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Preventing Whistleblower Claims: Lessons Learned From Another Year of Sarbanes-Oxley. AGG Employment Law Seminar June 10, 2004 Robert F. Dow Arnall Golden Gregory LLP 1201 West Peachtree St., Ste. 2800 Atlanta, Georgia 30309 (404) 873-8706

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preventing whistleblower claims lessons learned from another year of sarbanes oxley
Preventing Whistleblower Claims: Lessons Learned From Another Year of Sarbanes-Oxley

AGG Employment Law Seminar

June 10, 2004

Robert F. Dow

Arnall Golden Gregory LLP

1201 West Peachtree St., Ste. 2800

Atlanta, Georgia 30309

(404) 873-8706

sarbanes oxley whistleblower provisions
Sarbanes-OxleyWhistleblower Provisions
  • Civil remedies for retaliation against employees reporting securities fraud to company supervisors, law enforcement or Congress (Sec. 806)
  • Criminal remedies for retaliation against informants reporting violations of any federal law to law enforcement (Sec. 1107)
  • Audit committees must establish procedures for handling complaints about accounting and auditing issues (Sec. 301)
  • Requires a code of ethics addressing compliance with laws and internal reporting of violations (Sec. 406)
Section 806

Civil Remedies

section 806 what actions are protected
Section 806 What Actions Are Protected
  • Providing information or otherwise assisting in an investigation OR
  • Filing, testifying, participating in or otherwise assisting in a proceeding that is
    • Filed or
    • About to be filed (with any knowledge of the employer)
section 806 what investigations are covered
Section 806 What Investigations Are Covered

Investigations involving violations of:

  • Federal criminal law involving securities fraud, mail fraud, bank fraud, or wire, radio and television fraud
  • SEC rules or regulations; or
  • Federal law relating to fraud against shareholders.
section 806 blowing the whistle to whom
Section 806 Blowing The Whistle – To Whom?
  • Federal regulatory or law enforcement agency
  • Any member or committee of Congress
  • Persons working for the employer:
    • Supervisory authority over employee
    • Authority to investigate, discover, or terminate misconduct
procedure for seeking remedies
Procedure ForSeeking Remedies
  • Complainant has 90 days after violation to file complaint with Department of Labor (DOL)
  • DOL must determine that the employee has made a showing that the protected conduct was a contributing factor in the employer’s action
  • If so, DOL opens an investigation
procedure for seeking remedies cont d
Procedure ForSeeking Remedies (cont’d)
  • DOL issues an order to either dismiss the complaint or impose sanction
  • Either party may appeal the order to an administrative law judge
  • If DOL does not resolve the complaint within 180 days, complainant may bring a claim in federal district court
morefield v exelon services jan 2004
Morefield v. Exelon Services (Jan. 2004)
  • Plaintiff claims:
    • Management manipulated financial reports
    • Plaintiff fired when he complained
  • Company claimed the employee of a non-public subsidiary not covered by SOX
  • Lessons:
    • Can’t play corporate shell game to avoid liability
    • No materiality limit for accounting irregularities
welch v cardinal bankshares jan 2004
Welch v. Cardinal Bankshares(Jan. 2004)
  • Plaintiff claims:
    • False accounting entries to inflate income
    • CFO access to auditors restricted
    • Too many non-finance personnel could make accounting entries without CFO approval
  • Company started an investigation into allegations
  • Plaintiff terminated when he refused to meet with audit committee without his attorney
welch v cardinal bankshares jan 2004 cont d
Welch v. Cardinal Bankshares(Jan. 2004)(cont’d)
  • Lessons learned:
    • Employee needs only reasonablebelief
    • Company liable even if investigation indicates allegations were wrong
    • Can’t place conditions on communications
    • Protected activity only has to be a “contributing factor” in termination
    • Closeness in time may indicate that termination was in retaliation
hopkins v atk tactical sys may 2004
Hopkins v. ATK Tactical/Sys. (May 2004)
  • Plaintiff claims he was fired because he complained about release of sludge into groundwater
  • Complaint dismissed because it was filed late and failed to show a cause covered by SOX
  • Lessons:
    • Close attention to procedures needed
    • SOX not that broad: only financial fraud
    • Employee’s best shot is to show there is no legitimate claim
platone v atlantic coast airlines april 2004
Platone v. Atlantic Coast Airlines(April 2004)
  • Plaintiff claims she was terminated because she raised concerns about possible flight pay fraud
  • Company claims plaintiff was dismissed due to her personal relationship with a union representative/pilot
  • Lessons:
    • Employer must show proper motive by clear and convincing evidence
    • If dual motives can’t be separated, employer loses
getman v southwest securities inc feb 2004
Getman v. Southwest Securities, Inc.(Feb. 2004)
  • Plaintiff claims:
    • Pressured to give favorable analysts’ report on SSI client
    • Fired when she refused to sign a “buy” rating
  • Lessons:
    • Refusal to sign report is “whistleblowing”
    • Company can’t suddenly decide that this is a bad employee after protected conduct
whitley v coca cola oct 2003
Whitley v. Coca-Cola (Oct. 2003)
  • Plaintiff claims he was fired for raising issues about Coke’s fountain unit and Burger King
  • Settled for $540k: $240k to plaintiff and $300k to his attorney
  • Coke also wrote down $9 million in assets, and continues to be under an SEC investigation
halloum v intel corp mar 2004
Halloum v. Intel Corp. (Mar. 2004)
  • Plaintiff claims the company retaliated for his complaints about improper deferral of invoices by placing more stringent requirements on him
  • Company was able to establish that it would have taken these actions, regardless of the complaints, due to plaintiff’s poor performance and violations of policy
  • Lesson: Timely documentation of employee performance is key to defending whistleblower claims
murray v txu corp et al texas april 2003
Murray v. TXU Corp. et al. (Texas, April 2003)
  • Allegations in Murray’s complaint:
    • TXU had aggressive earnings targets
    • CFO engaged in “earnings management”
    • TXU didn’t disclose exposures in trading markets
    • Murray made numerous objections to management
  • Murray was terminated 8/1/02
collins v beazer homes georgia may 2003
Collins v. Beazer Homes(Georgia, May 2003)
  • Allegations from Collins:
    • Beazer was taking deposits on homes but misapplying the funds for other purposes
    • Collins suspected that Beazer division management was receiving kickbacks from a contractor
    • Collins complained to corporate management
    • Division management immediately terminated her
Section 1107

Criminal Penalties

section 1107 criminal penalties overview
Section 1107 Criminal Penalties – Overview
  • Very broad application
  • Applies to public and private companies
  • Whistleblowing of violations of any federal law
  • Employers and their agents may face:
    • Fines up to $500,000 ($250,000 for individuals)
    • Imprisonment up to 10 years
federal sentencing guidelines reward effective compliance program
Federal Sentencing Guidelines Reward “Effective Compliance Program”
  • Compliance standards and procedures reasonably capable of reducing the prospect of criminal activity
  • Oversight by high-level personnel
  • Due care in delegating substantial discretionary authority
  • Effective communication to all levels of employees
federal sentencing guidelines reward effective compliance program cont d
Federal Sentencing Guidelines Reward “Effective Compliance Program” (cont’d)
  • Reasonable steps to achieve compliance, which include systems for monitoring, auditing, and reporting suspected wrongdoing without fear of reprisal
  • Consistent enforcement of compliance standards including disciplinary mechanisms
  • Reasonable steps to respond to and prevent further similar offenses upon detection of a violation
jan 2004 amendment to sentencing guidelines
Jan. 2004 Amendment to Sentencing Guidelines
  • Reporting system must encourage employees to seek guidance regarding potential criminal conduct without fear of retribution
  • System to periodically evaluate compliance program’s effectiveness in:
    • Preventing and detecting criminal activity
    • Promoting a culture that encourages a commitment to compliance with law
  • Compliance training programs for directors, senior management and personnel with substantial authority
Section 301

Audit Committee Requirements for Complaint Procedures

procedures for handling complaints regarding accounting matters
Procedures for Handling Complaints Regarding Accounting Matters
  • Receipt, retention, and treatment of complaints
  • Regarding accounting, internal accounting controls or auditing matters
  • Including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters

The SEC rules require the audit committee to establish procedures for:

section 301 effective dates
Section 301 Effective Dates
  • Rule became effective 4/25/03
  • Applies to all companies listed on national securities exchange or association (NYSE, AMEX, Nasdaq, etc.)
  • Most listed companies must comply by the earlier of:
    • First annual meeting after 1/15/04 or
    • 10/31/04e until 7/31/05
survey by deloitte touche july 2003
Survey by Deloitte & Touche (July 2003)

(Top 4000 public companies)

79% - have a hotline or other mechanism to report ethics issues

- 90% of those have anonymous reporting

- 40% report results at least quarterly to Board of Directors

67% - have training on ethics and compliance