What whistleblowing disclosures are protected under the Sarbanes-Oxley Act?

Q: What whistleblowing disclosures are protected under the Sarbanes-Oxley Act?

What is Sarbanes-Oxley protected conduct? Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation &hellip; <a href="https://www.zuckermanlaw.com/sp_faq/whistleblowing-disclosures-protected-sarbanes-oxley-act/">Continued</a>

What is Sarbanes-Oxley protected conduct?

Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation regarding any conduct that they reasonably believe violates:

federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
any rule or regulation of the Securities and Exchange Commission (“SEC”); 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 federal regulatory or law enforcement agency;
any Member of Congress or any committee of Congress; or
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).

Significantly, SOX protects internal disclosures, such as an employee raising a concern to a supervisor about misleading financial data in an SEC filing.

The SOX whistleblower protection law also prohibits retaliation for filing, causing to be filed, or otherwise assisting in a proceeding filed or about to be filed relating to:

federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud;
any rule or regulation of the Securities and Exchange Commission (“SEC”); or
any provision of federal law relating to fraud against shareholders.

SOX does not limit its application to reported misconduct of the employer or any other particular perpetrator. Disclosure of third-party fraud may be covered under SOX. See Funke v. Fed. Express Corp., ARB No. 09–004 (July 8, 2011)

For more information about protections and remedies for SOX whistleblowers, download our guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.

If you are seeking representation in a Sarbanes-Oxley whistleblower case, click here, or contact our experienced SOX whistleblower lawyers at 202-262-8959 to schedule a confidential consultation.

See our tips to get the maximum damages in your whistleblower retaliation case.

What Damages Can Sarbanes-Oxley Whistleblowers Recover in SOX Whistleblower Retaliation Cases?

Whistleblower Retaliation Prohibited by the Sarbanes-Oxley Act

**ARB Sylvester Decision Defining Sarbanes-Oxley Protected Conduct**

In May of 2011, the ARB issued a seminal decision in Sylvester v. Parexel, which adopted the following broad construction of SOX protected conduct:

SOX complainants need only show that they reasonably believed the conduct complained about violated a relevant law. Sylvester v. Parexel Int’l LLC, ARB Case No. 07-123, at 14 (ARB May 25, 2011).
An employee need not wait until misconduct occurs to make a protected disclosure, so long as the employee “reasonably believes that the violation is likely to happen.” at 16.
A complainant need not allege 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 would protect a disclosure about deficient internal controls over financial reporting, even though there is no allegation of actual fraud. at 19.
The reasonable belief standard does not require complainants to tell management or the authorities why their beliefs are reasonable. at 42.
SOX complainants no longer need to show that their disclosures “definitively and specifically” relate to the relevant laws. at 41.
SOX complainants do not need to establish criminal fraud. Requiring a complainant to allege, prove, or approximate the elements of fraud would be contrary to the purpose of the whistleblower protection provision. at 47.

Sylvester also held that the Platone standard was in conflict with “the plain language of the SOX whistleblower protection provision, which protects ‘all good faith and reasonable reporting of fraud.’” Id. at 14–15, 30 (quoting 148 Cong. Rec. S7418-01, S7420).

The Second, Third, Sixth, and Eighth Circuits and several district courts have adopted the Sylvester standard of SOX protected conduct, and no federal court has rejected the reasoning in Sylvester. See Beacom v. Oracle America, Inc., No. 15-1729, 2016 WL 3144730, at 3 (8th Cir. June 6, 2016) (expressly adopting the Sylvester standard); Rhinehimer v. U.S. Bancorp Invs., Inc., 787 F.3d 797 (6th Cir. 2015); Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 220–21 (2d Cir. 2014) (granting Skidmore deference to Sylvester); Wiest v. Lynch, 710 F.3d 121 (3d Cir. 2013) (according Chevron deference to Sylvester); Stewart v. Doral Fin. Corp., 997 F. Supp. 2d 129, 135–36 (D.P.R. 2014) (adopting the Sylvester standard); Leshinsky v. Telvent GIT, S.A., 942 F. Supp. 2d 432, 443 (S.D.N.Y. 2013).

Recently the Sixth Circuit issued an opinion in Rhinehimer v. U.S. Bancorp Investments, Inc., adopting the Sylvester standard and affirming a jury verdict for a whistleblower who disclosed unsuitability fraud. Rhinehimer, 787 F.3d at 811–13. Rhinehimer agrees with the ARB’s observation in Sylvester “that an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion [referring to Platone] undermines this purpose and conflicts with the statutory design, which turns on employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Id. at 810. In addition, Rhinehimer suggests that the issue of objective reasonableness is rarely amenable to summary disposition:

“[T]he issue of objective reasonableness should be decided as a matter of law only when no reasonable person could have believed that the facts [known to the employee] amounted to a violation” or otherwise justified the employee’s belief that illegal conduct was occurring. If, on the other hand, “reasonable minds could disagree about whether the employee’s belief was objectively reasonable, the issue cannot be decided as a matter of law.”

Id. at 811–12 (citations omitted).

At trial, the jury found that U.S. Bancorp Investments (“USBII”) disciplined and fired Michael Rhinehimer in retaliation for alerting one of his superiors to unsuitable trades a coworker made to the detriment of an elderly client. Rhinehimer’s manager expressly admitted that he gave Rhinehimer a written warning for opposing the unsuitable trades because Rhinehimer’s complaint “prompted a FINRA investigation . . . and anybody associated with this was really feeling the heat.” Id. at 804. In addition, the manager warned Rhinehimer that if he were to sue the bank, his career in the city would be over. The bank placed Rhinehimer on a performance improvement plan requiring him to increase his revenue to $40,000 per month. Shortly thereafter, the bank terminated his employment.

On appeal, USBII argued that, under Platone, Rhinehimer was required to establish facts from which a reasonable person could infer each of the elements of an unsuitability fraud claim, including the misrepresentation or omission of material facts and that the broker acted with intent or reckless disregard for the client’s needs. The Sixth Circuit held that the evidence was more than sufficient to sustain the jury’s finding that Rhinehimer reasonably believed that certain trades constituted unsuitability fraud. Id. at 812. And the court noted that the “employee’s reasonable belief is a simple factual question requiring no subset of findings that the employee had a justifiable belief as to each of the legally-defined elements of the suspected fraud.” Id. at 806.

Rhinehimer is an important development for corporate whistleblower rights and protections in that it restores the original intent of SOX whistleblower protection. A whistleblower’s reasonable belief is now assessed in a manner consistent with similar anti-retaliation statutes; i.e., the employee must subjectively believe that there is a violation, and the belief must be objectively reasonable. And as federal courts continue to adopt or defer to the ARB’s construction of SOX protected conduct as articulated in Sylvester, SOX whistleblowers are more likely to survive summary judgment.

This decision is part of a trend, both at the DOL and in federal courts, of broadly construing SOX’s protection of whistleblowers and rejecting prior decisions that imposed a heightened standard of objective reasonableness.

In May 2016, the Fourth Circuit held that a SOX whistleblower can establish the reasonableness of his or her belief by proffering corroborating testimony from coworkers. See Deltek, Inc. v. Dep’t of Labor, Admin. Review Bd., No. 14-2415, 2016 WL 2946570 (4th Cir. May 20, 2016). Dinah Gunther began working for Deltek, Inc., as a financial analyst in 2008. Gunther, whose position was within Deltek’s IT department, lacked a college degree but had experience as an executive assistant and workflow manager. Soon after beginning work at Deltek, Gunther noticed a lack of clear procedure and documentation for Deltek’s billing disputes with Verizon Business (“Verizon”). She suspected Deltek employees were obscuring the IT department’s financial condition by subjecting Verizon to unfounded billing disputes, thereby concealing a shortfall in Deltek’s telecommunications budget. Gunther’s coworker, who was responsible for managing the billing relationship between Deltek and Verizon, agreed with her concern. Gunther reported the situation to her immediate supervisor, after which she faced hostility in the workplace. She then expressed her concerns of ongoing fraud in a letter to Deltek’s general counsel, which she copied to the SEC. Deltek’s general counsel met with Gunther and asked her to gather information about her concerns. Following their meeting, the general counsel investigated Gunther’s report and found no improper activity had occurred, but Gunther noticed her coworkers shredding documents.

After continuing to experience mistreatment at work, Gunther informed Deltek’s vice president of human resources that she was experiencing stress-related medical issues that were affecting her work. Gunther accepted Deltek’s offer of paid leave, conditioned on Gunther’s being able to return to work with 24 hours’ notice. Upon taking leave, Gunther filed a SOX complaint with the Occupational Safety and Health Administration (“OSHA”). Later, Gunther attempted to return to work on a Monday after having given notice of her return the prior Saturday. But a Deltek attorney and the vice president of human resources met her at the office to say she could not yet return to work, although they assured her she still had a job. The following day, Deltek fired Gunther for being confrontational and disruptive in that meeting.

OSHA concluded that there was no violation of SOX. Gunther appealed, and an administrative law judge (“ALJ”) held Deltek liable for retaliating against her. The ARB affirmed, and Deltek appealed. The Fourth Circuit determined that Gunther’s belief that Deltek was violating securities laws was reasonable. Id. at *7.

Deltek argued that Gunther’s belief was not objectively reasonable because she lacked the education and experience necessary to recognize securities fraud. The Fourth Circuit rejected this argument, stating that consideration of the “factual circumstances,” including information Gunther learned from coworkers, was warranted. See id. The Fourth Circuit agreed with the ALJ’s determination, which the ARB affirmed, that “in forming her belief Gunther reasonably relied on her close dealings with [her coworker], who did have extensive experience in Verizon invoicing . . . [and] who was himself a ‘credible, convincing witness at the hearing.’” Id. Therefore, Gunther’s belief was reasonable, and her activity was protected under SOX. Id.

In another broad interpretation of SOX protected conduct, the ARB held in March 2016 that disclosures relating to violations of state wage laws constitute protected conduct under SOX when they implicate the federal mail or wire fraud statute. See Dietz v. Cypress Semiconductor Corp., ARB Case No. 15-017, 2016 WL 1389927, at *5–6 (ARB Mar. 30, 2016). Timothy Dietz worked for a company that was acquired by Cypress Semiconductor Corp. (“Cypress”) in 2012. Following the acquisition, Cypress hired Dietz as a program manager. Cypress required certain employees to participate in a bonus plan but did not disclose this plan to employees of the acquired company until they accepted jobs with Cypress. After receiving complaints about the bonus plan from subordinates, Dietz internally reported concerns that the plan violated state laws and that important aspects of the plan, such as compulsory salary deductions, had not been disclosed to employees of the acquired company. Thereafter, Dietz was given a disciplinary memo and was constructively fired. After a hearing, an ALJ held Cypress liable for retaliation, and the company appealed.

Cypress argued that Dietz’s disclosures were not protected under SOX because the state laws Cypress allegedly violated are not enumerated in SOX’s whistleblower protection provision. The ARB rejected this argument, reasoning that the plaintiff’s disclosures constituted protected activity because they related not only to his employer’s violation of state law, but also to the employer “knowingly misrepresenting or concealing material facts.” Id. at *6–7. Without determining whether Dietz’s complaints revealed actual fraud, the ARB held they were protected under SOX because they evidenced a violation of the federal statute prohibiting mail and wire fraud. See id.

Dietz clarifies, therefore, that SOX protects a broad range of disclosures, including any fraud that is reasonably believed to involve the use of interstate mail, wires, or banks.[2]

However, some courts go against the tide and continue to construe SOX protected conduct narrowly. For example, in Diaz v. Transatlantic Reinsurance Co., the Southern District of New York held that disclosing a violation of an employer’s conflict-of-interest policy is not protected under SOX because “the conduct reported by a whistleblower must deal with a violation of . . . federal securities law or the enumerated crimes of mail and wire fraud.” Diaz v. Transatlantic Reinsurance Co., No. 1:16-cv-01355, slip op. at 10 (S.D.N.Y. June 22, 2016) (emphasis in original). Ileana Diaz was assistant manager of Transatlantic Reinsurance Co.’s (“Transatlantic”) claims department when she reported a potential conflict of interest arising from the executive vice president’s control over the Transatlantic’s litigation matters. Specifically, the executive vice president was responsible for assigning work to, and approving invoices from, her husband’s law firm, which received more than $13 million in legal fees from Transatlantic in 2014. The court held that Diaz’s disclosure was not protected, stating that her “bald assertions that she ‘expressed concern about . . . the effect [the purported conflicts of interest] could have on Alleghany’s shareholders’ and ‘on Defendant’s reputation in the reinsurance industry’ are precisely the type of conclusory statements that cannot sustain a § 1514A claim.” Id. at 10–11 (alterations in original) (citation omitted)

Construing SOX protected conduct is consistent with its remedial purpose: “The legislative history of Sarbanes–Oxley makes clear that its [whistleblower] protections were ‘intended to include all good faith and reasonable reporting of fraud, and [that] there should be no presumption that reporting is otherwise, absent specific evidence.’” Van Asdale v. Int’l Game Tech., 577 F.3d 989, 1002 (9th Cir.2009) (quoting 148 Cong. Rec. S7418–01, S7420 (daily ed. July 26, 2002) (statement of Sen. Leahy).

Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797, 810 (6th Cir. 2015)

[1] See, e.g., Wiggins v. ING U.S., Inc., No. 3:14-CV-01089-JCH, 2015 WL 8779559 (D. Conn. Dec. 15, 2015). In Wiggins, a U.S. district court in Connecticut held that the heightened Rule 9(b) pleading standard for fraud claims does not apply to SOX retaliation claims. Id. at *3. The court held, furthermore, that a whistleblower can plead that she had a reasonable belief that her employer violated one of Section 1514A’s enumerated fraud provisions without alleging specifically that she believed that the employer’s conduct satisfied all of the elements of the federal statute or SEC rule that allegedly was violated. See id. at *5–7. The court found that the plaintiff’s complaint sufficiently “tethered” her subjective belief to a violation of Section 1514A’s enumerated provisions, where the plaintiff was trained in federal securities laws and her complaint identified specific federal statutes and regulations, the responsibilities the employer had pursuant to those laws, and the specific actions that formed the basis of the plaintiff’s belief that the employer was breaching those responsibilities. Id.

[2] Another notable takeaway from Dietz is that constructive discharge can be established not only where the employer has created “working conditions so intolerable that a reasonable person in the employee’s position would feel forced to resign,” but also where the employer “acts in a manner so as to have communicated to a reasonable employee that [he] will be terminated, and the . . . employee resigns.” See Dietz, 2016 WL 1389927, at *7 (alterations in original). Under this standard, an employee facing “imminent discharge” can potentially establish a constructive discharge claim. See id.

The purpose of a protected report is not to expose illegality, but to “trigger an investigation to determine whether evidence of discrimination exists.” Procedures for the Handling of Discrimination Complaints under the Sarbanes–Oxley Act, 69 Fed.Reg. 163, 52106 (Aug. 24, 2004).

SOX Whistleblower Protection Attorneys

We have assembled a team of leading whistleblower lawyers to provide top-notch representation to Sarbanes-Oxley (SOX) whistleblowers. Recently Washingtonian magazine named two of our attorneys top whistleblower lawyers. U.S. News and Best Lawyers® have named Zuckerman Law a Tier 1 Law Firm in the Washington D.C. metropolitan area.

The whistleblower lawyers at Zuckerman Law have substantial experience litigating Sarbanes Oxley whistleblower retaliation claims and have achieved substantial recoveries for officers, executives, accountants, auditors, and other senior professionals. To schedule a free preliminary consultation, click here or call us at 202-262-8959.

Leading whistleblower law firm Zuckerman Law has written extensively about whistleblower protections and is quoted frequently in the media on this topic. A sample of those blog posts and articles appears below:

There is no unclean hands defense to establishing SOX-protected conduct. In other words, a whistleblower reporting their own misconduct can be protected. See Seybold v. Charter Communications Inc., 2022 WL 675804 (N.D.Tx. Mar. 7, 2022).