Congress enacted the Sarbanes-Oxley Act (Act) in July 2002 in response to numerous cases of corporate fraud and misconduct. The Act’s main thrust was to elevate the standards of corporate transparency and accountability in order to “protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to securities laws.” The Act also affords significant protections to corporate whistleblowers – the proverbial bulletproof vest.

Specifically, Section 806 of the Act protects employees of publicly- traded companies who “act lawfully to disclose information about fraudulent activities within their companies.” The statute will protect employees who take lawful action to disclose information; assist in criminal investigations; or provide information to regulatory agencies, Congress or supervisors within their company. The Act’s anti-retaliation provisions also extend beyond publicly-traded companies to protect their contractors, subcontractors and agents.

What Constitutes Protected Activity?
In an effort to provide whistleblowers with the broadest possible protection, the Act contains a comprehensive definition of what constitutes protected activity. The Act has specifically outlined the following conduct as protected activity:

• Reports to government officials
• Internal reports
• Reports to Congress
• Conduct that initiates a “proceeding” under the securities laws

Congress envisioned a broad base of persons and entities to which an employee can report misconduct. In fact, the case law suggests that the notion of protected activity may possibly extend to an employee who reports to the news media; or the outside auditor whose reports reflect an aggressive performance of job duties.

What are the Reportable Offenses?

Congress has also broadly defined the types of activities that are considered a violation of the Act. Specifically, the Act defines the types of reportable conduct as violations of —

• Federal criminal and civil fraud laws protecting investors
• Any rule or regulation of the SEC
• Any federal law relating to fraud against shareholders

What is Considered Retaliatory Conduct?
The Act prohibits a company from engaging in retaliatory conduct or adverse action against any employee who is involved in protected, whistleblowing activity. Specifically, the Act prohibits an employer from such retaliatory conduct as discharge, demotion, suspension, threats, harassment, or any other manner of discrimination against an employee regarding the terms and conditions of employment. The Department of Labor has interpreted “adverse action” as any conduct on the part of an employer that serves to intimidate, threaten, restrain or blacklist an employee who has engaged in protected activity.

Civil and Criminal Penalties Under the SOX Act
A Sarbanes-Oxley whistleblower who has been the victim of retaliation may seek relief by filing a complaint with the Department of Labor within ninety days of the adverse employment action. Many employers may be surprised by the short window of opportunity in which they must respond to an employee’s complaint.

Employees who prevail under the Act are entitled to be made whole. In other words, a whistleblower who is a victim of retaliation by an employer is entitled to reinstatement, back pay, interest, compensatory damages, special damages, attorney fees and costs.

In addition to the imposition of civil penalties, Section 1107 of the Act also amended the obstruction of justice statute, making it a crime for anyone to knowingly retaliate against a whistleblower who has provided “truthful” information to a “law enforcement officer” about the commission or possible commission of any Federal offense. Section 1107 is comprehensive; it is not limited to public companies; and it prescribes significant penalties of either a ten-year prison sentence or a fine, or both.

Human resources executives, as well as the whistleblower’s supervisor have exposure to criminal liability under Section 1107 when an adverse employment action is knowingly undertaken against an employee who has blown the whistle. Additionally, an employee who has successfully litigated a whistleblower action under the Act may also use the evidence and the court record created in the action to pursue an independent cause of action pursuant to the Racketeering Influenced and Corrupt Organizations Act (RICO).

Internal and External Fallout From Retaliatory Conduct
In addition to the potential civil and criminal ramifications of the Act, retaliation against an employee who has reported corporate misconduct will invariably result in a public relations nightmare for a company. Consider the headline that says: “Corporate Cover-up: Employee Blows the Whistle and Receives Intimidation Instead of Commendation!” Suddenly, the company’s stock plunges.

The impact on employee morale in response to retaliatory conduct on the part of the corporation may also be substantial and pervasive. If an employee’s report of misconduct leads to wrongful termination, the news will inevitably spread like wildfire throughout the company.

The development of appropriate procedures that implement the statutory anti-retaliation protections are crucial to minimizing exposure to liability and maximizing insulation from negative publicity and a decline in morale. Ultimately, prevention of these types of adverse outcomes will be more cost effective than any attempts to remediate the damage that has already been done.

Recommendations
Given the far-reaching, anti-retaliation provisions of the Act, CEOs and CFOs must recognize those employment decisions that can lead to potentially adverse results. The Act requires that an audit committee be established; and the necessary procedures implemented to encourage the confidential and anonymous submission of employee complaints. In fact, to meet the Act's requirement for confidential reporting, it is considered a "best practice" for publicly-traded companies to establish anonymous reporting through toll-free numbers.

Although the Act encompasses a vast array of issues and concerns, it is silent with respect to guidance for companies on how to prevent retaliation against employees who have the courage to report suspected unlawful conduct.

The following are some practical suggestions:

• Provide educational materials and training programs to human resources personnel and management concerning the breadth and scope of the Act’s anti-retaliation provisions.
• Adopt and implement corporate codes of conduct and ethics policies that address the Act’s anti-retaliation provisions; and have employees sign an acknowledgement of the provisions’ existence.
• Maintain lines of communication between human resources, management and the company’s contractors and subcontractors.
• Assemble a SOX anti-retaliation team (separate and apart from the audit committee) to foster communication and to review adverse personnel decisions; to ensure that any action taken is commensurate with the employee’s alleged wrongdoing.
• Implement policies governing documentation of adverse personnel actions, and promote the importance of contemporaneous documentation.
• Develop a policy that provides multi-channel reporting; allowing employees to report misconduct outside of their chain of command.
• Create an ethical work environment: one where employees “walk the walk” as well as “talk the talk” of corporate codes of ethics.
• Establish and implement guidelines to routinely assess the efficacy of the policies.

As with all generalities, these recommendations are not all-inclusive. With leadership and decision making status, CEOs, CFOs and other senior-level executives and managers are required to govern in a way that protects the interests of the shareholders and prevents harm to employees who report compliance problems. Companies should respond to the mandates of the Act in a proactive fashion.

About the Author
Sue Ellen Eisenberg, Esq., is co-founding partner of Eisenberg & Bogas, P.C, a boutique law firm in Bloomfield Hills, Michigan, which specializes in all areas of employment law, including Title VII, Sarbanes-Oxley, Whistleblower’s Protection Act, ADA, ADEA, Elliott-Larsen and wrongful termination. Ms. Eisenberg dedicates a significant portion of her time to work place fairness issues and the establishment of preventative measures in the labor and employment setting. Ms. Eisenberg can be reached at see@ebpclaw.com.