The Whistle Blower Provisions of Sarbanes-Oxley Extends to Employees of Privately Held Companies Under Some Circumstances

In a decision that expands considerably the number of employees covered by the whistle-blower provisions of the Sarbanes-Oxley Act, the United States Supreme Court ruled earlier this month in Lawson v. FMR LLC that two former employees of privately held companies, that acted as mutual fund investment advisors to public investment companies, were entitled to the protection of the SOX whistle-blower provisions based on their allegations that their private company employers retaliated against them after they reported alleged shareholder fraud at the mutual funds.

The Sarbanes-Oxley Act, otherwise known as “SOX,” was passed in 2002 in response to a number of major corporate and accounting scandals. SOX established new or enhanced standards for all United States public companies, boards, management and public accounting firms. One component of SOX is a whistle-blower section that provides protection against demotion, discharge or discrimination for employees who “blow the whistle” on conduct the employee reasonably believes constitutes mail, wire and bank fraud, securities fraud, or a violation of any SEC rules and regulations. The whistle-blower section protects employees who make a complaint to the authorities as well as employees who pursue an internal complaint. The privately held employer in the Lawson case argued that the whistle-blower protection section of SOX only protects employees of public companies, arguing that the plain language of the statute and the underlying purpose of SOX is to prevent public company fraud. The Supreme Court rejected the private employer’s argument and held that SOX creates a cause of action for employees of non-public companies that perform work for public companies. The Supreme Court reasoned that to deny a whistle-blower cause of action to a private company employee who reported alleged shareholder fraud at a public company would undermine the overarching SOX goal of preventing fraud at public companies. However, as the dissenting opinion observed, the majority opinion in Lawson “threatens to subject private companies to a costly new front of employment litigation.”

What Should Employers Do in Response?

Even small private companies are well-served by a well-drafted anti-retaliation policy which protects employees who engage in protected activity, including whistle-blowing, coupled with a robust internal complaint reporting system. Following the Lawson decision, every private employer should: 

  • Review whether the company performs any work as a contractor or subcontractor for any public company and, as a result, has employees who potentially come within the reasoning of the Lawson opinion;
  • Review their policies to ensure that there is a policy in place which prohibits retaliation against employees who engage in protected activity, including external and internal whistle-blowing regarding topics covered by SOX;
  • Ensure that there is a strong internal complaint process in place that encourages internal whistle-blowing and properly protects employees who use the complaint process from retaliation.

Topics:  Employer Liability Issues, Lawson v FMR, Privately Held Corporations, Retaliation, Sarbanes-Oxley, Securities Fraud, Whistleblower Protection Enhancement Act, Whistleblowers

Published In: Civil Rights Updates, General Business Updates, Finance & Banking Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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