SOX Whistleblower Protection Expanded By A Federal Appeals Court

Michael Starr is a Partner and Katherine H. Marques an Associate in our New York office

A federal appeals court recently made it substantially easier for plaintiffs to assert claims that they were fired for "whistleblowing" activity protected by the Sarbanes-Oxley Act ("SOX"). In Wiest v. Lynch, 2013 WL 1111784 (3d Cir. Mar. 19, 2013), the U.S. Court of Appeals for the Third Circuit ruled that an employee who communicates to corporate managers a "reasonable belief" that an accounting irregularity or "misstatement of accounting records" is about to occur may be protected from retaliation by SOX, even if the protest lacks any clear indication that the error had the markings of shareholder fraud, such as its being an intentional misrepresentation as to facts that would be of material significance to investors. Other courts had previously required more than the mere assertion of inaccurate or irregular accounting to rise to the level of "protected activity" under the SOX whistleblower provision. The Wiest court, however, fully embraced a broad re-interpretation of that statute recently advanced by the administrative agency authorized to enforce the SOX prohibition against whistleblower retaliation. If other courts follow Wiest in this new direction, the scope of SOX whistleblower protection will be dramatically expanded.

Under Section 806(a) of SOX (18 U.S.C. §1514a), publicly traded companies are prohibited from discharging, or in any other way discriminating against, employees who lawfully provide information concerning conduct that they reasonably believe constitutes a violation of certain specified federal anti-fraud statutes (namely, mail fraud, wire or media fraud, bank fraud, securities and commodities fraud), any rule or regulations of the Securities and Exchange Commission, or "any provision of Federal law relating to fraud against shareholders" (emphasis added). Unless one of these six categories enumerated by Section 806 is implicated by the employee's protest, the SOX anti-retaliation protections do not apply. It is this last category — generically, "shareholder fraud" — that appears to have grown in significance in the Wiest decision.

Background

Wiest worked for 30 years in the accounting department of Tyco Electronics before he was fired in April 2010, after having raised concerns about the proper accounting treatment for several large and questionable expenses. Wiest's objections to the accounting for these expenses arose from...