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DOL Continues to Ignore and Rewrite SOX’s Whistleblower Law


     By Fulcrum Inquiry Damages, Appraisal, Accounting & Economics Expert Witnesses

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Complaints involving this portion of SOX are initially administered though the Department of Labor’s OSHA. OSHA has dismissed almost half of employee complaints based on a strained interpretation of the law, and has substantively ruled against the employee in most of the rest of the actions. The authors of this portion of SOX have demanded change
According to records maintained by the Department of Labor (DOL), the government has ruled in favor of whistleblowers 17 times out of 1,273 complaints filed since 2002. Another 841 cases have been dismissed. This data comes from Richard Moberly, a University of Nebraska law professor who has recently had his statistics reported by the Wall Street Journal.

Most of the dismissals were based on the DOL’s premise that employees working for a corporate subsidiary are not covered by the whistleblower provisions of Sarbanes Oxley Act (SOX). A DOL spokeswoman said in a statement that DOL:

“…believes that there is no legal basis for the argument that subsidiaries of covered corporations are automatically covered [under SOX whistleblower provisions]…The plain language of the statute only applies to publicly traded corporations.”

The DOL stands alone in this interpretation. Certainly the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCOAB) do not administer the rest of SOX provisions as applying only to the publicly-traded parent company. For example, if the DOL’s approach were correct, one could merely ignore the practical effect of all of SOX Section 404 (the internal control provisions that cause great headache and expense) by placing operations into wholly-owned subsidiaries.

SOX’s whistleblower litigation process is administered by the DOL’s Occupational Health & Safety Administration (OSHA). OSHA handles similar provisions of other laws. An employee complaint is initially addressed by an OSHA official, then appealed to a DOL administrative law judge (ALJ), and then appealed to the DOL’s Administrative Review Board (ARB). The ALJs and ARB members typically do not have the business or accounting backgrounds required to understand SOX’s accounting provisions, since the vast majority of whistleblower cases have nothing to do with accounting.

No serious study of SOX could assert that the DOL is complying with legislative intent. However, even if there were any such doubt, the actual authors have weighed in. Senator Patrick Leahy (a Democrat) and Senator Charles Grassley (a Republican) wrote SOX’s whistleblower provisions. When they learned about Professor Moberly’s work, they wrote a strongly-worded letter to the Secretary of the DOL. The letter included:

“We authored the corporate whistleblower provisions of the Corporate and Criminal frauds Accountability Act, section 806 of the Sarbanes-Oxley Act (SOX). In 2002 and 2003, we corresponded with the Attorney General and the President to express our disagreement with the Administration’s overly narrow interpretation of these important whistleblower protections in the corporate accountability legislation.

We are dismayed to learn that the Administration – the Department of Labor in particular – has been using an overly restrictive interpretation of this law to dismiss a majority of the complaints filed by employees of public corporations under this section who assert that they have been fired or treated unfairly because they reported fraud.

…We want to point out, as clearly and emphatically as we can, that there is simply no basis to assert, given this broad language [which the Senators had quoted in text not repeated here] that employees of subsidiaries of the companies identified in the statute were intended to be excluded from its protections. Moreover, as the authors of this provision, we can clearly state that it was by no means our intention to restrict these important protections to a small minority of corporate employees or to give corporations a loophole …”

In testimony before the Subcommittee on Workforce Protections, Committee on Education and Labor of the House of Representatives, Professor Moberly testified:

“This low win rate for whistleblowers has two primary causes. First, administrative decision-makers focus an extraordinary amount of attention on whether the whistleblower is the “right” type of whistleblower. Did the whistleblower disclose the “right” type of misconduct, to the “right” type of person? Did the whistleblower work for the “right” type of company? Did the whistleblower provide a complaint precisely within the 90-day statute of limitations? ALJs determined that over 95% of Sarbanes-Oxley whistleblower cases failed to satisfy one or more of these questions as a matter of law. Thus, very few whistleblowers were actually provided the opportunity to demonstrate that they were the subject of retaliation.

Second, at the initial OSHA investigative level, when OSHA found that an employee’s claim actually satisfied all of Sarbanes-Oxley’s legal requirements, OSHA still found for the employee only 10% of the time. This low win rate seems surprising, because Sarbanes-Oxley purposefully presents a very low burden of proof for employees once their prima facie case is met.”

As already, noted, most cases do not even get to a substantive hearing. However, those rare cases that are allowed to continue through the DOL process face additional hurdles. For example, in the first case that had reached the DOL’s ARB, the ARB rewrote the plain language of SOX’s whistleblower provisions, causing that employee to obtain no SOX protection.

Under Sarbanes-Oxley, whistleblowers eventually can appeal the DOL’s rulings to a federal circuit court. Until the DOL changes its antagonism towards employee whistleblowers, this may the only way for the law to be enforced.


Fulcrum Inquiry provides turn-key whistleblower collection and reporting services

ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
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