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Supreme Court on Sarbanes-Oxley & Whistleblower Protection
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U.S. Supreme Court finds Sarbane-Oxley Act and Whistleblower Protection

The United States Supreme Court settled a dispute over the statutory language of the Sarbanes-Oxley Act (“Sarbanes-Oxley”) as it relates to whistleblower protection. Sarbanes-Oxley Act was passed by Congress in the wake of the Enron scandal. The law intended to increase corporate accountability, restore trust in the securities markets and protect whistleblowers. To prevent discouragement of whistleblowers coming forward to reveal corporate wrongdoing, the Act included the following provision:

“No [public] company . . ., or any . . . contractor [or]subcontractor . . . of such company, may discharge, demote, suspend, threaten, harass, or . . . discriminate against an employee in the terms and conditions of employment because of [whistleblowing activ­ity].” 18 U. S. C. §1514A(a).

In the case of Lawson et al. v. FMR LLC et al 571 US _____(2014), the Supreme Court ruled that an employee of a private contractor which works for one of the publicly-traded companies, subject to the regulation by Sarbanes-Oxley, can sue their employers if they suffer retaliation in response to their whistleblowing activities. The plaintiffs in the case who worked for a private company serving a publicly-traded mutual fund had raised allegations of putative fraud by the mutual fund and suffered retaliation by their employer. The First Circuit Court of Appeals decided that the law applied only to employees of public companies; hence, the whistleblowers in this case could not bring such claims against their employer and ruled the case should be dismissed.

The Supreme Court reversed this decision. The opinion by Justice Ruth Bader Ginsburg relies on the text of the statute and the legislative history surrounding the debate leading to the passage of Sarbanes-Oxley to conclude that the statute meant to include employees of private companies which contract with privately-traded ones. Her majority opinion noted that it is not uncommon for mutual funds to have no employees of their own. These companies hire other companies to sell and service their funds. The drafters of the legislation acknowledged this and framed the statute’s language to prohibit companies from skirting the intent of the law.   The decision reiterates that Sarbanes-Oxley aims to “prevent and punish corporate and criminal fraud, protect the victims of such fraud, preserve evidence of such fraud, and hold wrongdoers accountable for their actions.” As one of the associated wrongdoers in the Enron debacle was the company’s accounting firm, Arthur Andersen (which went bankrupt after revelations of its role surfaced),  “Congress identified the lack of whistleblower protection as “a significant deficiency” in the law, for in complex securities fraud investigations, employees “are [often] the only firsthand witnesses to the fraud.” Id., at 10.

This ruling should finally dispel any notions held by the officers of publicly-traded companies that they can merely contract out many of their company’s critical services so as to reduce or eliminate any possibility that a knowledgeable employee of such a contractor may bring attention to any of their company’s nefarious or improper practices.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law.  Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at www.glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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