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.

Sarbanes-Oxley Whistleblower Protection Law

We represent corporate whistleblowers nationwide in high-stakes whistleblower retaliation cases and have obtained substantial recoveries for CEOs, CFOs, auditors, accountants, risk managers, CISOs, and other executives and senior professionals.  We have recovered more than $15 million for corporate whistleblowers and have obtained settlements in excess of one million dollars in at least five SOX matters. Click here to read reviews from senior executives and professionals that we represented in whistleblower retaliation matters.

To learn more about the Sarbanes-Oxley corporate whistleblower protection law, download our free guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.

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We are also one of the leading law firms representing whistleblowers worldwide before the SEC, and indeed our attorneys represented whistleblowers at the SEC before the enactment of the Dodd-Frank Act. We helped shape the SEC rules implementing the SEC Whistleblower Program, and have represented whistleblowers in disclosing a wide range of violations of federal securities laws, including:

See our recent article in Forbes: One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective.  If you have information that you would like to report to the SEC, contact an experienced SEC whistleblower attorney at Zuckerman Law for a free, confidential consultation by calling 202-262-8959.

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Why Hire Leading SOX Whistleblower Law Firm Zuckerman Law

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  • Our team of leading whistleblower lawyers includes a Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor.  Prior to becoming a lawyer, Matt Stock developed an expertise in financial statement analysis, internal controls testing and fraud recognition.  He uses his auditing experience to help IRSCFTC and SEC whistleblowers investigate and disclose complex financial frauds to the government.
  • Both Eric Bachman and Jason Zuckerman were appointed by the Secretary of Labor to serve on the Department of Labor’s Whistleblower Protection Advisory Committee, which makes recommendations to improve OSHA’s administration of federal whistleblower protections.
  • Bachman and Zuckerman also served in senior positions at the U.S. Office of Special Counsel, the federal agency charged with protecting whistleblowers in the federal government.  At OSC, they oversaw investigations of whistleblower claims and enforced the Whistleblower Protection Act.
  • Jason Zuckerman was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2018, 2015, 2009, and 2007 selected by his peers to be included in The Best Lawyers in America® in the category of employment law (2011-2020), and selected by his peers to be listed in SuperLawyers (2012 and 2015-2020) in the category of labor and employment law.  He is rated 10 out of 10 by Avvo, based largely on client reviews, and rated AV Preeminent® by Martindale-Hubbell based on peer reviews.
  • Eric Bachman has substantial experience litigating precedent-setting employment cases.  His wins include a $100 million settlement in a disparate impact Title VII class action and a $16 million class action settlement against a major grocery chain.  Having served as Special Litigation Counsel in the Civil Rights Division of the Department of Justice and as lead or co-counsel in numerous jury trials, Bachman is trial-tested and ready to fight for you to obtain the relief that you deserve.
  • The firm has published extensively on whistleblower rights and protections, and regularly speaks nationwide at seminars and continuing legal education conferences.  We blog about new developments in whistleblower law at the Whistleblower Protection Blog.

Client Reviews from Executives and Senior Professionals in SOX Whistleblower Retaliation Matters

“Jason is the consummate professional when it comes to SOX retaliation claims. He is, without question, one of the most deeply knowledgeable, technical, and astute attorneys in this very specialized body of law. During one of the most difficult times in my professional career, Jason not only provided exceptional legal guidance, but equally as important, he provided emotional support that was vital to my family and me. Jason ran circles around the “major national law firm” team that was assigned to defend my employer. In fact, Jason made them look silly at times. Jason always advocated my best interests, not his own.  Jason is not only an exceptional attorney who helped my family to achieve a favorable outcome, but he is a friend. I’ve worked with major law firms throughout my career and when it comes to SOX and employment law matters, there is not a finer, more talented attorney than Jason Zuckerman.”

“Jason is everything you could possibly ask for an an attorney: highly intelligent, thoughtful, and extraordinarily knowledgeable in his specialty of the law. In a very short period of time Jason was able to assimilate a laundry list of details and offer a compelling strategy on how to effectively proceed.  Moreover, he is extremely responsive.”

“Jason did an exceptional job in quickly understanding the intricacies of my case, grasping not only his field of expertise of employment law, but also the violations of law and SEC Regulations that were central to my dispute. The overall strategy he utilized insured that opposing counsel was challenged and made clear that this case would simply not proceed based on a timetable convenient to them. Jason is thorough, accurate and seemingly working at all hours based on phone calls and correspondence. Fortunately Jason has a very down to earth personality, understands issues readily and can convey in understandable language current “legal” circumstances and probable outcomes. I would easily and thoroughly recommend Jason for issues related to a Sarbanes-Oxley or employment related dispute.”

“I selected Jason to handle my case after consulting with three other lawyers because of his extensive SOX experience and negotiation skills. My decision paid off as he easily surpassed all of my expectations. He quickly analyzed the merits of my case and aggressively engaged my former employer to reach a favorable settlement, avoiding years of potential litigation. He was responsive, professional, ethical and a great advocate on my behalf. I truly believe that I could not have found a better lawyer to represent my interests. He would be the first person I would recommend if a colleague or friend were to ever need similar services. Put simply, Jason is a top notch lawyer who works tirelessly to achieve a positive outcome for his clients. It’s easy to see why he is regarded as an expert in the field.”

“Jason Zuckerman is the most focused, thoughtful and aggressive attorneys I have ever known, let alone had the pleasure to have on my side in a highly complex legal case. He brought well-honed legal insights and a rapid pace to our legal preparations. He forcefully brought those preparations to the opposing side, which gave them little choice but to engage with us until a positive settlement was reached. In addition, we found Jason to be extremely responsive at every step, even if it required working past midnight. His character is beyond reproach and his dedication through the entire process was unwavering. If I ever need someone in my legal court again, I won’t hesitate for even a second, before I seek Jason’s support.”

Jason Zuckerman, Principal of Zuckerman Law, litigates whistleblower retaliation, qui tam, wrongful discharge, and other employment-related claims. He is rated 10 out of 10 by Avvo, was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” in 2015 and selected by his peers to be included in The Best Lawyers in America® and in SuperLawyers.