Section 806 of Sarbanes-Oxley: Protecting Those Who Complain of Fraud at Work

by | June 3, 2021 | Retaliation Law

In the wake of the Enron and Arthur Anderson scandals, Congress enacted the Sarbanes-Oxley Act of 2002 (“SOX”) to address “a culture, supported by law, that discourage[s] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC [Securities and Exchange Commission], but even internally.”  S. Rep. No. 107–146, at 4–5 (2002).Section 806 of SOX prevents publicly traded companies—in addition to any subsidiary or affiliate whose financial information is included in the consolidated financial statements of such company—from terminating, harassing, or discriminating against any employee who reports (1) mail fraud, (2) wire fraud, (3) bank fraud, (4) securities fraud, or a violation of (5) any rule or regulation of the SEC or (6) any provision of federal law relating to fraud against shareholders, to a federal or law enforcement agency, Congress, or an internal supervisor.  See Digit. Realty Tr., Inc. v. Somers, 138 S. Ct. 767, 772 (2018); 18 U.S.C § 1514A(a)(1)(C).  Section 929A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extended SOX’s protection to employees of public company subsidiaries and nationally recognized statistical rating organizations, employees of private contractors and subcontractors serving public companies, as well as the personal employees of public company officers.  See Lawson v. FMR L.L.C., 571 U.S. 429, 455 & n.11, 459 (2014); 15 U.S.C § 78u-6.  To make out a prima facie case under SOX, an employee must show, “by a preponderance of the evidence,” that (1) she engaged in protected whistleblowing activity, (2) the employer knew that she engaged in the protected activity, (3) she suffered an “adverse action,” and (4) the protected activity was a “contributing factor” to the adverse action.  See Lozada-Leoni v. MoneyGram, Int’l, Inc., No. 4:20CV68-RWS-CMC, 2020 WL 7000874, at *18 (E.D. Tex. Oct. 19, 2020) (quoting Wallace v. Andeavor Corp., 916 F.3d 423, 426 (5th Cir. 2019)).

So, what does this mean in plain English?  Take the facts alleged in Sylvester v. Parexel International LLC, Case No. 07–123, 32 IER Cases 497, 2011 WL 2517148 (Dep’t of Labor May 25, 2011).  Kathy Sylvester worked for Parexel International LLC, a publicly traded company that conducts clinical tests for drug manufacturers.  As a Case Report Forms Department Manager, Ms. Sylvester was charged with ensuring that data from Parexel’s clinical studies adhered to FDA standards.  Meanwhile, Theresa Neuschafer worked as a Clinical Research Nurse at Parexel, and it was her responsibility to make sure that Parexel was reporting accurate clinical data.  Parexel’s public representations about its clinical data were critically important to investors and Parexel consistently reported to its shareholders that it “strictly adheres” to FDA standards.  See id. at *1–2.

Unfortunately, Parexel was not living up to its public representations.  One day, while reviewing the charts of four subjects participating in a study Parexel was conducting for the drug manufacturer AstraZeneca, Ms. Neuschafer noticed that certain neurocognitive data had not been properly inputted in each subject’s chart.  She reported these omissions to her supervisor, who proceeded to unethically backdate information into the charts.  Ms. Neuschafer objected to her supervisors that this backdating was fraudulent, but was told that the falsifications were “no big deal.”  Ms. Sylvester observed this exchange and she too complained to her supervisors about the fraud.  Shortly thereafter, Parexel fired Ms. Sylvester for not being a “team player” and fired Ms. Neuschafer because her “personality did not fit in.”  Id. at *2–4.

In a 2011 opinion, the Administrative Review Board of the U.S. Department of Labor held that, based on the above allegations, Ms. Sylvester and Ms. Neuschafer had sufficiently alleged violations of SOX.  See Sylvester, 2011 WL 2517148, at *1–3, *21–22.  As the Board explained, both women complained to their supervisors about activities they reasonably believed were fraudulent: they objected to Parexel’s practice of misleading investors regarding the company’s FDA compliance.  See id. at *1, *21.  Additionally, Ms. Sylvester and Ms. Neuschafer sufficiently described how the fraudulent activities related to the financial status of Parexel: by representing to shareholders that its studies complied with FDA requirements, Parexel was able to maintain its large profit from the drug manufacturer studies, maintain stock value, avoid corporate credit problems, and maintain high compensation levels for executives.  See id. at *3, *22.  Moreover, Ms. Sylvester and Ms. Neuschafer sufficiently alleged that the conduct to which they objected related to mail and wire fraud: the false data was “reported as accurate by Parexel in communication through the U.S. mails and by wire communications such as the Internet.”  Id. at *3 (quotation omitted).

The Sylvester decision holds important lessons for employees on the broad scope of SOX.

First, a whistleblower need not definitively prove that the corporate defendant committed fraud to prevail under SOX.  Rather, the statute only requires the employee to prove that she “reasonably believed” that the employer’s conduct violated federal law.  See Guyden v. Aetna, Inc., 544 F.3d 379, 384 (2d Cir. 2008).Moreover, a whistleblower “need not cite a code section” she believes was violated in her communication to her employer.  Welch v. Chao, 536 F.3d 269, 275 (4th Cir. 2008) (quotation omitted).  Instead, the employee need only convey that she believes her employer has committed or is about to commit mail fraud, wire fraud, bank fraud, or securities fraud, or has violated or is about to violate any rule or regulation of the SEC or any provision of federal law relating to fraud against shareholders.  See Ashmore v. CGI Grp. Inc., 138 F. Supp. 3d 329, 385 (S.D.N.Y. 2015); Sylvester, 2011 WL 2517148, at *14.

Second, the activity reported need not directly involve financial information.  For example, Ms. Sylvester and Ms. Neuschafer alleged that Parexel committed fraud in the form of failing to disclose clinical data to shareholders in an attempt to maximize the company’s profits, which in turn affected shareholder value.  See Sylvester, 2011 WL 2517148, at *1–2.  In Wallender v. Canadian National Railway Co., No. 2:13-cv-2603-dkv, 2015 WL 10818741 (W.D. Tenn. Feb. 10, 2015), the plaintiff engaged in protected activity under SOX where he alleged that “the misreporting of efficiency and performance metrics and derailments constitutes a betrayal of the company’s obligation to its shareholders.”  Id. at *13.  And in Gladitsch v. Neo@Ogilvy, No. 11 Civ. 919, 2012 WL 1003513 (S.D.N.Y. Mar. 21, 2012), the plaintiff sufficiently alleged a SOX violation where he claimed that the defendants had deliberately overbilled their largest client and that the overbilling could be detrimental to that business relationship, artificially inflate revenues, and “cripple shareholder confidence.”  Id. at *1, *7.

Third, as was the case in Sylvester, the employee need only make a protected disclosure to an individual “with supervisory authority over” her—and need not report the fraud to the CEO of the company or an administrative or law enforcement body.  See 18 U.S.C. § 1514A(a)(1)(C); Leznik v. Nektar Therapeutics, Inc., ALJ Case No. 2006-SOX-00094, 2007 WL 5596626, at *8 (Dep’t of Labor Nov. 16, 2007) (“Once an employee’s supervisor has actual knowledge of the protected activity, that knowledge is attributed to the ultimate decision-maker.”).  Additionally, the supervisor to whom the employee complains can even be implicated in the alleged fraud.  See Leshinsky v. Telvent GIT, S.A., 942 F. Supp. 2d 432, 448 (S.D.N.Y. 2013).

Finally, it is worth noting that SOX’s whistleblower protection covers a “very broad spectrum of adverse actions,” Wiest v. Lynch, 15 F. Supp. 3d 545, 560 (E.D. Pa. 2014) (quotation omitted), and a plaintiff need not be terminated to have a claim.  Instead, a whistleblower alleging retaliation need only demonstrate that the retaliatory activity “would deter a reasonable person from engaging in protected activity.”  Id. (quotation omitted).  Also, plaintiffs need only show that their whistleblowing was a “contributing factor” to the adverse action taken against them.  Feldman v. Law Enf’t Assocs. Corp.¸ 955 F. Supp. 2d 528, 553 (E.D.N.C. 2013).  A contributing factor is “any factor, which alone or in combination with other factors, tends to affect in any way the outcome of the decision.”  Allen v. Admin. Review Bd., 514 F.3d 468, 476 n.3 (5th Cir. 2008) (quotation omitted).  This causation standard has been described as “broad and forgiving” for plaintiffs.  Wiest, 15 F. Supp. 3d at 562 (collecting cases).

If you have been retaliated against at work for complaining of fraud, you should consult with an attorney to determine what your legal options are.  Sanford Heisler Sharp has experienced whistleblower lawyers and retaliation lawyers in New York, Washington, DC, San Francisco, San Diego, Tennessee, and Baltimore.