Revisiting Sarbanes-Oxley (Beyond Section 404)

Holly Eng is a partner in business law firm Dorsey's labor and employment practice group. She advises a wide range of corporations on labor and employment-related issues. She recently discussed in great detail some common misconceptions about certain provisions of the Sarbanes-Oxley Act.

Eric Krell: Given the focus that so many of our readers have needed to place on Sarbanes-Oxley Sections 302 and, especially, Section 404, they may not be aware of some important issues concerning whistle-blowing (Section 806) and other sections of the law. Can you share some common misperceptions -- and important insights -- about Section 806 that you have encountered in your work?

Holly Eng: In response to highly-public whistleblower complaints, Section 806 of the Sarbanes-Oxley Act prohibits publicly-traded companies -- and any officer, employee, contractor, subcontractor, or agent of such companies -- from discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against an employee because:

• The employee provides information or assistance to a Federal regulatory law enforcement agency; a Member of Congress or Congressional committee; or the employee's supervisor or other such person in the company who has the authority to investigate or terminate misconduct; and,
• The employee reasonably believes that the conduct at issue constitutes a violation of mail, wire, bank, or securities fraud laws, any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholder.*

There are a few things to keep in mind here.

First, the employee does not have to identify fraud correctly to be protected. So long as the employee has provided information (to one or more of the individuals listed in the Act) regarding conduct that the employee "reasonably believes" constitutes a violation of various laws, the employee is protected.

As a practical matter, the first person to whom a complaint is made is often the individual's supervisor or a human resources professional. These individuals should be trained in recognizing a Sarbanes-Oxley complaint and in how to ensure that such complaints are directed to and through the necessary channels and investigative process.

Second, simply uttering the words "Sarbanes-Oxley" or complaining to someone about alleged abuses is not enough to establish a claim under the Act. The "whistleblower" must establish the following things in order to set forth a viable claim:

1. He engaged in protected activity as defined by the Act;
2. The employer knew about (or reasonably suspected) the protected activity;
3. He suffered an unfavorable personnel action (in other words, something "bad" happened to his employment, such as a termination or demotion); and
4. There was a nexus between the unfavorable personnel action and the protected activity sufficient to raise an inference that the whistle-blowing activity was a "contributing factor."

Moreover, notwithstanding a finding that these elements have been met, the Federal Occupational Safety and Heath Administration (the "OSHA," the division of the Department of Labor responsible for investigating and making final determinations with respect to whistleblower complaints under the Sarbanes-Oxley Act) will not proceed with an investigation if the employer demonstrates "by clear and convincing evidence" that it would have taken the same unfavorable personnel action in the absence of the complainant's whistleblower activity.