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U.S. DOL ARB Ends Landmark Year Holding Summary Decision Improper Unless Employer Proves Sarbanes-Oxley Act Does Not Apply

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On December 16, 2011, the United States Department of Labor’s Administrative Review Board issued important decision for whistleblowers and their advocates to end a year of landmark Sarbanes-Oxley Act of 2002 (SOX) decisions by the ARB, including:

In the ARB’s final SOX decision for 2011, Charles v. Profit Inv. Mgmt., ARB No. 2009-SOX-40 (ARB December 16, 2011), the ARB overturned an Administrative Law Judge’s (ALJ) premature summary decision in favor of the employer.  The ALJ believed erroneously that whistleblower Lisa Charles’s employer (Profit Investment Management) could not be subject to the whistleblower provisions of SOX.

Profit Investment Management employed Charles from 2004 to 2008, terminating her employment after she reported SEC violations to the CEO.  Charles then filed a SOX complaint with the U.S. Department of Labor in August 2008, resulting in the employer’s motion for summary decision.

The ALJ granted the employer’s motion for summary decision and dismissed the case at least in part on the basis that Charles’s former employer was not a covered employer under SOX, because it is a privately owned company.

The SOX whistleblower protection provision (Section 806) states:

(a) WHISTLEBLOWER PROTECTION FOR EMPLOYEES OF PUBLICLY TRADED COMPANIES. No company with a class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)), including any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company, . . . or any officer, employee, contractor, subcontractor, or agent of such company, . . .  may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee  —

(1)  to provide information, cause information to be provided, or otherwise assist in any investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 [mail fraud], 1343 [wire, radio, TV fraud], 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, when the information or assistance is provided to or the investigation is conducted by – [a Federal regulatory or law enforcement agency, a supervisor, or in support of a related proceeding.]

The ARB noted that the burden lies with the moving party to demonstrate the absence of any material fact genuinely in dispute in order to prevail on a motion for summary decision.  In this case, there is a genuine issue of fact regarding whether Profit Investment is a covered employer under SOX.  Profit Investment failed to establish a record showing that it was not a subsidiary, contractor, or agent of a public company.  The ARB states:

The plain language of Section 806(a) identifies several categories of potentially covered entities beyond the registration and reporting requirements of SOX (i.e., “any officer, employee, contractor, subcontractor, or agent of such company”).  The Second and Sixth Circuits have concluded that the use of the term “any” preceding the listing of the several entities identified in Section 806(a) is an indication that Congress intended the clause “officer, employee, contractor, subcontractor, or agent” to be interpreted in an allencompassing manner.

(Internal citations omitted).

The ARB also cited its decision in Johnson, supra, in which it found that “. . . Congress intended to enact robust whistleblower protections for more than employees of publically traded companies.”  Congress also intended to not only protect whistleblowers who work for publically traded companies, but also “employees of private firms that work with, or contract with, publically traded companies.”

The ARB concluded that in this case the ALJ’s summary decision was improper.  Much of the factual record of the case remains in dispute: particularly the nature of the contractual relationship between Profit Investment Management and a publically traded firm to which it is connected.  Consequently, whistleblowers will more easily prevail against motions for summary decision based on employer coverage, unless the employer proves it has no connections to a public company that might give rise to Section 806 liability.

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