The U.S. Supreme Court recently held, in Lawson et al. v. FMR LLC, that the whistleblower protection provisions of Section 806 of The Sarbanes-Oxley Act (“SOX”) cover employees of privately owned companies performing contract services on behalf of publicly traded companies when they raise reasonably based concerns to their supervisors about fraud adversely affecting shareholders of the client company. It reversed a federal appeals court decision that Section 806 only protects employees of publicly traded companies (see Goodwin Procter’s February 12, 2012 Financial Services Alert, “First Circuit Limits SOX Whistleblower Coverage to Employees of Public Companies”).
One of the plaintiffs was employed by a privately held investment advisory firm that contracted to advise and manage mutual funds; he alleged that he was fired for expressing concerns about inaccuracies in a draft registration statement that the advisory firm prepared for the SEC on behalf of its client mutual funds. The other plaintiff was employed by a privately held brokerage firm affiliated with the advisor; she alleged that she was constructively discharged for reporting accounting practices that overstated expenses associated with managing certain mutual funds.
In pertinent part, Section 806 of SOX provides that:
No [public company] . . . , or any officer, employee, contractor, 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 employment because of any lawful act done by the employee … to provide information … regarding any conduct which the employee reasonably believes constitutes [mail fraud, fraud by wire, bank fraud, or securities fraud], any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders, when the information … is provided to …a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct….
The issue before the Supreme Court was whether the “employee” who is protected from discrimination in Section 806 refers to the employee of a public company or the employee of any of the others listed at the beginning of Section 806, including contractors to a public company. A divided Supreme Court ruled (6-3) that Section 806 extended its protections to employees of contractors and others listed at the beginning of Section 806.
The federal mail fraud and wire fraud statutes that are referred to in Section 806 are extremely broad, and encompass virtually any conceivable type of fraud, having nothing to do with investor protection concerns underlying SOX. In the words of a federal appeals court in Atlas Pile Driving v. FinCo., “[t]he crime of mail fraud is broad in scope and its fraudulent aspect is measured by a non-technical standard, condemning conduct which fails to conform to standards of moral uprightness, fundamental honesty, and fair play.”
The Department of Labor’s Administrative Review Board (“ARB”) has broadly interpreted Section 806 to protect employees who make internal reports about a wide variety of alleged fraudulent conduct involving their employers – not merely reports of securities fraud or SEC rule violations. For example, in Lockheed Martin v. Administrative Review Board, a federal appeals court upheld an ARB ruling that an employee’s internal report that her manager was arranging “business trips” to engage in sexual rendezvous and submitting false reports seeking reimbursement for her expenses related to that misconduct was protected activity under SOX because emailing false expense reports constituted wire fraud. In another case, the ARB ruled that reporting concerns to an employer about possible fraudulent conduct by a customer was protected by SOX.
Significantly, the Lawson Court found it unnecessary to resolve concerns raised in amicus briefs by industry groups (including the U.S. Chamber of Commerce) that the implications of its holding that employees of private companies contracting with public companies are protected by SOX could lead to a spate of litigation brought by employees “who have no exposure to investor-related activities.” The Court expressly declined to determine the bounds of activity protected by Section 806, since the plaintiffs’ allegations about accounting improprieties and inaccuracies in registration statements (which had to be accepted as true for purposes of the motion to dismiss their claims) “fall squarely within Congress’ aim in enacting” the SOX’s whistleblower protection provisions. Whether any limiting principles will be applied to require some nexus between the investor protection purpose of SOX and potential protected activity by employees of privately held contractors providing services to public companies remains an open question.