The Failure of Whistleblower Protection Under Sarbanes-Oxley
One of the big selling points of the Sarbanes-Oxley Act of 2002 was the alleged protection for whistleblowers. The law required public companies to create "anonymous reporting mechanisms" such as fraud hotlines, so that employees could report suspicions of fraud without fear of reprisal. The legislation also required companies to protect whistleblowers from retaliation when they report suspected fraud.
Initially, lawyers thought it might be too easy for employees to make frivolous claims of fraud while hiding behind the law. Sarbanes-Oxley was seen as very employee-friendly.
But the truth is that the results for employees since Sarbanes-Oxley was passed have been poor. Employees who report suspicions of wrongdoing aren’t nearly as protected as many though they would be. Five years into Sarbanes-Oxley, we’re seeing that employees have had almost no success in whistleblower cases.
Since Sarbanes-Oxley was passed, about 1,000 whistleblower cases have been filed, and according to CFO.com, almost all of those cases were dismissed without merit or had settlements between employees and their companies.
A Study on Whistleblowers
A report by lawyers from Orrick, Herrington, & Sutcliffe LLP shows that of the whistleblower cases that have proceeded through the court system, as of September, only six had passed the first level of appeal by the companies. So although whistleblower cases might successfully navigate the system, companies are having success in appealing the cases.
The highest level of appeal of whistleblower cases at the Department of Labor, in front of the Administrative Review Board (ARB), has not been won by any employee.
The report states that 665 of the almost 1,000 cases examined were dismissed as having no merit; 126 complaints were withdrawn by the whistleblower; and 138 complaints were settled before a Department of Labor ruling. Only 17 cases were deemed to have merit and allowed to proceed.
Hurdles for Whistleblowers
The odds of a whistleblower succeeding in an action against a company are clearly very low. Is this a result of many cases lacking merit, or does it really mean that the burden of
Critics of the law say that the burden of proof for employees is too great. Instead of protecting employees who suspect wrongdoing, the law is forcing those employees to prove that wrongdoing actually occurred. The focus has been taken off whether or not the employee had a reasonable belief that wrongdoing was committed.
Another complaint is the short timeframe for filing a whistleblower complaint. Employees have 90 days after they believe they've been retaliated against to file a claim. Critics think this is not enough time, especially if an employee has been fired and is conducting an extensive job search.
Supporters of protections for whistleblowers say that the problem is not with Sarbanes-Oxley itself. Rather, the problem is with the narrow interpretation of what how “protected activity” is defined by those reviewing and ruling upon the cases. They say a very narrow view is being applied, and this is causing employees to lose their cases.
Companies need employees who are willing to expose internal fraud. Yet employees may be reluctant to come forward if the dismal results for whistleblowers continue.
A balance needs to be struck between protecting employees with legitimate concerns about fraud issues, and vetting false accusations. The evidence suggests that the employees are currently being held to an unreasonably high standard in the whistleblower cases.
