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:
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:
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.
Eric Krell: The issue of subsidiary compliance recently received mention in the daily business press. What should corporate subsidiaries (and also private companies that elect to adopt Sarbanes-Oxley compliance processes) know about this issue?
Holly Eng: As your readers know, the Sarbanes-Oxley Act is an incredibly broad and comprehensive law. There are several sections of the Act that most certainly do extend beyond publicly-held corporations to a wider group of entities, and even to individuals. In others, such as Section 806, Congress chose wording that expresses an intent to limit its scope to publicly-traded companies and those directly associated with publicly-traded companies. In fact, the first words in Section 806 (codified at 18 U.S.C. § 1514A) are "Traded Companies." In crafting this Section, Congress seemed to focus on protecting individuals who blow the whistle on issues that ultimately may impact shareholders of publicly-traded companies. Thus, as the Department of Labor has recognized time and time again, there is no basis for an argument that subsidiaries of covered corporations are automatically covered under Section 806 (the whistleblower provision discussed above). This is consistent with long-standing principles in corporate law that the mere fact that a parent-subsidiary relationship exists does not, in and of itself, make one corporate entity liable for the acts or omissions of its affiliates.
That being said, however, administrative decisions and cases have come out on both sides of this issue. On its face, this Section extends not only to publicly-traded companies, but also to "any officer, employee, contractor [whether or not such contractor is employed by a publicly-traded company], subcontractor [whether or not such subcontractor is employed by a publicly-traded company], or agent [whether or not such agent is employed by a publicly-traded company] of such company. . . ." Whether or not a person or entity is acting as an "agent" of the publicly-traded company, for example, can be an interesting and fact-intensive question.
Of course, many companies and organizations that are not publicly traded have adopted controls and best practices that have evolved under Sarbanes-Oxley. Regardless of whether a company is a "covered entity" under the Act, public awareness has been raised by the statute, and the bar is higher now than it was when the Act was passed in 2002.
Eric Krell: If I'm an executive with a prominent role in my organization's overall compliance program, what are some steps I might consider to help ensure that our processes concerning whistle-blowing are compliant and appropriate?
Holly Eng: As an initial matter, whistleblower policies used to reside within a company's anti-discrimination/anti-harassment policies and were rarely distributed or applied outside of those arenas. A broader whistle-blower protection policy may now be appropriate. Any such policy should contain, at a minimum:
With respect to a specific complaint procedure, the Act requires that the audit committee of the corporation's Board establish an anonymous reporting procedure, along with an internal apparatus to receive, review, and solicit employee reports concerning fraud and potential ethical violations. While one size does not fit all when it comes to such mechanisms -- and a company has the ability to craft an effective mechanism that fits its size, culture, and unique employee needs -- there are certain best practices that generally are non-negotiable:
Eric Krell: You're familiar with how whistle-blowing instances are investigated and, in some cases, prosecuted. What should readers keep in mind about how the investigation process works?
Holly Eng: Let's start with the 3 Ts: time lines are short; thoroughness is necessary; and teamwork is often key.
As an initial matter, the time lines on these claims are quite short. An employee who believes that he/she has been retaliated against in violation of § 806 must file a complaint with the Department of Labor (the OSHA division) within 90 days of the alleged violation. Untimely claims are routinely dismissed.
The employer/corporation (generally called the "Respondent") will have only 20 days from the time that it is notified of a whistleblower complaint until it must respond to that complaint. It is very important that the employer use this time wisely, conduct a thorough investigation (if one has not already been conducted), and marshal its evidence.
Within 60 days of receiving the complaint, the OSHA should conduct an investigation and issue a preliminary order. The rights to various hearings and appeals follow in quick succession. In fact, if the agency fails to complete the entire process of investigation and hearing and issue its final determination within 180 days of receiving the initial complaint, the employee may proceed directly to federal court to pursue his claims.
An employer should strongly consider seeking summary dismissal of the complaint at the OSHA level within the initial 20-day period. An investigation may not be conducted at all if the OSHA determines at this stage that the complaint does not make a satisfactory showing that the protected activity (the whistleblower complaint) was a contributing factor in the unfavorable personnel action (the termination, demotion, or other tangible job action) alleged in the complaint. As is mentioned above, even where such a showing is made, the OSHA generally will not proceed with an investigation if clear and convincing evidence submitted by the employer shows that the employer would have taken the same unfavorable personnel action in the absence of the protected activity. This is significant. In many cases that reach my desk, a "whistleblower" has made a complaint of some sort when he is in the last days or weeks of a performance improvement plan and understands that his employment is otherwise in jeopardy.
This is an area of the law that counsels for teamwork between a company's business people, corporate counsel, HR professionals, and employment counsel. The allegations made by whistleblowers under this Act often involve complex issues of accounting principles or securities law, as well as employment law. The SEC is automatically notified of any Sarbanes-Oxley complaint filed with OSHA and has certain rights and abilities to join the proceedings, if it so chooses.
One also should keep in mind that potential damages recoverable under this section of the Act include a host of make-whole remedies: reinstatement with seniority; back pay, with interest; and compensation for special damages resulting from the discrimination, including attorneys' fees, litigation costs, and expert witness fees.
Eric Krell: Are there any steps I (again, as a corporate executive responsible for these processes) should consider taking if a whistle-blowing investigation commences?
Holly Eng: Once the initial 20-day responsive period has passed and an OSHA investigation has actually commenced, there is little to do other than to cooperate in the investigation and continue to put on your best defense.
There may be opportunities to settle the matter either at the outset of the process or at various points along the way before the OSHA has rendered a final decision. However, employers should keep in mind that the Department of Labor generally must approve any such settlement. Thus, private settlement agreements -- including confidentiality provisions -- are not likely. As a rule, such settlement agreements become part of the record of the case, and are subject to public disclosure under the Freedom of Information Act (FOIA). Thus, while the settlement agreement may not be published immediately, a member of the public subsequently may request that the agreement be disclosed.
Finally, if an offense is detected (via your internal investigation or as the result of something uncovered by the OSHA), and employer should be prepared to take -- and take -- all reasonable steps to respond, including self-reporting and referral to law enforcement as appropriate, and make necessary modifications to applicable programs or controls that are designed to minimize the likelihood of any subsequent violations.
Eric Krell: Two other sections of Sarbanes-Oxley also tend to receive short shrift in business media: Section 1107 and Section 802. What should readers know about Section 1107?
Holly Eng: In addition to the civil whistle-blower Act discussed above, the Sarbanes-Oxley Act also included a new type of potential criminal liability for all employers (whether publicly-held, privately-held, non-profit, or otherwise) and, in fact, for individuals. Section 1107 of the Act provides that:
Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.
In other words, the Act makes it a crime for anyone to retaliate against informants involved in exposing an actual -- or potential -- federal offense. Moreover, such offense need not relate to corporate securities fraud or accounting abuses; rather, under its broad language, § 1107 applies if the information shared by the whistleblower pertains to any alleged Federal offense.
Eric Krell: How about Section 802?
Holly Eng: Section 802 is an even more potentially expansive section of the Act. An outgrowth of Congress's extreme unhappiness with Arthur Andersen's destruction of key documents in the Enron matter, Section 802 provides that any alteration or destruction of a document with the intent to obstruct a federal investigation or any bankruptcy case is punishable by a fine, imprisonment of up to 20 years, or both:
Whoever knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11 [bankruptcy], or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned not more than 20 years, or both.
The basic lesson to keep in mind here is a simple one that good corporate citizens already know: thou shalt not tamper with or destroy evidence.
A related (and little known) provision of the Sarbanes-Oxley Act applies these same theories to witness tampering. Section 1102 states, in pertinent part, as follows:
Whoever corruptly -- (1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so, with the intent to impair the object's integrity or availability for use in an official proceeding; or (2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so, shall be fined under this title or imprisoned not more than 20 years, or both.
*The Act reads, in pertinent part, as follows: Traded Companies. No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o (d)), or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee -- (1) to provide information, cause information to be provided, or otherwise assist in any investigation regarding any conduct which 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, when the information or assistance is provided to or the investigation is conducted by -- (A) a Federal regulatory or law enforcement agency; (B) any Member of Congress or any committee of Congress; or (C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or (2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged 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."
Links:
[1] http://businessfinancemag.com/article/revisiting-sarbanes-oxley-beyond-section-404-1030?page=0,6