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“Are Sarbanes-Oxley and Dodd-Frank Becoming Generalized Whistleblower Laws?”

Middle-Market Legal Toolbox Joseph D. Masterson

The array of corporate misconduct covered by Dodd-Frank and SOX is growing. The anti-retaliation provisions in those statutes ban companies from retaliating against employees, and other covered individuals, that report or disclose securities violations or corporate fraud. The reporting activities and disclosures that Dodd-Frank and SOX protect, though, are the subject of ongoing review by the courts and Department of Labor (“DOL”).

The conventional notion is that Dodd-Frank and SOX protect employees who report shareholder fraud. After all, Congress passed these laws in response to widespread concerns about manager malfeasance and shareholder vulnerability. But recent rulings from the federal courts and the DOL signal that the anti-retaliation net may be widening, ensnaring more than merely shareholder fraud.

Take, for example, a recent DOL decision concluding that SOX protected an employee who reported a manager’s sexual relationships, inappropriate emails and purchases with company funds. While the misconduct did not necessarily amount to shareholder fraud, the 10th Circuit Court of Appeals affirmed the DOL decision and upheld a $75,000 compensatory damage award plus reinstatement, back pay and additional expenses to the employee.

Only a few days after the 10th Circuit ruling, commentators began making ominous predictions about the expansive scope of Dodd-Frank and SOX, even proclamations that the statutes would create a “generalized whistleblower law.” Only time will reveal the accuracy of such a prognosis. In the meantime, companies should pay close attention to how they treat employees who report misconduct.

The first step is to update your management team on the activities that Dodd-Frank and SOX may now protect. If your management team thinks that these laws apply only to reports of shareholder fraud, then your institutional knowledge may be out of date. It is also wise to update your team on what amounts to retaliation. When an employee asks management if he or she can report misconduct to an external agency, management’s response is critical. The SEC is now focusing heavily on managerial efforts to curb or discourage external reporting, especially with severance or employment agreements.

If you missed Quarles & Brady’s webinar today, Whistleblowers: Strategies for Minimizing Risk,you can still check out the seminar materials.

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