Understanding SOX Whistleblower Litigation - Wild...

Understanding SOX Whistleblower Litigation

March 1, 2011

Steven J. Pearlman (Chicago)

1 | © 2011 Seyfarth Shaw LLP

Seyfarth’s National SOX Whistleblower Team

Webpage: www.seyfarth.com/SOX

Multi-disciplinary approach: combining the strengths of our L&Eemployment retaliation litigators and counselors; securitieslitigators; and corporate attorneys

Making our mark:

►Day v. Staples, Inc. (1st Cir.)

►Mart v. Berkshire Hathaway Inc., et al. (N.D. Ind.)

►O’Mahony v. Accenture (S.D.N.Y.)

►Giurovici v. Equinix, Inc. (ARB)

►Johnson v. WellPoint, Inc. (OALJ)


Legislative Purpose Behind SOX

Enacted July 30, 2002, in reaction to accounting and othercorporate scandals.

Congress sought to encourage reporting of fraud through“self-appointed corporate police” that could impactshareholder confidence without fear of retaliation.

“Insight vs. Oversight”: Congress recognized that employeeshave access to information beyond the government’s andpublic’s view and thus are uniquely positioned to protectshareholders.


Understanding The Whistleblower

Know your plaintiff’s motive to: develop effective methodsof either resolving the complaint internally before a claim isfiled; enhance the chances of reaching a favorablesettlement; and develop effective defenses.

“Private Attorney General” – the “good-faith complainant”

►Seeks to disclose unethical conduct to protect employees and shareholders

Opportunity and personal profit – the “bad-faith complainant”

►Under-performing employee “sees the writing on the wall”;►Disgruntled employee is seeking leverage; or►Employee seeking recognition or influence.


Litigation Procedure

Must file complaint with OSHA within 180 days of violation

Dodd Frank doubled the original 90-day statute of limitations

Employee can pursue claim through DOL’s adjudicative regime and thenproceed in federal court of appeals: OSHA → OALJ → ARB → Federal Appellate Court

Employee can “kick out” claim to federal district court (de novo) if DOLdoes not issue a final order within 180 days.

Stone v. Instrumentation Lab. Co.: can pursue a claim de novo indistrict court where a final decision was not reached within 180 days– even where an ALJ already adjudicated the claim. 2009 WL5173765 (4th Cir. Dec. 31, 2009)


OSHA Has Stepped Up Enforcement

OSHA’s recent willingness to issue substantial monetary rewards and orderreinstatement in response to pressure from the plaintiffs’ bar, advocacy groupsand GAO reports

March 2010: Tennessee Commerce Bank ordered to pay $1M and reinstatea CFO (6th Circuit found reinstatement not necessary)

March 2010: e-Smart Technologies ordered to pay ~ $600K and reinstateemployee

May 2010: Assistant Secretary of Labor announced OSHA’s plan tosubstantially strengthen whistleblower program

June 2010: U.S. Bank in Seattle ordered to pay back wages and reinstatemanager

U.S. DOL Secretary Solis appointed 2 new judges to the ARB


SOX’s Coverage

Arguably, coverage under § 806 was limited to private companies – specifically, coveragewas limited to “company with a class of securities registered under Section 12 of theSecurities Exchange Act of 1934 [“SEA”] … or that is required to file reports under Section15(d) of the [SEA] … or any officer, employee, contractor, subcontractor or agent … .” 18U.S.C. § 1514(a)

As noted later in this presentation, Dodd-Frank amended § 806 to provide that SOX coversprivate subsidiaries and affiliates of publicly held companies whose finances areconsolidated with the parent

Retroactive? ARB currently is focusing on this issue in Johnson v. Siemens Building Technologies,

et al., ARB Case No. 08-032► If not retroactive, Johnson raises the question of which of the competing prior tests is

appropriate – agency test vs. integrated enterprise test– Agency: whether parent was involved in the challenged employment decision

– Integrated Enterprise: Examines centralized control of labor and employment relations; interrelation ofoperations; common management; and common ownership or financial control


Coverage (cont’d)

Extraterritorial application?

A number of courts and the ARB have ruled that SOX does notprovide for jurisdiction over claims filed by foreign nationalsemployed outside of the U.S., as § 806 was not intended to apply topersons employed outside of the U.S.

►These decisions are consistent with the presumption against

extraterritorial application of employment law statutes

At least one federal court has taken the opposite view. O’Mahony v.Accenture Ltd., 537 F. Supp. 2d 506 (S.D.N.Y. Feb. 5, 2008).


Damages, Penalties & Other “Teeth”

Civil Criminal ReputationReinstatement “Whoever knowingly, with the intent to

retaliate, takes any action harmful to anyperson, including interference with thelawful employment or livelihood of anyperson, for providing to a law enforcementofficer any truthful information relating to thecommission or possible commission of anyfederal offense, shall be fined … imprisonednot more than 10 years, or both. (§ 1107)

Enforced by DOJ.

Cases garnersignificantpublicity,adverselyimpactingreputation andgoodwill.

Back-pay with interest

Emotional distress and lossof reputation

Attorneys’ fees and costs

Other “affirmative relief”(e.g., letter of apology,formal posting of decision)

SOX also provides for INDIVIDUAL LIABILITY.


Competing Burdens Of Proof

Employee’s Burden:

Must show the following by a preponderance of the evidence:protected activity; employer knew or suspected, actually orconstructively, that employee engaged in protected activity;unfavorable personnel action; and circumstances sufficient to raiseinference that protected activity was a contributing factor.

Employer’s Burden:

Must show by clear and convincing evidence that it would have takenthe same unfavorable personnel action in the absence of theprotected activity.


Protected Activity &Unfavorable Personnel Action

Protected Activity:

Employee engages in “protected activity” by providing information heor she reasonably believes constitutes a violation of federal mail,wire, bank or securities fraud; federal law relating to fraud againstshareholders; or any rule or regulation of the SEC

Unfavorable Personnel Action:

Adopts standard in Burlington Northern & Santa Fe Ry. Co. v. White,548 U.S. 53 (2006) (plaintiff must show that a reasonable employeewould have found the challenged action materially adverse)


Defenses

180-Day Statute of Limitations

Ricks doctrine: clock starts ticking when the decision is final andcommunicated to the employee.

The newly constituted ARB has been receptive to equitablemodification arguments. See Hyman v. KD Resources, 2010DOLSOX LEXIS (ARB Mar. 31, 2010).

Failure to Exhaust Administrative Remedies


Defenses (cont’d)

Employee Lacked A “Reasonable Belief”

§ 806 requires an employee to have a reasonable belief that he orshe is complaining of the type of fraud the statute prohibits.

Subjective requirement

Objective requirement

►Day v. Staples, Inc., 555 F.3d 42, 55 (1st Cir. 2009)

►“Educational background and sophistication” of complainant are relevant factors


Defenses (cont’d)

Complaint Does Not “Definitely And Specifically” Relate To Prohibited ConductIdentified In § 806

Courts have rejected claims based on unlawful activities that do not specificallyimplicate the types of fraud specified in Section 806. Harvey v. Home Depot, U.S.A.,Inc., Case Nos. 04-114, 115, 2006 DOLSOX LEXIS 65, at *32-*33 (ARB June 2,2006) (“Providing information to management about questionable personnel actions,racially discriminatory practices, executive decisions or corporate expenditures withwhich the employee disagrees, or even possible violations of other federal laws suchas the Fair Labor Standards Act or Family Medical Leave Act, standing alone, is notprotected under the SOX.”)

Complaints about internal operations are insufficient

Day v. Staples, Inc. (supra)


Defenses (cont’d)

Must be material to investors

Frederickson v. The Home Depot U.S.A., Inc., Case No. 07-100, 2010 DOL LEXIS 47,at *14 (ARB May 27, 2010) (“to come under the protection of SOX, the employee mustordinarily complain about a material misstatement of fact or omission concerning acorporation’s financial condition on which an investor would reasonably rely.”)

However, the focus is on whether the employee reasonably believed that there wouldbe a material impact on shareholders. Barker v. UBS AG & UBS Securities LLC, CaseNo. 09-CV-2084 (D. Conn. Jan. 26, 2011)

Must be a fraud on shareholders

courts divided

presently before the ARB in Sylvester v. Parexel International LLC, ARB No. 07-123


Defenses (cont’d)

Must be a “present” – rather than a potential “future” – violation

Robinson v. Morgan Stanley, Case No. 07-070, 2010 DOLSOX LEXIS 7, at *21 (ARBJan. 10, 2010): “A mere possibility that a challenged practice could adversely affectthe financial condition of a corporation, and that the effect on the financial conditioncould in turn be intentionally withheld from investors, is not enough.”


The Dodd-Frank Wall Street Reform& Consumer Protection Act

Enacted July 21, 2010

Expands and strengthens Section 806 of SOX

SOX now covers private subsidiaries and affiliates of publicly tradedcompanies whose financial information is consolidated with parent’s

Doubles statute of limitations (90 180 days)

Provides a right to a jury trial in actions “kicked-out” to federal district court

Prohibits pre-dispute arbitration agreements and any other “agreement,policy, form, or condition of employment” that requires a waiver of rightsunder SOX


Bounties

Dodd-Frank creates financial incentivesfor employees to go straight to the SECand bypass internal compliancemechanisms

§ 922 amends the Securities Exchange Act of1934 by requiring the SEC to provide amonetary award to individuals who“voluntarily” provide “original information” tothe SEC that results in sanctions exceeding$1,000,000

SEC has discretion to award between 10%-30% of the total amount of the sanctions


Bounties (cont’d)

SEC’s proposed regulations

SEC will consider if an internal complaint was made in exercising its discretion todetermine the size of the bounty

90-day “grace period” following internal report to report to SEC if company “failed toreport the information to the SEC in a reasonable time” or “acted in bad faith”

► Report to SEC within 90 days means that the date of the internal report is considered the date of the complaint to the SEC for determining whether the employee gave the SEC “originalinformation” (employee keeps his or her “place in line”)

Management’s concerns:

► Internal complaint should be mandatory

► is 90 days a sufficient time for the company to investigate?

► “Bad faith” is amorphous and subjective


Bounties (cont’d)

SEC’s proposed regulations (cont’d)

“Whistleblower” defined: Must be an individual, not an entity, who, alone or jointly withothers, provides "original information" to the SEC relating to a potential violation of thesecurities laws

► Information submitted to the SEC is not limited to "actual, proven securities violations”

Anonymous submissions: Anonymous whistleblower must be represented by anattorney and the attorney's contact information must be provided to the SEC upon thewhistleblower's initial submission. In addition, the attorney representing an anonymouswhistleblower must provide the SEC a form certifying that the attorney verified thewhistleblower’s identity.

Whistleblower’s misconduct: Whistleblower shall not receive any amount he or she isordered to pay or that is assessed against an entity attributable to "conduct that thewhistleblower directed, planned, or initiated."

► Shouldn’t the whistleblower who engaged in misconduct be completely barred from any recovery?


Bounties (cont’d)


Broad protection against retaliation: protect any individual who providesinformation to the SEC regarding potential violations of the securities laws,"regardless of whether the whistleblower fails to satisfy all of therequirements for award consideration set forth in the Commission's rules.”

► Thus, employees who provide mistaken reports to the SEC may still be protected

“Voluntary” submission: whistleblower must submit information beforehe/she or his/her employer receives a request from the SEC

► Report is not voluntary if whistleblower has a pre-existing duty to report violations. But if the company fails to report information that the SEC requests “in a timelymanner” then the report may be considered voluntary


Bounties (cont’d)


“Original information”:

► “Original information" must be derived from either "independent knowledge" or "independent analysis." Contrast information obtained from publicly availablesources. But first-hand knowledge is not required.

► Exclusions: privileged information; non-privileged information lawyer obtains through legal representation; information obtained by independent publicaccountant; individuals with legal, compliance, audit, supervisor or governanceresponsibilities (except where company fails to disclose information to the SEC ina reasonable time or proceeds in bad faith); information obtained through aviolation of a state or federal criminal law; individuals who obtain information fromother individuals who are subject to the foregoing exclusions.


New Private Rights Of Action

Private right of action in federal court for retaliation based onreporting securities fraud to the SEC

May pursue directly in federal court (contrast SOX)

Double back-pay available

Exceptionally long statute of limitations: employee has up to 6 years afterthe violation occurred, or 3 years after he or she knew or reasonably shouldhave known of facts material to the violation, so long as the complaint is filedwithin 10 years of the violation


New Private Rights Of Action (cont’d)

Protection For Financial Services Employee Whistleblowers

Protects employees in the financial services industry who are retaliated against forcomplaining of fraud related to the offering or provision of a consumer financialproduct or service

Applies to companies that: extend credit or service or broker loans; provide realestate settlement services or perform property appraisals; provide financial advisoryservices to consumers relating to proprietary financial products, including creditcounseling; or collect, analyze, maintain, or provide consumer report information orother account information in connection with any decision regarding the offering orprovision of a consumer financial product or service

Burden-shifting framework similar to SOX (employee-friendly); 180-day statute oflimitations; 210 days to kick out to federal district court; right to a jury trial; cannot besubject to mandatory arbitration agreements


Questions?

Peter A. Walker

(212) 218-5570

[email protected]

Ariel D. Cudkowicz(617) 946-4884

[email protected]

Steven J. Pearlman(312) 460-5000

[email protected]

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