Whistleblower Law Blog
The Internal Revenue Service released new guidelines for whistleblowers to report tax fraud and possibly claim a reward based on the amount of additional tax, penalties and interest that is owed. Under the new procedures, the award for reporting tax fraud ranges from 15% to 30% of the collected proceeds. To be eligible for an award, the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed in the aggregate $2,000,000 and, if the allegedly noncompliant person is an individual, the individual’s gross income must exceed $200,000. The new guidelines are posted at http://www.irs.gov/pub/irs-drop/n-08-04.pdf.
Yesterday the Senate approved by unanimous consent S. 274, Federal Employee Protection of Disclosures Act (FEPDA). The FEPDA would significantly improve both substantive and procedural protections for federal employee whistleblowers and would close the many loopholes that the Federal Circuit and the Merit Systems Protection Board have read into the Whistleblower Protection Act of 1989. In particular, the FEPDA would:
- Remove the Federal Circuit’s monopoly on whistleblower appeals;
- Reverse the judge-made requirements of “irrefragable proof,” of the whistleblower being the original source of the report of a violation, and of immediate reporting of the violation;
- Protect reports made as part of job duties (thus clarifying that the Garcetti duty speech doctrine does not apply to federal employees); and
- Recognize denial of a security clearance as an adverse employment action.
Under the FEPDA, protected conduct includes “any disclosure that-`(i) is made by an employee or applicant of information required by law or Executive order to be kept secret in the interest of national defense or the conduct of foreign affairs that the employee or applicant reasonably believes is direct and specific evidence of–`(I) any violation of any law, rule, or regulation; (II) gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety; or(III) a false statement to Congress on an issue of material fact.”
The companion bill in the House (HR 985), which was passed in March 2007, is stronger than S274 in that it enables a whistleblower to remove a WPA claim to federal court for a jury trial if there is no final MSPB decision within 180 days after the date on which a request for corrective action has been duly submitted, and it applies the protections of the WPA to employees of national security agencies. As summarized by the Government Accountability Project, HR 985 would:
- Codify the legislative history for any protected disclosure, meaning the WPA applies to all lawful communication of misconduct. This restores loopholes’ protection and cancels the effect of the Supreme Court’s Garcetti v. Ceballos decision limiting federal workers’ First Amendment rights.
- Provide those covered by the WPA access to jury trials in federal district court to challenge reprisals.
- End the Federal Circuit Court of Appeals monopoly on appellate review of the Whistleblower Protection Act (The Court has single-handedly gutted the WPA, leading to a 2-178 record against whistleblowers for decisions on the merits from October 1994 through February 12, 2007), restoring all-Circuit review, as in the original 1978 Civil Service Reform Act and the Administrative Procedures Act. This provision was approved today by a voice vote amendment.
- Extend rights to all national security whistleblowers, including those at the FBI and intelligence agencies.
- Extend rights to federally-funded contractors.
- Extend WPA rights to some 40,000 airport baggage screeners.
- Provide normal whistleblower rights to those who disclose misconduct in litigation testimony, or who refuse to violate the law.
- Restore independent due process review of security clearance determinations for whistleblower reprisal, unavailable since a 1985 Supreme Court decision.
- Create specific protection in the law for scientific freedom, making it an abuse of authority to censor, obstruct dissemination, or misrepresent the results of federal research.
- Restore the unqualified, original “reasonable belief” standard established in the 1978 Civil Service Reform Act for whistleblowers to qualify for protection.
- Define the “clear and convincing evidence” legal burden of proof for an employer’s affirmative defense of independent justification, after an initial reprisal case is established.
- Make permanent and provide a remedy for the anti-gag statute (a rider in the Treasury Postal Appropriations bill for the past 17 years) that bans illegal agency gag orders. The anti-gag statute neutralizes hybrid secrecy categories like classifiable, sensitive but unclassified,sensitive security information and other new labels that lock in prior restraint secrecy status, enforced by threat of criminal prosecution for unclassified whistleblowing disclosures by national security whistleblowers.
- Codify protection against retaliatory investigations, giving whistleblowers a chance to end reprisals by challenging preliminary fact-finding charades.
- Provide specific authority for whistleblowers to disclose classified information to Members of Congress on relevant oversight committees or their staff.
- Provide compensatory damages and reimbursement for expert witness fees to prevailing whistleblowers, establishing consistency with other remedial employment laws. This was another strengthening amendment added today.
- Modify the burdens of proof to make it more realistic for the Office of Special Counsel to seek disciplinary accountability against those who retaliate.
- Provide the Special Counsel with authority to file friend of the court briefs in support of whistleblower rights cases appealed from the administrative level.
The Washingtonian magazine’s list of top lawyers in the Washington, D.C. metropolitan area lists Jason Zuckerman,a Principal at The Employment Law Group® law firm on its list of top whistleblower lawyers. The Employment Law Group® law firm has established key precedent under the whistleblower provision of the Sarbanes-Oxley Act and has substantial experience representing corporate and government whistleblowers in a wide variety of state and federal statutory and common law whistleblower retaliation actions, including actions under the Sarbanes-Oxley Act and the False Claims Act. We are proud of the results we achieve for our clients, and are equally proud of our role in helping clients blow the whistle on corporate fraud, government contractor fraud, tax fraud and misconduct that threatens public health and safety.
Department of Labor Administrative Law Judge William Dorsey has denied summary judgment in a SOX case brought by a former in-house attorney who was terminated for blowing the whistle on violations of SEC rules. Judge Dorsey’s order resolves several significant substantive and procedural issues under SOX, including:
The Duty Speech Doctrine Does Not Apply to SOX. The employer argued that the complainant could not have engaged in protected conduct because she was merely doing her job an in-house attorney, and therefore her disclosures cannot be protected unless she acted outside her role as in-house counsel. Applying well-established DOL precedent, Judge Dorsey unequivocally rejected this argument, holding that an employee whose own job duties encompass reporting illegal conduct may obtain whistleblower relief. Judge Dorsey noted: “The SOX Act and the Secretary’s implementing regulations specifically protect reports employees make to their supervisors. Nektar cannot invent exceptions to those federal protections.” The employer also argued that the Supreme Court’s duty speech doctrine set forth in Garcetti v. Ceballos, 126 S. Ct. 1951 (2006) applies to SOX and therefore employees must step outside their official duties to be protected. Judge Dorsey held that Garcetti is inapposite as it “involved no whistleblower protection statute [and] it dealt with public employees who claimed their termination,” whereas a SOX action “is a statutory claim a private employee filed . . . . [and has] nothing to do with the reach of First Amendment.”
Protected Conduct is Not Limited to Disclosures of Shareholder Fraud. While some ALJs have erroneously held that protected conduct under SOX is limited to disclosures about shareholder fraud, Judge Dorsey, applying the plain meaning of SOX and the ARB’s decision in Klopfenstein v. PCC Flow Technologies Holdings, ARB No. 04-149, ALJ No. 2004-SOX-11 (ARB May 31, 2006), held that “allegations of fraud are not the sole means for whistleblowers to secure SOX protections.” In particular, Judge Dorsey held that disclosures about violations of SEC-mandated internal controls can constitute protected conduct.
The Cat’s Paw Doctrine Applies to SOX. The employer claimed that the decision-maker was an officer who has joined the company shortly before the complainant was terminated and knew nothing about her protected conduct. Judge Dorsey rejected the employer’s effort to pin the decision on a clean slate, holding that the “clean slate” relied heavily upon the input of a supervisor who knew of the complainant’s protected conduct. Acomplainant may hold an employer liable for discrimination without proof that the individual who made the final decision to terminate her knew of her protected activity. The employee need only make a protected disclosure to an individual with supervisory authority over her. 18 U.S.C. § 1514A(a)(1)(C). Once an employee’s supervisor has actual knowledge of the protected activity, that knowledge is attributed to the ultimate decision-maker.
Individual Liability Does Not Require a Showing of Malice. While more than 800 SOX retaliation claims have been filed, very few opinions address the standard for individual liability. Judge Dorsey held that individual liability under SOX can be established absent a showing of actual malice. Instead, “[a]n individual’s liability is assessed in same manner that the corporate employer’s liability is assessed. Individual liability must be predicated on retaliatory intent that contributed to the decision to take an unfavorable personnel action; it need not be the sole factor that motivated the named individual.”
Formal Rules of Evidence Do Not Apply to SOX Claims. Judge Dorsey also clarified the standard of admissibility at the summary decision stage. In this action, the employer filed 506 pages of objections to the complainant’s statement of material facts, contending that the materials submitted by the complainant were not properly authenticated and contained hearsay. Judge Dorsey rejected the employer’s attempt to strictly construe the rules of evidence at the summary judgment stage, noting that formal rules of evidence do not apply to SOX claims. Moreover, as “[w]histleblower discrimination claims commonly turn on inferences drawn from circumstantial evidence,” the adjudication of such claims requires full presentation of a broad range of evidence that may prove, or disprove, retaliatory animas and its contribution to the adverse action taken. Judge Dorsey also held that discovery documents and depositions need not be authenticated on personal knowledge when submitted in opposition to a motion for summary decision.
On behalf of the Government Accountability Project, the National Whistleblower Center and Taxpayers Against Fraud, the leading whistleblower advocacy organizations, The Employment Law Group® law firm filed an amicus brief in Welch v. Chao urging the Fourth Circuit to reverse the Department of Labor Administrative Review Board’s decision establishing a standard for protected conduct that is plainly contrary to the plain meaning and intent of Section 806 of SOX.
In order to protect a broad range of disclosures about potential accounting fraud, securities fraud, and violations of securities laws, Congress specifically included in the language of Section 806 a “reasonable belief” test under which a complainant can engage in protected conduct without disclosing an actual violation of law. Contrary to the plain meaning and intent of SOX, the ARB is requiring complainants to prove that they disclosed unequivocal, actual violations of securities law and is requiring complainants to demonstrate that their disclosures pertained to actual investor fraud even though Section 806 expressly protects disclosures about a violation of any SEC rule. The ARB’s standard undermines the prophylactic purpose of Section 806 depriving employers of the opportunity to receive an early warning of potential violations of Securities and Exchange Commission (“SEC”) rules that can ultimately result in shareholder fraud. For example, protecting disclosures about deficient internal accounting controls or misleading financial reporting enables employers to correct these problems before investors are harmed. Moreover, by speculating about whether Welch’s disclosures implicated securities laws, rather than consulting the pertinent SEC rules, the ARB has adopted an “I know it when I see it” standard that will chill employees from making the disclosures that Congress intended to protect and encourage. If allowed to stand, the ARB’s erroneous interpretation of protected conduct will undermine the clear intent of Congress and inevitably increase the risks of the very financial disasters that SOX was enacted to prevent.
Rep. Lynn Woolsey (D-CA), Chairwoman of the House Education and Labor Subcommittee on Workforce Protections, has introduced robust and comprehensive whistleblower protection legislation for private sector employees. H.R. 4047 would close loopholes in existing federal whistleblower protection statutes and protect employees who disclose threats to public health and safety, financial fraud, insurance fraud, or violations of environmental protection laws, food and drug safety laws, or transportation safety laws. A section-by-section analysis of the legislation from the Education and Workforce Subcommittee is available here. The bill would also create a new office at DOL to investigate whistleblower complaints. While there are many hardworking OSHA investigators who try to conduct thorough investigations of whistleblower complaints, OSHA has shown itself often unwilling and unable to enforce existing whistleblower protection laws. This is due in part to OSHA applying incorrect legal standards and OSHA’s propensity to adopt employers’ pretextual allegations against whistleblowers instead of conducting investigations. Under the current Administration, OSHA has found for employers in more than 90% of whistleblower claims and now appears to require smoking gun evidence to find for an employee. DOL’s failure to enforce whistleblower protection laws has real consequences for public health and safety. Indeed, Congressional testimony about recent mine explosions and collapses revealed that many of the miners killed in these tragic accidents were aware of violations of mine safety laws, but were afraid to report such violations for fear of losing their jobs. Hopefully, Congress will promptly enact H.R. 4047, and in the interim, hopefully DOL will consider enforcing existing whistleblower protection laws, rather than undermining them. The Government Accountability Project has done a terrific job informing Congress of the flaws and loopholes in existing whistleblower protection laws and working with the House Education and Labor Subcommittee on Workforce Protections to devise appropriate legislative corrections. GAP’s testimony concerning the inadequacy of existing whistleblower protection laws is available here.
On October 30, 2007, the Senate Committee on Commerce, Science and Transportation unanimously approved the CPSC Reform Act S. 2045 which includes protection for employees who disclose to the Federal government or a state Attorney General information relating to any violation of a consumer product safety standard, regulation, or order of the Consumer Product Safety Commission. In addition to protecting whistleblowers form retaliation, S. 2045 rewards whistleblowers whose disclosures about consumer product safety issues result in civil penalties. Similar to the qui tam provision of the False Claims Act, a whistleblower whose disclosure to the CPSC or a state AG results in successful prosecution would receive between 15 to 25 percent of the civil penalty. Unlike the qui tam provision of the False Claims Act, however, only the government could bring an action prosecuting a violation of consumer product safety regulations or orders.
According to data released by the Department of Justice this week, disclosures by qui tam relators have led to recoveries of $1.45 billion in fiscal year 2007. Approximately 75% of all recoveries in False Claims Act suits resulted from disclosures by qui tam relators. This highlights the importance of the qui tam provision of the False Claims Act in combating contractor fraud. Unfortunately, some courts have erected barriers to qui tam actions that are inconsistent with the plain meaning of the False Act and that discourage whistleblowers from reporting fraud on the government. Senator Grassley recently introduced the False Claims Correction Act to restore the original intent of the 1986 amendments to the qui tam provision of the False Claims Act. At a time when contractors are taking advantage of lax oversight, it is critical to strengthen the False Claims Act.
The National Law Journal Quotes The Employment Law Group® Law Firm About SOX Whistleblower Protection
Employers scoring in whistleblower actions
Tresa Baldas / Staff reporter
October 29, 2007A law that was designed to protect whistleblowers who reveal corporate fraud has produced robust victories for employers, which have plaintiffs’ lawyers and employee-rights advocates reeling.
Since the passage of the Sarbanes-Oxley Act of 2002 which offers corporate whistleblowers protection from retaliation about 1,000 claims have been filed, but only 17 have been found to have merit, according to U.S. Department of Labor statistics.
And of those 17 cases, only six have kept their wins after full hearings before administrative law judges.
Management-side attorneys believe the law is working just fine, holding that Sarbanes whistleblowers rarely win because they are misusing the law as a weapon in garden-variety workplace disputes.
Plaintiffs’ lawyers, meanwhile, believe that employees are getting a raw deal.
“I think the retaliation provision of Sarbanes-Oxley is a major disappointment,” said Jason Zuckerman of The Employment Law Group® law firm in Washington, who is handling five Sarbanes-Oxley claims on behalf of employees.
“What’s so problematic for me is that I get calls from clients all the time” usually in the accounting and legal profession” who did the right thing,” Zuckerman said. “They naively believed that they would be rewarded for doing the right thing. They’re now out of work and they come to me and I am in the unfortunate position of having to explain to them how this great law that was enacted only five years ago has been significantly undermined.”
A representative for the U.S. Department of Labor was not available for comment.
Under Sarbanes-Oxley, an employee claiming retaliation for reporting corporate fraud must first file a claim with the Occupational Safety and Health Administration, the agency charged with investigating initial complaints. Employees can proceed to federal court after 180 days or appeal to an administrative law judge, if they disagree with OSHA’s finding.
Lawyers note that a sticking point in these cases is what is considered protected activity. In other words, what did the employee reveal that led to retaliation?
Under Sarbanes-Oxley, the whistleblower’s information must relate to one of three things: a violation of securities laws, a fraud on shareholders or a violation of rules and regulations set by the U.S. Securities and Exchange Commission. The law also specifies that an actual violation does not need to be reported, only that an employee must “reasonably believe” that a violation occurred.
On Nov. 1, a closely watched Sarbanes-Oxley case is scheduled to be heard in the 4th U.S. Circuit Court of Appeals, involving an employee who complained that he was retaliated against after reporting that certain employees were not properly trained in manufacturing a vaccine â€” a potential violation of federal training requirements. A lower court held that his complaint was not protected under Sarbanes-Oxley. Livingston v. Wyeth, 2006 WL 2129794.
“I think the act has been interpreted by the [Labor Department] and the courts precisely the way it was intended to be interpreted,” said Michael Delikat, who is representing the defendant in Livingston.
Delikat, who chairs Orrick Herrington & Sutcliffe’s employment law practice from the firm’s New York office, rejects the argument that Sarbanes-Oxley isn’t working because employees are losing their cases. He said the statute has been successful in changing corporate conduct, prompting employers to implement whistleblower hotlines and ensure that people who come forward do not face retaliation.
Bradford Newman, who chairs the labor and employment practice in the Palo Alto, Calif., office of Paul, Hastings, Janofsky & Walker and represents management, said plaintiffs are losing their cases because they’re filing a host of claims that aren’t covered under the act. For example, an employee might complain he or she was fired for disclosing an environmental problem, a defective product or discrimination. But those aren’t protected under the act.
“Employees still don’t understand what the act covers and what it doesn’t cover,” Newman said.
Employee rights attorney Lynne Bernabei disagrees. She believes administrative law judges and courts are placing too high a burden of proof on employees, often requiring employees to prove an actual violation or striking down a claim because they believed that shareholder fraud specifically was not proven.
“If you have someone reporting insider trading, you shouldn’t have to say in addition that they’re defrauding shareholders, that should be enough,” said Bernabei of Bernabei & Wachtel, a Washington employee rights firm.
Whistleblowers Remain in the Line of Fire
September 12, 2007
When the Securities and Exchange Commission came under congressional fire this year for its handling of an insider trading probe into hedge fund Pequot Capital, Senator Charles Grassley said the episode showed that whistle-blowers were “as welcome as a skunk at a picnic”. The SEC denied suggestions it had blocked a whistle-blower, Gary Aguirre, from pursuing the probe into Pequot – one of the senator’s suspicions at the time.Anyone looking for evidence that the system is still stacked against corporate whistle-blowers might take comfort from a study just out in the US.A University of Nebraska College of Law examination of decisions from “administrative hearings” into cases brought by whistle-blowers in the three years since the passage of Sarbanes-Oxley in 2002 shows that a mere3.6 per cent of cases were won by employees.
Robust anti-retaliation provisions in Sarbox were supposed to have made it easier for whistle-blowers to raise concern over possible accounting and securities fraud after the Enron and WorldCom scandals.
The findings could resonate amid the subprime crisis as regulators are on heightened alert for fraud.
The suspicion is that mortgage originators mis-sold products and securities were improperly packaged and sold to investors.
The study looked at 700 cases where employees experienced retaliation from companies for whistle-blowing.
In the first three years since Sarbox, employees filed 491 complaints with the US Department of Labor’s Occupational Safety and Health Administration, the agency charged with initially investigating such complaints.
Osha resolved 361 of the cases, with only 13 going in favour of staff.
Only 6.5 per cent of whistle-blowers won appeals to the departments’ judges.
Richard Moberly, the study’s author, argues the findings “challenge the hope of scholars and whistle-blower advocates that Sarbanes-Oxley’s legal boundaries and burden of proof would often result in favourable outcomes for whistle-blowers”.
The Government Accountability Group, a non-profit organisation that lobbies for whistle-blowers, described Sarbox in 2002 as “a revolution in corporate governance freedom of speech”. Its president, Louis Clark, now says it is “a disaster”.
Whistle-blowers struggle to win cases because Osha and judges who hear claims and appeals have tended to reject them either on a narrow reading of procedure or after deciding that claims “fail to fit within the exact legal parameters of a Sarbanes-Oxley claim”, the study says.
Jason Zuckerman, a lawyer at The Employment Law Group® law firm which represents Sarbox whistle-blowers, says: “Part of the problem is that investigators misunderstand the relevant legal standards and believe that a complainant must have a smoking gun – that is, unequivocal evidence proving retaliation.”
He also says judgeshave amended thelaw’s “reasonable belief” standard that whistle-blowers need to bring a case of suspected fraud to the point that they “have to report an actual violation” – which can be hard if an employee does not have all the evidence.
Yet lawyers who have acted for companies in such cases say a lot of cases are settled before reaching Osha and should be taken into account in any assessment of Sarbox’s success.
Dan Westman, a partner at Morrison & Foerster, points out that the Nebraska study does not include this. Yet many companies settle with complainants – confidentially.
“My gauge of success is not how many whistle-blowers win their cases because my assumption is only the weakest of cases go to litigation because companies will try to resolve them if they have any strength of merit at all,” he says.
Osha says any calculation of “wins” for whistle-blowers should include occasions where a whistle-blowersettles a case after submission to the department,but before investigations begin.
That takes the number of cases “with outcomes favorable to complainants” this fiscal year to 18 per cent.
The agency believes Sarbox has made it easier for people to bring claims based on retaliation for disclosing corporate fraud.
“Prior to the enactment of Sarbanes Oxley’s whistle-blower protection provisions, employees who exposedcorporate fraud wereprotected under a patchwork of various state laws,”it said.