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All Good Faith and Reasonable Reporting of Fraud is Protected Activity under SOX


By Patricia Porter Kryder

The corporate controller of a company that was publicly traded reasonably believed her employer had violated securities law by attempting to circumvent internal accounting controls.   The controller was found to have a claim under the Sarbanes-Oxley Act of 2002 (SOX) when her services were terminated after she reported suspicions of illegal conduct.  It is a well established public policy when an employee seeks to further public policy by preventing crime in the workplace, the employer may not retaliate by discharging the employee.

The Facts
An accounting professional employee had worked for the same company for approximately 30 years when, one day, she was asked by her supervisor to accrue  1 million dollars in discretionary bonuses for various corporate executives without approval of  her company’s Board of Directors..  She refused to book the transaction without board approval, and reported the request to the company’s general counsel as well as to the company’s outside counsel.  Immediately, her supervisor began to retaliate against the employee by ostracizing her, excluding her from meetings and discussions, withholding crucial information needed to carry out her corporate accounting responsibilities and by eliminating her corporate accounting staff.

Within the same year, the employee was terminated in what they described as a “layoff.”  The employee – of course – alleged this “layoff” was a pretext for retaliation, because her position was given to one of her subordinates.  While other executives who had been laid off during the 30 years she worked at the company received 62 weeks of severance, she was treated differently and pressured to sign a “retention agreement,” eliminating her severance.  The employee then brought this lawsuit alleging whistleblower retaliation under SOX.

At trial, the federal district court in California reiterated SOX provides whistleblower protection for employees of publicly traded companies.  SOX prohibits employers from discharging, demoting, suspending, threatening, harassing or  discriminating against an employee  for any lawful acts done by the employee to provide information regarding conduct which the employee reasonably believes constitutes a violation of a federal fraud statue, the Securities and Exchange Commission (SEC), or federal law relating to fraud against shareholders.  The SEC rules provide that “no person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account.”

If the employee here had a reasonable belief the conduct being reported violated one of the above listed laws, and this belief was objectively reasonable, the employee is protected under SOX against retaliation.  The federal court in California followed the position of an Illinois federal district court which found protected activity can occur even in the absence of an actual violation of pertinent securities laws or regulations if an developing violation, i.e. 1 million dollars in potential executive bonuses, did not actually ripen into a violation because of the whistle blowing activity, but had reached the stage where it was about to be committed.  In this case, the court similarly reasoned the company was still liable for SOX violations; it did not matter that the bonuses were not actually accrued or paid prior to board approval.

Read the case here.



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