Business Services Industry

Whistle-blower claims rejected

HR Magazine, April, 2008 by Phillip K. Cha

Allen v. Administrative Review Board, U.S. Dept. of Labor, 5th Cir., No. 06-60849 (Jan. 22, 2008).

Employees could not state a retaliation claim under the Sarbanes-Oxley Act (SOX) when their alleged activities did not implicate one of its six enumerated categories of prohibited conduct, according to the 5th U.S. Circuit Court of Appeals.

Patricia Allen, Dana Breaux and Laura Waldon were employed by Stewart Enterprises Inc., a publicly traded company in the funeral home and cemetery business.

More Articles of Interest

In late 2000, during an internal audit, Stewart discovered a malfunction in its AS400 computer system for calculating interest on customer balances, resulting in erroneous calculation of customer "payoff" amounts. Stewart immediately began working on a program to correct the errors in the interest calculations and also performed manual amortizations on its customer accounts.

Beginning in April 2003, Allen, Breaux and Waldon expressed concerns to their supervisors about the problems with the AS400. They testified that they never thought Stewart intentionally programmed the AS400 to overcharge customers and that they knew Stewart was actively working on a solution, but they believed that Stewart was taking too long to fix the problem because of Stewart's alleged desire to keep the problem a secret.

Allen and Breaux also were concerned about Stewart's billing system for "Pending Other Source (POS) Accounts," which are accounts that a third party, such as an insurance company, pays in part or in full. Allen and Breaux suspected that this POS billing system made it difficult for the company to collect the unpaid balances from customers and would affect revenue in situations where the other source did not pay the balance.

After reviewing internal accounting reports and speaking with Stewart's head of internal audit, Waldon became concerned that Stewart was not in compliance with the U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin 101 (SAB-101). Waldon was aware that Stewart did not submit these internal accounting reports to the SEC, but she was concerned that the company was overstating its gross profit.

The employees filed a SOX whistle-blower complaint with the U.S. Department of Labor, claiming that Stewart retaliated against them and included them in a companywide reduction in force as a result of engaging in protected activity. An administrative law judge dismissed the complaint, and the administrative review board affirmed.

In upholding the decision, the 5th Circuit determined that Waldon's suspicion that Stewart's conduct violated SOX was not reasonable, as she knew that the internal consolidated financial statements were not financial statements submitted to the SEC.

As for the employees' complaints to managers regarding the AS400 interest calculation, untimely refunds and POS billing issues, the court held that the employees did not have a reasonable belief that Stewart acted with intent to deceive, manipulate or defraud its shareholders.

By Phillip K. Cha, an attorney with Swerdlow Florence Sanchez Swerdlow & Wimmer, a Worklaw[R] Network member firm in Beverly Hills, Calif.

Online Resources

New cases are posted online each week. Visit the online version of Court Report at www.shrm.org/law.> RELATED ARTICLE: Professional Pointer

Employers should not treat employees who are mistaken in-their beliefs any differently, because even a mistaken but objectively reasonable belief is protected under the law.