Academic journal article St. John's Law Review

Just Pucker and Blow?: An Analysis of Corporate Whistleblowers, the Duty of Care, the Duty of Loyalty, and the Sarbanes-Oxley Act

Academic journal article St. John's Law Review

Just Pucker and Blow?: An Analysis of Corporate Whistleblowers, the Duty of Care, the Duty of Loyalty, and the Sarbanes-Oxley Act

Article excerpt

"You know how to whistle, don't you, Steve? You just put your lips together-and blow."1

INTRODUCTION In the past year, we have seen a number of corporate scandals involving major business entities such as Enron, Adelphia, Worldcom, Arthur Andersen, Tyco, and Martha Stewart. The New York Daily News described this bad behavior by corporate executives in a caption entitled "These Little Piggies Went to Market."2 Newsweek magazine in a headline called these executives the "Bad Boys Club."3 Well-known financial journalist Lou Dobbs called the bad boy executives "CEO Hogs."4 In addition, we have seen scenes of the Adelphia senior executives being carted off to jail in handcuffs like common criminals doing the so-called "perp walk."5 This corrupt conduct has involved various instances of fraud, ranging from using generally unacceptable accounting principles (like using IMAGE FORMULA8

partnerships to hide corporate losses and treating ordinary expenses as capital expenses to increase corporate profits), to providing exorbitant loans to senior executives.6 Insider trading also has been alleged.7 These scandals have led investors to be fearful of investing in the stock market. They also have caused major corporations difficultly in attracting CEOs,8 as well as prompted soul searching over the direction of our capitalist system,9 the decision to become a corporate executive,10 and whether the United States has a two-tiered moral system-one for bosses and one for the rest.11

In the midst of this new anti-corporate environment, corporate whistleblowers recently have received a lot of favorable press. For instance, Sherron Watkins has been described as the whistleblower who exposed the Enron fraud, although even she admits that she was not the first person at Enron to complain about its shady accounting practices.12 In many respects, Ms. Watkins was the prototypical, yet atypical, corporate whistleblower. This Article will examine the fiduciary obligations of corporate insiders who want to blow the whistle. It will compare the executives' contemporaneous (and often IMAGE FORMULA10

conflicting) duties of care and loyalty. It will show how the Sarbanes-Oxley Act of 2002 (the "Act") attempts to address these issues by providing some protection against retaliation. Finally, this Article will highlight the various considerations that the Act failed to address, but that the Securities and Exchange Commission (SEC) should take into account when promulgating its rules of implementation.

I. THE ULTIMATE WHISTLEBLOWER, SHERRON WATKINS Ms. Watkins was a Vice-President at Enron Corp.13 She earned a master's degree in professional accounting from the University of Texas at Austin. In 1982, she began her career as an auditor with the accounting firm Arthur Andersen, spending eight years at its Houston and New York offices.14 In 1983, she became a certified public accountant.15 Enron Vice-President Andrew Fastow hired Ms. Watkins to manage Enron's partnership with the California Public Employee Retirement System.16 From June to August 2001, Ms. Watkins worked directly for Mr. Fastow.17 During this time, Ms. Watkins learned that Enron was engaging in accounting improprieties with certain affiliated entities.18 She believed that Enron was using its own stock to generate gains and losses on its income statement.19 Ms. Watkins testified before the House Subcommittee on Oversight and Investigations that she failed to receive satisfactory explanations regarding these accounting transactions from Enron executives.20 Ms. Watkins admitted that she was troubled by the accounting practices but was IMAGE FORMULA13

uncomfortable reporting them to either Mr. Fastow or former Enron President Jeff Skilling,21 fearing termination if she approached them directly.22 On August 15, 2001, Ms. Watkins sent to Kenneth Lay, the CEO of Enron, a seven-page anonymous letter. …

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