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Topic: Sarbanes-Oxley Act (SOX)

ARB Upholds “Reasonable Belief” Standard for Fraud Claims Under SOX

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The Department of Labor’s Administrative Review Board affirmed an Administrative Law Judge’s (ALJ) decision that found the following: Timothy Dietz reported violations of the federal mail and wire fraud statutes to his former employer Cypress Semiconductor Corporation and, in retaliation, Cypress placed an undeserved disciplinary memo in his personnel file, and then constructively discharged him, thereby violating the whistleblower provision of the Sarbanes-Oxley Act (SOX).  The ARB’s decision was issued in Dietz v. Cypress Semiconductor Corp., ARB Case No. 15-017, ALJ Case No. 2014-SOX-002

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Connecticut District Court Applies Dodd-Frank Retroactively and Sends SOX Whistleblower Case to Trial

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In Richard Trusz v. UBS Realty and UBS AG, Case No. 3:09-cv-00268,  Richard Trusz, a high-ranking executive for UBS, complained that the company followed improper procedures in its real estate valuation. These problems, Trusz claimed, resulted in valuation errors totaling as much as $27 million.

Trusz reported his concerns about these valuation procedures both internally and externally prior to the termination of his employment in 2008. According to UBS, it eliminated Trusz’s position because the company decided to outsource its valuation review duties. Trusz alleged three types of whistleblower retaliation claims, one a federal claim under the Sarbanes-Oxley Act and two state law claims.» Read more

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Judge Holds that SOX and Dodd-Frank Allow Individual Director Liability

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On October 23, 2015, a federal magistrate judge in California held that individual corporate directors may be found liable under the Sarbanes-Oxley Act of 2002 (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Plaintiff Sanford Wadler brought a whistleblower action under SOX, Dodd-Frank, and state law, against Bio-Rad Laboratories, Inc. and the individual members of its Board.  Wadler claimed that Bio-Rad wrongfully terminated him in retaliation for disclosures he made to Bio-Rad‘s upper-level management regarding possible violations of the Foreign Corrupt Practices Act (FCPA) in China.  The defendants filed a motion to dismiss, leading to the October 23, 2015 ruling.

Bio-Rad manufactures and sells products around the world, and is subject to the FCPA.    Bio-Rad agreed to pay $55.1 million in fines for possible FCPA violations in Thailand, Vietnam, and Russia.  Subsequent to discovering these violations, Bio-Rad hired Steptoe and Johnson LLP to investigate possible bribery by Bio-Rad employees in China.  The firm found no evidence of improper payments.» Read more

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Former Viacom Executive Files Suit for Alleged “Teenage Mutant Ninja Turtles” Tax Evasion Scheme

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On January 5, 2016, former Viacom Vice President for Financial Planning and Analysis Nataki Williams filed suit under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act against the entertainment company.  In her complaint filed in federal court in the Southern District of New York, Williams claims that Viacom fired her in retaliation for questions she raised about a scheme in which Viacom allegedly sought to avoid paying taxes on licensing rights to the “Teenage Mutant Ninja Turtles” (TMNT) franchise.

Viacom acquired the international licensing rights to TMNT in 2009 from The Mirage Group and 4Kids Entertainment.  Williams alleges that shortly after Viacom acquired the licensing rights, Viacom concocted a scheme to attribute TMNT’s revenue to the Netherlands to avoid the U.S. tax burden.  TMNT is owned by a Netherlands-based entity, but Williams asserts that all of TMNT’s business took place in New York.  She further claims that a Netherlands-based employee was tasked with making immaterial changes to draft contracts in order to legitimize business contacts outside of New York.  Williams’ superiors were allegedly in on the scheme, joking that they do not “look good in orange.”

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Pending Legislation Seeks to Expand Whistleblower Protections

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Whistleblowers are a legal class of persons who expose what they reasonably believe to be unlawful activity to a person or entity that has the power to correct that wrongdoing. A number of laws at both the federal and state level protect whistleblowers from retaliation.  These protections exist because whistleblowers often expose fraud or other unlawful activity that would otherwise remain undisclosed.  The Department of Labor’s Occupational Safety & Health Administration, for example, enforces the anti-retaliation provisions of twenty-two different statutes that protect employees in the private sector. The United States Office of Special Counsel enforces the Whistleblower Protection Act, which covers most, but not all, civilian employees of the federal government. In recent years, whistleblower protections have been extended, through the National Defense Authorization Act of 2013, to employees of government contractors who disclose fraud or mismanagement related to a contract with the federal government. And in 2014, the Supreme Court extended the anti-retaliation provisions of the Sarbanes-Oxley Act to employees of contractors who provide services to publicly held companies.

But there are limits to the many protections that already exist for whistleblowers. The WPA, for example, specifically excludes members of the Intelligence Community. Members of the Intelligence Community are covered instead under the Intelligence Community Whistleblower Protection Act, which lacks an anti-retaliation provision. Even Presidential Policy Directive 19, which President Obama signed in October 2012 to provide some protection from retaliation to those serving in the Intelligence Community, fails to provide a private right of action to an aggrieved employee. And in recent years, there have been a number of cases involving whistleblower retaliation in the Department of Veterans Affairs.

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Recent Actions Highlight OSHA’s Role in Enforcing Whistleblower Anti-Retaliation Laws

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The Department of Labor’s Occupational Safety and Health Administration is known for its role in implementing and enforcing safety standards in workplaces across the United States. But another main role played by OSHA is its enforcement of the whistleblower anti-retaliation provisions of a number of statutes, including but not limited to: The Occupational Safety and Health Act, the Sarbanes-Oxley Act, the Clean Air Act, the Surface Transportation Safety Act, and the Federal Railroad Safety Act. Several recent actions by OSHA demonstrate the seriousness with which OSHA enforces these statutes.

On August 4, 2015, OSHA announced that it filed suit against Continental Alloys and Services, Inc., a Houston-based company which provides steel for oil and gas companies, for violations of the Occupational Safety and Health Act’s whistleblower provision. In this case, a former employee filed a complaint for wrongful termination after Continental fired her, allegedly because she complained that the company failed to log workplace injuries in violation of OSHA regulations.  The whistleblower reported several instances when the company failed to log injuries, and even recorded a meeting with the company official who failed to record the injuries in order to gather evidence for an internal investigation. Continental fired her as a result of her actions. In its suit, OSHA seeks an injunction barring further retaliation, and reinstatement, back pay, and any other damages suffered by the whistleblower.
» Read more

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Federal Court in New York Rules that SOX Protects Post-Employment Disclosures and Prevents Post-Employment Retaliation

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In Kshetrapal v. Dish Network, the U.S. District Court for the Southern District of New York ruled that an employee stated a valid claim under the anti-retaliation provisions of the Sarbanes-Oxley Act for alleged retaliation for a disclosure he made after his employer terminated him.

Plaintiff Tarun Kshetrapal sued his former employer Dish Network LLC, for, among other things, retaliation in violation of SOX section 806. He alleged both pre- and post-termination protected activities, and pre- and post-termination retaliation for his disclosures. Under SOX, an employer may not “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” that an employee performs in blowing the whistle on certain types of fraud.

After Dish terminated Kshetrapal, he testified in a deposition, in a separate litigation, about his internal complaints to Dish about fraudulent invoices. In its ruling, the Court rejected Dish’s argument that Kshetrapal’s SOX claim was limited to pre-termination protected activities. The Court examined the purpose of SOX, which is to “combat what Congress identified as a corporate culture, supported by law, that discourages employees from reporting fraudulent behavior not only to the proper authorities . . . but even internally.” The Court reasoned that given the purpose and language of the statute, its scope should not be interpreted narrowly and, as properly interpreted, SOX protects post-employment disclosures and prevents post-employment retaliation.

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Dow Chemical and CEO Settle SOX Whistleblower’s Retaliation Suit

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Dow Chemical Company, a multinational corporation headquartered in Midland, Michigan, settled a case with a former employee, Kimberly Wood, who alleged that Dow terminated her in retaliation for blowing the whistle on it and its CEO Andrew Liveris’s improper spending and other financial wrongdoing.

Wood, a fraud investigator at Dow, alleged that Dow and Liveris violated Securities and Exchange Commission rules by exceeding the budget for a project by $13 million; paying for numerous unreported personal expenses for Liveris (including family trips to the Super Bowl, World Cup, and Masters Tournament); making payments, at the direction of Liveris, to certain charities, including Liveris’s own charity; excessive use of a corporate jet; improperly hiding cost overruns; and engaging in financial statement fraud.

On October 9, 2013, Wood reported an instance of financial statement fraud. The very next day, Dow notified Wood that it would terminate her employment by the end of the month. Wood sued Dow, alleging that it retaliated against her because of her protected activity in violation of the anti-retaliation provisions of the Sarbanes-Oxley Act of 2002 (SOX), 18 U.S.C. § 1514A. Under SOX, employers are prohibited from retaliating against employees who report certain illegal or unethical conduct. Employees are also protected when making disclosures about shareholder fraud or violations of any SEC rules and regulations.

In December 2014, the United States District Court for the Eastern District of Michigan denied Dow’s motion to dismiss Wood’s complaint. In its ruling, the Court held that SOX plaintiffs need not allege actual management knowledge of protected activity—it’s enough to allege sufficient facts from which such knowledge may be reasonably inferred. At that time the court denied its motion to dismiss, Dow said that it would defend its case “vigorously.” But just two months later, in February 2015, the parties announced that they reached an amicable settlement. The terms of the settlement are confidential.

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Fourth Circuit Holds SOX Retaliation Plaintiffs May Recover Emotional Distress Damages

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The U.S. Court of Appeals for the Fourth Circuit is now the third federal appeals court –joining the Fifth and Tenth circuits – to hold that emotional distress damages are available under the anti-retaliation provision of the Sarbanes-Oxley Act of 2002 (SOX ). SOX section 806 protects employees from firing or other adverse actions for reporting that their publically traded employers misstated or omitted information in filings with the Securities and Exchange Commission or violated any SEC rule.

In Jones v. SouthPeak Interactive Corp. of Delaware, (4th Cir. 2015), the former Chief Financial Officer of video game publisher SouthPeak, Andrea Gail Jones, sued under the SOX anti-retaliation provision. Jones alleged that SouthPeak fired her because she refused to sign a proposed amendment that denied SouthPeak intentionally omitted a $307,400 wire transfer in the company’s balance sheet and quarterly financial report filed with the SEC. Jones allegedly refused to sign because when she first notified her supervisor of the omission, he rebuffed her and failed to add it to the filing.

The Fourth Circuit upheld the jury’s award of emotional distress damages to Jones, finding that the relief is permissible because 18 U.S.C. 1514A(c)(1) states that an employee prevailing in a SOX retaliation action “shall be entitled to all relief necessary to make the plaintiff whole.”

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Supreme Court Revisits the Scope of SOX

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What does a fisherman’s criminal destruction of undersized fish have to do with the scope of federal whistleblower laws? The U.S. Supreme Court will soon tell us, after hearing oral arguments last week in Yates v. United States.

In deciding whether a fish is a “tangible object” as that term is used in the Sarbanes-Oxley Act (SOX), the justices will again signal how broadly they’re willing to apply SOX — a topic they last visited in March in Lawson v. FMR LLC, a sweeping decision that turned one section of SOX into something like a general-purpose whistleblower protection law.

Passed in 2002 in the wake of the Enron scandal, SOX sets strict standards for financial behavior by publicly traded companies. Its whistleblower provision, Section 1514A of the U.S. Code, protects employees of many companies — both public and private — against retaliation for blowing the whistle on various types of fraud.

Yates concerns Section 1519, the law’s criminal provision against destruction of evidence. The case stems from an incident in 2007, when a Florida official inspecting John Yates’s fishing boat suspected that 72 red grouper in his catch were too small to meet the legal limit. Mr. Yates was issued a citation and ordered to bring the fish to port the next day for seizure by federal officials. Instead, the government charged, he directed his crew to toss the undersized fish overboard and replace them with fish that met the legal limit.

Unusually, Mr. Yates was charged and convicted under SOX, which penalizes anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object” to impede a federal investigation. As with the civil whistleblower provision in Section 1514A, the text of Section 1519 isn’t obviously limited to Enron-style wrongdoing — and indeed, the government argued on November 5 that it’s a broad law limited only by the literal meaning of its words.

Congress deliberately used broad language (“any … tangible object”) because it intended to create a general law against evidence destruction, argued Roman Martinez, an assistant to the U.S. Solicitor General, stressing that Congress was trying to close loopholes in federal law.

No, argued Mr. Yates’ lawyer John Badalamenti: Congress was primarily concerned with the type of document-shredding at the center of the Enron scandal. In that context, he said, “tangible object” must mean only a device used to record information, such as a computer hard drive or a digital camera. A broader interpretation would make Section 1519 much too far-reaching, he said.

The Court balked at Mr. Badalamenti’s proposed limits, however, foreshadowing a Lawson-type decision in favor of Section 1519’s broad scope. For example, Justice Ruth Bader Ginsburg warned that under Mr. Badalamenti’s interpretation, a suspected murderer could be indicted under SOX for destroying a letter written by his victim — but not for destroying the murder weapon.

Justice Ginsburg also noted that Congress could have written Section 1519 to cover any “tangible object used to preserve information,” if that’s what it meant. That it did not, she said, suggests that Congress contemplated  no such limitation.

Justice Kennedy saw practical issues with Mr. Badalamenti’s approach, too, suggesting that it creates “more problems with determining what [Section 1519’s] boundaries are than the government’s test.”

In the end, most justices seemed unwilling to narrow the scope of Section 1519, agreeing instead that it is a broad statute that should never have been used against Mr. Yates. “What kind of a mad prosecutor would try to send this guy up for 20 years?” asked Justice Antonin Scalia. The maximum sentence for destruction of evidence under SOX is 20 years, although the judge in Mr. Yates’s case sentenced him to 30 days.

None of the justices could offer a limitation on Section 1519 that would stop prosecutors from applying it for trivial offenses, but Lawson indicates that the Court will trust lower tribunals to apply discretion. The Lawson majority conceded that “overbroad applications” of Section 1514A were possible, too, but essentially said that the text of the law can’t be denied.

A similar decision seems likely in Yates, and will be further proof of the Court’s reluctance to apply limits to SOX.

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