Blowing the Whistle on Fraud - Sarbanes-Oxley's Provision That Protects Employees Who Report Wrongdoing May Pose Problems

Originally published in The National Law Journal 11/25/02

By Clifford Thau and Gregory Zimmer

The recently enacted Sarbanes-Oxley Act received widespread attention for its provisions requiring that certain officers and directors of public companies certify their companies' financial statements, prohibiting most corporate loans to officers and directors and the destruction of auditing documents, creating the Public Company Accounting Oversight Board and regulating potential conflicts of interest relating to accounting firms and stock analysts. The act drew attention also for the criminal penalties it imposes. Discussed less often is the provision of the act that protects whistleblower employees.

The language and legislative history of the whistleblower provision of the act raise questions about how it will be interpreted by the courts. It is instructive to compare the act's whistleblower provision to the anti-retaliation provision of Title VII of the Civil Rights Act of 1964 and analyze judicial interpretations of that provision.Sec. 806 of the act prohibits most public companies, their officers, employees and agents from discharging, demoting, suspending, threatening, harassing or otherwise discriminating against employees who provide information to federal regulatory or law enforcement agents, members of Congress or their supervisors or assist in the investigation of conduct that the employee reasonably believes constitutes a violation of criminal fraud statues, any rule or regulation of the Securities and Exchange Commission or any provision of federal law relating to fraud against shareholders. The act also protects employees who file or participate in lawsuits or other proceedings alleging such violations.

The act's legislative history indicates that its whistleblower provision is intended to impose the "normal reasonable person standard used and interpreted in a wide variety of legal contexts" and that "[t]he threshold is intended to include all good faith and reasonable reporting of fraud." 148 Cong. Rec. S7481-01. However, application of the "reasonable person" standard to claims under the whistleblower provision may present difficulties for courts, especially in today's highly charged corporate-fraud environment.

Public awareness

The current state of stock prices and the economy, combined with the recent attention given to high-profile cases of alleged corporate fraud, has highlighted the issue in the public mind; much of the public believes that many corporations engage in some form of fraud. Polls conducted in June show that 82% of Americans had heard of, or read about, recent corporate accounting scandals and bankruptcy filings and that 70% followed these stories either "very closely" or "somewhat closely" (Bloomberg News), that 79% of Americans believe "questionable accounting" is widespread among American corporations, only 27% believe that...