Sarbanes-Oxley, Quirky Question # 74

Quirky Question # 74:

We have been having some performance issues with one of our mid-level marketing managers.  In October, we placed him on a performance improvement plan.  He has not been meeting the expectations established by the plan.  We are scheduled to meet with him about his performance again next week, and it is very likely that we will be moving him toward separation from the Company.  Yesterday, this individual complained to his manager that he was uncomfortable with the way that accounting manages travel receipts.  He reminded his manager about the Sarbanes-Oxley Act and noted that he wanted management to know that he was “blowing the whistle” on this accounting practice.  When pressed for details about his alleged concerns, the employee either could not describe what he found objectionable about corporate accounting’s handling of travel receipts or how he believes the process should be done.  It is obvious to us that he has no idea what he’s talking about and that this is just another way to try to avoid being terminated as a result of his performance issues.  We are a publicly-traded Company, so, of course, we have internal reporting and investigation procedures in place.  Must we really take this feeble “Sarbanes-Oxley complaint” seriously?

Dorsey’s Analysis:

The short answer, particularly if yours is a publicly-traded company, is “yes”; you should take this complaint seriously and conduct an appropriate investigation (although what’s appropriate under these circumstances may be quite abbreviated).

While investigative processes vary among organizations, you should follow whatever corporate controls are in place within your organization and ensure that the Audit Committee of your Board of Directors receives any and all necessary information.

Moreover, you should ensure that no adverse employment action is taken against this employee because he asserted this complaint.  Of course, this does not mean that you should discontinue your performance-management activities.  You should continue to manage his performance, as necessary.  However, do not allow anything about this complaint to alter or enhance your performance-management activities in any way.

By way of background, let me offer a few words about the Sarbanes-Oxley Act (“SOX”).  In response to highly-public whistleblower complaints, Section 806 of the SOX prohibits publicly-traded companies (and any officer, employee, contractor, subcontractor, or agent of such companies) from discharging, demoting, suspending, threatening, harassing, or otherwise discriminating against an employee because (1) the employee provides information or assistance to a Federal regulatory law enforcement agency, a Member of Congress or Congressional committee or the employee’s supervisor or other such person in the company who has the authority to investigate or terminate misconduct; and, (2) the employee reasonably believes the conduct at issue constitutes a violation of mail, wire, bank, or securities fraud laws, any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders.

There are a few things to keep in mind under the circumstances you’ve presented.

First, the employee does not have to identify fraud correctly to be protected.  So long as the employee has provided information (to one or more the individuals listed in the Act) regarding conduct the employee “reasonably believes” constitutes a violation of various laws, the employee arguably falls within the gamut of the Act.  We may quibble about whether or not this employee has a “reasonable belief” that a violation exists.  However, it is difficult to know what someone is actually thinking, and any inquiry that an administrative body may do on this point is likely to be very fact intensive and to give the benefit of the doubt to the employee.

Second, the individual’s simple statement that he is a “whistleblower” does not make it so.  If he does file a charge with the Occupational Safety and Health Administration (“OSHA”), (the division of the Department of Labor responsible for investigating and making final determinations with respect to whistleblower complaints under SOX), a “whistleblower” must be able to establish the following things to set forth a viable claim:

1.         He engaged in a protected activity (as defined by the Act);

2.         The employer knew about (or reasonably suspected) the protected activity;

3.         He suffered an unfavorable personnel action (in other words, something “bad”
happened to his employment, such as a termination or demotion); and

4.         There was a nexus between the unfavorable personnel action and the          protectedactivity sufficient to raise an inference that the whistle-blowing activity was a “contributing factor.”

Third, notwithstanding a finding that these elements have been met, the Department of Labor will not proceed with an investigation if the employer demonstrates “by clear and convincing evidence” that it would have taken the same unfavorable personnel action in the absence of the complainant’s whistleblower activity.

Finally, although it’s small consolation, if this individual does file a charge in bad faith, the SOX provides that the company may seek some attorneys’ fees and costs as a result.