Blowing the Whistle on the Dodd-Frank Amendments: The Case against the New Amendments to Whistleblower Protection in Section 806 of Sarbanes-Oxley
King, Meghan Elizabeth, American Criminal Law Review
A mere six months into his term in office, President Barack Obama proposed a "sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression." (1) The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), (2) a 2,300-page bill with tremendous reach into the regulation of the financial services industry, was enacted one year after the President's proposal. (3)
The Dodd-Frank Act, in its entirety, offers significant increases in whistleblower protection in comparison to other federal whistleblower statutes. In general, whistleblower protection shields an employee from retaliation when the employee reports that his employer engaged in fraudulent behavior. (4) In addition to creating its own separate cause of action for whistleblowers alleging employer retaliation, (5) the Act amends the oft-maligned (6) section 806 of the Sarbanes-Oxley Act of 2002 (7) ("Sarbanes-Oxley"). Prior to Dodd-Frank's passage, section 806 was the only source of federal whistleblower protection for private-sector employees. (8)
The Dodd-Frank amendments to Sarbanes-Oxley are found in sections 922 and 929A of the Act. These sections extend liability for whistleblower retaliation to a mass of employers previously not covered by Sarbanes-Oxley's section 806. sections 922 and 929A amend section 806 by prohibiting pre-dispute mandatory arbitration agreements, extending 806's statute of limitations and granting whistleblowers the fight to a jury trial in district court.
Because of the difficulties whistleblowers had in obtaining protection and relief under Sarbanes-Oxley, (9) many scholars view Dodd-Frank's amendments as a positive step toward increasing protection for whistleblowers. (10) This Note takes a contrary stance. After analyzing the pillar whistleblower cases arising under section 806, this Note will argue that Dodd-Frank's amendments will not substantially alter the outcome of section 806's cases and may be more detrimental than beneficial to employee whistleblowers. Because this Note only argues against Dodd-Frank's amendments to Sarbanes-Oxley's 806, I will not discuss Dodd-Frank's separate cause of action except when necessary for the purposes of analyzing the amendments to section 806.
In Part I, I will discuss the background leading up to the enactment of Sarbanes-Oxley's whistleblower protection provisions. In Part II, I will discuss the history that led to the amendments to those protections by Dodd-Frank. In Part III, I will analyze the litigation that arose under the whistleblower provisions in Sarbanes-Oxley. Finally, in Part IV, I will argue that Dodd-Frank's amendments to Sarbanes-Oxley will not provide greater whistleblower protection against retaliation in light of the previous decisions in section 806 cases.
I. THE HISTORY AND ACCOUNTING SCANDALS LEADING TO THE FORMATION OF SARBANES-OXLEY'S WHISTLEBLOWER PROVISIONS
Prior to Sarbanes-Oxley's enactment in 2002, a private-sector employee had no federal legal protection from retaliation if he alerted the regulators or his superiors to fraudulent activity occurring in his company. (11) Significant protections were already firmly in place for government employees reporting fraud in order to curb the waste of taxpayers' dollars. (12) However, Congress had yet to find a reason to extend such protection to employees in the private sector. (13) The substantial publicity and apparent pervasiveness of the accounting scandals of the early twenty-first century gave Congress a reason to extend the protection to private sector employees.
Two of the most well-known accounting scandals, Enron and WorldCom, involved instances of whistleblowing. In both situations, employees alerted upper management to the accounting irregularities that they discovered, only to see their concerns fall on deaf ears. (14)
Enron filed for bankruptcy in the Southern District of New York on December 2, 2001. (15) Four months earlier, Sherron Watkins, the vice president of corporate development, wrote a memo to the company's chairman, Kenneth Lay, alleging that the company was "very aggressive in its accounting." (16) The memo signaled that Enron's accounting methods could ultimately swallow the company in scandal. (17) Shortly thereafter, Watkins met with Lay to discuss the concerns she raised in her memo. (18) Although the meeting triggered an investigation by an outside law firm, the firm ultimately concluded Enron's accounting methods were legal. (19) Despite the law firm's conclusion, Enron had to restate its financial statements, as its accounting methods had allowed the company to overstate its income by almost 600 million dollars. (20) This disclosure eventually led to the company's demise. (21)
Six months after Enron's collapse, WorldCom, Inc. announced that it had overstated its cash flow by more than $3.8 billion dollars. (22) Cynthia Cooper, the company's vice president of internal audit, and her staff discovered the accounting improprieties. (23) Cooper brought her concerns to WorldCom's chief financial officer, the company's outside auditors, and the board of directors' audit committee. In response, Cooper was repeatedly brushed off, stonewalled, or instructed to suspend the investigation. (24)
Congress included section 806 in Sarbanes-Oxley because of its concern that private-sector employees who report fraud, like Watkins and Cooper, were vulnerable to "the patchwork and vagaries of current state laws" (25) formulating the extent of whistleblower protection for private-sector employees. (26) The goal of section 806 was not to supplant the protection offered by the states but to set a "national floor." (27)
Sarbanes-Oxley passed with widespread bipartisan support (28) reflecting the public's growing skepticism of financial disclosures and general mistrust of corporations. (29) This mistrust was well founded as certain reports indicated that more than 700 publicly traded companies restated their earnings between 2000 and 2002 due to erroneous initial financial reports. (30)
Sarbanes-Oxley provides whistleblowers with a civil cause of action to protect themselves against retaliation after reporting allegations of corporate fraud. (31) An initial draft of section 806 allowed the complainant to immediately file in federal district court and had a statute of limitations of 180 days. Congress amended that draft by shortening the statute of limitations to ninety days and requiring the whistleblower to first file her complaint with the Occupational Safety and Health Administration ("OSHA"), a division of the Department of Labor. (32) These changes were made to minimize the excessive costs of the section. (33) Because OSHA already had jurisdiction over thirteen other whistleblower statutes, Congress felt that the Agency had the appropriate experience to conduct section 806 investigations. (34) The final version of the bill included these changes. Thus, under section 806 a whistleblower has ninety days to file a complaint with OSHA alleging retaliation, or she loses her claim. (35)
In her complaint, an employee must establish a prima facie case that her whistleblowing activity was a contributing factor to the adverse employment action she experienced. (36) To do so, the employee must prove by a preponderance of the evidence that: (1) she engaged in the protected activity; (2) the employer knew of the protected activity; (3) the employee suffered unfavorable personnel action; and (4) the circumstances suggest the protected activity contributed to the unfavorable personnel action. (37) If the employee establishes a prima facie case of discrimination, OSHA will proceed with an investigation unless the employer demonstrates by a clear and convincing standard that it would have taken the same action without the whistleblowing activity. (38) If the employer meets this standard, the complaint is dismissed unless the employee shows by a preponderance of the evidence that the employer's stated reason for the adverse action is a pretext for retaliation. (39) If the employee meets this burden, OSHA will proceed with its investigation. (40)
After concluding its investigation, OSHA will issue an order announcing its decision and can require the employer to reinstate the employee, pay back wages, and provide for other relief. (41) Either party can appeal this decision to the Office of Administrative Law Judges ("ALJ") for de novo review. (42) Once the ALJ has issued his decision, either party may appeal to the Administrative Review Board ("ARB"). (43) If the ARB declines to hear the case, the ALJ's decision is final. However, if OSHA, the ALJ, or the ARB do not make a final decision within 180 days of the whistleblower's initial filing, she can bring a de novo suit in federal district court. (44)
Sarbanes-Oxley's whistleblower provisions do not protect all private-sector employees. The Act's protections against retaliation are limited to the employees of a company that registers a class of securities "under section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781), or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d))." (45) This limitation is appropriate considering that Sarbanes-Oxley's purpose is to protect investors in publicly traded companies. Additionally, to find protection from employer retaliation under section 806, the employee must report a violation of mail or banking law, of securities fraud law, of a rule or regulation of the Securities and Exchange Commission ("SEC"), or of a federal law relating to fraud against shareholders. (46) If the employee reports a different violation, she will not find protection from retaliation under section 806.
II. THE WALL STREET FINANCIAL CRISIS AND THE ORIGIN OF DODD-FRANK'S WHISTLEBLOWER PROVISIONS
The financial crisis of 2007-2009 delivered a significant blow to both Wall Street and Main Street and ultimately led to the passage of Dodd-Frank. (47) The housing bubble, sub-prime mortgages, outsized risks, and overleveraging were among the several causes contributing to the crisis. (48) While these catalysts differ from those that led to Sarbanes-Oxley's passage, Dodd-Frank's overall objectives--to restore the public's faith in the financial system and to prevent another financial crisis (49)--are similar to the objectives of Sarbanes-Oxley.
The SEC came under intense scrutiny during the financial crisis because of its failure to investigate and regulate the companies under its authority. (50) The Agency did not stop Bernie Madoff as he defrauded investors of almost sixty-five billion dollars in one of the largest Ponzi schemes to date. (51) Harry Markopolos, a chartered financial analyst, made three complaints to the SEC about Madoff in 2000, 2001, and 2005. (52) The SEC's district and regional offices repeatedly dismissed Markopolos' warnings. (53)
In 2009, Markopolos testified in front of the Senate Banking Committee regarding his warnings to the SEC about Madoff's Ponzi scheme. (54) During his testimony, Markopolos vigorously advocated for stronger federal whistleblower protections than those offered under Sarbanes-Oxley. (55) His congressional testimony was cited as a driving force behind the enactment of Dodd-Frank's new whistleblower cause of action and its amendments to Sarbanes-Oxley's section 806. (56)
The bounty-award provision in section 922 is the most discussed whistleblower provision in Dodd-Frank. (57) The provision provides for a mandatory bounty award for a whistleblower who voluntarily provides the SEC with "original information" (58) ultimately leading to a successful enforcement action against her employer. (59) To be eligible for the bounty award, the SEC's judicial or administrative action against the employer must result in monetary sanctions exceeding one million dollars. (60) The whistleblower who meets these criteria will automatically receive a bounty award of 10 to 30% of the total amount of sanctions imposed against her employer. (61) Before Dodd-Frank, the SEC's bounty program issued awards at the Agency's discretion, and the amount of the award was capped at 10% of the total amount of sanctions. (62)
Two days after President Obama signed Dodd-Frank into law, the SEC awarded its first one-million-dollar bounty award to Glen and Karen Kaiser. (63) The Kaisers provided the SEC with information leading to seventeen million dollars in sanctions against Pequot Capital Management. (64) The Kaisers' award came under the old bounty provision in 21A(e) of the Securities Exchange Act of 1934 ("Exchange Act"). (65) Before the Kaisers' award, the largest bounty …
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Publication information: Article title: Blowing the Whistle on the Dodd-Frank Amendments: The Case against the New Amendments to Whistleblower Protection in Section 806 of Sarbanes-Oxley. Contributors: King, Meghan Elizabeth - Author. Journal title: American Criminal Law Review. Volume: 48. Issue: 3 Publication date: Summer 2011. Page number: 1457+. © 1994 Georgetown University Law Center. COPYRIGHT 2011 Gale Group.
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