FCPA Whistleblower Protection
The books and records provisions of the FCPA amended the Securities Exchange Act to add 1) anti-bribery provisions and 2) auditing and accounting provisions. The accounting provisions of the Securities Exchange Act and the corresponding SEC rule make it a crime for issuers of registered securities and those required to file reports under section 13(b) of the Act to falsify books, records, and accounts. 15 U.S.C. § 78m(b)(2)(A), (b)(5), 78ff(a); 17 C.F.R. § 240.13b2-1.
The SEC books and records rule states:
“No person shall directly or indirectly, falsify or cause to be falsified, any book, record or account subject to section 13(b)(2)(A) of the Securities Exchange Act.” 17 C.F.R. § 240.13b2-1. Section 806 of SOX protects employees from retaliation for “provid[ing] information, caus[ing] information to be provided, or otherwise assist[ing] in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of . . . 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.
In Erhart v. Bofi Holding, the District Court for the Southern District of California concluded that disclosures of potential violations of the SEC books and records rule and the corresponding FCPA provision can constitute SOX-protected activity. No. 15-cv-02287-BAS-NLS (S.D. Cal. Mar. 31, 2020). Citing a Northern District decision, the court explained that the FCPA’s books and records provision prohibits corporate officers from “falsifying a particular type of book or record.” and that falsifying corporate accounting to underreport corporate expenses implicates the FCPA books and records provisions. Id. at *24 (citing United States v. Jensen, 532 F. Supp. 2d 1187, 1196 (N.D. Cal. 2008)) (internal quotations omitted). Where a corporate officer falsifies a record that “reflect[s] the transactions and dispositions of the assets of the issuer,” the officer has violated the FCPA. Id. (citing Jensen, 532 F. Supp. at 1196-97 (quoting 15 U.S.C. § 78m(b)(2)(A))) (internal quotations omitted).
The Erhart court also relied on Wadler v. Bio Rad Labs, Inc., where the Ninth Circuit held that a reasonable jury could find that the plaintiff has an objectively reasonable belief that his employer had falsified books and records. Id. (citing 916 F.3d 1176, 1198 (9th Cir. 2019)). In Wadler, Bio Rad’s general counsel internally reported in a memo various instances where the company’s shipping documents did not match billing documents. Wadler, 916 F.3d at 1188. The court found that where the plaintiff knew of this issue and various other possible FCPA violations and “red flags,” including the company shipping free products, there was sufficient evidence to support Wadler’s reasonable belief that his employer had falsified books and records. Id. Although it found that the district court had improperly instructed the jury that the FCPA books and records provision is a “rule or regulation” of the SEC for purposes of § 806 of SOX, the Ninth Circuit found that the FCPA books and records provision is also an SEC rule or regulation and therefore comes within the ambit of SOX protected conduct. Id. at 1185 (explaining that the FCPA is a statute, and while the words “rule” or “regulation” could include a statute when read in isolation, in the context of the plain language of § 806, the words only refer to administrative rules or regulations of the SEC).
In Erhart, as in Wadler, the court explained that the FCPA books and records provision forbidding the falsification of books, records, and accounts is also an SEC regulation, and § 806 of SOX protects reporting a violation of any SEC rule or regulation. Erhart, No. 15-cv-02287-BAS-NLS at *25 (citing 18 U.S.C. § 1514A; Wadler, 916 F.3d at 1185). The FCPA and SEC provisions prohibit “the falsification of a corporate record that is necessary to accurately and fairly reflect the transactions and dispositions of the assets of the company in reasonable detail.” Id. Because the SEC books and records rule is a rule or regulation of the SEC, reporting a violation of that rule is protected by SOX. And because this SEC rule directly corresponds to an FCPA books and records provision, reporting violations of that FCPA books and records provision is SOX-protected activity.
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