Speak to an experienced Bountiful Utah Corporate lawyer to know if your employer’s misconduct is reportable under the Sarbanes Oxley Act. When you need a lawyer who works in business law, real estate law, corfporations, LLCs and trial law, call Ascent Law for your free consultation.

The types of misconduct reportable under the SOX include any violations of rules or regulations of the Securities and Exchange Commission (SEC), allegations of violations of criminal and civil laws protecting investors, and also includes allegations of fraud under any federal law that may harm shareholders. Under the statute, a wide variety of disclosures are protected. The securities laws largely prohibit any kind of fraudulent activities in connection with the offer, purchase, or sale of securities.” They require that investors receive truthful information about a company’s financial condition and other material aspects concerning a corporation. These laws also govern management activities of publicly traded companies; the requirements of audit committees; ethical and reporting duties related to accountants, auditors, corporate attorneys, and chief executive officers, the rights of shareholders; the voting and disclosure requirements at shareholder meetings; the use and counting of proxy votes; “the contents of materials filed with the SEC or with shareholders, and the requirement to disclose all important facts concerning the issues on which holders are asked to vote.” Additionally, various market activities are regulated or prohibited, such as insider trading, efforts to purchase over 5 percent of a company’s stock (e.g., a potential corporate takeover), prohibited conflicts of interest, the activities of certain investment advisors, and the enhanced criminal prohibitions and corporate responsibility requirements set forth in the Sarbanes-Oxley Act itself. In addition to the criminal statutes referenced directly in the SOX definition of protected activity, employees who blow the whistle on any SEC rule or regulation or any potential violation of “any provision of federal law relating to fraud against shareholders,” are fully protected.

Reportable violations

Reportable violations under the SOX include the following:

• Employee allegations regarding violations of the federal criminal fraud laws, such as sections 1341, 1343, 1344, and 1348 of Title 18.

• Employee allegations of possible violations of the numerous federal civil laws related to fraud against shareholders, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1940, the Investment Company Act of 1940, the Investment Advisors Act of 1940, and the Sarbanes Oxley Act of 2002.

• Employee allegations regarding any employer violation or noncompliance with the numerous and detailed requirements set forth in the rules and regulations of the SEC, including those rules published at Title 17 of the Code of Federal Regulations and the numerous laws administered by the SEC. Many of the laws, rules, and regulations incorporated into this provision of the SOX are published by the SEC on its Internet site.

• All laws related to fraud against shareholders. This provision potentially encompasses all of the laws, rules, and regulations just referenced, and any other law, rule, or regulation that could be reasonably argued protect investors from fraud. This would clearly include those portions of the Securities Act of 1933 that permit shareholders to file civil actions concerning corporate deceit, misrepresentations, and other fraud in the sale of securities. The broad scope of this provision is reflected in the numerous class action lawsuits filed by investors related to fraud against shareholders or other violations of SEC rules and regulations.
Participation Clause

The SOX “participation clause” protects employees who “file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348 “of Title 18”, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.”5 Case law interpreting “participation clause” provisions protect a wide range of conduct, including direct participation in SEC proceedings and other securities-related proceedings. Among the proceedings for which employees could participate are civil lawsuits filed by or on behalf of shareholders.

Protect Activities

Not every disclosure to any person regarding SEC violations is protected activity. The statute sets forth four categories of persons or organizations upon which an employee is permitted to “blow the whistle.” These encompass the following: reports to government officials, internal reports, reports to Congress, and conduct that initiates a “proceeding” under the securities laws. On the face of the statute itself, and in light of the court precedents interpreting similar laws, the scope of protected activities is extremely broad.

As a matter of judicial and administrative interpretation, whistleblower laws that contain even more restrictive language than that included in the SOX have been broadly construed.

Contacts with the SEC

The ability of an employee to communicate directly with federal law enforcement or regulatory authority is a critical component to employee whistleblowing and is explicitly protected under the SOX. Under the law, direct contact with government agencies, federal courts, and Congress is protected. The SOX statute explicitly protects employees who blow the whistle to a “federal regulatory or law enforcement agency.” This provision speaks for itself, and would cover employees who make protected disclosures to the SEC, a U.S. Attorney’s office, the U.S. Department of Justice, and other government agencies involved in any manner in regulating publicly traded companies, such as the Public Company Accounting Oversight Board. Disclosures to any federal regulatory agency or law enforcement office, even those not directly tied to the securities industry, should also be fully protected, if the contents of the disclosure relate to fraud against shareholders or violations of the laws or rules referenced in the SOX. Although complaints regarding the potential violation of securities law and / or SEC rules and regulations can be filed with the SEC, whistleblower retaliation complaints must be filed with the U.S. Department of Labor. The Labor Department will forward a copy of the complaint to the SEC, but only the Labor Department has jurisdiction over the merits of a SOX whistleblower employment discrimination case.
Any prohibition on permitting employees to contact federal law enforcement agencies also would constitute an illegal obstruction of justice under the Sarbanes-Oxley amendment to the Obstruction of Justice statute.

Contacts with Congress

The SOX explicitly protects employee contact with “any Member of Congress or any committee of Congress.” Even without explicit protection for these contacts, communications with Congress are fully protected under other whistleblower laws, as core protected activities. This statutory language is directly modeled on other whistleblower laws. FN 42 U.S.C. 5851(a).
Internal Protected Activity
The SOX explicitly protects internal employee complaints to management officials who exercise “supervisory authority” over the whistleblower. It also protects whistleblower disclosures to any “person working for the employer who has authority to investigate, discover or terminate misconduct.” This is a very broad definition of internal protected activity, and clearly establishes that reports to supervisors or managers, without direct contact with government regulators, is fully protected activity. In addition to a supervisor, disclosures to the following persons should be fully protected:
• Audit committee and auditors
• Office of General Counsel
• Chief Executive Officer of the Company
• Company instituted employee concerns programs
Significantly, even without this explicit statutory grant of authority, the DOL-administered whistleblowers laws upon which the SOX was based have been interpreted to fully protect internal whistleblowing.

Aggressive Auditing

It is now well settled that “self-auditing work,” and the “compliance” concerns it generates, constitutes protected activity. Specifically, “employees whose assigned job is to discover and report instances of noncompliance so that the employer may correct them” engage in protected activity when they identify potential violations. This would include the “initial statement of the employee” that “points out a violation,” as well as the additional statements that employee may make if the concern is eventually reported to the government.
An employee’s proper performance of his or her quality control, quality assurance, or auditing functions may be fully protected activity. For example, in the context of providing protection for auditors in the nuclear safety area, the DOL ruled: “The protection afforded whistleblowers by the ERA extends to employees who, in the course of their work, must make recommendations regarding how best to serve the interest of nuclear safety, even when they do not allege that the status quo is in violation of any specific statutory or regulatory standard.” Federal courts have upheld these holdings and have fully protected inspectors who, in the performance of their job, disclosed violations or misconduct.

Failure to follow chain of command

A necessary component of protecting internal whistleblowing is fully protecting employees who make disclosures outside of their chain of command. Once internal whistleblowing is protected, this rule is not only logical but necessary to protect the integrity of internal disclosures. Thus, regardless of a company’s policy, an employee’s ability to choose the internal component of a company to which he or she desires to make a whistleblower disclosure is extremely significant. On the one hand, an employee may feel comfortable discussing his or her concerns with a supervisor. However, the employee may want to remain confidential, and may raise a disclosure directly to the audit committee. Moreover, when an auditor conducts a review of a department or program, the employee would need to be protected when he or she provided the auditor truthful information regarding potential misconduct.
The DOL has adopted a firm rule in whistleblower cases that employees may circumvent the chain of command when reporting allegations of wrongdoing protected under various whistleblower laws.
Although employees can ignore a mandatory “chain of command” reporting requirement under a number of federal laws, they are not free to participate in protected activities in any manner they so choose. Reasonable restrictions on employee conduct will be sustained, even if the restrictions may impact otherwise protected activities. Thus, an employee who engages in protected activity still may be discharged for “insubordinate behavior, work refusal, and disruption.”

Participating in enforcement proceedings

Under the SOX, employees who “participate” in legal or administrative proceedings related to adjudicating a whistleblower case or an SEC enforcement proceeding are entitled to “exceptionally broad protection.” The SOX contains a sweeping “participation clause” provision, which protects employees who file charges, testify, or participate in any SEC proceedings or proceedings related to “any provision of Federal law relating to fraud against shareholders.” Given the broad protection courts and the Labor Department have afforded employees under such participation clauses, the scope of this section of the law is highly significant. For example, in similar “participation” clauses employees who file charges are protected even if management maintains that the allegations are purely “fabricated.” The “participation” clauses also protect witnesses who assist in antidiscrimination proceedings, even if these witnesses are “reluctant” or are compelled to testify “involuntarily.” Coverage under the “participation” clauses “does not turn on the substance of an employee’s testimony” and retaliatory actions are prohibited “regardless of how unreasonable” an employer finds the “testimony.”
Filing a whistleblower complaint with the U.S. DOL is, unto itself, protected activity52 Protected activity also includes meeting with DOL investigators or testifying in a DOL whistleblower proceeding.
The SOX statute, like other whistleblower statutes, makes explicit reference to protecting employees who are “about to” testify or file a claim against an employer.54 This language has been interpreted as explicitly protecting employees who threaten to file complaints with federal authorities, despite the fact that the employee has not actually filed a formal charge. To be protected, an employee does not have to directly inform management of his or her intention to report disclosures to the government. Instead, circumstantial evidence indicating this intention, including internal complaints to management and the circumstances surrounding the whistleblowing, can indicate an intention to report the violation to the government. The DOL has protected employee activities that may cause an employer to fear that an employee is going to report an alleged violation to the government.

Taping

Whistleblowers often engage in “one-party” taping of conversations in an attempt to document wrongdoing or retaliation. Under federal law, one-party taping motivated by a desire to “preserve evidence” or to “protect” oneself and to prevent “later distortions” of a conversation is legal. When you need legal help from a Bountiful Utah Corporate lawyer, give us a call today.

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— Tim Cella (@TimCella2) September 21, 2022