Corporate & Securities Law

By Jim Hamilton

Federal Appeals Court Construes Sarbanes-Oxley Whistleblower Protections

In deciding that an employee of the American Medical Association was not protected by the whistleblower protections of Sec.806 of Sarbanes-Oxley, a Seventh Circuit panel rejected the notion that the phrase ?contractor, subcontractor, or agent? in Sec. 806 means anyone who has any contact with a company that issues securities under SEC regulations. Fleszar v. US Department of Labor, CA-7, No. 09-2423, March 23, 2010.

The statute extends its protection to SEC registered companies or those required to file reports with the SEC and their contractors, subcontractors or agents. It was conceded that the AMA was not an SEC issuer or filer. But the employee believed that an investigation by a ``team of bloodhounds?? at the Department of Labor might turn up facts showing that the AMA is a contractor, subcontractor, or agent covered by Sec. 806.

While noting the employee?s belief that it would improve enforcement of Sarbanes-Oxley if the Secretary were more aggressive in nosing out violations, the panel said that the federal courts are not in the business of inventing procedures that agencies must follow It is enough to enforce the statutes and regulations on the books. An agency must be allowed the authority to decide where its investigative and prosecutorial resources are best applied.

Further, in the court?s view, the phrase ?contractor, subcontractor, or agent? refers to entities that participate in the company's activities. The idea behind such a provision, reasoned the panel, is that a covered firm, such as IBM, can?t retaliate against whistleblowers by contracting with an ``ax-wielding specialist?? such as the character George Clooney played in ?Up in the Air?. Nothing in Section 806 implies that if the AMA buys a box of rubber bands from Wal-Mart, a company with traded securities, the AMA thereby comes with the scope of the whistleblower statute.

But whether or not this is the right way to understand ``contractor, subcontractor, or agent?, the employee did not produce evidence that the AMA fits this category, and the Secretary was not legally obliged to assist her.

Full post as published by Jim Hamilton's World of Securities Regulation on March 23, 2010 (boomark / email).