iThe first showing that a corporate whistleblower must make to receive protection under SOX is that he engaged in protected whistleblowing, also known as protected conduct or protected activity.
Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation regarding any conduct disclosing conduct that they reasonably believe violates:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders
when the information or assistance is provided to or the investigation is conducted by:
- a federal regulatory or law enforcement agency;
- any Member of Congress or any committee of Congress; or
- a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct).
Significantly, SOX protects internal disclosures, such as an employee raising a concern to a supervisor about misleading financial data in a SEC filing.
SOX also prohibits retaliation for filing, causing to be filed, or otherwise assisting in a proceeding filed or about to be filed relating to:
- federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
- any rule or regulation of the Securities and Exchange Commission (“SEC”); or
- any provision of federal law relating to fraud against shareholders.
Is a SOX whistleblower required to establish an actual violation of one of the enumerated categories of protected whistleblowing in Section 806?
A SOX retaliation plaintiff need not demonstrate that they disclosed an actual violation of securities law; only that they reasonably believed that their employer was defrauding shareholders or violating an SEC rule. Indeed, a reasonable but mistaken belief is protected under SOX. “To demonstrate that a plaintiff engaged in a protected activity, a plaintiff must show that [s]he had both a subjective belief and an objectively reasonable belief that the conduct [s]he complained of constituted a violation of relevant law.”
Requiring a SOX complainant to demonstrate that they disclosed an actual violation is contrary to Congressional intent in that the legislative history of Section 806 specifically states that the reasonableness test “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.”
Is a SOX whistleblower required to prove shareholder fraud?
No. A complainant need not allege or prove shareholder fraud to receive SOX’s protection. SOX was enacted to address “corporate fraud generally,” and so a reasonable belief that a violation of “any rule or regulation of the Securities and Exchange Commission” could lead to fraud is protected, even if the violation itself is not fraudulent. For example, SOX protects a disclosure about deficient internal controls over financial reporting, even though there is no allegation of actual fraud.
As the Third Circuit held, SOX is meant to “protect people who have the courage to stand against institutional pressures and say plainly, ‘what you are doing here is wrong’ . . . in the particular way identified in the statue at issue.” An employee has fulfilled that purpose if they disclose conduct that is within the “ample bounds” of the anti-fraud statutes. Such an employee is therefore protected even if they lacked “access to information sufficient to form an objectively reasonable belief” as to the specific elements of fraud. And they are similarly protected even if their belief is “reasonable but mistaken.”
Does SOX protect whistleblowing about potential violations of federal securities laws?
Yes. Complaints about potential securities law violations may be protected under the whistleblower-protection provision of SOX. “A whistleblower complaint concerning a violation about to be committed is protected as long as the employee believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern.”
As a New York federal judge recently pointed out, limiting SOX whistleblower protection to disclosures of actual fraud “would lead to absurd results” by encouraging an employee to delay blowing the whistle until a potential violation has ripened to an actual violation. Section 806 was “designed to encourage insiders to come forward without fear of retribution,” and therefore “[i]t would frustrate the purpose of Sarbanes-Oxley to require an employee, who knows that a violation is imminent, to wait for the actual violation to occur when an earlier report possibly could have prevented it.”
Are SOX whistleblower required to show that their disclosures relate “definitively and specifically” to a federal securities law?
To be protected under SOX, an employee’s report “need not ‘definitively and specifically’ relate to one of the listed categories of fraud or securities violations in § 1514A.”
Whistleblowers are protected if they show that they reasonably believed that the conduct they complained of violated one of the enumerated violations in Section 806. Whistleblowers are not required, however, to tell management or the authorities why their beliefs are reasonable. Nor must their disclosures allege, prove, or approximate the elements of fraud.
All that SOX requires an employee to do is prove that they “reasonably believed” that their employer violated or is about to violate federal law. The focus here is “on the plaintiff’s state of mind rather than on the defendant’s conduct.” This rule is informed by the court’s recognition that, because “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers,” an employee’s “belief” in their employer’s wrongdoing is “central” to the analysis of SOX-protected conduct.
A Sixth Circuit opinion in a SOX case demonstrates the importance of broadly construing SOX protected conduct. In Rhinehimer v. U.S. Bancorp Investments, Inc,. the plaintiff Michael Rhinehimer alerted one of his superiors to unsuitable trades that a coworker made to the detriment of an elderly client. In response, Mr. Rhinehimer’s manager gave him a written warning. The manager admitted that the warning was motivated by the fact that Mr. Rhinehimer’s complaint “prompted a FINRA investigation . . . and anybody associated with this was really feeling the heat.” According to Mr. Rhinehimer, the manager then admonished Mr. Rhinehimer that if he sued the bank, then his career in the city would be over. U.S. Bancorp Investments (“USBII”) placed Mr. Rhinehimer on a performance-improvement plan requiring him to increase his monthly revenue to $40,000. Shortly thereafter, the bank fired him.
At trial, a jury found that USBII disciplined and fired Mr. Rhinehimer in deliberate retaliation for raising his concerns about the unsuitable trades. On appeal, USBII argued that Mr. Rhinehimer was required to establish facts from which a reasonable person could infer each of the elements of an unsuitability-fraud claim. These elements include the misrepresentation or omission of material facts, and that the broker acted with intent or reckless disregard for the client’s needs.
The Sixth Circuit, however, held that SOX protects “all good faith and reasonable reporting of fraud,” with a focus on “employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Therefore, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines this purpose and conflicts with the statutory design.” The Sixth Circuit affirmed the jury verdict because there was sufficient evidence to sustain the jury’s finding that Mr. Rhinehimer reasonably believed that certain trades constituted unsuitability fraud. A contrary result would have resulted in employees—due to lack of tangible evidence—refraining from reporting fraud until after investors have already been harmed.
Does SOX-protected conduct require a showing of materiality?
Generally, no. The great weight of authority holds that there is no independent materiality element to establish protected whistleblowing under Section 806 of SOX.
For example, in Donaldson v. Severn Sav. Bank, F.S.B., Vanessa L. Donaldson brought a SOX whistleblower action against her former employer, Severn Savings Bank (“Severn”), claiming she was unlawfully terminated after she reported to her supervisor her suspicions about an inaccurate bank report. Specifically, Ms. Donaldson alleged that she informed her supervisor about a scheme in which the commercial/retail manager for Ms. Donaldson’s branch falsified the retail production report for the third quarter of 2013, in order to collect unearned bonus pay.
Severn argued that Ms. Donaldson failed to allege she engaged in protected activity because she failed “to allege any facts whatsoever that would indicate any material misrepresentations (or omissions) were reported to Severn’s shareholders,” and so she lacked an objectively reasonable belief that she was disclosing shareholder fraud. The court rejected Severn’s narrow construction of SOX:
[T]he federal criminal fraud statutes . . . prohibit the scheme to defraud, not a completed fraud. . . .
Materiality of falsehood . . . was a common-law element of actionable fraud at the time these fraud statutes were enacted and is an incorporated element of the mail fraud, wire fraud, and bank fraud statutes. . . . But § 1514A carries no independent materiality element. Consequently, Donaldson’s objective belief need not be about a material matter, as Severn has argued. Rather, her objective belief must be based on facts permitting an inference that [the manager’s] allegedly false representation was material to Severn’s course of conduct.
The court found that Ms. Donaldson met this standard because the manager’s alleged inflation of the retail production figures was intended to, and likely would, affect the size of a bonus awarded him by Severn. Therefore, the court concluded, “it may be inferred from Donaldson’s complaint that she had an objectively reasonable belief that [the manager was] engaged in a scheme to defraud Severn.”
What are some types of proof to show that a disclosure is objectively reasonable?
Some of the options for a SOX whistleblower to prove that their disclosure was objectively reasonable include showing that the SEC had previously taken enforcement action to penalize conduct similar to that which the whistleblower opposed, and offering expert witness or coworker testimony indicating that other employees shared or agreed with the whistleblower’s concern.
A 2016 unpublished Fourth Circuit decision in Deltek, Inc. v. Dep't of Labor underscores the importance of coworker testimony in proving the objective reasonableness of a disclosure. In this case, soon after starting a new job in the IT department of Deltek Inc., Ms. Gunther noticed a lack of clear procedure and documentation for Deltek’s billing disputes with Verizon Business. Ms. Gunther suspected that Deltek employees were subjecting Verizon to unfounded billing disputes in order to conceal a shortfall in Deltek’s telecommunications budget.
Ms. Gunther’s coworker, who was responsible for managing the billing relationship between Deltek and Verizon, agreed with her concerns, after which Ms. Gunther then reported to her immediate supervisor. Soon thereafter, Ms. Gunther began to experience hostility at work. She then escalated her concerns of ongoing fraud in a letter to Deltek’s general counsel, which she copied to the SEC. Deltek’s general counsel met with Ms. Gunther and asked her to gather information about her concerns. The general counsel then investigated Ms. Gunther’s report and found that no improper activity had occurred. Despite this, Ms. Gunther witnessed her coworkers shredding documents.
Eventually, Ms. Gunther was fired for being “confrontational and disruptive.” Deltek argued that Ms. Gunther’s belief that Deltek was violating securities laws was not objectively reasonable because she lacked the education and experience necessary to recognize securities fraud; she, in fact, did not have a college degree. The Fourth Circuit rejected this argument, stating that a determination of the reasonableness of Ms. Gunther’s belief warranted consideration of the “factual circumstances,” including information that Ms. Gunther learned from coworkers. The court agreed with the administrative law judge’s (ALJ’s) determination that “in forming her belief Gunther reasonably relied on her close dealings with [her coworker], who did have extensive experience in Verizon invoicing . . . [and] who was himself a ‘credible, convincing witness at the hearing.’” Therefore, the Fourth Circuit held Ms. Gunther’s belief that Deltek was violating securities laws as reasonable.
Are disclosures made in the course of performing one’s job duties protected?
A consensus is emerging that the duty speech doctrine does not apply to SOX whistleblower claims. The duty speech defense asserts that disclosures made while performing routine job duties are outside the ambit of protected conduct. The defense became increasingly popular in the wake of the Supreme Court’s 2006 decision in Garcetti v. Ceballos, which held that government employees cannot not bring First Amendment whistleblower retaliation claims based on work-related speech if the speech is part of their job duties.
Most Department of Labor (DOL) ALJs addressing this issue have declined to apply Garcetti to SOX claims. For example, Judge Lee Romero Jr. concluded that “one’s job duties may broadly encompass reporting of illegal conduct, for which retaliation results. Therefore, restricting protected activity to place one’s job duties beyond the reach of the Act would be contrary to congressional intent.”
Recently, a New York district court held in Yang v. Navigators Grp., Inc. that the duty speech defense is inapplicable to SOX claims. Jennifer Yang worked as the chief risk officer for Navigators Group (“Navigators”), an insurance company. Ms. Yang alleged that Navigators terminated her employment for disclosing to her supervisor deficient risk management and control practices. Navigators moved to dismiss Ms. Yang’s SOX claim in part on the basis that Yang’s disclosures about risk issues were “part and parcel of her job.” The court rejected this duty speech argument, relying on a 2012 district court decision holding that “whether plaintiff’s activity was required by job description is irrelevant.”
No: a whistleblower’s motives for engaging in protected conduct are irrelevant, per longstanding ARB precedent. The whistleblower need only have a reasonable belief that the conduct violates federal securities laws or the other categories of protected conduct in Section 806 of SOX.
Does SOX protect disclosures about fraud on the government or gross mismanagement of a federal contract or grant?
In certain circumstances, such disclosures could be protected under SOX, such as massive Medicare fraud that could result in a publicly traded company’s debarment from the Medicare program. But generally such disclosures are actionable under two whistleblower protection statutes: 1) the anti-retaliation provision of the False Claims Act; and 2) the National Defense Authorization Act (NDAA) whistleblower provisions. Click here to find out more about those whistleblower protection laws.
Are disclosures about consumer financial fraud protected under SOX?
Certain disclosures about consumer financial fraud can be actionable under SOX. In addition, the whistleblower protection provision of the Consumer Financial Protection Act (CFPA) protects disclosures to the Consumer Financial Protection Bureau (CFPB) or any local, state, or federal government authority or law enforcement agency concerning any act or omission that the employee reasonably believes to be a violation of any CFPB regulation or any other consumer financial protection law that the Bureau enforces. This includes several federal laws regulating unfair, deceptive, or abusive practices related to the provision of consumer financial products or services.
Is there some variation in how courts interpret the scope of SOX protected whistleblowing?
In recent years, a general consensus has emerged at the DOL and in federal courts about the broad scope of protected conduct under SOX. But some judges are determined to construe SOX narrowly and to impose burdens on SOX whistleblowers that are inconsistent with the plain meaning of the statute. Therefore, prior to invoking the option to remove a SOX complaint to federal court, it is important to research recent opinions in the relevant circuit concerning the scope of protected conduct.
To learn more about SOX whistleblower law, download the new eBook Sarbanes-Oxley Whistleblower Law: Robust Protection for Corporate Whistleblowers.
Chapter 1 -Whistleblowers Protected by the Sarbanes-Oxley Act: SOX Whistleblowers
Chapter 2- Elements of a SOX Whistleblower Retaliation Claim
1 Wiest v. Lynch, 710 F.3d 121, 132 (3d Cir. 2013)
2 Leshinsky v. Telvent GIT, S.A., 942 F.Supp.2d 432, 444 (S.D.N.Y.2013) (internal quotation
marks and citations omitted).
3 Legislative History of Title VIII of HR 2673: The Sarbanes-Oxley Act of 2002, Cong. Rec.
S7418, S7420 (daily ed. July 26, 2002), available at 2002 WL 32054527.
4 Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123, at 19 (ARB May 25, 2011).
5 Wiest, 710 F.3d at 132.
6 Sylvester v. Parexel, ARB Case No. 07-123, 2011 WL 2165854 at *13 (DOL May 25, 2011).
7 Murray v. UBS Securities, LLC, 2017 WL 1498051 (S.D.N.Y. Apr. 25, 2017).
8 Id. (citations omitted).
9 Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 224 (2d Cir. 2014)
10 Murray, 2017 WL 1498051, at *10.
11 Id., at *10 (quoting Guyden v. Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008), superseded on
other grounds by statute).
12 Id., at *9 (quoting Nielsen, 762 F.3d at 221 (alterations in original)).
13 Rhinehimer v. U.S. Bancorp Invs., Inc., 787 F.3d 797 (6th Cir. 2015).
14 No. JKB-15- 901, 2015 WL 7294362, at *3 (D. Md. Nov. 18, 2015).
15 Id. at *3 (citations omitted).
16 Id.
17 See Deltek, Inc. v. Dep’t of Labor, Admin. Review Bd., No. 14-2415, 2016 WL 2946570 (4th
Cir. May 20, 2016).
18 See, e.g., Robinson v. Morgan Stanley, ARB Case No. 07-070, 2010 WL 348303, at *8 (Jan.
10, 2010) (“[Section 1514A] does not indicate that an employee’s report or complaint about a
potential violation must involve actions outside the complainant’s assigned duties.”).
19 See Garcetti v. Ceballos, 547 U.S. 410, 422 (2006).
20 Deremer v. Gulfmark Offshore, Inc., ALJ Case No. 2006-SOX- 2, 2007 WL 6888110, at *42
(June 29, 2007).
21 See Yang v. Navigators Grp., Inc., 18 F. Supp. 3d 519, 530 (S.D.N.Y. May 8, 2014).
22 Id.
23 See id. at 531 (citing Barker v. UBS AG, 888 F. Supp. 2d 291, 297 (D. Conn. 2012)).
24 See Henderson v. Wheeling & Lake Erie Ry., ARB No. 11-013, ALJ No. 2010-FRS- 012, slip
op. at 14 (ARB Oct. 26, 2012); Malmanger v. Air Evac EMS, Inc., ARB No. 08-071, slip op. at
10-11, ALJ No. 2007-AIR- 8 (ARB July 2, 2009).
