June 2013

A recent decision has clarified the reach of the protections offered to whistleblowers under Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”).  In the matter of Lockheed Martin Corporation v. Administrative Review Board, United States Department of Labor, it has been determined that SOX whistleblower protection extends beyond employee reporting of frauds on shareholders.  Lockheed had attempted to argue that the type of activity reported by the whistleblower was not fraud perpetrated against shareholders and therefore not subject to SOX protection.

In the above referenced matter, a Lockheed employee claimed to have been constructively discharged after reporting that a supervisor was having affairs with various soldiers in Lockheed’s pen pal program and using company funds for related inappropriate purposes, among other things.  The employee testified that she believed the inappropriate expenses were being billed to the customer (in many cases, the government).  Section 806 states that no covered company may:

“discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee—

(1) to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of section 1341 (mail fraud), 1343 (wire fraud), 1344 (bank fraud), or 1348 (securities and commodities fraud), any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders (emphasis added), when the information or assistance is provided to or the investigation is conducted by—

(A) a Federal regulatory or law enforcement agency;
(B) any Member of Congress or any committee of Congress; or
(C) a person with supervisory authority over the employee (or such other person working for the employer who has the authority to investigate, discover, or terminate misconduct); or

 (2) to file, cause to be filed, testify, participate in, or otherwise assist in a proceeding filed or about to be filed (with any knowledge of the employer) relating to an alleged violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.”

In order to successfully gain protection, a claimant must demonstrate:

(1)  They engaged in protected activity/conduct;
(2)  The employer knew about the protected activity;
(3)  They suffered an unfavorable personnel action; and
(4)  Their protected activity was a contributing factor in that personnel action

In this case, the argument was whether the reporting of mail or wire fraud was an appropriate basis for whistleblower protection under SOX. Lockheed argued that employee reports of mail and wire fraud that do not allege shareholder fraud are not protected under Section 806, basically asserting that the phrase “relating to fraud against shareholders” was a modifier to all of the items described in point (1) above.  The Court confirmed that reporting of each of the violations outlined in Section 806 were covered, with or without a general allegation of fraud against shareholders.

The broader coverage confirmed by the Court should encourage management to treat all employee whistleblower activity with the appropriate level of care.  While it may seem that Human Resources would best be in a position to handle claims of improper relations, the implications are potentially altered when company funds are involved and there is a possible whistleblower protection triggered.  A whistleblower hotline is required for all public companies by Section 301(4) of SOX.  Had the employee in this case been encouraged to use the hotline to report her allegations and the proper channels been alerted to the issue, it might have allowed the company to keep better track of her claims and ensure that no retaliation occurred.

For more guidance on what should be part of a company’s hotline and whistleblower process, see Best Practices in Whistleblower Systems.

Fulcrum Inquiry performs forensic accounting services, including fraud examinations. Fulcrum provides turnkey whistleblower reporting systems as described in this article.