almost 14%. According to the Complainant, third quarter financial statements would be relied upon by investors, and in fact apparently were based on increases in stock prices after the third quarter report. The ALJ found the Respondent's arguments to the contrary unconvincing. Second, the Complainant alleged that his access to Respondent's external auditors was so restricted that he could not attest to the validity the Respondent's financials prepared by the auditors (the auditors instead communicated directly with the Respondent's President/CEO and Chairman). Again, the ALJ found that the Respondent's arguments to the contrary were not convincing. Finally, the ALJ found that the Complainant engaged in protected activity when he alleged that the Respondent had inadequate internal controls because too many individuals outside the finance department were making journal entries without the CFO's review or knowledge.
PROTECTED ACTIVITY; INTERNAL REPORT; NO REQUIREMENT THAT INFORMATION BE PROVIDED IN SUPPORT OF AN INVESTIGATION
In Getman v. Southwest Securities, Inc., 2003-SOX-8 (ALJ Feb. 2, 2004), the Respondent argued that the Complainant was not engaged in protected activity under the whistleblower provision of the SOX when she refused to change her rating of a stock because she did not provide information in support of an investigation. The ALJ, however, citing notes from the regulatory history of the SOX interim final rules interpreting protected activity to include both reporting violations and participating or assisting in a proceeding, found that "Complainant's refusal to change her rating, done in the presence of her managers, was an act of whistleblowing protected by the Act."
PROTECTED ACTIVITY; ANALYST'S REFUSAL TO CHANGE STOCK RATING; REFERENCE TO SEC REGULATIONS
In Getman v. Southwest Securities, Inc., 2003-SOX-8 (ALJ Feb. 2, 2004), the Complainant was a research analyst at a securities firm covering healthcare technology. At a review committee meeting, the Complainant declined to change her rating on a company from "accumulate" to a stronger "buy" rating. Although the committee did not tell the Complainant to change her rating or tell her that they were displeased with the rating, the Complainant interpreted the questioning as pressuring her to provide a stronger rating. The Respondent stood to participate in a banking deal to raise capital for the company if the securities report was favorable. The Respondent contested whether such a meeting actually took place and argued that even if the meeting took place, the Complainant's case was grounded merely in her perception of being pressured. The ALJ found, however, that there was definitive evidence in the record showing that such a meeting had occurred, and concluded that the Complainant's theory that the Respondent had attempted to conceal the existence of the meeting showed a motive to hide a securities law violation.
The ALJ next considered whether the Complainant's actions were protected activity under the SOX whistleblower provision through reference to the "manipulative practices" provision of SEC regulation 17 C.F.R. 240.10-5. The ALJ wrote:
These antifraud provisions are catchalls expressly designed to thwart misrepresentations in securities trading. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 151 (1972); SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 859 (2d Cir. 1968) (en banc); SEC v. Softpoint, Inc., 958 F. Supp. 846, 861 (S.D.N.Y. 1997), aff'd, 159 F.3d 1348 (2d Cir. 1998) (unpublished table decision). They are thus liberally construed to embrace a wide range of misconduct. Softpoint, 958 F. Supp. at 862. To prove a violation of these provisions, the party asserting that a violation has occurred must show: (1) that a misrepresented or omitted fact was made in an offer, attempt to induce a purchase or sale, or an actual purchase or sale of security; (2) that the misrepresented or omitted fact was "material"; and (3) that the respondent acted with the requisite "scienter." Basic, Inc. v. Levinson, 485 U.S. 224, 240 (1988); Aaron v. SEC, 446 U.S. 680, 701-02 (1980). The jurisdictional requirements of the antifraud provisions are interpreted broadly and are satisfied by intrastate telephone calls and even very ancillary mailings. Softpoint, 958 F. Supp. at 865.7/
___
7/ The jurisdictional requirement of the Securities Act is satisfied here through Complainant's use on Respondent's behalf of the telephone system in carrying out the research necessary to prepare the Cholestech report.
Slip op. at 19 (one footnote omitted). The ALJ found the Respondent attempted to misrepresent the value of the stock because it attempted to rate it at a level higher than its own expert, the Complainant deemed accurate, based on a motive not grounded in the characteristics of the stock but it own interests in a potential banking deal. The ALJ found materiality because investors relied on the Respondent's ratings in making investment decisions. Finally, the ALJ found scienter based on evidence that the Respondent was seeking to enter into a banking deal that depended on a higher rating, and on evidence that the Respondent attempted to conceal the review committee meeting.
PROTECTED ACTIVITY; GENERAL INQUIRIES ABOUT ACCOUNTING PRACTICES
In Lerbs v. Buca Di Beppo, Inc., 2004-SOX-8 (ALJ June 15, 2004), the ALJ noted that under the pertinent case law, in order for a whistleblower to be protected the reported information must have a certain degree of specificity. Thus, where the Complainant merely made general inquiries about the propriety of certain accounting entries, and never identified particular concerns about the Respondent's conduct that the Complainant may have believed to be illegal, the ALJ found that the Complainant failed to establish that he had engaged in protected activity under the whistleblower provision of the SOX.
PROTECTED ACTIVITY; REQUIREMENT OF FRAUD AGAINST SHAREHOLDERS
In Hopkins v. ATK Tactical Systems, 2004-SOX-19 (ALJ May 27, 2004), the Complainant filed a SOX whistleblower complaint premised on his raising the question of whether Respondents' systems illegally resulted in the release of sludge water into the ground water system. The ALJ found that such an activity fails to state a cause of action under the whistleblower provision of the SOX, which contemplates the prevention of fraudulent actions relating to securities. The ALJ wrote:
The Sarbanes-Oxley Act provides whistleblower protection for employees of publicly traded companies who provide information or participate in an investigation relating to violations of certain criminal code provisions relating to fraud (including "fraud and swindles"; "fraud by wire, radio, or television"; bank fraud; and securities fraud), rules or regulations of the Securities and Exchange Commission, or any provisions of Federal law relating to fraud against shareholders. The legislative history of the Act makes it clear that fraud is an integral element of a cause of action under the whistleblower provision. See, e.g. S. Rep. No. 107-146, 2002 WL 863249 (May 6, 2002) (explaining that the pertinent section "would provide whistleblower protection to employees of publicly traded companies who report acts of fraud to federal officials with the authority to remedy the wrongdoing or to supervisors or appropriate individuals within their company.") The provision is designed to protect employees involved "in detecting and stopping actions which they reasonably believe are fraudulent." Id. In the securities area, fraud may include "any means of disseminating false information into the market on which a reasonable investor would rely." Ames Department Stores Inc., Stock Litigation, 991 F.2d 953, 967 (2d Cir. 1993) (addressing SEC antifraud regulations). While fraud under the Act is undoubtedly broader, an element of intentional deceit that would impact shareholders or investors is implicit.
The protected activity alleged in the complaint involves the Complainant's reporting (both internally and to regulatory agencies) of ATK's release of sludge water into the ground water system due to poor maintenance and overdue inspections. The complaint does not address any kind of fraud and it does not involve transactions relating to securities. Moreover, there has been no allegation that the activities complained of involved intentional deceit or resulted in a fraud against shareholders or investors. Therefore, the matters complained of within the complaint do not fall within the purview of the employee protection provisions of the Act.
The ALJ found that Complainant's complaint may have fallen within the environmental statutes, but did not remand to OSHA for an investigation under those laws because the complaint was also untimely under any of those statutes.
PROTECTED ACTIVITY; SCOPE OF SOX COVERAGE; RACIAL DISCRIMINATION
In Harvey v. The Home Depot, Inc., 2004-SOX-20 (ALJ May 28, 2004), the Complainant first filed a distinct SOX complaint beyond 90 days of his termination, and therefore that complaint was untimely. In addition, he had mailed three letters to the Secretary of Labor within 90 days of his termination from employment. If one of those filings raised a SOX complaint, Complainant would have filed a timely complaint. Thus, the ALJ analyzed what, specifically, constitutes a viable complaint under the whistleblower provision of SOX. The ALJ wrote:
In regards to protected activities, a fundamental protected activity under SOX, and the activity most relevant in Mr. Harvey's case, involves an employee providing information to supervisory authority based on a reasonable belief that a SOX violation has occurred. Under the statute, 18 U.S.C. § 1514A (a) (1), a SOX violation must relate to at least one of the following specific categories:
1. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1341, Frauds and swindles. This provision establishes that use of the Post Service or private or commercial interstate carrier as a means to intentionally defraud or obtain property by false or fraudulent pretenses is a felony crime punishable by up to five years (or thirty years if the victim is a financial institution) imprisonment.
2. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1343, Fraud by wire, radio, or television. This provision establishes that use of wire, radio, or television communication as means to intentionally defraud or obtain property by false or fraudulent pretenses is a felony crime punishable by up to five years (or thirty years if the victim is a financial institution) imprisonment.
3. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1344, Bank fraud. This provision establishes that executing a scheme or artifice to defraud a financial institution is a felony crime punishable by not more than thirty years imprisonment.
4. Title 18, Crimes and Criminal Procedure, Chapter 63, Section 1348, Securities fraud. This provision establishes that executing a scheme or artifice a) to defraud any person in connection with any security of an issuer of a class of securities registered under Section 12 of the Securities Exchange Act or that is required to file reports under Section 15 (d) of the Securities Exchange Act; or b) to obtain by means of false or fraudulent pretenses any money or property in connection with the purchase of such security identified in a) above is a felony crime punishable by not more than twenty-five years imprisonment.
5. Any rule or regulation of the Securities Exchange Commission.
6. Any provision of federal law relating to fraud against shareholders.
Slip op. at 12-13 (footnotes omitted).
The ALJ found that the Complainant's allegations did not relate to mail fraud, wire fraud, bank fraud or securities fraud -- nor did they point to violations of SEC rules. That left the question of federal law relating to fraud against shareholders. The Complainant's central complaint was about systemic and individual racial discrimination. The ALJ found that the Complainant had failed to show that he had raised a reasonable complaint of systemic discrimination. In regard to individual discrimination, the ALJ wrote:
... In determining whether these alleged violations of individual employment rights involve a federal law related to fraud against shareholders, an implicit argument may be made that a company which permits discriminatory practices despite its public policy of equal opportunity is acting contrary to the best interests of its share holders. While that argument has understandable appeal, a SOX protected activity must involve an alleged violation of a federal law directly related to fraud against share holders. In this case, the federal law actually prohibiting individual employment discriminatory practices, Title VII, is based on individual rights and establishes procedures to address illegal employment discrimination; it was not enacted to preclude fraud against shareholders. In contrast, a federal law directly linked to the prevention of fraud against shareholders is the SOX statute itself. As set out in the SOX preamble, Congress imposed additional, specific legal requirements and standards on corporations, directors, senior financial officers, lawyers, and accountants to protect shareholders by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws and for other purposes. For example, SOX includes Section 302 (corporate officer certification that a financial disclosure is accurate and does not contain any untrue statement of material fact), Section 401 (enhanced disclosure requirements for mandated financial reports), and Section 406 (code of ethics for senior financial officers).
I have also considered another reasonable argument that since SOX mandates the accuracy of corporate disclosures, a reported incident of racial discrimination within a publicly traded company that represents itself to be non-discriminatory may amount to violation of a SOX disclosure requirement and thus involve a federal law related to fraud against shareholders. That is, although the racial discrimination is prohibited by a different federal law, its existence may also adversely affects the accuracy of corporate disclosures mandated by SOX, which is a federal law concerning fraud against shareholders.
While this presentation also has some logical appeal, the connection becomes tenuous upon close examination of SOX. Specifically, Section 302's requirement for the accuracy of material facts relating to finances, demonstrates Congress' intention to protect shareholders by requiring accurate reporting of a corporation's financial condition. The two key components are accurate accounting and financial condition. Whether a supervisor's acts of individual discrimination comply with the company's stated equal opportunity standards has a very marginal connection with those two components. Perhaps, the failure to disclose a class action lawsuit based on systemic racial discrimination with the potential to sufficiently affect the financial condition of a corporation might become the subject of a SOX protected activity if an individual complained about the failure to disclose that situation. However, individual, rather than systemic, discrimination does not reach that materiality threshold in terms of a corporation's financial condition. Alleged individual violations of Title VII would not fall into the category of SOX mandated disclosures. Further, Mr. Harvey's particular discrimination complaints to supervisors and the Board of Directors centered on the alleged existence of racial and employment discrimination rather than the company's failure to report such discrimination to the public.
Slip op. at 14-15 (footnote omitted).
PROTECTED ACTIVITY; SCOPE OF SOX COVERAGE; CHALLENGE TO INTERNAL COMPANY POLICY
In Reddy v. Medquist, Inc., 2004-SOX-35 (ALJ June 10, 2004), the Complainant alleged that the Respondent violated the whistleblower provision of the SOX because she was terminated from employment after expressing concerns to management regarding an internal company policy and its alleged deleterious impact on the rate of pay for medical transcriptionists. The ALJ granted Respondent's motion to dismiss for failure to state a claim upon which relief can be granted because the Complainant failed to show that she was engaged in protected activity. The ALJ found that "the evidence demonstrates the complaints concerned internal company policy as opposed to actual violations of federal law."
PROTECTED ACTIVITY; COMPLAINANT'S REPORT OF HER BELIEF THAT INSIDER TRADING HAD OCCURRED AS A REASONABLE BELIEF THAT A SOX-RELATED VIOLATION MAY HAVE OCCURRED
In Reines v. Venture Bank and Venture Financial Group, 2005-SOX-112 (ALJ Mar. 13, 2007), the Complainant, the former CFO for Respondent, alleged that she engaged in protected activity under SOX when she notified her supervisor, along with the Respondent's Stock Oversight Committee, "of her belief that the price [her supervisor] sought for 45,000 shares of stock he offered for repurchase by the Respondent was ‘excessive as an inside trade.'" Reines, slip op. at 43, 46. The Respondent argued that the Complainant's objection to the offered share price was not a "report" to someone with investigation authority that the Respondents were "engaging in an actual or suspected legal violation, or about to commit fraud." Id. at 46.
The ALJ held that the Complainant engaged in a protected activity. Reines at 48. He stated that "Complainant ‘provided information' and/or ‘caused information to be provided' to [her supervisor], who is ‘a person with supervisory authority' over her, by refusing to approve his proposed transaction and alerting him of her belief that the price he requested was not the fair market value of the stock." Id. at 46. He also held that the Complainant provided information about her concerns to the Stock Oversight Committee and the Board of Directors, both entities enabled to "investigate, discover or terminate misconduct" under SOX. Id. at 46. Finally, he held that although the Complainant did not utilize the Respondent's formal whistleblower policy, she still engaged in protected activity "as she brought her concerns to the attention of appropriate authorities." Id. at 47.
In reaching his conclusion, the ALJ also noted that the Complainant reasonably believed that a SOX law could be violated, and that the Complainant was reasonable in her belief that share prices were inflated and transactions unfavorable to the Respondent's shareholders may have occurred. Reines, slip op. at 47. The ALJ observed that the Respondent had created its Stock Oversight Committee in response to similar concerns the Complainant had raised a year before. Id. at 47. Such a remedial action taken by the Respondent, he said, further supported the reasonableness of the Complainant's concerns a year later. Id. at 47. Finally, the ALJ stated that there was no dispute as to whether the Respondent was aware of the Complainant's activity. Id. at 48.
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