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July will mark the two-year anniversary of the Sarbanes-Oxley Act. Enacted in response to the corporate financial and accounting scandals of 2002, Sarbanes-Oxley makes it illegal for a public company to discriminate against an employee for blowing the whistle on activity the employee reasonably believes to violate federal securities law. This significant new federal right of action has not suffered from neglect. The Department of Labor, the agency tasked with enforcing the act’s whistleblower provisions, estimated last December that approximately 170 whistleblower charges had been filed with the agency since the legislation’s July 30, 2002, enactment — making Sarbanes-Oxley whistleblower claims the most common type of claim other than traditional occupational safety and health claims. The department has given investigative responsibility for Sarbanes-Oxley whistleblower charges to the Occupational Safety and Health Administration, and given adjudicative responsibility to its administrative law judges; the OSHA investigators and ALJs have been handling those charges for some time now. But only in the law few months have we have received the benefit of the first three ALJ Sarbanes-Oxley decisions issued on the merits after full evidentiary hearings — Welch v. Cardinal Bankshares Corp., Getman v. Southwest Securities Inc., and Halloum v. Intel Corp. The Cardinal Bankshares and Southwest Securities decisions, in particular, offer valuable new insight into the unique interplay between employment and securities law in Sarbanes-Oxley whistleblower claims, and merit a cautionary note regarding the perils of over-regulation. THE DECISIONS Welch v. Cardinal Bankshares Corp., issued Jan. 28, 2004, is the very first ALJ decision issued on the merits of a Sarbanes-Oxley whistleblower claim after a full evidentiary hearing. David Welch had been the chief financial officer of Cardinal Bankshares, a Virginia bank holding company. During his employment, Welch complained repeatedly to Cardinal management about the company’s financial reporting practices, and on several occasions he refused to certify certain of the company’s quarterly financial reports. The company’s audit committee conducted an investigation into Welch’s complaints and job performance, and identified numerous examples of what it determined to be deficient performance on Welch’s part. Ultimately, the company asked Welch to present his concerns before the audit committee. When he refused to do so without his personal attorney present, the company terminated his employment. The ALJ found that Welch’s allegations were based on a “reasonable belief” that violations were being committed and that, therefore, Welch’s allegations constituted “protected activity” under the act. The ALJ then found that Welch’s protected activity was a “contributing factor” in his termination, determining that the close temporal proximity between Welch’s complaints and the termination was sufficient to create an inference of unlawful discrimination. The ALJ rejected Cardinal’s explanation that it terminated Welch solely because he refused to meet with its audit committee without his personal attorney present, holding that this reason was a pretext for firing him. The ALJ ordered that Cardinal reinstate Welch with back pay and interest, purge negative disciplinary references from his personnel file, and reimburse his litigation costs. Getman v. Southwest Securities Inc., issued Feb. 2, 2004, is the second Sarbanes-Oxley whistleblower ALJ decision issued on the merits after a full evidentiary hearing. Southwest Securities had hired Margot Getman in October 2000 as an equity research analyst, and terminated her employment in July 2002. Bringing a Sarbanes-Oxley whistleblower charge, Getman alleged that the company fired her because she had refused to upgrade her assessment of stock in a company with which the securities firm had wanted to conduct business. The company contended that it fired her for poor performance and for referring business to a competitor. Resolving key factual disputes in Getman’s favor, the ALJ found that the company had pressured her to give the stock a higher rating than it deserved, that she had refused, that her refusal constituted a protected activity under Sarbanes-Oxley, and that her refusal was a contributing factor in Southwest Securities’ termination of her employment. Finally, the ALJ held that Southwest Securities failed to demonstrate that it would have terminated Getman even if she had not engaged in the protected activity. ADDING SECURITIES LAW The ALJ in each of the two decisions applied the following analytical framework (adopted by the department in its Interim Final Rules implemented on May 28, 2003): Whether the complainant engaged in activities that were protected by the act; whether the respondent knew of the activity; whether the complainant suffered an unfavorable personnel action; whether the complainant’s activity was a contributing factor in the unfavorable personnel action; and whether the respondent demonstrated by clear and convincing evidence that it would have taken the same unfavorable personnel action irrespective of the complainant’s having engaged in protected activity. In one sense, this legal analysis is nothing new to the Labor Department or to employment lawyers experienced in handling whistleblower cases. It is a standard analysis developed judicially over years of employment discrimination litigation. The department’s OSHA investigators and ALJs have been applying it for years in the context of other statutory whistleblower protections (such as occupational safety and health, airline safety, and environmental protection claims). But the ALJ decisions reveal that this standard employment law analysis takes some unique twists and turns when applied to securities whistleblower claims. Cardinal Bankshares analyzed, and rejected, the company’s contention that the whistleblower’s allegations did not constitute protected activity because the company’s alleged misconduct was not “material” within the meaning of securities law. Issues of securities law seemed featured even more prominently in the Southwest Securities decision. There, the employer had contended that the employee’s refusal to increase the stock rating did not constitute a protected activity under Sarbanes-Oxley because the company’s pressure for her to do so did not constitute “manipulative practices in the purchase or sale of security.” This defense required the ALJ to analyze whether a fact was misrepresented or concealed, whether it was done in connection with a purchase or sale of security, whether the misrepresented or concealed fact was “material,” and whether the company acted with the requisite “scientor” or intent. This interplay between employment and securities law issues poses a unique challenge to companies and employment lawyers when handling Sarbanes-Oxley whistleblower claims before the Labor Department. It would be a mistake to focus on familiar employment law issues without considering defenses based on accounting and finance principles and issues of securities law. The two decisions suggest that OSHA investigators and ALJs are receptive to these types of defenses and will strive to understand them. However, the investigators and ALJs almost certainly lack the same familiarity and knowledge with the securities law issues that they have with the employment law issues with which they have grappled for many years. For that reason, companies and their employment lawyers must consider the risk that presenting finance and accounting principles and securities law issues might divert the investigator or ALJ from issues with which he or she is more readily familiar. COORDINATING THE MOVING PARTS The Cardinal Bankshares and Southwest Securities decisions illustrate the difficulty that companies and their counsel may encounter in coordinating the various components of a Sarbanes-Oxley whistleblower claim. Very often a company faced with employee charges of securities law violations will need to conduct internal investigations through its audit committee and human resources department. The former will focus on whether there was an actual securities violation; the latter will focus on whether the employee “reasonably believed” there was a securities violation and whether the employee suffered some adverse personnel action as a result of his complaint. An employer also may be forced to respond to both a Securities and Exchange Commission investigation and an OSHA investigation. Depending on the timing of the investigations, the company may focus on either the securities or employment law issues, to the exclusion of the other. Worst case, the company may take positions or reach conclusions in the first proceeding that could harm the company in the subsequent proceeding. If the company is represented by different lawyers in each proceeding, there is the risk that the lawyers will not be acting in concert with one another and may be undermining each other’s case. Public companies and their counsel must take steps at the outset to protect against these potential pitfalls. THE THREAT OF OVER-REGULATION Cardinal Bankshares offers a vivid illustration of the unique detrimental impact that Sarbanes-Oxley whistleblower claims can have on a company’s operations — an impact that can far exceed the dollar amounts at issue. From the company’s perspective, the most onerous aspect of the ALJ’s decision must have been the reinstatement order. One can only imagine the awkwardness of a reinstated whistleblower’s first day back among the ranks of senior management. Nor can one help but wonder how a reinstated executive and his colleagues would be able to work together to further the shareholders’ interests, and just how long it would take until they are once again embroiled in a dispute involving allegations of securities improprieties and deficient performance. This risk exists with a reinstated Sarbanes-Oxley whistleblower more so than with any other type of whistleblower. Sarbanes-Oxley whistleblowers are uniquely prone to be members of management responsible for ensuring compliance with the very issues about which they are complaining. That can create an extremely high risk of future tension within corporate management. Reinstatement under these circumstances could have devastating effects on a company. Companies have a legitimate interest in disciplining poor performance and misconduct, in shaping and managing their work force as they deem necessary. That interest is particularly great with respect to senior management. By interfering with that interest, over-enforcement of Sarbanes-Oxley’s whistleblower provisions would impair a company’s ability to create profits for its shareholders. Sarbanes-Oxley reflects Congress’ determination that there exists a need to regulate corporate financial wrongdoing in order to protect shareholders. The whistleblower provisions are well-designed to help achieve that purpose. But over-regulation by the Labor Department — whether through excessive liability determinations or excessive use of the reinstatement remedy — could have the unintended consequence of actually harming shareholders. John Scalia is a shareholder in the Tysons Corner, Va., office of Greenberg Traurig, where he practices employment law and general civil litigation. The views expressed are solely his own. He can be reached at [email protected].

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