A United States judge ruled on Monday the whistleblower provisions passed in the Dodd-Frank law in 2010 could be applied retroactively to protect not only people employed by parent companies but also those working for subsidiaries of parent companies.
The court held that Dodd Frank merely clarified Congress’s original intent in the 2002 Sarbanes-Oxley statute. The expanded coverage thus applies even to cases initiated before Dodd-Frank.
The ruling made by US District Judge J. Paul Oetken in Manhattan came in the case of Philip Leshinsky. Leshinsky had, according to Reuters, worked for the “non-public Caseta unit of the Spanish technology company Telvent GIT.” In July 2008, he allegedly was wrongfully terminated.
As the decision details:
[The] plaintiff alleges that he was terminated as a result of his raising objections to a proposal to use fraudulent information in connection with a bid to have Caseta obtain a contract with the New York Metropolitan Transit Authority (“MTA”) for the maintenance and repair of the electronic toll registry system for the MTA bridges and tunnels E-Z Pass System. Plaintiff alleges that his termination was in violation of Section 806 of Sarbanes-Oxley, which prohibits retaliation against corporate whistleblowers.
The ruling does not determine whether Leshinsky’s claims about why he was fired were true or not. The court only decided whether Leshinsky could bring the case under a section of the Sarbanes-Oxley Act, the law passed in 2002 in the aftermath of the Enron scandal, which granted some level of protection to corporate whistleblowers in publicly-traded companies.
This section of Dodd-Frank is highlighted as reason for applying the legislation retroactively:
…[a]mends Section 806 of the Sarbanes-Oxley Act of 2002 to make clear that subsidiaries and affiliates of issuers may not retaliate against whistleblowers, eliminating a defense often raised by issuers in actions brought by whistleblowers. Section 806 of the Sarbanes-Oxley Act creates protections for whistleblowers who report securities fraud and other violations. The language of the statute may be read as providing a remedy only for retaliation by the issuer, and not by subsidiaries of an issuer. This clarification would eliminate a defense now raised in a substantial number of actions brought by whistleblowers under the statute.
The court also determined that previous decisions in courts did not really support Telvent’s legal argument that employees of subsidiaries should not enjoy protection. The statute in Sarbanes-Oxley had always been “ambiguous.” Prior judicial and administrative decisions on the statute affirm this fact.
Noting Sarbanes-Oxley passed in the wake of exposed corruption at Worldcom and Enron, the decision cites legislative history that indicates Congress, at the time, viewed whistleblowers as important to “the exposure of financial fraud within large, complexly structured corporations.” It includes this relevant section from a judge’s dissenting argument in the case of Bechtel v. Competitive Technologies, Inc:
Congress enacted the Sarbanes-Oxley Act of 2002 . . . in response to an acute crisis: Revelations of mass corporate fraud, most vividly in connection with the Enron Corporation, threatened to destroy investors’ faith in the American financial markets and, in so doing, to jeopardize those markets and the American economy. Congress recognized that the problem was an intractable one, and that a number of strong enforcement tools would be necessary—from new regulations and reporting requirements, to expanded oversight, to new criminal provisions. Congress also recognized that for any of these tools to work, the law had to protect whistleblowers from retaliation, because “often, in complex fraud prosecutions, . . . insiders are the only firsthand witnesses to the fraud.” S. Rep. No. 107-146, at 10 (2002). Congress therefore made whistleblower protection central to the Act . . . .
Furthermore, the decision factored in Congress’ intent to protect investors in companies through the protection of whistleblowers. From the decision, “To the extent that Congress sought to protect investors in Telvent GIT through protection of whistleblowers who could provide valuable information about the workings of the company, the employees of the subsidiaries are at least as important as, if not more important than, the dozen employees of the parent company.”
Also used to bolster this argument is a salient section of an amicus brief submitted by the Securities & Exchange Commission (SEC) in support of applying the Dodd-Frank law to employees of subsidiaries:
Interpreting Section 806 not to cover consolidated subsidiaries would mean that whether a whistleblower was protected would turn on whether he worked for the parent or an unincorporated division rather than for a subsidiary, even though the consequences of his reporting misconduct would be exactly the same in both situations. It seems quite unlikely that Congress intended that outcome. Nor would it make sense to exclude from whistleblower protection the employees most likely to know of misstatements in consolidated financial statements, such as misstatements concerning inventory and sales at subsidiaries where inventory is maintained and sales staff is actually located.
The decision is clearly a victory for whistleblowers. However, it does not mean that corporate whistleblowers are necessarily any better off than they were before the Dodd-Frank law passed or that they will be in the future. From 2002 through May 20, 2011, according to the Center for Public Integrity, the Occupational Safety and Health Administration (OSHA) “found merit in only 21 whistleblower complaints under Sarbox and dismissed 1,211 others, according to agency data obtained by iWatch News. That translates into a win rate of less than 2 percent.”
And in the fall of 2002, Leonard M. Baynes wrote in an analysis published in the St. John’s Law Review on the Sarbanes-Oxley law:
…There are several matters that the Act fails to address or provide sufficient protection, i.e., (1) non-securities fraud matters are not covered; (2) low-level employees may not be aware of the protections; (3) no guidance is given as to when to report wrongdoing to outside authorities or to a supervisor; (4) no guidance is given as to when the whistleblower should go over his or her supervisor’s head to senior management; and (5) no protection is given to undercover retaliations that do not quite manifest themselves as a “discharge, demotion, suspension, threat, or other manner of discrimination.” In promulgating its rules in implementing this matter, the SEC, to the extent possible, should take some of these limitations of the Act into account. As a consequence, the corporate whistleblower cannot just pucker and blow. She has to use a great deal of thought to whether and how she may want to blow the whistle. [emphasis added]
There is little indication that it has gotten any better for corporate whistleblowers. The House of Representatives led by Republicans would like to repeal the Dodd-Frank whistleblower provisions and replace it with an Orwellian piece of legislation called the “Whistleblower Improvement Act.” On top of that, not only do whistleblowers have to fear retaliation if they expose corruption but they also have to worry that what they say might not be paid any attention.
Corporate whistleblowers should have it better in American society, yet far too many citizens believe employees should follow a “boss’s orders even if the boss is wrong.” So they, similar to national security whistleblowers, face a culture that vilifies them if they raise their voice and cause trouble in the workplace or in their community.