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. Neo@Ogilvy, 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
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