The Sarbanes-Oxley Act (the Act) became effective in July of 2002. The Act contains provisions that regulate the auditing and disclosure of corporate finances. Both public and private corporations may also be affected by the Act in their role as employer, which is the focus of this article.
Companies Must Establish Procedures for Employee Reporting
Public companies, i.e., those with stock registered with the Securities Exchange Commission (SEC) and publicly traded on exchanges, were obligated under the Act to create procedures by which employees can confidentially express concerns regarding questionable company practices, including accounting or auditing practices. The procedures for submitting complaints must be memorialized in a written policy and communicated to employees. Companies that failed to establish such procedures within 270 days of enactment of the Act faced possible "delisting" of their stock from the exchanges.
Protecting the "Whistleblower"
The Act protects "employees" of publicly-traded companies who report certain behavior. "Employee" is defined as an "officer, employee, contractor, subcontractor or agent of a company." Two types of conduct are protected:
The first is disclosure of information or assistance in the investigation of conduct that the employee "reasonably believes" is a violation of federal mail fraud, wire fraud, bank fraud, or securities fraud laws, or any rule or regulation of the SEC or provision of federal law relating to fraud against shareholders. The disclosure must be provided to:
- A federal regulatory or law enforcement agency;
- A member of Congress or any committee of Congress; or
- One with supervisory power at the company, or other company person with the authority to investigate, discover, or terminate misconduct.
The second type of protected conduct is filing, testifying, participating in, or otherwise assisting in a proceeding filed or about to be filed, relating to certain alleged violations of the rules or regulations of the SEC, or any provisions of federal law relating to fraud against shareholders.
Civil Actions by Employees
Employers are prohibited from discharging, demoting, suspending, threatening, harassing or in any other manner discriminating against an employee who engages in the protected conduct. An employee who claims discharge or other discrimination in violation of the Act may file a complaint with the U.S. Department of Labor (DOL) not later than 90 days after the violation occurs. If the DOL does not issue a final decision within 180 days, the employee may file an action in federal court.
The employee has the burden of showing that the discharge or discrimination was a result of the protected conduct. If successful, the employee may be awarded reinstatement with the same seniority, back pay with interest, and special damages resulting from violation of the Act, including litigation costs and fees. However, if the complaint is unsuccessful and is determined to be "frivolous," the employee may have to pay up to $1,000 of the employer's costs and fees.
Criminal Action Against the Employer
A separate section of the Act created a new felony crime for retaliation against certain whistleblowers. This section covers any person or entity, and is equally applicable to both private and public companies and individuals. Anyone who, with the intent to retaliate "takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense" may be subject to criminal prosecution. If convicted, the person or entity may be subject to a heavy fine and/or up to ten years in jail.
Professional Conduct Standards for Attorneys
The Act specifically requires attorneys employed by a company (whether in-house or outside counsel) to report any material violation of securities laws, breach of fiduciary duty, or similar violation to the company's chief executive officer or chief legal counsel. If these persons do not "appropriately respond," i.e., act to remedy such violations, the attorney must report the violation to the board of directors, the audit committee of the board of directors, or another committee made up solely of directors not employed (directly or indirectly), by the company.
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