WHISTLEBLOWER PROTECTIONS UNDER THE SARBANES-OXLEY ACT: A PRIMER AND A CRITIQUE

Fordham Journal of Corporate & Financial Law, 2007 by Watnick, Valerie

INTRODUCTION

In the wake of scandals involving Enron, Arthur Andersen and other corporations, Congress enacted the landmark Corporate and Criminal Fraud Accountability Act, more famously known as the Sarbanes-Oxley Act (hereinafter the "Act" or "Sarbanes-Oxley"). ' Sarbanes-Oxley provided for sweeping reforms in the way that publicly held corporations account for and make public disclosures under federal securities laws.2 President George W. Bush signed the bill into law and touted the Act as a "far-reaching" reform of American business practices.3 In attempting to reform American business practices, Congress pressed corporate officers, directors, and other employees into service, enlisting them as "foot soldiers" in the fight against corporate fraud. Congress did so by requiring those who witness corporate fraud to report what they know about it4 and by offering commiserate protection from retaliation under the "whistleblower protection" provisions contained within Sarbanes-Oxley.5 Yet, despite SarbanesOxley being touted as a new bulwark against corporate fraud, the courts continue to weaken these whistleblower provisions6 and newspapers continue to report scandals involving corporate fraud.7 It seems that those who might blow the whistle and protect corporate shareholders are not coming forward soon enough to prevent corporate fraud8 and whistleblower protections have not accomplished their intended purpose. The question then is: are the administrative procedures and legal standards inherent in Sarbanes-Oxley such that the whistleblower protections are more illusory than functional?

This Article sets out to answer this question, critically examining the whistleblower protections afforded employees under SarbanesOxley. Part I of the Article considers the statutory language, the legislative history, and the regulations pursuant to the Act. Part II then examines recent decisions by the U.S. Department of Labor in SarbanesOxley whistleblower cases (cases under the Act are initially adjudicated by the Department of Labor)9 and the overall framework for implementation of the law. The manner in which Sarbanes-Oxley relates to state law, particularly the doctrine of at-will employment, is discussed in Part III. Part IV considers the breadth and effectiveness of the Sarbanes-Oxley whistleblower protections and the existing legal and corporate cultural framework. Finally, Part V proposes suggestions for improving current whistleblower protections under Sarbanes-Oxley so that they will accomplish their intended legislative purposes.

This article concludes that rulings on Sarbanes-Oxley complaints, and the implementation of existing regulations adopted by the Department of Labor to date, are evidence that Sarbanes-Oxley whistleblower protections are not nearly strong enough to protect whistleblowing employees, and to bring about the changes envisioned by Congress.10 Rather, the existing legal framework imposes undue waiting periods on whistleblowers, and does not compel corporations to root out fraud. ' ' Moreover, in May 2006, the already anemic framework suffered another blow in the Second Circuit. 12 In Bechtel v. Competitive Technologies, the Circuit Court questioned the viability of all-important Sarbanes-Oxley provisions that call for immediate reinstatement of a whistleblowing employee who establishes "reasonable cause"13 before a hearing that his termination was in retaliation for his whistleblowing.14 This decision, holding the reinstatement remedy under Sarbanes-Oxley unenforceable in a federal court, strikes a deadly blow to whistleblowing employees and the Sarbanes-Oxley whistleblower provisions generally.15 What Bechtel makes abundantly clear is that as the Act is being implemented, the Sarbanes-Oxley whistleblower provisions will not protect and encourage corporate whistleblowers.16

Normatively, it appears that meaningful changes must occur on three levels to protect and encourage whistleblowers to "whistle" early on and to thereby prevent corporate fraud: (i) there must be more exacting implementation of the existing Sarbanes-Oxley regulations; (ii) administrative tribunals and courts must give effect to the intent of the statute - to actually protect whistleblowers; and (iii) years after the "Enron wake-up call," public companies must still reform their business cultures to encourage the free flow of information and reporting of wrongdoing.

Whistleblower protection is a critical part of both Sarbanes-Oxley and fraud prevention.17 Loyal employees with information to report about their corporate employer will only come forward readily - to protect investors and individual shareholders against corporate fraud - when they believe that their livelihoods will be protected in an immediate and real way. Only when all employees are watching - and no one is afraid to blow the whistle - will the incidence of fraud in public corporations drop to an acceptable level.

I. THE WHISTLEBLOWER PROVISIONS OF THE SARBANES-OXLEY ACT OF 2002