The Intersection between the Sarbanes-Oxley and Dodd-Frank Acts: Qui Tam Whistleblower Rewards under SOX
On July 30, 2002 Congress passed the most sweeping enhancement of securities laws in a generation: The Sarbanes-Oxley Act (also commonly referred to as SOX). In signing the law, President George Bush called it "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt." SOX was a bi-partisan law that created the Public Company Accounting Oversight Board, enhanced the rules on financial disclosures and corporate accountability, increased rules governing auditors, and created numerous strict rules protecting investors. SOX also included a whistleblower retaliation provision. But SOX did not include a bounty law, or a whistleblower rewards provision. Despite this, whistleblowers who disclose violations of SOX are fully eligible for rewards if their disclosures result in the Commission awarding a sanction of $1 million or more for the reported violations.
The Senate Report on SOX (S. Rep. 107-205) described its major new provisions:
The purpose of the bill is to address the systemic and structural weaknesses affecting our capital markets which were revealed by repeated failures of audit effectiveness and corporate financial and broker-dealer responsibility in recent months and years. The bill creates a strong independent board to oversee the conduct of the auditors of public companies, and it strengthens auditor independence from corporate management by limiting the scope of non-audit services that auditors can offer their public company audit clients.
The bill also requires steps to enhance the direct responsibility of senior corporate management for financial reporting and for the quality of financial disclosures made by public companies. The bill establishes clear statutory rules to limit, and expose to public view, possible conflicts of interest affecting securities analysts.
In the context of whistleblowing most of the discussion regarding the SOX rules concerns Section 806 of the Act, which protects corporate whistleblowers from retaliation if they report potential securities violations to a wide range of entities, including the SEC, the Department of Justice, Congress, supervisors, and internal compliance officials. SOX also aimed to arm the Justice Department and the SEC with new authorities to target corporate crime. It contained two sections entitled as the Corporate and Criminal Fraud Accountability Act and the White-Collar Crime Penalty Enhancement Act. These two provisions significantly increased civil and criminal penalties for violations of securities laws. It expanded securities related criminal provisions, including sections related to mail fraud, wire fraud, conspiracy, destruction of documents, false statements on financial records, and false certifications.
In explaining why Congress was expanding the civil and criminal penalties covering securities frauds, the Judiciary Committee stated:
In the wake of the continuing Enron Corporation (‘‘Enron’’) debacle, the trust of the United States’ investors and pensioners in the nation’s stock market has been seriously eroded. This is bad for our markets, bad for our economy, and bad for the future growth of investment in American companies. This bill would play a crucial role in restoring trust in the financial markets by ensuring that the corporate fraud and greed may be better detected, prevented and prosecuted. While greed cannot be legislated against, the federal government must do its utmost to ensure that such greed does not succeed.
All of the provisions of SOX were incorporated into our nation’s securities law. The SOX statute itself empowered the Securities and Exchange Commission to issue regulations and enforce every provision of the SOX, criminal, civil or administrative. Congress’ intent to enlarge the jurisdiction of the Commission to cover all SOX violations was explicitly set forth in Section 3 of SOX:
SEC. 3. COMMISSION RULES AND ENFORCEMENT.
(a) REGULATORY ACTION. —The Commission shall promulgate such rules and regulations, as may be necessary or appropriate in the public interest or for the protection of investors, and in furtherance of this Act.
(1) IN GENERAL.—A violation by any person of this Act, any rule or regulation of the Commission issued under this Act, or any rule of the Board shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) or the rules and regulations issued thereunder, consistent with the provisions of this Act, and any such person shall be subject to the same penalties, and to the same extent, as for a violation of that Act or such rules or regulations.
Based on this provision it is clear that Congress intended SOX to be fully integrated into the general body of securities law, and explicitly empowered the Commission to enforce all of its provisions.
Eight years after enacting SOX, Congress passed the Dodd-Frank Act (“DFA”). That law expanded the whistleblower provisions originally included in SOX and created the qui tam or bounty provisions requiring the SEC to pay monetary awards to whistleblowers. In defining the scope of the DFA’s whistleblower provisions, Congress made clear that the scope of the DFA’s whistleblower provisions was not limited to violations of the Securities Exchange Act of 1934. Instead, Congress required the Commission to pay rewards for violations of every securities law within the jurisdiction of the SEC. Congress defined the scope of the whistleblower reward provisions as covering all “covered judicial or administrative action(s).” Congress then defined “covered judicial or administrative action(s)” extremely broadly. Section 21F(a)(1) of the DFA’s whistleblower law defined the scope of the whistleblower provision as follows: “The term ‘covered judicial or administrative action’ means any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000.” (emphasis added).
Consequently, whistleblowers are entitled to awards for any violation of the full range of statutes administered by the SEC, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act, the Investment Company Act, the Investors Advisory Act, the Jumpstart our Business Startups Act and the Sarbanes-Oxley Act.
Whenever a whistleblower files a case under the Sarbanes-Oxley Act, they must also consider whether or not the issues they identified may constitute violations of SOX or any of the other securities laws administered by the SEC. A SOX violation is a violation of the securities laws policed by the Dodd-Frank Act, and a SOX whistleblower may be fully entitled to a reward under the Dodd-Frank Act.
Additionally, a Sarbanes Oxley whistleblower who files a retaliation case before the U.S. Department of Labor can also file a Dodd-Frank Act retaliation case in federal court and join the two causes of action. This is made possible because the DFA and SOX retaliation provisions have two separate statutes of limitation. A SOX retaliation case must be filed with the U.S. Department of Labor within 180-days of when a whistleblower first learns that they have suffered an adverse action for which they want to seek a remedy. After filing the case within the DOL, a SOX whistleblower must exhaust his or her administrative remedies, but after exhausting these remedies, they can file their retaliation case in federal court.
Exhausting administrative remedies under SOX is easy. The whistleblower simply must file the initial case before the Department of Labor, respond to all orders issued by the DOL, and take no action to delay the DOL proceeding. One-hundred-and-eighty-days after filing the case with the DOL, the Sarbanes Oxley whistleblower is deemed to have exhausted administrative remedies and has an option to remove the case to federal court. The SOX anti-retaliation law states as follows:
[I]f the Secretary has not issued a final decision within 180 days of the filing of the complaint and there is no showing that such delay is due to the bad faith of the claimant, bringing an action at law or equity for de novo review in the appropriate district court of the United States, which shall have juris- diction over such an action without regard to the amount in controversy.
If the whistleblowers perform these fairly simple actions, the whistleblower can remove his or her case to federal court. This is when the SOX retaliation claim can be joined with the DFA retaliation claim. Dodd-Frank Act cases must be filed directly in U.S. District Court. Consequently, after a DOL case is removed to federal court a whistleblower can join the SOX case with a DFA case. The Dodd-Frank Act has a six-year statute of limitations for filing a whistleblower retaliation claim. Because of the staggered statutes of limitation, Congress made it relatively easy to join DFA and SOX wrongful discharge cases in federal court.
Joining a SOX and DFA case can have significant advantages for a whistleblower. The DFA has a narrow definition of a protected disclosure and requires that allegations be filed directly with the SEC. The SOX law expands that definition, and protects disclosures to supervisors, compliance officials, Congress, and other federal regulatory and law enforcement authorities. Moreover, the SOX law prohibits mandatory arbitration of whistleblower cases, a provision that does not exist with the DFA’s anti-retaliation law. Finally, the DFA requires that a wrongfully discharged whistleblower be paid double back pay, whereas the SOX only provides for single damages. By merging the two causes of action, a whistleblower can enhance his or her case and increase the potential damages that are awardable.
However, there may be very good reasons for adjudicating the SOX case within the Department of Labor, and the decision to remove a case to federal court and join a SOX case with a DFA case must be carefully weighed. For example, the Department of Labor procedures for adjudicating SOX retaliation cases are less expensive than filing a case in federal court, the hearings are far more informal, and many of the Labor Department judges who hear SOX cases have experience judging whistleblower cases.
Whistleblowers must read the SOX law and the DFA law together. Each law complements the other. SOX violations can trigger eligibility for rewards under the DFA. SOX retaliation cases can be joined with DFA retaliation cases, strengthening both causes of action. The decision as to how the DFA and SOX whistleblower laws may be used together can only be decided on a case-by-case basis. Regardless, the key to using these two laws is to ensure that the different filing procedures mandated under these laws are scrupulously followed. Both laws have radically different rules governing how to file a claim. The failure to follow these rules can inadvertently result in the waiver of significant rights, the loss of an employment case, or forfeiting a potential multi-million-dollar reward.