The Sarbanes-Oxley Act (“Sarbanes-Oxley”) is a federal law that established new and enhanced standards for public company boards as well as management and public accounting firms. Under Sarbanes-Oxley, public companies must adopt a business ethics code and create an internal procedure by which employee reports about fraud or ethical violations can be taken, reviewed, and solicited. Both corporate liability and individual liability exist under the law, and it is enforced administratively, civilly, and criminally.
What kinds of companies are covered under Sarbanes-Oxley? The law applies to all domestic public companies, as well as non-public companies with publicly traded debt securities. Some sections of Sarbanes-Oxley apply to companies that do business with publicly traded companies, even if they aren’t publicly traded themselves. Subsidiaries of covered public companies can also be held liable for retaliating against a whistleblower under certain circumstances.
Among other things, Sarbanes-Oxley provides protection for whistleblowers who work for covered companies when they disclose information that they reasonably believe shows a violation of federal securities law, SEC rules, or any federal law related to fraud against shareholders.
Whistleblower Protection Against Retaliation
Under Section 806 of Sarbanes-Oxley, codified at 18 U.S.C. § 1514A, employees of public companies who are retaliated against because of disclosures related to mail, wire, bank, or securities fraud have a civil cause of action. To pursue a whistleblower claim, you must file a written complaint with any office of the Occupational Safety and Health Administration, which is part of the Department of Labor, within 180 days of your employer’s retaliation.
To prove a Sarbanes-Oxley claim, you must show
You’re an employee engaged in protected activity;
A covered employer took adverse employment action against you; and
The protected activity at least partly caused the adverse employment action.
You count as an employee for purposes of whistleblower protection if you are a present or former employee, supervisor, manager, officer, or a certain type of independent contractor for a covered business. Former employees have protection when their protected activity happened during the course of employment. Independent contractors are protected depending on the extent to which the covered company exerted control over their work. For example, if an independent contractor has a schedule that is arranged by the covered company and must complete most of his or her work at the company offices, Sarbanes-Oxley protects him or her from retaliation for assisting in an investigation of employer fraud.
Even an in-house attorney can reveal information. Until recently, it was believed that the attorney-client privilege would prevent the attorney from revealing confidential information. However, otherwise privileged information can be admitted in a whistleblower proceeding so that the attorney can establish he or she was engaged in protected activity.
Protected activity is narrowly defined as complaining internally to supervisors, complaining to regulators, or complaining in connection with an investigation that the company violated a federal rule related to fraud on shareholders. An employee who complains about violations of state regulations, without reference to possible federal regulation violations, is not engaged in protected activity under Sarbanes-Oxley.
The employee can be wrong, as long as he or she was motivated by a reasonable belief. However, it’s not enough for an employee to report a concern about a practice. The employee has to clearly articulate a reasonable belief that a specific practice is an SEC violation or fraud that affects shareholders to be protected.
Adverse employment actions under Sarbanes-Oxley include discharging, demoting, suspending, threatening, harassing, or discriminating against an employee with regard to any aspect of employment because he or she lawfully gave information or assisted in an investigation about fraud or SEC rule violations.
If you are successful in a Sarbanes-Oxley action, you may be entitled to reinstatement, back pay, attorneys’ fees and costs, and special damages, which can include non-economic damages like emotional distress.
The Sarbanes-Oxley Act
The Sarbanes-Oxley Act was created in response to several scandals involving public and private companies. Provisions in the act cover the responsibilities of company boards and added criminal penalties to certain corporate misconduct.