Financial Services Employment Law News, Updates, and Insights for Financial Services Employers

Expansion of Protected Activity Under Sarbanes-Oxley Continues

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By:  Allen B. Roberts and Frank C. Morris, Jr.

Continuing its trend from 2011, the Department of Labor (DOL) Administrative Review Board (ARB) seems intent on extending whistleblower protection under the Sarbanes-Oxley Act of 2002 (SOX) beyond allegations of securities fraud – even where that means reversal of its own administrative law judges who believe they are applying the law as Congress intended and consistent with ARB precedent. For now, whistleblowers and their attorneys can expect a more hospitable reception in this administrative forum for innovative claims alleging that adverse employment actions have occurred in reprisal for activity claimed to be covered by SOX Section 806. 

 

The ARB’s March 28, 2012 decision in Zinn v. American Commercial Lines Inc. (pdf) builds from the groundbreaking May 2011 holding in Sylvester v. Paraxel, Int’l LLC that “a reasonable belief about a violation of any rule or regulation of the Securities and Exchange Commission could encompass a situation in which the violation, if committed, is completely devoid of any type of fraud,” and a whistleblower need not prove fraud to win a retaliation claim. Zinn, at 8. Further, even if the whistleblower’s belief is mistaken, and no actual violation of the law has occurred, whistleblower protections are available and will be enforced.  Id. at 10.

SOX Section 806 protects whistleblowers who:

provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341[mail fraud], 1343[fraud by wire, radio or television], 1344 [bank fraud], or 1348 [securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders….

 

18 U.S.C. 1514(a)(1). 

 

In Zinn, an in-house attorney hired in November 2007 invoked SOX Section 806 protections for reports made in April and May 2008. In one, she notified a division vice president and her legal department supervisor of her belief that a vendor improperly had used unlicensed personnel on its tugboats, a circumstance she claimed needed disclosure to avoid an SEC Form 10-K misrepresentation. In the other, she expressed concern to her legal department supervisor that the appointment of a new General Counsel required an SEC Form 8-K announcement. In her administrative complaint filed with the Occupational Safety and Health Administration (OSHA), Zinn claimed that she was subjected to changed work responsibilities, drug testing, increased monitoring of her performance, and ultimately the new General Counsel’s termination of her employment in July 2008 for poor job performance and insubordination. After OSHA investigated and administratively dismissed her complaint, Zinn exercised her right to a hearing before an Administrative Law Judge (ALJ). 

 

The ALJ issued a decision dismissing the complaint, finding that Zinn did not show she engaged in protected activity and that her employer showed it would have taken the same adverse employment action regardless of any protected activity. From the ALJ’s perspective: (1) evidence of shareholder and securities fraud, essential to Zinn’s claim, was absent; (2) notwithstanding Zinn’s subjective belief of employer wrongdoing, she failed to establish that her beliefs were objectively reasonable; and (3) Zinn did not demonstrate that her employer actually violated the law. The ARB reversed and remanded, addressing and ascribing error on each of three critical issues: (1) based on the plain language of Section 806, reports of shareholder or securities fraud are not essential predicates for whistleblower protection; (2) reports of other types of frauds or violations suffice to support a claim; and (3) even without describing an actual violation of law, an employee’s communication of a reasonable but mistaken belief that her employer’s conduct constitutes a violation of any of the six enumerated categories under Section 806 may be protected.

 

In addition, the ARB reversed on the grounds that an incorrect standard was used to evaluate Zinn’s claim. Faulting the ALJ for applying the burden shifting standard utilized in the Title VII context, the ARB noted that SOX replaced the familiar McDonnell Douglas standard with a lesser burden of proof for complainants. According to the ARB, once protected activity is shown by a preponderance of evidence, analysis of SOX claims has the following elements:

  • Where protected activity involves providing information to an employer, the “reasonable belief” standard is measured by both subjective reasonableness (the employee “actually believed the conduct complained of constituted a violation of pertinent law”) and objective reasonableness (“evaluated based on the knowledge available to a reasonable person in the same factual circumstances with the same training and experience as the aggrieved employee”).  Zinn, at 6-7.
  • Direct or indirect proof that protected activity was a contributing factor to the adverse employment action can substantiate a claim. Id. at 11-12.
  • A contributing factor is any factor, including temporal proximity, that, “alone or in connection with other factors, tends to affect in any way the outcome of the decision.” Id.
  • Complainants are not necessarily required to prove the employer’s reasons for the adverse employment action are pretextual, and ALJs must weigh all evidence, including pretext evidence, to determine whether the complainant has overcome any legitimate business reason articulated by the employer.  Id. at 13.

Zinn further shapes the ARB’s landscape of whistleblower protections under SOX and should inform every employer faced with reports of potential violations of the law that: (1) allegations of any of the enumerated frauds or violations, not just securities and shareholder frauds, are protected under Section 806; and (2) a complainant can prevail even if there was no actual violation of the law.

It remains to be seen if the ARB’s extremely expansive interpretation of SOX and proof standards under SOX will pass muster as employers seek court review of principles announced in any of these recent decisions. There appear to be ample grounds to question the current ARB’s fidelity to both the language of SOX and expression of Congressional intent as demonstrated both by prior ARB decisions and decisions of ALJs.