Scope of Sarbanes-Oxley Corporate Whistleblower Protection

The whistleblower protection provision of SOX protects:

• employees, officers, and agents of publicly traded companies (companies issuing securities registered under section 12 of the Securities Exchange Act of 1934 or required to file reports under section 15(d) of the Securities Exchange Act of 1934);
• employees of any subsidiary or affiliate of a publicly-traded company whose financial information is included in the consolidated financial statements of such company;
• employees of contractors or subcontractors of public companies, including the attorneys and accountants who prepare public companies’ SEC filings;[i] and
• employees of nationally recognized statistical rating organizations (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c).

Employees not protected by SOX may have a remedy under other whistleblower protection laws.

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.

Whistleblowers are protected under SOX for providing information, causing information to be provided, or otherwise assisting in an investigation regarding any conduct disclosing 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).

Examples of SOX protected activity (SOX protected whistleblowing) include disclosures concerning:

• Circumventing internal controls or failing to maintain adequate internal controls over financial reporting.
• Submitting false internal control certifications. Section 906 of SOX mandates that the chief executive officer and chief financial officer of any issuer to certify that the periodic reports fully comply with the requirements of section 13(a) or 15(d) of the Securities Exchange Act and that the information contained therein fairly present the financial condition of the issuer.
• Failing to prepare financial statements in accordance with generally accepted accounting principles (GAAP).  See 17 C.F.R. §§ 244.100(c).
• Concealing material off-balance sheet transactions, which is required by Section 401(a)(ii) of SOX.
• Inaccurately recording personal use of corporate funds as business expenses in a company’s books and records.
• Failing to disclose Section 403 transactions involving management and principal stockholders. See 17 C.F.R. § 229.404.
• Falsifying corporate accounting to underreport corporate expenses.
• Wire fraud, i.e., a deceptive scheme to deprive the victim of money or property carried out using a wire transmission.

A SOX retaliation plaintiff need not demonstrate that they disclosed an actual violation of securities law; only that they reasonably believed that their employer was defrauding shareholders or violating an SEC rule.[i] Indeed, a reasonable but mistaken belief is protected under SOX. “To demonstrate that a plaintiff engaged in a protected activity, a plaintiff must show that [s]he had both a subjective belief and an objectively reasonable belief that the conduct [s]he complained of constituted a violation of relevant law.”[ii]

Requiring a SOX complainant to demonstrate that they disclosed an actual violation is contrary to Congressional intent in that the legislative history of Section 806 specifically states that the reasonableness test “is intended to include all good faith and reasonable reporting of fraud, and there should be no presumption that reporting is otherwise, absent specific evidence.”[iii]

“A whistleblower complaint concerning a violation about to be committed is protected as long as the employee believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern.”[i]

As a New York federal judge recently pointed out, limiting SOX whistleblower protection to disclosures of actual fraud “would lead to absurd results” by encouraging an employee to delay blowing the whistle until a potential violation has ripened to an actual violation.[ii] Section 806 was “designed to encourage insiders to come forward without fear of retribution,” and therefore “[i]t would frustrate the purpose of Sarbanes-Oxley to require an employee, who knows that a violation is imminent, to wait for the actual violation to occur when an earlier report possibly could have prevented it.”[iii]  As the purpose of SOX is to protect and encourage greater disclosure, only providing whistleblower protection to individuals exposing existing fraud would be counterproductive, as the harm SOX seeks to deter would need to be occurring for the protection to attach. Stewart v. Doral Financial Corp., 997 F.Supp.2d 129 (2014).  See also Ronnie v. Office Depot, Inc., ARB No. 2019-0020, slip op. at 4 (ARB Sept. 29, 2020)(A complainant does not need to show that he reported an actual violation, but “can engage in protected activity when he reports a belief of a violation that is about to occur or is in the stages of occurring.”).

The ARB has held that where a government investigation failed to substantiate a whistleblower’s disclosure, the whistleblower can still demonstrate that they had an objectively reasonable belief that there was a violation.  In Menendez v. Halliburton, Inc., ARB No. 09-002-003, ALJ No. 2007-SOX-5, at 13-14 (ARB Sept. 13, 2011), the complainant believed that his employer Halliburton was not complying with accounting standards related to revenue recognition. His disclosures prompted two internal investigations and an SEC investigation.  The SEC ultimately approved of the accounting methods. The ARB upheld the ALJ’s finding that Menendez’s belief was both subjectively and objectively reasonable, cautioning that the fact that an agency found there was no violation of the relevant law does “not necessarily” undermine the reasonableness of the belief. Id. at 13-14.

In Sylvester, the ARB clarified the low bar to establish protected conduct:

Notwithstanding the above, a violation of a law cited in Section 1514A need not actually occur for a complainant’s report to be SOX-protected activity. A whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably believes that the violation is likely to happen. Such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been broken to safely register his or her concern. See, e.g., Melendez, ARB No. 96-051, slip op. at 21 (“It is also well established that the protection afforded whistleblowers who raise concerns regarding statutory violations is contingent on meeting the aforementioned ‘reasonable belief’ standard rather than proving that actual violations have occurred.”); Crosby v. Hughes Aircraft Co., 1985-TSC-002, slip op. at 14 (Sec’y Aug. 17, 1993) (required reasonable belief that the employer “was violating or about to violate the environmental acts”). Accord Yellow Freight Sys., Inc. v. Martin, 954 F.2d 353, 357 (6th Cir. 1992) (protection under Surface Transportation Assistance Act not dependent upon whether complainant proves a safety violation); Collins, 334 F. Supp. 2d at 1376. Consistent with this line of authority, the ARB has held that an employee’s whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer’s conduct constitutes a violation of one of the six enumerated categories of law under Section 806. See, e.g., Halloum v. Intel Corp., ARB No. 04-068, ALJ No. 2003-SOX-007, slip op. at 6 (ARB Jan. 31, 2006).

Similarly, the Third Circuit concluded in In Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013):

To hold that an employer could not have suspected that the plaintiff was engaged in protected activity because the communication did not recite facts showing an objectively reasonable belief in the satisfaction of each element of one of the listed anti-fraud provisions would eviscerate § 806. An employee may not have access to information necessary to form a judgment on certain elements of a generic fraud claim, such as scienter or materiality, and yet have knowledge of facts sufficient to alert the employer to fraudulent conduct. When an employee communicates these facts to a supervisor, the employer has a sufficient basis to suspect that the employee is protected against reprisal for communicating that information.

[i] Sylvester v. Parexel, ARB Case No. 07-123, 2011 WL 2165854 at *13 (DOL May 25, 2011).

[ii] Murray v. UBS Securities, LLC, 2017 WL 1498051 (S.D.N.Y. Apr. 25, 2017).  See also Gladitsch v. Neo@ogilvy, Ogilvy, Mather WPP Group USA Inc., 2012 U.S. Dist. LEXIS 41904 at *22-23 (S.D.N.Y. 2011) (“The employee’s protected activity need not describe an actual violation of the law, as long as it is based on a reasonable, even if mistaken, belief that the employer violated one of these enumerated categories.”).

[iii] Id. (citations omitted).

[i] Wiest v. Lynch, 710 F.3d 121, 132 (3d Cir. 2013)

[ii] Leshinsky v. Telvent GIT, S.A., 942 F.Supp.2d 432, 444 (S.D.N.Y.2013) (internal quotation marks and citations omitted).

[iii] Legislative History of Title VIII of HR 2673: The Sarbanes-Oxley Act of 2002, Cong. Rec. S7418, S7420 (daily ed. July 26, 2002), available at 2002 WL 32054527.

And as noted in Van Elswyk v. RBS Securities, Inc., (D. Conn. Aug. 9, 2017):

“The objective prong of the reasonable belief test focuses on the `basis of knowledge available to a reasonable person in the circumstances with the employee’s training and experience.'” Nielsen, 762 F.3d at 221 (quoting Sharkey v. J.P. Morgan Chase & Co., 805 F. Supp. 2d 45, 55 (S.D.N.Y. 2011)). Of course, “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers.” Id. As several circuit courts have made clear, “[i]f reasonable minds could disagree on this issue, the objective reasonableness of an employee’s belief should not be decided as a matter of law. . . .” Allen v. Admin. Rev. Bd., 514 F.3d 468, 477-78 (5th Cir. 2008) (citing Lipphardt v. Durango Steakhouse of Brandon, Inc., 267 F.3d 1183, 1188 (11th Cir. 2001); Fine v. Ryan Int’l Airlines, 305 F.3d 746, 752-53 (7th Cir. 2002)).

Finally, as the Sixth Circuit has held, “[t]he well-established intent of Congress supports abroad reading of the statute’s protections.”  Rhinehimer v. U.S. Bancorp Investments, Inc., 787 F.3d 797, 810 (6th Cir. 2015);  Rather, “[t]he well-established intent of Congress supports abroad reading of the statute’s protections.” Id. Accordingly, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines [Sarbanes-Oxley’s] purpose and conflicts with the statutory design, which turns on employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Id.

As the 10th Circuit held in Reznik v. inContact, Inc.,  — F.4th —-2021 WL 5625781 (10th Cir. Dec 1, 2021), objective reasonableness does not require a showing of an actual violation: 

Other circuits have also considered attendant circumstances alongside the law in evaluating objective reasonableness in Title VII retaliation cases. See E.E.O.C. v. Rite Way Serv., Inc., 819 F.3d 235, 240 (5th Cir. 2016); Boyer-Liberto v. Fontainebleau Corp., 786 F.3d 264, 282–83 (4th Cir. 2015) (en banc) (majority opinion); Kelly v. Howard I. Shapiro & Assocs. Consulting Eng’rs, P.C., 716 F.3d 10, 14–17 (2d Cir. 2013) (per curiam). We find those decisions instructive.

In Boyer-Liberto v. Fontainebleau Corp., the Fourth Circuit evaluated a Title VII retaliation claim where a white employee had twice called a night club server a “porch monkey.” 786 F.3d at 269–70. “[W]ith guidance from the Supreme Court [in Breeden],” the court considered what standard should determine when an employee’s belief that certain conduct violates Title VII is reasonable. Id. at 284. The court required a “lesser showing” than necessary to meet the legal standard of establishing an actual hostile work environment claim. Id. at 285. As in Breeden, the plaintiff’s belief was “based on an isolated incident.” Id. at 284. Thus, the court considered the severity of the harassment, which involved factors relevant to the legal standard “used to judge whether a workplace is sufficiently hostile or abusive for purposes of a hostile environment claim — specifically, whether the discriminatory conduct ‘is physically threatening or humiliating, or a mere offensive utterance.’ ” Id. at 284 (quoting Harris v. Forklift Sys., Inc., 510 U.S. 17, 23, 114 S.Ct. 367, 126 L.Ed.2d 295 (1993)). The court decided that the plaintiff’s belief was objectively reasonable because “ ‘porch monkey’ is a racial epithet that is not just humiliating, but is degrading and humiliating in the extreme.” Id. at 285 (quotation and citation omitted).

In E.E.O.C. v. Rite Way Serv., Inc., the Fifth Circuit also applied a test for determining the objective reasonableness of a plaintiff’s belief that accounted for the “zone of conduct that falls short of an actual violation but could be reasonably perceived to violate Title VII.” 819 F.3d at 242. The court considered several factors: (1) whether the harasser directed conduct at a specific employee; (2) whether a supervisor’s conduct is involved; (3) the context of the conduct, such as understanding multiple incidents in light of one another; and (4) “the setting in which [the plaintiff] voiced her complaint,” that is, whether the employer informed the plaintiff of its sexual harassment policies and what those policies included. See id. at 243–44. These factors were relevant because they drew upon conceptions (from caselaw) about what influences people’s reasonable beliefs in the workplace. See id. at 242–44.

SOX Whistleblowers are not required to show that their disclosures relate “definitively and specifically” to a federal securities law

To be protected under the SOX whistleblower protection law, an employee’s report “need not ‘definitively and specifically’ relate to one of the listed categories of fraud or securities violations in § 1514A.”[i]

SOX whistleblowers are protected if they show that they reasonably believed that the conduct they complained of violated one of the enumerated violations in Section 806. Whistleblowers are not required, however, to tell management or the authorities why their beliefs are reasonable. Nor must their disclosures allege, prove, or approximate the elements of fraud.  The employee “need not cite a code section he believes was violated in his communication to his employer, but [his]communication must identify the specific conduct that [he] believes to be illegal.” Starkey v. J.P. Morgan Chase & Co., 805 F.Supp. 2d 45, 57 (S.D.N.Y. 2011).

All that SOX requires an employee to do is prove that they “reasonably believed” that their employer violated or is about to violate federal law.[ii] The focus here is “on the plaintiff’s state of mind rather than on the defendant’s conduct.”[iii] This rule is informed by the court’s recognition that, because “[m]any employees are unlikely to be trained to recognize legally actionable conduct by their employers,” an employee’s “belief” in their employer’s wrongdoing is “central” to the analysis of SOX-protected conduct.[iv]

A Sixth Circuit opinion in a SOX case demonstrates the importance of broadly construing SOX-protected conduct. In Rhinehimer v. U.S. Bancorp Investments, Inc,.[v] the plaintiff Michael Rhinehimer alerted one of his superiors to unsuitable trades that a coworker made to the detriment of an elderly client. In response, Mr. Rhinehimer’s manager gave him a written warning. The manager admitted that the warning was motivated by the fact that Mr. Rhinehimer’s complaint “prompted a FINRA investigation . . . and anybody associated with this was really feeling the heat.” According to Mr. Rhinehimer, the manager then admonished Mr. Rhinehimer that if he sued the bank, then his career in the city would be over. U.S. Bancorp Investments (“USBII”) placed Mr. Rhinehimer on a performance-improvement plan requiring him to increase his monthly revenue to $40,000. Shortly thereafter, the bank fired him.

At trial, a jury found that USBII disciplined and fired Mr. Rhinehimer in deliberate retaliation for raising his concerns about the unsuitable trades. On appeal, USBII argued, that Mr. Rhinehimer was required to establish facts from which a reasonable person could infer each of the elements of an unsuitability-fraud claim. These elements include 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, however, held that SOX protects “all good faith and reasonable reporting of fraud,” with a focus on “employees’ reasonable belief rather than requiring them to ultimately substantiate their allegations.” Therefore, “an interpretation demanding a rigidly segmented factual showing justifying the employee’s suspicion undermines this purpose and conflicts with the statutory design.” The Sixth Circuit affirmed the jury verdict because there was sufficient evidence to sustain the jury’s finding that Mr. Rhinehimer reasonably believed that certain trades constituted unsuitability fraud. A contrary result would have resulted in employees—due to lack of tangible evidence—refraining from reporting fraud until after investors have already been harmed.

In Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013), the Third Circuit confirmed that a SOX whistleblower need not be an expert in securities law to engage in SOX protected conduct:  “[An]t employee should not be unprotected from reprisal because she did not have access to information sufficient to form an objectively reasonable belief that there was an intent to defraud or the information communicated to her supervisor was material to a shareholder’s investment decision. “Congress chose statutory language which ensures that ‘an employee’s reasonable but mistaken belief that an employer engaged in conduct that constitutes a violation of one of the six enumerated categories [set forth in § 806] is protected.’ ” Van Asdale, 577 F.3d at 1001 (quoting Allen, 514 F.3d at 477). An employee’s lack of knowledge of certain facts that pertain to an element of one of the anti-fraud laws would be relevant to, but not dispositive of, whether the employee did have an objectively reasonable belief that a listed anti-fraud law had been violated. Indeed, whether an employee has an objectively reasonable belief may not always be decided as a matter of law. See Allen, 514 F.3d at 477–78.”

[i] Nielsen v. AECOM Tech. Corp., 762 F.3d 214, 224 (2d Cir. 2014)

[ii]  Murray, 2017 WL 1498051, at *10.

[iii] Id., at *10 (quoting Guyden v. Aetna, Inc., 544 F.3d 376, 384 (2d Cir. 2008), superseded on other grounds by statute).

[iv] Id., at *9 (quoting Nielsen, 762 F.3d at 221 (alterations in original)).

[v] Rhinehimer v. U.S. Bancorp Invs., Inc., 787 F.3d 797 (6th Cir. 2015).

Yes.  The whistleblower protection provision of the Sarbanes-Oxley Act protects an employee filing, testifying, participating in, or otherwise assisting in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of federal securities law.  Also, the Supreme Court’s decision in Crawford v. Metropolitan Government of Nashville and Davidson County, Tennessee, 129 S.Ct. 846 (2009), construing an analogous anti-retaliation provision suggests that an employee’s disclosures during an internal investigation are protected.

The Court held in Crawford that”‘[w]hen an employee communicates to her employer a belief that the employer has engaged in . . . a form of employment discrimination, that communication’ virtually always ‘constitutes the employee’s opposition to the activity.'”  Examples of protected opposition include:

• accompanying a coworker to the human resources office in order to file an internal EEO complaint;
• complaining to management about discrimination against oneself or coworkers;
• taking a stand against an employer’s discriminatory practices not by refusing to follow a supervisor’s order to fire a junior worker for discriminatory reasons; or
• an employee who did not initiate a complaint answers an employer’s questions about potential discrimination.

EEOC Enforcement Guidance on Retaliation and Related Issues

In a leading case defining the scope of SOX protected conduct, the ARB held:

SOX protection applies to the provision of information regarding not just fraud, but also “violation of . . . any rule or regulation of the Securities and Exchange Commission.” 18 U.S.C.A. § 1514A(a)(1).  . . .  A complainant need not express a concern in every possible way or at every possible time in order to receive protection, so long as the complainant’s actual communications “provide information, cause information to be provided, or otherwise assist in an investigation” regarding a covered violation. 18 U.S.C.A. § 1514A(a)(1).

Klopfenstein v. PCC Flow Technologies Holdings, Inc., ARB Case No. 04-149, 2004-SOX-11 (May 31, 2006) (emphasis added).

Some of the options to prove that a disclosure was objectively reasonable include 1) showing that the SEC took enforcement action to penalize similar conduct; 2) offering testimony from co-workers to prove that other employees shared similar concerns about the unlawful conduct; and 3) offering expert witness testimony.

A 2016 unpublished Fourth Circuit decision in Deltek, Inc. v. Dep’t of Labor underscores the importance of coworker testimony in proving the objective reasonableness of a disclosure.[i] In this case, soon after starting a new job in the IT department of Deltek Inc., Ms. Gunther noticed a lack of clear procedure and documentation for Deltek’s billing disputes with Verizon Business. Ms. Gunther suspected that Deltek employees were subjecting Verizon to unfounded billing disputes in order to conceal a shortfall in Deltek’s telecommunications budget.

Ms. Gunther’s coworker, who was responsible for managing the billing relationship between Deltek and Verizon, agreed with her concerns, after which Ms. Gunther then reported to her immediate supervisor. Soon thereafter, Ms. Gunther began to experience hostility at work. She then escalated 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 Ms. Gunther and asked her to gather information about her concerns. The general counsel then investigated Ms. Gunther’s report and found that no improper activity had occurred. Despite this, Ms. Gunther witnessed her coworkers shredding documents.

Eventually, Ms. Gunther was fired for being “confrontational and disruptive.” Deltek argued that Ms. Gunther’s belief that Deltek was violating securities laws was not objectively reasonable because she lacked the education and experience necessary to recognize securities fraud; she, in fact, did not have a college degree. The Fourth Circuit rejected this argument, stating that a determination of the reasonableness of Ms. Gunther’s belief warranted consideration of the “factual circumstances,” including information that Ms. Gunther learned from coworkers. The court agreed with the administrative law judge’s (ALJ’s) determination 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.’” Therefore, the Fourth Circuit held Ms. Gunther’s belief that Deltek was violating securities laws as reasonable.

[i] See Deltek, Inc. v. Dep’t of Labor, Admin. Review Bd., No. 14-2415, 2016 WL 2946570 (4th Cir. May 20, 2016).

A whistleblower’s motive for engaging in protected conduct is irrelevant. See Henderson v. Wheeling & Lake Erie Ry., ARB No. 11-013, ALJ No. 2010-FRS-012, slip op. at 14 (ARB Oct. 26, 2012); Malmanger v. Air Evac EMS, Inc., ARB No. 08-071, slip op. at 10-11, ALJ No. 2007-AIR-8 (ARB July 2, 2009).  The law does not require a noble or altruistic motive for blowing the whistle.

To engage in protected whistleblower under the SOX whistleblower protection law, a whistleblower need only have a reasonable belief that the conduct violates federal securities laws or the other categories of protected conduct under Section 806 of SOX (disclosing (1) federal criminal prohibitions against securities fraud, bank fraud mail fraud, or wire fraud; (2) a potential violation of any rule or regulation of the SEC; or (3) any provision of federal law relating to fraud against shareholders.

In a March 2019 ARB opinion in Hernandez v. Metro-North Commuter Railroad Co., Inc., ARB No. 17-016, ALJ No. 2016-FRS-23, the ARB noted that “a complainant’s motive in making a protected complaint is irrelevant,” citing Guay v. Burford’s Tree Surgeons, Inc., ARB No. 2006-0131, ALJ No. 2005- STA-00045, slip op. at 7 (ARB Jun. 30, 2008) ((“However, ‘where the complainant has a reasonable belief that the respondent is violating the law, other motives he may have for engaging in protected activity are irrelevant.”‘) (quoting Diaz-Robainas v. Florida Light & Power Co., 1992-ERA-00010 (Sec’y Jan. 19, I996))).

Sarbanes Oxley Protected Conduct Does Not Require a Showing of Materiality

The great weight of authority holds that there is no independent materiality element to establish protected whistleblowing under Section 806 of SOX.

Most recently, Judge Brantley Starr soundly rejected an employer’s argument that SOX protects only disclosures about material violations: “Materiality isn’t in the Sarbanes-Oxley whistleblower law. It isn’t in the four of the six specifically defined trigger laws.”  Seybold v. Charter Communications Inc., 2022 WL 675804 (N.D.Tx. Mar. 7, 2022) (citing 18 U.S.C. §§ 1341, 1343, 1344, 1348).

In Donaldson v. Severn Sav. Bank, F.S.B.,[i] Vanessa L. Donaldson brought a SOX whistleblower action against her former employer, Severn Savings Bank (“Severn”), claiming she was unlawfully terminated after she reported to her supervisor her suspicions about an inaccurate bank report. Specifically, Ms. Donaldson alleged that she informed her supervisor about a scheme in which the commercial/retail manager for Ms. Donaldson’s branch falsified the retail production report for the third quarter of 2013, in order to collect unearned bonus pay.

Severn argued that Ms. Donaldson failed to allege she engaged in protected activity because she failed “to allege any facts whatsoever that would indicate any material misrepresentations (or omissions) were reported to Severn’s shareholders,” and so she lacked an objectively reasonable belief that she was disclosing shareholder fraud. The court rejected Severn’s narrow construction of SOX:

[T]he federal criminal fraud statutes . . . prohibit the scheme to defraud, not a completed fraud. . . .Materiality of falsehood . . . was a common-law element of actionable fraud at the time these fraud statutes were enacted and is an incorporated element of the mail fraud, wire fraud, and bank fraud statutes. . . . But § 1514A carries no independent materiality element. Consequently, Donaldson’s objective belief need not be about a material matter, as Severn has argued. Rather, her objective belief must be based on facts permitting an inference that [the manager’s] allegedly false representation was material to Severn’s course of conduct.[ii] 

The court found that Ms. Donaldson met this standard because the manager’s alleged inflation of the retail production figures was intended to, and likely would, affect the size of a bonus awarded him by Severn. Therefore, the court concluded, “it may be inferred from Donaldson’s complaint that she had an objectively reasonable belief that [the manager was] engaged in a scheme to defraud Severn.”[iii]

Similarly, the Third Circuit held in Wiest v. Lynch, 710 F.3d 121 (3d. Cir. 2013) that a SOX whistleblower need not prove materiality:  “[R]equiring a complainant to prove or approximate the specific elements of a securities law violation contradicts the statute’s requirement that an employee have a reasonable belief of a violation of the enumerated statutes.” Sylvester, 2011 WL 2165854, at *18. The ARB further explained, “a complainant can engage in protected activity under Section 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation.” Id. We find this interpretation to be reasonable because there is nothing in the statutory text that suggests that a complainant’s communications must assert the elements of fraud in order to express a reasonable belief that his or her employer is violating a provision listed in Section 806. Therefore, the District Court erred by requiring that an employee’s communication reveal the elements of securities fraud, including intentional misrepresentation and materiality.”

Per SEC Staff Accounting Bulletin No. 99 (SAB 99) and well-established precedent, exclusive reliance on quantitative benchmarks to assess materiality in preparing financial statements and performing audits of those financial statements is inappropriate; misstatements are not immaterial simply because they fall beneath a numerical threshold.  In Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824 (8^th Cir. 2003), the Eighth Circuit relied on the following principles to assess materiality:

• A fact is deemed material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as substantially altering the mix of information available to the investor.
• Information can be material because a reasonable investor would be interested in knowing that the senior managers of a company were oblivious to their underlings’ malfeasance. Management’s integrity is important to investors.
• In order to take the decision about materiality away from the jury, the circumstances must make it obvious why a reasonable investor would not be concerned about the facts misrepresented
• The importance of the misrepresented facts should not be judged with the advantage of hindsight. The test is whether there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” Rodney v. KPMG Peat Marwick, 143 F.3d 1140, 1144 (8th Cir. 1998) (quotations omitted) (emphasis added). This requires the factfinder to look at the information from the perspective of a reasonable investor at the time of the misrepresentation, not from the perspective of a reasonable investor looking back on how events unfolded.

Pursuant to SAB 99, “among the considerations that may well render material a quantitatively small misstatement of a financial statement item are –

• whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate¹⁴
• whether the misstatement masks a change in earnings or other trends
• whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise
• whether the misstatement changes a loss into income or vice versa
• whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability
• whether the misstatement affects the registrant’s compliance with regulatory requirements
• whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements
• whether the misstatement has the effect of increasing management’s compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation
• whether the misstatement involves concealment of an unlawful transaction.”

[i] No. JKB-15-901, 2015 WL 7294362, at *3 (D. Md. Nov. 18, 2015).

[ii] Id. at *3 (citations omitted).

[iii] Id.

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.

[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.

Disclosures made in the course of performing one’s job duties are protected under the SOX whistleblower law

A consensus is emerging that the duty speech doctrine does not apply to SOX whistleblower claims.[i] The duty speech defense asserts that disclosures made while performing routine job duties are outside the ambit of protected conduct. The defense became increasingly popular in the wake of the Supreme Court’s 2006 decision in Garcetti v. Ceballos, which held that government employees cannot bring First Amendment whistleblower retaliation claims based on work-related speech if the speech is part of their job duties.[ii]

Most Department of Labor (DOL) ALJs addressing this issue have declined to apply Garcetti to SOX claims. For example, Judge Lee Romero Jr. concluded that “one’s job duties may broadly encompass reporting of illegal conduct, for which retaliation results. Therefore, restricting protected activity to place one’s job duties beyond the reach of the Act would be contrary to congressional intent.”[iii]

Recently, a New York district court held in Yang v. Navigators Grp., Inc. that the duty speech defense is inapplicable to SOX claims.[iv] Jennifer Yang worked as the chief risk officer for Navigators Group (“Navigators”), an insurance company. Ms. Yang alleged that Navigators terminated her employment for disclosing to her supervisor deficient risk management and control practices. Navigators moved to dismiss Ms. Yang’s SOX claim in part on the basis that Yang’s disclosures about risk issues were “part and parcel of her job.”[v] The court rejected this duty speech argument, relying on a 2012 district court decision holding that “whether plaintiff’s activity was required by job description is irrelevant.”[vi]

[i] See, e.g., Robinson v. Morgan Stanley, ARB Case No. 07-070, 2010 WL 348303, at *8 (Jan. 10, 2010) (“[Section 1514A] does not indicate that an employee’s report or complaint about a potential violation must involve actions outside the complainant’s assigned duties.”).

[ii] See Garcetti v. Ceballos, 547 U.S. 410, 422 (2006).

[iii] Deremer v. Gulfmark Offshore, Inc., ALJ Case No. 2006-SOX-2, 2007 WL 6888110, at *42 (June 29, 2007).

[iv] See Yang v. Navigators Grp., Inc., 18 F. Supp. 3d 519, 530 (S.D.N.Y. May 8, 2014).

[v] Id.

[vi] See id. at 531 (citing Barker v. UBS AG, 888 F. Supp. 2d 291, 297 (D. Conn. 2012)).

Recent cases also suggest that the “duty speech” doctrine does not apply to False Claims Act protected conduct.

Establishing Knowledge of SOX Protected Conduct

The second element of a SOX claim is knowledge of protected conduct. A whistleblower may establish employer knowledge by demonstrating that a supervisor or senior executive knew of the activity (actual knowledge) or that a person with knowledge of the disclosure influenced the official who decided to take the retaliatory action (constructive knowledge).

In a SOX retaliation suit against an employer, a whistleblower need only make a protected disclosure to someone who has either supervisory authority over them or authority to investigate and address misconduct. The supervisor’s knowledge is imputed to the final decision maker.[i]

SOX whistleblowers can demonstrate knowledge of protected conduct using the cat’s paw theory, i.e., by showing that the decision-maker followed the biased recommendation of a subordinate without independently investigating the reason or justification for the proposed adverse personnel action.

In Jayaraj v. Pro-Pharmaceuticals, Inc.,[ii] the employer was a start-up biotechnology company whose primary executives were a chief executive officer (“CEO”) and a chief operating officer (“COO”). The CEO testified that when he decided to terminate the complainant’s employment, he was unaware that she had engaged in protected activities. However, based on evidence that the CEO and COO worked closely together since the founding of the company, the ALJ found that the COO had likely told the CEO about the complainant’s protected activity.

The Supreme Court has held that a “cat’s paw” theory of causation can apply in retaliation cases. Staub v. Proctor Hosp., 562 U.S. 411, 419-22 (2011). A “cat’s paw” theory of causation applies when the protected activity has no bearing on the decision-maker, but does bear on the actions of a lower-level supervisor, who in turns influences or causes the decision-maker to take the adverse action. Id. at 415; see also Bobreski v. J. Givoo Consultants, Inc., ARB No. 09-057, ALJ No. 2008-ERA-003, slip op. at 16 (ARB June 24, 2011); Zinn v. American Commercial Lines, 2009-SOX-25, slip. op. 18 (Nov, 19, 2012) (“A complainant is not required to prove direct knowledge on the part of the employer’s final decision maker because the law will not permit itself to insulate it by creating layers of bureaucratic ignorance between a whistleblower’s direct line of management and the final decision maker.”).

“A complainant may show contribution via a cat’s paw theory. See Kuduk, 768 F.3d at 790–91. This theory applies when the impermissible consideration has no bearing on the decision–maker, suggesting no discrimination, but does bear on the actions of another supervisor who in turns acts to bring about the ultimate adverse action in some way. See Staub v. Proctor Hosp., 562 U.S. 411, 422–23 (2011). If the impermissible factor contributed to actions of one supervisor, and those actions contributed to the ultimate decision resulting in the adverse action, then the impermissible factor was a contributing factor in the adverse action. The complainant need only show that one individual among multiple decision makers influenced the final decision and acted, in part, because of the protected activity. Rudolph, ARB No. 11–037 at 16–17 (citing Bobreski v. J. Givoo Consultants, Inc, ARB No. 09–057, ALJ No. 2008–ERA–3, slip op. at 13–14 (ARB June 24, 2011).”  Klinger v. BNSF Railroad Co., ALJ No. 2016-FRS-00062, at 16 (ALJ Sept. 29, 2022).

Some courts have held that SOX whistleblower protection does not apply extraterritorially, but in certain circumstances, the whistleblower protection provision of SOX can apply to covered employees working outside the United States.  One of our attorneys prevailed in defeating a dispositive motion in a SOX case on the issue of extraterritoriality where the employee of a US public company worked abroad but 1) blew the whistle to senior management working in the US headquarters and 2) management in the US office played a role in the decision to terminate the whistleblower’s employment.

Recently the ARB held in Perez v. Citigroup, Inc., ARB No. 2017-0031, ALJ No. 2015-SOX-00014 (ARB Sept. 30, 2019) (per curiam) that Section 806 does not apply extraterritorially and that applying Section 806 outside the United States could lead to conflict with the laws of foreign nations and potentially inconsistent results for employees.  According to the current ARB, the key factor to consider is the location of the employee’s permanent or principal worksite.

However, the ARB that served during the Obama Administration took a broader view of SOX extraterritorial jurisdiction and interpreted the scope of SOX protection in light of the purpose of the statute.  In particular, the Obama-era ARB held in Blanchard v. Exelis Systems Corp., ARB No. 15-031, ALJ No. 2014-SOX-20 (ARB Aug. 29, 2017) that Section 806 of SOX is a securities statute (not just an employment statute) and therefore there is no presumption limiting its application to U.S. territory.  Judge Brown concluded: “It is by analyzing the Sarbanes-Oxley Act as a whole that one finds Congress’s intent to protect both domestic and foreign-based employees of U.S. domestic or foreign publicly traded companies who ‘blow the whistle’ on activity the employee reasonably believes violates one or more of the ‘predicate’ acts or provisions of Section 806, provided the alleged wrongdoing of which the employee complains involves U.S. domestic violations of the ‘predicate’ act or provision unless the ‘predicate’ act/provision itself extends its reach extraterritorially.”

In January 2018, the Second Circuit affirmed the dismissal of a SOX whistleblower case where the plaintiff Paul Ulrich, a United States citizen who sometimes interacted with Moody’s United States managers, was an overseas permanent resident working for a foreign subsidiary of Moody’s, and the alleged wrongdoing and protected activity took place outside the United States.  The non-precedential order in Ulrich v. Moody’s Corp. is available here.

In a SOX case litigated in the Southern District of New York, the court permitted an employee of Accenture working in France to proceed with her claim.  O’Mahony v. Accenture Ltd and Accenture LLP, 07 Civ. 7916 (S.D.N.Y. Feb. 5, 2008).  The plaintiff alleged that the retaliation against her occurred in the United States and the conduct about which she complained, a scheme to evade social security taxes owed to France, also occurred in the United States. Weighing the pertinent material acts (the commission of the alleged fraud and the decision by Accenture LLP to retaliate against O’Mahon) against the fact that O’Mahony was employed in France and that Accenture SAS allegedly carried out the retaliation against O’Mahony at the command of Accenture LLP, the court found that “the center of gravity of the alleged misconduct was located within the United States.”