Source: https://www.weil.com/articles/sarbanes-oxley-update-the-whistleblower-provisions
Timestamp: 2019-04-25 08:27:46+00:00

Document:
On July 30, 2002 President Bush signed the Sarbanes-Oxley Act of 2002,1 instituting sweeping changes in the accounting and disclosure requirements applicable to public companies. The legislation contains several provisions that entail important changes in employment law. Section 806 of the Act creates a civil action for employees of public companies who have been subject to retaliation due to their disclosure of illegal activities perpetrated by their employers.2 Section 501 of the Act mandates protection from retaliation for securities analysts who report negatively on corporations that have an investment banking relationship with the analysts’ employers.3 Finally, Section 307 of the Act requires the promulgation of new rules of professional conduct that require attorneys who “appear” or “practice” before the SEC to make reports of evidence of certain violations of law to the public company’s chief legal counsel, chief executive officer or board of directors. These provisions, particularly the anti-retaliation sections of the Act, are a marked departure from the prior status of whistleblower protection under New York law.
The Securities and Exchange Commission has not yet promulgated any rules to effectuate this statutory mandate.
On November 6, 2002 the Securities and Exchange Commission issued a press release announcing that the Commission had voted to propose rules based on Section 307. The Commission announced that “the proposed rule would adopt an expansive view of who is an attorney subject to the rule, covering all attorneys … whether employed in-house by an issuer or retained to perform legal work on behalf of an issuer.” The Commission also stated that the rule will not require an attorney to know that a violation has occurred, but that reporting obligations will be implicated whenever “an attorney ‘reasonably believes’ that a material violation has occurred….” The proposed rules will also permit and/or require an attorney whose internal complaints have been ignored to effectuate a “‘noisy withdrawal’” by “disaffirm[ing] a submission to the [Securities and Exchange] Commission which the attorney believes has been tainted by a material violation….” It is important to note however that neither Section 307, nor the recent announcement of the forthcoming rules to be promulgated pursuant to that provision, provide explicit protection against retaliation for attorneys who disclose violations by an issuer. In-house attorney whistleblowers would presumably be protected as “employees” under Section 806 of the Act, but it is unlikely that that this provision would provide protection to outside counsel.
1. P.L. 107-204, 116 Stat. 745 (2002).
3. 15 U.S.C. § 78a(15)(D)(a)(1)(C).
4. N.Y. Lab. Law § 740(2)(a) (Consol. 2002).
6. Lamagna v. New York State Assoc. for the Help of Retarded Children, Inc., 551 N.Y.S.2d 556, 557, 158 A.D.2d 588, 589 (2nd Dep’t 1990).
7. Murphy, 58 N.Y.2d at 297-98, 448 N.E.2d at 87.
8. Murphy, 58 N.Y.2d at 300, 448 N.E.2d at 89.
10. Murphy, 58 N.Y.2d at 301, 448 N.E.2d at 89. See also Mulder v. Donaldson, Lufkin & Jenrette, 623 N.Y.S.2d, 560, 563, 208 A.D.2d 301, 305 (1st Dep’t 1995) (refusing to extend exception to at-will employment doctrine recognized for attorneys to plaintiff auditor in retaliation suit against defendant securities dealer).
11. S. Rep. No. 107-146, at 10 (2002).
12. To encourage employees to come forward, Section 301 of the Sarbanes-Oxley Act requires issuers of securities to form “audit committees” made up of independent directors who would be required, among other duties, to establish procedures for the confidential and anonymous receipt of complaints from employees regarding accounting or auditing matters. See 15 U.S.C. § 78f(m)(4). These provisions are, at least in part, a reaction to the perceived role of employees in disclosing, or failing to disclose, improprieties in the recent corporate accounting scandals. See David Barboza, Teaching Them How to Blow the Whistle, N.Y. Times, July 21, 2002, § 3, at 2.
13. 18 U.S.C. §§ 1341, 1343, 1344 and 1348 are the federal criminal provisions relating to mail fraud, wire fraud, bank fraud and securities fraud, respectively.
14. 18 U.S.C. § 1514A(a)(1)-(2). The provision only applies to corporations “with a class of securities registered under Section 12 of the Securities and Exchange Act of 1934 (15 U.S.C. 781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d))….” 18 U.S.C. § 1514A(a).
15. The Act provides that proceedings at the DOL will be governed by the procedures set forth in 49 U.S.C. § 42121(b), which is the federal statute governing the protection of employee whistleblowers in the airline industry. See 18 U.S.C. § 1514A(b)(2)(A). These procedures mandate that, within 60 days of the receipt of a complaint, the DOL must determine whether there is reasonable cause to believe a violation has occurred, and, if so, issue a preliminary order granting temporary relief. See 49 U.S.C. § 42121(b)(2). Within 30 days of the issuance of this preliminary finding, either party can request a hearing on the record. See id. If a hearing is not requested, the preliminary order will be deemed a final order. See id. If a hearing is held, then the DOL must, within 120 days of the conclusion of the hearing, issue a final order providing or denying the relief requested. See 49 U.S.C. § 42121(b)(3)(A).
16. 18 U.S.C. § 1514A(b)(1). The Act provides that any action brought in federal district court will be governed by the burdens of proof set forth in the federal statute governing the protection of employee whistleblowers in the airline industry. See 18 U.S.C. § 1514A(b)(2)(C). This system of proof requires the claimant to make a “prima facie” showing that wrongful retaliation was a “contributing factor” in the adverse personnel action. However, relief may not be granted if the employer demonstrates by “clear and convincing” evidence that the employer “would have taken the same unfavorable personnel action in the absence of” the employee’s disclosures. See 49 U.S.C. § 42121(b)(2)(B).
17. 18 U.S.C. § 1514A(b)(2)(D).
18. 18 U.S.C. § 1514A(c)(1).
19. 18 U.S.C. § 1514A(c)(2). The statute does not provide for the imposition of punitive damages. See 18 U.S.C. § 1514A(c).
20. See Patrick McGeehan, Goldman Wooed A Star Analyst, Documents Show, N.Y. Times, Oct. 12, 2002, at C1; Editorial, Jack Grubman’s Last Deal, N.Y. Times, August 17, 2002, at A10.21. 15 U.S.C. § 78a(15)(D)(a)(1)(C).
148 Cong. Rec. S6555 (daily ed. July 10, 2002) (statement of Sen. Enzi).
23. The proposed rules were published on November 21, 2002. The text of the rules can be accessed at http://www.sec.gov/rules/proposed/33-8150.htm . Comments on the proposed rules are due by December 18, 2002.
24. Press Release, Securities and Exchange Commission, SEC Proposes Rules to Implement Sarbanes-Oxley Act Provisions Concerning Standards of Professional Conduct for Attorneys (Nov. 6, 2002), at http://www.sec.gov/news/press/2002-158.htm.
26 Id. The rules will provide that such a disaffirmation does not breach the attorney-client privilege. See id.

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