When federal officials issued final regulations for the whistleblower provisions of the Sarbanes-Oxley Act in the summer of 2004, experts deemed it a seminal moment.
Three years later, however, it has become painfully apparent that the SOX provision—Section 806—has not lived up to its promise to provide protection for whistleblowers trying to expose corporate wrongdoing.
So far, the Administrative Review Board of the Department of Labor has not found one whistleblower case to have merit, according to a report compiled by the law firm of Orrick, Herrington & Sutcliffe.
Since SOX was enacted, 947 whistleblower cases have been filed with the DOL, according to a recently updated report, put together by Orrick partner Michael Delikat and associate Renee Phillips. The DOL dismissed 665 cases because they had no merit. Another 126 were withdrawn by the complainant, while 138 were settled before the DOL ruled on them.
The end result: Only 17 cases were determined by the DOL to have merit and warrant a hearing before the Labor Department’s administrative law judges.
But just six of those 17 whistleblowers have prevailed in front of those administrative law judges. Of those six cases, three have been reversed by the DOL’s Administrative Review Board; one settled; another settled after the administrative law judge ruled but before the case got to the ARB; and one case remains open.
Delikat
“It is a high bar for the complaining party to get over,” says Delikat, who heads up Orrick’s employment law practice.
The ARB, the last step in the appeals process, has heard a total of 31 appeals from both companies and whistleblowers through early June. Of the 31 cases, five were subsequently withdrawn or settled, seven were dismissed when the whistleblower indicated an intention to refile the case in federal court, seven appeals were determined to be untimely, three were dismissed for failure to prosecute (the plaintiff did not show up in court), and nine were dismissed after it was determined that the whistleblower’s claims had no merit.
Meanwhile, a separate study recently published by Richard Moberly, a law professor at the University of Nebraska, found that during SOX’s first three years, only 3.6 percent of whistleblowers won relief through the initial administrative process that adjudicates such claims, and only 6.5 percent of whistleblowers won appeals through the process. The study consisted of more than 700 separate decisions from administrative investigations and hearings.
Perhaps the most high-profile—and most recent—case to be reversed by the ARB was the ruling involving David Welch, the former CFO of Cardinal Bancshares and the first person to claim whistleblower protection under SOX. Welch also was the first SOX whistleblower to win reinstatement to his job from a DOL administrative law judge. But Cardinal refused to reinstate him and appealed instead to the ARB. On May 31, the ARB reversed the ALJ’s ruling, asserting that the judge erred legally. Rather, the ARB concluded that Welch “had not demonstrated that he engaged in protected activity,” an essential element of his case.
Attorneys who represent both plaintiffs and companies cite numerous reasons for the lack of completed cases that favor the whistleblower. Bruce Shine, a lawyer at the firm of Shine & Mason and who represents Welch, concedes that many of the early cases were lousy and never should have been filed. Many of the dismissed cases “had absolutely no merit,” he admits.
Of course, the numerous settlements and withdrawn cases suggest some sort of deal was struck. But attorneys believe that even though the settlements are confidential, the details would have been leaked somehow if the settlements were substantial. “If they were significant, the plaintiff bar would be talking about it,” Shine says. “But you don’t hear anything about it.”
Working Harder, Still Losing?
Even discounting the dismissed and settled cases, Shine finds it hard to believe that no cases have been deemed to have had merit during this entire period; he believes the ARB has applied a very narrow view of what constitutes protected activity. “They have elevated what an employee must believe to something greater than what the statute requires,” he insists.
Berkowitz
Attorneys who represent companies agree with him. “The courts are reading SOX in a restrictive manner,” says Philip Berkowitz, partner with the law firm Nixon Peabody.
“The statute is being read the way Congress intended it to be read,” adds Delikat. “The complaint must definitively and specifically be related to enumerated statutes in SOX. You have a tight filter.” Permissible complaints include mail, wire or securities fraud, violations of securities law, and fraud against shareholders.
Moberly says his study indicates that employees rarely won claims for two primary reasons. First, judges generally decided cases as a matter of law and rigidly construed Sarbanes-Oxley’s legal requirements. As a result, they avoid any determination of the factual merits of an employee’s allegations. “In so doing, these administrative decision-makers often strictly interpreted Sarbanes-Oxley’s legal requirements,” Moberly says.
“The complaint must definitively and specifically be related to enumerated statutes in SOX. You have a tight filter.”
— Michael Delikat,
Partner,
Orrick, Herrington & Sutcliffe
Second, for cases that survived this strict legal scrutiny during the initial investigation, the Occupational Safety and Health Administration—which conducts preliminary hearings into whistleblower complaints—tended to misapply SOX’s burden of proof regarding causation, to the substantial detriment of employees, according to Moberly. “These findings challenge the hope of scholars and whistleblower advocates that Sarbanes-Oxley’s legal boundaries and burden of proof would often result in favorable outcomes for whistleblowers,” his report says.
What’s more, even for cases that did fall within the strict boundaries of SOX, OSHA failed to fulfill employees’ expectations for protection based upon the law’s employee-friendly burden of proof for causation, according to Moberly’s report. Employers won almost 90 percent of these “causation” cases in front of OSHA, “indicating that OSHA failed to properly apply the law’s burden-shifting requirements,” Moberly contends in his study. “OSHA seemed more willing than the administrative law judges to delve into messy factual issues involving causation, but when OSHA did evaluate the causation elements of a case, employees rarely won.”
In the Welch case, for example, the erstwhile Cardinal executive claimed that he was fired after questioning the bank’s accounting policies and internal controls and subsequently refused to certify its financial results. The bank said it suspended and then fired Welch because he refused to meet with an independent auditor and an attorney representing the company without his own lawyer present.
The critical issue in the case had to do with certain loan recoveries, which Welch charged were misclassified as “income.” Cardinal, however, claimed that since Welch had previously signed financial statements and Federal Reserve call reports without objecting to the entries, he could not have reasonably believed that the ledger entries were improper.
“Welch’s concerns that Cardinal misclassified the loan recoveries and consequently misled investors do not constitute protected activity because Welch could not have reasonably believed that Cardinal misstated its financial condition,” the ruling stated.
Another key issue stemmed from Welch’s claims that Cardinal’s auditor, Larrowe & Co., did not communicate enough with him about financial matters that fell under Welch’s job description. Welch claimed that Larrowe instead communicated with Cardinal’s CEO, Ronald Leon Moore.
The Administrative Review Board, however, went against the administrative law judge and contended that Welch’s complaints about access to the auditor and about Cardinal’s internal accounting controls were not SOX-protected activity, because they did not relate to the federal securities laws. Since Welch failed to demonstrate that he engaged in protected activity, the board said, his complaint was denied.
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