Is a SOX whistleblower required to prove shareholder fraud?
A SOX 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.[i] In Sylvester, the ARB emphasized the purpose of Section 806 of SOX is “to protect and encourage greater disclosure” by exposing existing fraud as well as potentially fraudulent behavior, expressing a concern that “the purposes of the whistleblower protection provision will be thwarted if a complainant must, to engage in protected activity, allege, prove, or approximate” the substantive elements of a given category of 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.”[ii] 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.”
Finally, the plain meaning of Section 806 unambiguously covers more than just disclosures concerning shareholder fraud:
Section 1514A states, in pertinent part, that a publicly traded company may not retaliate against an employee who provides information that the employee “reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, 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(a)(1). Section 1514A contains six provisions that enumerate six specific forms of misconduct which, if reported by an employee, protect the whistleblower from employer retaliation: (1) § 1341 (mail fraud); (2) § 1343 (wire fraud); (3) 18 U.S.C. § 1344 (bank fraud); (4) 18 U.S.C. § 1348 (securities fraud); (5) any rule or regulation of the SEC; or (6) any provision of federal law relating to fraud against shareholders. The first four provisions are statutes that, as written by Congress, are not limited to types of fraud related to SOX. By listing certain specific fraud statutes to which § 1514A applies, and then separately, as indicated by the disjunctive “or”, extending the reach of the whistleblower protection to violations of any provision of federal law relating to fraud against securities shareholders, § 1514A clearly protects an employee against retaliation based upon the whistleblower’s reporting of fraud under any of the enumerated statutes regardless of whether the misconduct relates to “shareholder” fraud.
O’Mahony v. Accenture Ltd and Accenture LLP, 07 Civ. 7916 (S.D.N.Y. Feb. 5, 2008).
A complainant need not establish the elements required in a securities fraud action or describe an actual violation of law to demonstrate a reasonable belief that an employer committed SOX-related misconduct. See Zinn v. American Commercial Lines, ARB No. 10-029, ALJ No. 2009-SOX-025, slip. op. at 8 (ARB May 28, 2012). A clear and reasonable belief about a violation of any SEC rule or regulation, even if devoid of any accusation of securities fraud, could constitute an objective belief. Id.
Courts have recognized that it would it be unfair to expect a plaintiff seeking to inform his boss of financial misbehavior to have a working knowledge of the United States Code. See, e.g., Sharkey v. J.P. Morgan Chase & Co., No. 10 Civ. 3824, 2011 WL 135026, at *6 (S.D.N.Y. Jan. 14, 2011) (explaining that, while “the employee’s communications must identify the specific conduct that the employee believes to be illegal,” a whistleblower “need not cite to a code section he believes was violated in his communications to his employer ….” (quoting Welch v. Chao, 536 F.3d 269, 275 (4th Cir.2008))); see also Fraser v. Fiduciary Trust Co. Intern., 417 F.Supp.2d 310, 322 (S.D.N.Y.2006) (holding that, “[w]hile general inquiries … do not constitute protected activity, a plaintiff “need not … cite a code section he believes was violated ….” (internal quotation marks and citation omitted)); Ashmore v. CGI Grp. Inc., No. 11 Civ. 8611(LBS), 2012 WL 2148899, at *6 (S.D.N.Y. June 12, 2012) (same); Gladitsch v. [email protected], No. 11 Civ. 919(DAB), 2012 WL 1003513, at *3, *7–8 (S.D.N.Y. Mar. 21, 2012) (plaintiff’s report that the defendant was “potentially defrauding the stockholders of the parent company” constitutes protected activity); Harp v. Charter Communications, Inc., 558 F.3d 722, 725 (7th Cir.2009) (“If the specific conduct reported was violative of federal law, the report would be sufficient to trigger Sarbanes–Oxley protection even if the employee did not identify the appropriate federal law by name.” (citation omitted)). Here, Plaintiff told his supervisor that he was concerned about the morality of the two overhead scheme, and added that it “may even be illegal but I wasn’t sure since I’m not a lawyer.” This statement sufficiently alerted Defendant as to the possibility that there was possibly illicit conduct afoot. Plaintiff therefore sufficiently “provided information” under § 1514A.
In a briief to the ARB in Thibodeau v WalMart, the DOL Solicitor argues: “The SOX whistleblower provision does not require the complainant to prove an actual violation by alleging or proving that each of the elements of fraud or of a violation of an SEC rule were satisfied. Beacom v. Oracle Am., 825 F.3d 376, 380 (8th Cir. 2016) (noting that “an employee’s belief may still be objectively reasonable”); Jones v. Southpeak Interactive Corp. of Del., 777 F.3d 658, 668 (4th Cir. 2015) (noting that to be protected under SOX, the employee does not need to prove “that the employer’s conduct was, in fact, a legally actionable fraud. The whistleblower need only show that she ‘had both a subjective belief and an objectively reasonable belief that the conduct’ violated relevant law) (internal citations omitted); Allen v. Admin. Review Bd., 514 F.3d 468, 477 (5th Cir. 2008) (“Importantly, an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories is protected”). Also, because complainants may not have access to complete information, the complainant’s communication to the employer does not need to include information relevant to each element of a violation. Wiest v. Lynch, 710 F.3d 121, 134 (3rd Cir. 2013) (a whistleblower’s report of a potential violation need not “ring the bell on each element” of the relevant violation at issue to be protected because “an employee may not have access to information necessary to form a judgement on certain elements, such as scienter or materiality…”). Nor does the SOX whistleblower provision include an independent materiality requirement.”
[i] Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123, at 19 (ARB May 25, 2011).
[ii] Wiest, 710 F.3d at 132.
Sarbanes-Oxley (SOX) Whistleblower Protection for Reporting Fraud and Violations of SEC Rules
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.
Top-Rated SOX Whistleblower Lawyers
We have assembled a team of leading whistleblower lawyers to provide top-notch representation to Sarbanes-Oxley (SOX) whistleblowers. Recently Washingtonian magazine named two of our attorneys top whistleblower lawyers. U.S. News and Best Lawyers® have named Zuckerman Law a Tier 1 Law Firm in the Washington D.C. metropolitan area.
The whistleblower lawyers at Zuckerman Law have substantial experience litigating Sarbanes Oxley whistleblower retaliation claims and have achieved substantial recoveries for officers, executives, accountants, auditors, and other senior professionals. To schedule a free preliminary consultation, click here or call us at 202-262-8959.
Dodd-Frank and SOX Whistleblower ProtectionProtections for SEC Whistleblowers Post-Digital Realty (11-6-2020)
Qualifying for an SEC Whistleblower Award: Tips for SEC Whistleblowers
5 Tips for SEC Whistleblowers and Lessons Learned from SEC Whistleblower Awards
SEC Whistleblower Program and SEC Whistleblower Awards
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.”whistleblower_lawyers_012017_infographic