Supreme Court Says Sarbox Whistleblower Protection Extends To Contractors

Mar 4 2014, 2:33pm CST | by

The U.S. Supreme Court today ruled the whistleblower protections in the Sarbanes-Oxley financial-reform law extend to employees of contractors of public companies, in a decision supporters say will rein in the accountants and other outside contractors who closed their eyes to financial scandals at Enron and Worldcom, but which defense lawyers say could expose millions of small businesses to opportunistic employee suits.

The court, in a decision by Justice Ruth Bader Ginsburg, rejected Fidelity parent FMR’s argument that only direct employees of public companies should receive protection. FMR, like most mutual fund companies, operates its funds with zero employees under a contracting arrangement with separately incorporated investment advisors. It sought to avoid liability under a whistleblower-retaliation case filed by Jackie Hosang Lawson, a former senior director of finance who claimed she was punished for disclosing certain cost-accounting improprieties.

Fidelity warned of  “absurd results” if the whistleblower protections under Sarbox were extended to employees of every contractor working for a public company. Justices Anthony Kennedy, Samuel Alito and Sonia Sotomayor also dissented, saying the decision sweeps in low-level employees who will be able to file federal retaliation claims after witnessing trivial offenses.

As interpreted today, the Sarbanes-Oxley Act 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. And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.

“For 10 years employees of smaller contractors likely believed that it would be an exercise in futility to bring claims” under Sarbox, said Steven J. Pearlman, a partner in Proskauer’s Chicago office who focuses on whistleblower defense. “Now that there is a clear Supreme Court precedent we can expect them to bring cases.”

But the law is clear, the Supreme Court ruled. Congress ordered protection for “any officer, employee, contractor, subcontractor, or agent” of any public company. In the case of the FMR executive working for a fund manager, the court said, “it is implausible that Congress intended to leave such an employee remediless.”

This despite the fact that the heading on the section of the law covering whistleblowers says: “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.”

Ginsburg, in the majority opinion, said there is “scant evidence” that the floodgates scenario is “more than hypothetical.”

“Few housekeepers or gardeners, we suspect, are likely to come upon and comprehend evidence of their employer’s complicity in fraud,” she wrote.

Pearlman said the threat is very real that enterprising employment lawyers will seek out contractor employees now with any plausible claim of retaliation that can be tied to a financial matter. Under federal labor law an employee need only show that retaliation was a factor in his or her demotion or dismissal under a low preponderance of the evidence standard. Employers, on the other hand, must provide clear and convincing evidence the employee was fired for legitimate reasons.

The result is that employees can file relatively weak cases with the anticipation employers will settle to avoid even larger legal bills. Millions of contractors of public companies, meanwhile, will have to hire lawyers like Pearlman to devise compliance plans and defense strategies if they want to minimize the risk. The financial improprieties employees can claim to have blown the whistle on include mail and wire fraud, which have extremely broad definitions and could include virtually anything impacting a public company’s finances or the activity of its employees.

The dissent drew a surprising mix of conservative justices and the somewhat liberal Sotomayor. Archconservative Justice Antonin Scalia signed off on the majority opinion, but with a generous helping of snark. He criticized Ginsburg for attempting to figure out what Congress meant to accomplish when it wrote the law, instead of simply interpreting the words on the page.

Reliance on legislative history rests upon several frail premises. First, and most important: That the statute means what Congress intended. It does not. Because we are a government of laws, not of men, and are governed by what Congress enacted rather than by what it intended, the sole object of the interpretative enterprise is to determine what a law says. Second: That there was a congressional “intent” apart from that reflected in the enacted text. On most issues of detail that come before this Court, I am confident that the majority of Senators and Representitives had no views whatever on how the issues should be resolved  —indeed, were unaware of the issues entirely.

Source: Forbes Business


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

Bhopal fugitive Warren Anderson is dead (Roundup, Changing dateline)
Washington, Oct 31 (IANS) Warren Anderson, the former CEO of Union Carbide Corp, has died at 92 after living for 30 years under the shadow of the 1984 Bhopal gas tragedy that killed thousands.
Sit-ins delayed building powerhouses: Nawaz Sharif
Islamabad, Oct 31 (IANS) Prime Minister Nawaz Sharif Friday blamed sit-ins for delaying the construction of powerhouses in the country, as cricketer-turned-politician Imran Khan continued protesting with supporters in the capital city for over two months.
Britain to repay part of First World War debt
London, Oct 31 (IANS) British Chancellor of the Exchequer George Osborne Friday announced that the British government will pay off part of the country's First World War debt as part of the redemption of bonds stretching as far back as the 18th century.
UN-Habitat presents the first World Cities Day
Shanghai, Oct 31 (IANS/EFE) The UN Human Settlements Programme (UN-Habitat), headed by former Barcelona mayor Joan Clos, Friday launched its first World Cities Day in China, to be held every Oct 31 to promote sustainable development.

Latest from the Network

Apple Outsmarts Samsung in Terms of Revenue Generation
Samsung can sell more products, but it doesn’t mean that it will earn more profit, as Apple overtakes the Korean giant with respect to the earnings.According to the Cult of Mac, Samsung earned a profit of $3.8 billion...
Read more on Apple Balla
Apple Declares Not to Remove PCalc iOS Calculator Widget
The PCalc iOs calculator widget is free from the risk of being removed, as Apple decides not to drop it from the App Store.According to Tech Crunch, the officials of Apple have confirmed about the move, stating that it...
Read more on Apple Balla
Seth Rogen to Act as Steve Wozniak in the Steve Jobs’ Movie
Seth Rogen has got an important role in the biopic of the late Apple co-founder Steve Jobs, as he has been selected to play as Steve Wozniak.According to the Variety, Rogen will be advised directly by Steve Wozniak, the...
Read more on Apple Balla
Ponzy schemer cheats residents of $22 mn, gets 15-year jail
Washington, Oct 31 (IANS) If you have been one of those approached by some 'known' person for investing in something with an assurance of 'easy money', you may benefit reading about this Ponzi schemer jailed in the US...
Read more on Politics Balla
Burkina Faso's president quits, army chief takes power (Roundup)
Ouagadougou, Oct 31 (IANS) Burkina Faso's army chief Gen. Nabere Honore Traore assumed power Friday after President Blaise Compaore announced his resignation following violent protests against his attempt to extend...
Read more on Politics Balla
Spanish government challenges Catalonia's symbolic vote on independence
Madrid, Oct 31 (IANS/EFE) Spain's government Friday challenged Catalonia's decision to hold a symbolic vote Nov 9 as an alternative to a referendum on independence stalled by the Constitutional Court. The government...
Read more on Politics Balla
Myanmar roundtable summit discusses political issues
Nay Pyi Taw, Oct 31 (IANS) Myanmar's first five-party roundtable summit held in the Presidential Palace here Friday discussed some key political issues in the country, presidential spokesman U Ye Htut said at a press...
Read more on Politics Balla
Jake Gyllenhaal saves outrageous clothes for Halloween
Jake Gyllenhaal always wears his ''sl***iest outfit'' every Halloween. The 33-year-old actor has revealed his dad, director Stephen Gyllenhaal, is ''obsessed'' with Halloween and throughout his childhood Jake and his...
Read more on Celebrity Balla
Katie Holmes would tell her younger self to 'relax'
Katie Holmes would tell her younger self to ''relax''. The 35-year-old actress, who has eight-year-old daughter Suri with ex-husband Tom Cruise, claims she never believed she could carve out a career in Hollywood while...
Read more on Celebrity Balla
Joshua Jackson calls Diane Kruger his wife
Joshua Jackson calls Diane Kruger his wife. The 'Affair' star, who previously admitted he and his German girlfriend of eight years are unlikely to ever marry, doesn't like referring to the blonde beauty as his...
Read more on Celebrity Balla