Image of Does the Sarbanes-Oxley Act protect whistleblowing about potential violations of federal securities laws?

Does the Sarbanes-Oxley Act protect whistleblowing about potential violations of federal securities laws?


SOX Whistleblower Law Protects Disclosures About Potential Violations of Federal Securities Laws

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.[i] 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.”[ii]

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.”[iii]

“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.”[i]

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.[ii] 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.”[iii]  As the purpose of SOX is to protect and encourage greater disclosure, only providing whistleblower protection to individuals exposing existing fraud would be counterproductive, as the harm SOX seeks to deter would need to be occurring for the protection to attach. Stewart v. Doral Financial Corp.997 F.Supp.2d 129 (2014).  See also Ronnie v. Office Depot, Inc., ARB No. 2019-0020, slip op. at 4 (ARB Sept. 29, 2020)(A complainant does not need to show that he reported an actual violation, but “can engage in protected activity when he reports a belief of a violation that is about to occur or is in the stages of occurring.”).

The ARB has held that where a government investigation failed to substantiate a whistleblower’s disclosure, the whistleblower can still demonstrate that they had an objectively reasonable belief that there was a violation.  In Menendez v. Halliburton, Inc., ARB No. 09-002-003, ALJ No. 2007-SOX-5, at 13-14 (ARB Sept. 13, 2011), the complainant believed that his employer Halliburton was not complying with accounting standards related to revenue recognition. His disclosures prompted two internal investigations and an SEC investigation.  The SEC ultimately approved of the accounting methods. The ARB upheld the ALJ’s finding that Menendez’s belief was both subjectively and objectively reasonable, cautioning that the fact that an agency found there was no violation of the relevant law does “not necessarily” undermine the reasonableness of the belief. Id. at 13-14.

In Sylvester, the ARB clarified the low bar to establish protected conduct:

Notwithstanding the above, a violation of a law cited in Section 1514A need not actually occur for a complainant’s report to be SOX-protected activity. A whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably 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. See, e.g., Melendez, ARB No. 96-051, slip op. at 21 (“It is also well established that the protection afforded whistleblowers who raise concerns regarding statutory violations is contingent on meeting the aforementioned ‘reasonable belief’ standard rather than proving that actual violations have occurred.”); Crosby v. Hughes Aircraft Co., 1985-TSC-002, slip op. at 14 (Sec’y Aug. 17, 1993) (required reasonable belief that the employer “was violating or about to violate the environmental acts”). Accord Yellow Freight Sys., Inc. v. Martin, 954 F.2d 353, 357 (6th Cir. 1992) (protection under Surface Transportation Assistance Act not dependent upon whether complainant proves a safety violation); Collins, 334 F. Supp. 2d at 1376. Consistent with this line of authority, the ARB has held that an employee’s whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer’s conduct constitutes a violation of one of the six enumerated categories of law under Section 806. See, e.g., Halloum v. Intel Corp., ARB No. 04-068, ALJ No. 2003-SOX-007, slip op. at 6 (ARB Jan. 31, 2006).

Similarly, the Third Circuit concluded in In Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013):

To hold that an employer could not have suspected that the plaintiff was engaged in protected activity because the communication did not recite facts showing an objectively reasonable belief in the satisfaction of each element of one of the listed anti-fraud provisions would eviscerate § 806. An employee may not have access to information necessary to form a judgment on certain elements of a generic fraud claim, such as scienter or materiality, and yet have knowledge of facts sufficient to alert the employer to fraudulent conduct. When an employee communicates these facts to a supervisor, the employer has a sufficient basis to suspect that the employee is protected against reprisal for communicating that information.

[i] Sylvester v. Parexel, ARB Case No. 07-123, 2011 WL 2165854 at *13 (DOL May 25, 2011).

[ii] Murray v. UBS Securities, LLC, 2017 WL 1498051 (S.D.N.Y. Apr. 25, 2017).  See also Gladitsch v. Neo@ogilvy, Ogilvy, Mather WPP Group USA Inc., 2012 U.S. Dist. LEXIS 41904 at *22-23 (S.D.N.Y. 2011) (“The employee’s protected activity need not describe an actual violation of the law, as long as it is based on a reasonable, even if mistaken, belief that the employer violated one of these enumerated categories.”).

[iii] Id. (citations omitted).

[i] Wiest v. Lynch, 710 F.3d 121, 132 (3d Cir. 2013)

[ii] Leshinsky v. Telvent GIT, S.A., 942 F.Supp.2d 432, 444 (S.D.N.Y.2013) (internal quotation marks and citations omitted).

[iii] 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.

And as noted in Van Elswyk v. RBS Securities, Inc., (D. Conn. Aug. 9, 2017):

“The objective prong of the reasonable belief test focuses on the `basis of knowledge available to a reasonable person in the circumstances with the employee’s training and experience.'” Nielsen, 762 F.3d at 221 (quoting Sharkey v. J.P. Morgan Chase & Co., 805 F. Supp. 2d 45, 55 (S.D.N.Y. 2011)). Of course, “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers.” Id. As several circuit courts have made clear, “[i]f reasonable minds could disagree on this issue, the objective reasonableness of an employee’s belief should not be decided as a matter of law. . . .” Allen v. Admin. Rev. Bd., 514 F.3d 468, 477-78 (5th Cir. 2008) (citing Lipphardt v. Durango Steakhouse of Brandon, Inc., 267 F.3d 1183, 1188 (11th Cir. 2001); Fine v. Ryan Int’l Airlines, 305 F.3d 746, 752-53 (7th Cir. 2002)).

Finally, as the Sixth Circuit has held, “[t]he well-established intent of Congress supports abroad reading of the statute’s protections.”  Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797, 810 (6th Cir. 2015);  Rather, “[t]he well-established intent of Congress supports abroad reading of the statute’s protections.” Id. Accordingly, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines [Sarbanes-Oxley’s] purpose and conflicts with the statutory design, which turns on employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Id.

As the 10th Circuit held in Reznik v. inContact, Inc.,  — F.4th —-2021 WL 5625781 (10th Cir. Dec 1, 2021), objective reasonableness does not require a showing of an actual violation: 

    Other circuits have also considered attendant circumstances alongside the law in evaluating objective reasonableness in Title VII retaliation cases. See E.E.O.C. v. Rite Way Serv., Inc., 819 F.3d 235, 240 (5th Cir. 2016); Boyer-Liberto v. Fontainebleau Corp., 786 F.3d 264, 282–83 (4th Cir. 2015) (en banc) (majority opinion); Kelly v. Howard I. Shapiro & Assocs. Consulting Eng’rs, P.C., 716 F.3d 10, 14–17 (2d Cir. 2013) (per curiam). We find those decisions instructive.

    In Boyer-Liberto v. Fontainebleau Corp., the Fourth Circuit evaluated a Title VII retaliation claim where a white employee had twice called a night club server a “porch monkey.” 786 F.3d at 269–70. “[W]ith guidance from the Supreme Court [in Breeden],” the court considered what standard should determine when an employee’s belief that certain conduct violates Title VII is reasonable. Id. at 284. The court required a “lesser showing” than necessary to meet the legal standard of establishing an actual hostile work environment claim. Id. at 285. As in Breeden, the plaintiff’s belief was “based on an isolated incident.” Id. at 284. Thus, the court considered the severity of the harassment, which involved factors relevant to the legal standard “used to judge whether a workplace is sufficiently hostile or abusive for purposes of a hostile environment claim — specifically, whether the discriminatory conduct ‘is physically threatening or humiliating, or a mere offensive utterance.’ ” Id. at 284 (quoting Harris v. Forklift Sys., Inc., 510 U.S. 17, 23, 114 S.Ct. 367, 126 L.Ed.2d 295 (1993)). The court decided that the plaintiff’s belief was objectively reasonable because “ ‘porch monkey’ is a racial epithet that is not just humiliating, but is degrading and humiliating in the extreme.” Id. at 285 (quotation and citation omitted).
    In E.E.O.C. v. Rite Way Serv., Inc., the Fifth Circuit also applied a test for determining the objective reasonableness of a plaintiff’s belief that accounted for the “zone of conduct that falls short of an actual violation but could be reasonably perceived to violate Title VII.” 819 F.3d at 242. The court considered several factors: (1) whether the harasser directed conduct at a specific employee; (2) whether a supervisor’s conduct is involved; (3) the context of the conduct, such as understanding multiple incidents in light of one another; and (4) “the setting in which [the plaintiff] voiced her complaint,” that is, whether the employer informed the plaintiff of its sexual harassment policies and what those policies included. See id. at 243–44. These factors were relevant because they drew upon conceptions (from caselaw) about what influences people’s reasonable beliefs in the workplace. See id. at 242–44.

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