The Supreme Court ruled in favor of expanding the whistleblower protections of the Sarbanes-Oxley Act to include private firms that act as contractors and subcontractors for public companies, which could have major implications for accountants.
The 6 to 3 decision reversed a lower court decision involving Section 1514A of the Sarbanes-Oxley Act, which was enacted in the wake of accounting scandals such as Enron and WorldCom. The case, Lawson et al v. FMR LLC, involved a pair of employees, Jackie Hosang Lawson and Jonathan M. Zang, who worked for a contractor that provided advisory and management services to the Fidelity family of mutual funds. They were dismissed after blowing the whistle on what they claimed were misrepresentations in the fees charged to shareholders and the disclosures to the SEC.
Lawson worked for FMR for 14 years, eventually serving as a senior director of finance. She alleged that, after she raised concerns about certain cost accounting methodologies, contending that they overstated expenses associated with operating the mutual funds, she suffered a series of adverse actions, ultimately amounting to her discharge.
Zang was employed by FMR for eight years, most recently as a portfolio manager. He alleged that he was fired in retaliation for raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds. Lawson and Zang separately filed administrative complaints alleging retaliation. They claimed they were covered under Sarbanes-Oxley’s anti-retaliation provisions for whistleblowers. FMR, the management company behind Fidelity, contended that they were not covered because they did not work for a publicly traded company, but for a contractor.
Even though the case involved mutual funds, the justices noted that the case could also apply to accounting firms. “This case concerns the definition of a protected class: Does §1514A shield only those employed by the public company itself, or does it shield as well employees of privately held contractors and subcontractors—for example, investment advisers, law firms, accounting enterprises—who perform work for the public company?” wrote Justice Ruth Bader Ginsburg in the majority opinion. “We hold, based on the text of §1514A, the mischief to which Congress was responding, and earlier legislation Congress drew upon, that the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”
Ginsburg was joined in the majority opinion by Chief Justice John Roberts, and Justices Stephen Breyer and Elena Kagan. Justices Antonin Scalia and Clarence Thomas filed a concurring opinion stating that they were “relying only” on the text and broader context of Section 1514A, but agreeing that it protects employees of private contractors from retaliation when they report covered forms of fraud.
Justice Sonia Sotomayor wrote a dissenting opinion, joined by Justices Anthony Kennedy and Samuel Alito, arguing that the decision gives “a stunning reach” to Section 1514A.
“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,” Sotomayor wrote. “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.”
In the majority opinion Ginsburg harkened back to the accounting scandals of the early 2000s. “In the Enron scandal that prompted the Sarbanes-Oxley Act, contractors and subcontractors, including the accounting firm Arthur Andersen, participated in Enron’s fraud and its cover-up. When employees of those contractors attempted to bring misconduct to light, they encountered retaliation by their employers. The Sarbanes-Oxley Act contains numerous provisions aimed at controlling the work of accountants, auditors and lawyers who work with public companies. Given Congress’ concern about contractor conduct of the kind that contributed to Enron’s collapse, we regard with suspicion construction of Section 1514A to protect whistleblowers only when they are employed by a public company, and not when they work for the public company’s contractor.”
Important Day for Whistleblowers
“This is an important decision and it’s a very important day for whistleblowers, and indeed it’s an important day for accountants, as now accountants are going to be covered by the anti-retaliation provisions of the Sarbanes-Oxley Act to the extent that they have any accounting duties or contracts with publicly traded corporations,” said R. Scott Oswald, managing principal of The Employment Law Group, who wrote an amicus brief in the Lawson case on behalf of the National Employment Lawyers Association and the Government Accountability Project.
“The issue in this case is the breadth of the protections under Section 806 of the Sarbanes-Oxley Act, which was passed in the wake of the Enron and WorldCom implosions,” said Oswald. “That’s an important backdrop to the Supreme Court’s decision in this case. Section 806 was designed to protect individuals who blow the whistle to disclose any violation of our laws relating to wire fraud, bank fraud, mail fraud, shareholder fraud or any violation of an SEC rule, to the extent that the individual does so, either to his or her supervisor or somebody who has responsibility for receiving, investigating or remediating complaints relating to possible fraud in these contexts in the workplace.”
The issue before the court was the breadth of the statute itself, Oswald pointed out. “It states that no company, or any officer, employer, contractor or subcontractor or agent of such company may discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee in the terms and conditions of his employment because of his disclosure. The court held that this statutory construction as outlined by Congress includes any disclosure that an individual makes to a contractor so long as that contractor has a contract with a publicly traded corporation, and what the person is disclosing would constitute a violation of our laws relating to wire fraud, bank fraud, mail fraud, shareholder fraud or a violation of any SEC rule.”
Opening the Door to More Whistleblower Tips
Former SEC Inspector General H. David Kotz, who now works as a director at the consulting firm Berkeley Research Group, noted that the Supreme Court ruling could have a significant impact on the willingness of financial insiders to file whistleblower complaints and report allegations of wrongdoing.
“I think it certainly expands the protection of employees for companies that provide services or goods as contractors or subcontractors,” said Kotz. “Clearly, if an accountant provides services as a contractor or subcontractor, then this potentially could provide them additional protection. I think in general this ruling could significantly increase the number of individuals that may assert whistleblower protection for reporting allegations about fraud by public companies, and I think it could lead to a significant increase in whistleblower complaints and related lawsuits.”
The ruling might open the door to more accountants filing whistleblower tips with the SEC. “I think a lot of whistleblowers are concerned about coming forward because they are afraid they are going to suffer retaliation,” said Kotz. “Where they are clearly under SOX whistleblower protection, and they have a remedy for a situation where they feel like they’ve been retaliated against, it will encourage them to come forward. It expands the number of whistleblowers that get protection, and that additional protection will lead to more whistleblowers feeling more comfortable coming forward, and I think that will lead to more whistleblower complaints.”
Daniel Westman, a longtime employment partner with the law firm Morrison & Foerster and lead author of one of a textbook on whistleblower laws, called the decision a huge win for employees. “The Court has given a very employee-friendly reading of Sarbanes-Oxley’s whistleblower provisions,” he said in a statement. “The ruling means that private companies and third-party contractors that have not previously considered themselves subject to SOX are in fact, covered by whistleblower laws, even if they don’t have to comply with other aspects of the legislation as private businesses.”
In the case, FMR had contended that whistleblowers were only protected if they worked directly for a publicly traded corporation, and even though the statute mentions contractors and subcontractors, whistleblowers were only protected if the contractor made the decision to terminate the whistleblower’s employment.
The Supreme Court did not find that argument persuasive. “Justice Ginsburg said she was simply applying common sense here,” said Oswald. “Of course, what Congress intended was that it extended to contractors of publicly held corporations because that was precisely what led up to the Enron and WorldCom implosions—the failure of employees of contractors to notify either their own employers or law enforcement that in fact Enron was simply a fraud. And Justice Ginsburg gave several examples in the congressional record to show the statute was intended to broadly protect employees of contractors or subcontractors.”
Extra Measure of Comfort for Accountants
A whistleblower with an accounting firm that has a contract with a publicly traded corporation is already able to disclose an irregularity within a financial statement under the existing SEC rules and be covered. But the Supreme Court decision goes further. “What this decision does is it covers employees in a different scenario,” Oswald noted. “Let’s say that the accounting firm has a contract with a publicly traded corporation. The employee discloses an instance that would constitute wire fraud relating to an unrelated client to his or her manager. Now that employee is engaged in protected conduct under the Sarbanes-Oxley Act and has the protections of the Act, cannot be terminated and otherwise discriminated against, even though what the accounting employee was disclosing is completely unrelated to the contract that his or her employer has with the publicly traded corporation.”
The ruling will also protect accounting employees, to the extent to that the accounting firm or their employer has some contract with a publicly traded corporation. “To the extent that they do, now the employee will have a claim under the Sarbanes-Oxley Act,” said Oswald. “Importantly what it does is it protects accountants who are fiduciaries. It protects fiduciaries when they are forced to disclose a violation of law. It now gives them employment protection that heretofore they did not have.”
Sotomayor’s dissent from the majority came as a surprise. “Certainly this was a strange split in the court, that’s for sure,” said Oswald. “She objected given the breadth of the implications of the majority’s opinions here. She describes the majority opinion and she said it has stunning reach.’ Well, yes, it does have a stunning reach. That’s for sure, and that is an accurate statement, but that was Congress’s intent in passing the Sarbanes-Oxley Act, to prevent the next Enron and WorldCom and to do so in the broadest way. That’s what Congress intended to do was to protect employees from potential adverse actions as a result of meeting their obligations. Accountants have obligations now to report under the Sarbanes-Oxley Act, and concomitantly with this decision, in any of those situations they are now going to be protected to the extent that their employer has a contract with a publicly traded corporation, even where their reporting would not necessarily implicate their work for the publicly traded company.”
The decision will give additional employment protections to accountants. “Before today, unless the accountant was disclosing potential wrongdoing with a publicly traded client or customer, an audit client for example, in all likelihood the accountant had no employment protection,” said Oswald. “The accountant could be terminated for that disclosure without there being any legal implications. Heretofore, as the Supreme Court mentioned, and why SOX came into being was that the only recourse that an accountant would have would be to look to state law—a patchwork of 50 state laws, some states having no employment protections for wrongful discharge at all. Now accountants, to the extent that their employers have a contract with a publicly traded corporation, now have general whistleblower protections for simply performing their jobs. It gives accountants a little extra measure of comfort knowing that they can do their jobs without the fear of losing their jobs merely because they’re meeting their fiduciary obligations.”