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March 5, 2014

SOX whistle-blower protection extended to contractors

The US Supreme Court has applied a broad interpretation to the whistle-blower protection provisions of the Sarbanes-Oxley Act of 2002 (SOX), ruling that private companies’ employees serving public companies deserve protection too.

The US Supreme Court reviewed the case of Fidelity Management and Research (FRM), a mutual fund, and the former employees of its private contractors, who alleged they suffered retaliation when they exposed reputed fraud committed by FRM.

The plaintiffs claimed they should be protected by the SOX Act as its definition of "employee" not only refers to the staff of public companies but also to their private contractors and subcontractors.

A majority of the US Supreme Court judges decided on Tuesday by six votes to three, that section 1514A of SOX Act should also afford protection to the employees of private contractors from retaliation when they blow the whistle on fraud.

The US Supreme Court said FRM’s "textual arguments" that the term employee must refer exclusively to a public company employee were "unpersuasive".

Delivering the opinion of the court, Justice Ginsburg emphasised that it’s common practice for public companies in the mutual funds industry to have no employees of their own.

Therefore, SOX’s provision should protect "the employees of investment advisors, who are often the only first-hand witnesses to shareholder fraud involving mutual funds," Justice Ginsburg stated.

The US Supreme Court added that there is scant evidence that such an interpretation of the SOX Act would "open the floodgates" for whistle-blowing litigation, as the court’s reading of the law is in line with the US Department of Labor’s regulation, which have been applied for a decade.

Enron scandalJustice Ginsburg also argued that the court’s interpretation is within the spirit of the SOX Act, enacted to avoid another Enron scandal. She stated that the legislative records show how the US Congress understood that external professionals bear responsibility for reporting the fraud of the companies with whom they contract.

"That fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors. Sarbanes-Oxley contains numerous provisions designed to control the conduct of accountants, auditors, and lawyers who work with public companies, but only section 1514A affords such employees protection from retaliation," Justice Ginsburg states.

Delivering the dissenting opinion, Justice Sotomayor stated this reading of the act gives SOX "a stunning reach".

She argued that according to such as an interpretation a babysitter could "bring a federal case against his employer -a parent who happens to work at the local Walmart (a public company)- if the parents stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud."

For Justice Sotomayor, there is nothing in the text, context, or purpose of the SOX Act that suggests Congress wanted to cover the employees of private businesses that contract with public companies.

She argued that, as the rest of the SOX Act demonstrates, if the US Congress had really wanted section 1514A to impose liability upon broad swaths of the private sector, it would have said so more clearly.

Dodd-Frank ActIn November 2013, in relation to the amendments to the SOX Act introduced by the Dodd-Frank Act of 2010, former congressman Michael Oxley told The Accountant: "We’ll see how that works but I’m sceptical the changes in the Dodd-Frank Act are going to be helpful in encouraging whistle-blowing and discouraging retaliation."

Oxley was referring to the extended protection offered to those who provide information to the US Securities Exchange Commission (SEC) about the violation of securities laws, which is rewarded by a percentage of the potential sanction.

"I thought that the whistle-blower had to exhaust every avenue within the company, before they went to the SEC. They have a chance to really make millions of dollars," Oxley said.

Related storyScandal buster: Michael Oxley exclusive interview

Related linkUS Supreme Court: Lawson versus FMR

 

 

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