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New interpretation of Sarbanes-Oxley creates problems for employers

Employment lawyers fear that a recent decision from the U.S. Department of Labor Administrative Review Board broadening whistleblower protections under Sarbanes-Oxley may create new burdens for employers.

In the case before the board, a Halliburton employee filed a complaint with the Securities and Exchange Commission over certain accounting practices used by the company. He also sent an email to the company’s own Audit Committee, expressing similar concerns.

In his email to the Audit Committee, he gave his name and did not seek anonymity.

His email was forwarded to other members of the company, essentially “outing” his identity.

The Administrative Review Board found that this breach of confidentiality violated Sarbanes-Oxley and remanded the case for further proceedings, including the consideration of damages.

Kraig B. Long, who advises companies facing whistleblower lawsuits under Sarbanes-Oxley, said the board’s decision expands the duties of employers.

Companies must now protect from incidental disclosure the identities of employees who question their bookkeeping and ensure these workers face no retribution from management or their coworkers, no matter how minor, he said.

The decision has “put employers on alert that when dealing with whistleblower complaints and claims, any action toward the employee … could now subject them to liability,” added Long, of Shawe & Rosenthal LLP in Baltimore. “It will certainly change how employers have to treat whistleblower complaints.”

Attorney Jay P. Holland, who represents whistleblowers, called the board’s ruling “significant,” especially in light of what he called the Labor Department’s frequent dismissals of such claims under Sarbanes-Oxley, popularly referred to as SOX.

“The Department of Labor has been rather strict and stingy in regard to Sarbanes-Oxley complaints by whistleblowers,” said Holland, of Joseph, Greenwald & Laake PA in Greenbelt. “The Department of Labor here took a broad view of what would encompass retaliatory conduct by employers.”

The likelihood of defeat at the department had made him and many other whistleblower attorneys reluctant to bring SOX cases, Holland said.

“This could be a change in attitude and outlook from the Department of Labor as it pertains to SOX cases,” he added. “This may change my view.”

R. Scott Oswald, a Maryland lawyer and managing partner of The Employment Law Group in Washington, D.C., said the Administrative Review Board’s ruling on Sarbanes-Oxley marks the first time that “the act itself of revealing a whistleblower’s identity can be an adverse action under the statute.”

Whistleblowers may now feel safer coming forward to report information, he said, knowing their identity will be kept confidential.

The decision “shifts who is responsible for confidentiality,” said Richard Moberly, a professor at the University of Nebraska College of Law who has written about Sarbanes-Oxley and whistleblowers. “It is now the duty of the company to keep a whistleblower’s identity confidential.”

This creates a difficult challenge for employers because “there is a real tension between maintaining the confidentiality of a complainant and the requirements to preserve documents and communications” for an investigation, said Daniel Westman, co-chair of the Employment and Labor Group at Morrison Foerster in McLean, Va. and author of “Whistleblowing: The Law of Retaliatory Discharge.”

W. Carl Jordan, a partner at Vinson & Elkins in Houston, who represented Halliburton, did not return a call requesting comment.

Confidentiality breached

Anthony Menendez was hired in 2005 by the finance and accounting operation of Halliburton.

During the course of his work monitoring and researching technical accounting issues, he developed concerns about the company’s revenue recognition practices.

When his supervisor dismissed those concerns, he reported them to the Securities and Exchange Commission, filing his complaint with the agency confidentially.

He later sent an email to Halliburton’s Audit Committee presenting the same issues in his SEC complaint. The email was forwarded to other employees, including the company’s general counsel, and in a subsequent document retention email to various employees Menendez was identified by name.

He claimed that as a result, he received no phone calls and few emails, and his co-workers generally avoided him.

Menendez took a pre-scheduled leave of absence that the company extended to six months. Prior to his return, both the SEC and the Audit Committee recommended that no enforcement action be taken against Halliburton for its accounting practices.

Menendez received a letter stating that he would report to a new manager, which he felt was a demotion. He resigned and brought suit.

An administrative law judge determined that while Menendez engaged in activity protected by Sarbanes-Oxley, he did not suffer an adverse employment action as a result of the breach of his confidentiality.

But the Administrative Review Board disagreed.

It noted that under Section 301 of the Act, companies are required to establish procedures for “(A) the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, or auditing matters; or (B) the confidential, anonymous submission by employees of the issuer of concerns regarding questionable accounting or auditing matters.”

“We consider Section 301 a critical component of SOX,” the board said. “We agree with Menendez’s contention that the right to confidentiality Section 301 affords effectively establishes a ‘term and condition’ of employment … and that the exposure of Menendez’s identity in connection with his complaint to Halliburton’s Audit Committee constituted a violation of that employment term and condition.”

The board remanded the case to the administrative law judge to determine whether Halliburton had a legitimate business reason to disclose Menendez’s identity.

If not, the ALJ should then “fashion relief as he deems appropriate,” the ARB said, using “the fallout from the exposure of Menendez’s identity — personal and professional isolation as well as loss of professional opportunities and advancement” to calculate damages.

Long, the management-side attorney, said the board’s inclusion of “isolation” to the list of compensable injuries “significantly expands” the scope of an employee’s available recovery in a retaliation claim.

Historically, recovery has been available only when the retaliatory act caused the employee a clear economic loss, such as a demotion or termination, Long said. But now, “any impact, even the simple disclosure of a person’s name, can form the basis of a retaliation claim” under SOX, he said.

Holland, who defends whistleblowers, agreed that the Administrative Review Board has created a broader standard of calculating damages than applies under other employment-protection laws, such as Title VII of the 1964 Civil Right Act. In the board’s view, an employee whose name was illegally disclosed under SOX can be compensated for “any adverse employment action that is more than trivial,” Holland said.

Adding ‘teeth’ to statute

Moberly said the decision provides an “example of the way in which the new, Obama-dominated Administrative Review Board is reading Sarbanes-Oxley broadly. The ARB is taking seriously that Sarbanes-Oxley is a remedial statute.”

Oswald said the decision adds “teeth” to existing confidentiality policies.

Most companies have a policy that they will maintain a whistleblower’s confidentiality, he said. “But in reality, many corporations do not maintain adequate internal controls over their disclosure protocols.”

The Menendez decision provides additional incentives to employers to maintain confidentiality going forward, in part because the Administrative Review Board said that damages may be available.

Menendez could receive “special damages” under Sarbanes-Oxley, said Oswald, which could include recovery for the damage to his reputation as well as emotional distress.

In addition to establishing that the act of breaching confidentiality is actionable, the decision also changes the standard for what constitutes an adverse action.

The Administrative Review Board “articulated a more favorable iteration of adverse action than defined under other whistleblower statutes,” explained Oswald.

As a practical matter, this more generous standard will allow more cases to survive summary judgment, he said.

Awkward balance

Westman noted that the language of the statute makes it clear that companies need to have a mechanism in place for anonymous or confidential reports; but, in this case, Menendez did not complain anonymously. He named himself to the Audit Committee.

Before this decision, Westman said, “I would have told you that by not submitting his concern anonymously the company was under no statutory duty to keep his non-anonymous communication confidential.”

Now, he said, employers have been placed in an awkward situation. They have a duty to retain documents related to an investigation, but they have to somehow instruct employees to retain all relevant documents — including communications with the person who made the complaint — without revealing the name of that person.

“Companies will have to go into significant detail about the issues raised by the complainant to make sure they are casting the net broadly enough,” he said. But the more detail they provide, the more likely they are to reveal who filed the complaint, given the nature of the issues raised.

“This is going to be very difficult to do,” he said.

Daily Record Legal Affairs Writer Steve Lash contributed to this report.