United States: New Federal Law Does More Than Prevent Corporate Fraud

Last Updated: November 19 2002

By Harold P. Coxon and Locke Neely

New federal legislation was enacted on July 30, 2002, which effective immediately provides far-reaching corporate accountability reforms in response to the recent spate of highly publicized corporate scandals, business failures, and the resulting investment losses suffered by employees and stockholders. The new 66-page Sarbanes-Oxley Act of 2002 regulates the auditing, financial disclosure, executive compensation, and corporate governance practices of publicly-traded companies.

In addition, the new law contains several key employment-related provisions, including an expansive federal cause of action preventing discrimination, retaliation, or harassment against corporate whistleblowers. The statute exposes a company, as well as its officers and employees in their individual capacities, to both civil and criminal liability.

The law’s anti-retaliation provision is neither restricted to employees of public companies nor is it limited to disclosures of corporate fraud or accounting abuses. It extends to all federal investigations, apparently including those conducted by the U.S. Department of Labor (DOL), the Occupational Safety and Health Administration (OSHA), the Equal Employment Opportunity Commission (EEOC), the Immigration and Naturalization Service (INS), and the National Labor Relations Board (NLRB).

The new law also requires audit committees of boards of directors to establish procedures for the anonymous, confidential submission of employee concerns relating to corporate accounting or auditing practices. Other sections of the law provide new criminal sanctions for the destruction, concealment, alteration, or falsification of documents and for interference with federal investigations. These provisions amend the existing "obstruction of justice" statute and relate to interference with any federal investigation by any employer, not simply investigations of securities fraud or other financial investigations involving publicly-traded companies. Thus, the new provisions greatly expand exposure to both corporate and individual criminal liability and fines in employment law investigations.

Expanded Whistleblower Protections

Section 806 of the Sarbanes-Oxley Act creates a new federal civil action entitled "Whistleblower Protection for Employees of Publicly Traded Companies." The provision protects any employee who provides information, or assists in an investigation, regarding conduct which he or she "reasonably believes" to be a violation of federal securities law, SEC regulations, or "any provision of federal law relating to fraud against shareholders." The statute protects disclosures to a federal regulatory or law enforcement agency, a Member of Congress or congressional committee, or "any person" with supervisory authority over the company or "any person" with the power to "investigate, discover or terminate misconduct" (such as corporate officers and managers).

The complaining employee may not be discharged, demoted, suspended, harassed, or discriminated against in any way because of the protected disclosure. Remedies under the Act include all relief to make the employee whole," such as reinstatement, compensatory damages, back pay (with interest), and any "special damages" sustained as a result of the discrimination, such as litigation costs and attorneys’ fees, but not punitive damages. The new rights and remedies created by the Act supplement, rather than limit, the rights and remedies available under other federal and state laws or a collective bargaining agreement. Since the Act covers officers, employees, contractors, subcontractors, and agents, they may be subject to personal liability for violations of the whistleblower protections.

Similar to civil procedures under other whistleblower laws in the nuclear power, health care, and aviation industries, the Sarbanes-Oxley Act provides for administrative and judicial actions. Applying the same procedures governing complaints set forth in the whistleblower protection statute for aviation workers, an employee alleging discrimination may file a complaint with the DOL within 90 days of the date of the discrimination. Within 60 days of receiving the complaint, the DOL must conduct an investigation (giving the employer an opportunity to respond to the allegations) and thereafter will issue a preliminary order. If the DOL fails to act within 180 days, the employee may proceed directly to federal district court to pursue her claims.

The DOL may dismiss the case only if the employee’s complaint fails to state a prima facie (or initial) case – a fairly simple burden of showing that the protected disclosure was "a contributing factor" (not the sole reason or even a significant factor) in the "unfavorable employment action." The employer has the far more difficult burden of proving "by clear and convincing evidence" that the unfavorable employment action would have been taken even in the absence of the employee’s protected conduct.

If the DOL conducts a hearing, it must issue a decision and final order within 120 days. The DOL’s decision may be subject to judicial review by a federal court of appeals.

New Criminal Penalties For Tampering Or Illegal Retaliation

Section 1102 of the Sarbanes-Oxley Act, subtitled "Tampering With a Record or Otherwise Impeding an Official Proceeding," amends Section 1512 of Title 18 of the United States Code by adding criminal fines and imprisonment for up to 20 years for any individual who "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." These new criminal penalties are not limited to publicly-traded companies or to matters involving corporate securities fraud or accounting abuses. To the contrary, the broad language of the amendment encompasses "any official proceeding," apparently including any action by the EEOC, DOL, NLRB, OSHA, and the INS. The possibility of incurring these criminal penalties for anyone involved in even a potential action by one of these federal agencies dramatically affects the way future workplace investigations should be conducted.

Section 1107 of the Sarbanes-Oxley Act, subtitled "Retaliation Against Informants," provides criminal fines and imprisonment for up to ten years for any individual who "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." The harmful action" language amends the current criminal statute for retaliation against witnesses. The new criminal penalties for retaliation are not limited to publicly-traded companies or to matters involving corporate securities fraud or accounting abuses. It protects all employees from retaliation for informing any local, state, or federal officials about a possible federal criminal matter.

Practical Tips

Employers should give immediate consideration to complying with the Act’s mandates for creation of a forum in which employees can express concerns relating to corporate accountability and then seek to avoid civil liability for employment discrimination and criminal liability for retaliation against corporate whistleblowers or impeding an official proceeding. Some of the steps employers should consider include:

  • Establishing a mechanism and procedure for the receipt of confidential, anonymous employee concerns and the investigation of such concerns.
  • Establishing or reissuing company policies on non-retaliation and non-harassment; communicating such policies and training supervisors in the appropriate response to employee complainants; promptly and care-fully investigating all alleged violations of such policies, any federal statutes, and allegations of corporate misdeeds (using, where possible, experienced third-party investigators); and taking consistent disciplinary action against violators.
  • Documenting performance. Employers should anticipate having to prove "by clear and convincing evidence" that the same "unfavorable employment action" would have been taken in the absence of the employee’s protected whistleblowing conduct. Proper documentation, which is always critical in defending employment discrimination actions, is even more important in defending whistleblower and retaliation cases where troubled employees may attempt to ward off unfavorable employment decisions by using such charges as a sword. • Reviewing insurance policies for coverage of officers, managers, and employees for whistleblower and retaliation violations.
  • Establishing or reviewing document retention policies and practices, and training supervisors concerning such policies. Al-though federal employment laws generally re-quire recordkeeping and retention of records for up to three years, the new Sarbanes-Oxley Act has much broader application and more serious penalties.

In recent years, employers have experienced a dramatic increase in retaliation cases. The new corporate whistleblower and retaliation protections under Sarbanes-Oxley provide yet another source of employment litigation. Moreover, given the relatively low-level of proof required and the fact-intensive nature of such actions, employers will find it difficult to obtain early dismissal of the lawsuits filed under the new statute. Also, potential criminal liability will force companies to vigorously defend individual corporate officers, managers, and employees. Employers need to recognize the risks associated with this new law and take action to lessen their exposure to liability.

Harold Coxson is a shareholder with Ogletree Governmental Affairs in Washington, D.C., a subsidiary of Ogletree Deakins.

Locke Neely is Of Counsel with the Dallas office of Ogletree Deakins. Prior to praciticing law, Neely served as a Special Agent with the U.S. Secret Service. In addition to traditional employment matters, his practice includes complex workplace investigations (whistleblower, internal criminal and security related), workplace violence training and prevention, and physical and asset security consulting and services.

© 2002

This article has been abridged from laws, court decisions and administrative rulings and should not be construed or relied upon as legal advice. If you have questions concerning particular situations and specific legal issues, please contact an Ogletree Deakins attorney.

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