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Supreme Court Upholds Sarbanes-Oxley Whistleblower Protections for Wall Street Contractors

Following the collapse of Enron Corporation in 2001 due to fraudulent financial and accounting practices, the federal government passed the Sarbanes-Oxley Act (SOX) in an attempt to prevent similar corporate implosions. Under SOX, each corporation’s executives are required to certify the accuracy of the company’s financial records. The new law also created new penalties for fraudulent financial activity and increased the independence of the outside auditors who review the accuracy of corporate financial statements. As part of the latter changes, to increase the accountability of public companies with regard to their financial and accounting practices and accounting, SOX outlawed retaliation against whistleblowers who make good-faith reports of corporate fraud. Enforcement of whistleblower-protection provisions of SOX was assigned to the Departmet of Labor, which in turn assigned OSHA to investigate and adjudicate such claims.

On March 4, 1014 the U.S. Supreme Court in the case Lawson v. FMR LLC et al., in which the plaintiff alleged that she had been constructively terminated in retaliation after expressing concerns about the FMR’s accounting methods. Writing for the 6-Justice majority, Justice Ginsburg gave careful consideration to the text of the law in light of Congress’s reasons for enacting it. The central question in the case is whether the protection granted to whistleblowers applies i) only to the employees of public companies, or ii) to the company’s employees, its contractors, and the employees of its contractors. The majority reasoned that, because mutual fund companies are almost always nominal companies with no actual employees, the Sarbanes-Oxley Act would be able to have none of its intended effect if it was understood to apply only to those companies’ employees. For example, if the employees of a private accounting firm that managed the finances of a mutual fund had no legal protection when they reported fraud, because they were not employees of the mutual fund company itself, then there would be no one in a position to report the fraud. Justice Ginsburg reasoned that this interpretation of the law would undermine both the text and the purpose of the law. The law actually states that “no…contractor…may discharge an employee,” clearly referring to an employee of the contractor since the contractor is not in a position to retaliate. Further, since mutual fund companies almost never have employees, under the dissent’s narrow interpretation the law would have almost no effect; thus, she Justice Ginsburg writes, “This Court’s reading of § 1514A avoids insulating the entire mutual fund industry from § 1514A.”

In her dissent, Justice Sotomayor reasons that the majority’s construction of the law carries the absurd implication that, for example, that SOX authorizes a babysitter to bring a federal case against his employer–a parent who happens to work at the local Walmart (a public company)–if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an internet purchase fraud.” Justice Ginsburg replies: “Instead of indulging in fanciful visions of whistleblowing babysitters and the like…the dissent might pause to consider whether a Congress, prompted by the Enron debacle, would exclude from whistleblower protection countless professionals equipped to bring fraud on investors to a halt.” Further, the majority argues, “the issue…is likely more theoretical than real. Few housekeepers or gardeners, we suspect, are likely to come upon and comprehend evidence of their employer’s complicity in fraud.”

The decision in this case confirms that contractors and their employees who blow the whistle on corporate fraud are protected by the Sarbanes-Oxley Act.

If you are an employee and you believe your rights under the Sarbanes-Oxley Act have been violated, please contact The Harman Firm, LLP.

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