Whistleblowers Under the Sarbanes-Oxley Act: Overcoming the Private Subsidiary Sham

One of the main purposes of the Sarbanes-Oxley Act (“SOX”) of 2002 is to protect whistleblowers who speak out against a company’s financial improprieties. Section 1107 of SOX states:

Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any federal offence, shall be fined under this title, imprisoned not more than 10 years, or both.

Since its inception, however, whistleblowers have not fared particularly well before the Department of Labor, the agency responsible for interpreting and enforcing SOX claims:

The government has ruled in favor of whistleblowers 17 times out of 1,273 complaints filed since 2002 …. Another 841 cases have been dismissed. Many of the dismissals were made on the grounds that employees worked for a corporate subsidiary ….

Many cases hinge on whether SOX should apply to whistleblowers who work for subsidiaries of public companies. Department of Labor spokesperson, Sharon Worthy, doesn’t think so: “The plain language of the statute only applies to publicly traded corporations.” But Senator Patrick Leahy (D-Vermont), who helped draft SOX’s whistleblower clause, sharply disagrees: “Otherwise, a company that wants to do something shady, could just do it in their subsidiary.”

While Section 806 does not expressly include subsidiaries of publicly traded companies, consistent with its intent, the law has been correctly applied to private subsidiaries of publicly traded companies in a number of cases:

In Klopfenstein v. PCC Flow Technologies Holdings, Inc., the Administrative Review Board ruled that a Section 806 cause of action may proceed directly against a non-publicly traded subsidiary under an agency theory, reasoning that the subsidiary is an “agent” of the parent company.
In Savastano v. WPP Group, PLC, an Administrative Law Judge adopted the reasoning in Klopfenstein, while also clarifying that the agency relationship must pertain to employment matters. In other words, the fact that the companies share an agency relationship for other purposes, such as collecting and reporting financial data, is insufficient to establish subsidiary coverage under SOX.

Other cases applying an “agency” theory to protect whistleblowers working for private subsidiaries of publicly traded companies include: Johnson v. Siemens Building Technologies, Inc.; Lowe v. Terminix International Co.; Gale v. World Financial Group; Mann v. United Space Alliance, LLC.

The Sarbanes-Oxley Act is a complex statute. Where used correctly, SOX can be an effective tool for protecting whistleblowers who are courageous enough to speak out against a company’s illegal conduct. If you are or will soon become a whistleblower, finding an attorney to effectively represent your interests may require that you invest some time. To ensure that your rights are fully protected, choose a law firm that specializes in employment law.

For more information, please visit The Wall Street Journal article entitled, Whistleblowers Are Left Dangling.