Decision on Whistleblower Provisions of Sarbanes-Oxley

first_circuit_court_of_appealsA federal court held that a former employee seeking on acted in good faith, but under an objective analysis, his belief that the company was engaged in fraud was not reasonable and upheld termination. Day v. Staples, Inc., 2009 WL 294804 (1st Cir. February 9, 2009)

The employee complained that the company improperly handled regularly customer returns. The company claimed that the employee was terminated for performance reasons not connected to his statements concerning improper conduct.

The Department of Labor administrative law judge dismissed the SOX complaint, as did the federal district court. The district court concluded that the belief that Staples was engaged in accounting fraud was not reasonable.

In this decision, the First Circuit Court of Appeals held that the “reasonable belief” had to be both subjectively  reasonable as well as objectively reasonable.

This is the first decision by the First Circuit under under the whistleblower protection provision of the Sarbanes-Oxley Act (“SOX”), 18 U.S.C. §1514A.

Day’s complaint did not assert any specific violations of securities laws; rather, it stated that he believed certain Staples practices resulted in the “manipulat[ion] [of] accounting data in an unlawful manner that had negative financial ramifications for Staples,” which “defrauded Staples’ shareholders” and violated the Staples Code of Ethics.

The Court stated: “The plain language of SOX does not provide protection for any type of information provided by an employee but restricts the employee’s protection to information only about certain types of conduct. Those types of conduct fall into three broad categories: (1) a violation of specified federal criminal fraud statutes: 18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), § 1344 (bank fraud), § 1348 (securities fraud); (2) a violation of any rule or regulation of the SEC; and/or (3) a violation of any provision of federal law relating to fraud against shareholders.”18 U.S.C. §1514A(a)(1)

When the court applied this test to Mr. Day, it found that the he brought his complaints in subjective good faith. However, there was no objectively reasonable basis to believe that the conduct of which Mr. Day complained constituted securities fraud or shareholder fraud. Without an objectively “reasonable belief” that the conduct constituted either securities fraud or shareholder fraud, the court determined that the whistleblower protection provision did not shield the Mr. Day from termination.

Subscribe

Subscribe to have new articles from Compliance Building sent to your inbox.

, ,

Comments are closed.