By Kathleen Day
Washington Post Staff Writer
Sunday, April 23, 2006
As America watched Enron Corp. collapse under a tide of scandal more than four years ago, one employee -- accountant Sherron Watkins -- won household recognition for having alerted Chairman Kenneth L. Lay to the company's shenanigans.
Watkins, whom Time magazine named one of its people of the year in 2002, caught the eye of Congress, too, where lawmakers were keen to restore trust in U.S. markets after shareholders suffered multibillion-dollar losses in Enron, WorldCom Inc. and other scandal-ridden firms.
So when Congress passed the 2002 Sarbanes-Oxley Act with the goal of protecting investors, it included sweeping provisions to encourage employees to blow the whistle on corporate wrongdoing by shielding them from retaliation.
Now those provisions are being tested, with attempts underway to narrow the scope of the act. This is troubling to the bill's supporters, who view whistle-blowers as a first line of defense for investors, fellow employees, retirees and ultimately the public at large, who could all benefit if a problem is uncovered before it causes major damage or ruin. Folks who trudge to the office each day without thought of becoming a gadfly may one day land in a situation in which their consciences require they act. A federal law backing such efforts will encourage more people to come forward, supporters argue.
The law shields from retaliation any employee who tells superiors or federal officials of problems, about accounting or otherwise, that he or she thinks could hurt the company's investors -- even if the claims turn out to be untrue. The law applies to all publicly traded companies and carries both civil and criminal remedies against companies and individuals, making it tougher than other federal whistle-blower protection statutes.
Since President Bush signed the Sarbanes-Oxley legislation into law July 30, 2002, about 750 people have filed complaints with the Department of Labor, saying they were retaliated against for bringing to light problems in their company, whether to a superior in the firm or outside. The Labor Department oversees such cases in a three-step process that an employee must exhaust before going to federal court. The number of cases has risen, with about 150 in the law's first year and nearly twice that in its third.
The vast majority of these cases have been thrown out. Fewer than 100 have been settled. And only five whistle-blowers have won, though that number dwindled to four last summer, when the agency's administrative review board overturned a case on appeal. Companies have appealed three of the remaining four to the board, whose handful of judges so far have not decided an appeal in favor of a whistle-blower.
"I find those odds unbelievable," said D. Bruce Shine, attorney for David Welch, a former chief financial officer who was fired after raising questions about the bookkeeping practices of Bank of Floyd in southwest Virginia. "Either American business is a hell of a lot cleaner than we ever dreamed, or these complaints are not really being listened to by the Department of Labor."
In 2004, Welch became the first whistle-blower to win his case, but his is among the three winning cases that corporations are appealing.
"Corporations are taking this law seriously, at least for appearances," says Tom Devine, legal director for the Government Accountability Project, a nonprofit group that works to promote whistle-blower rights. "There's a burgeoning industry of hotlines in corporations, and their lawyers are actively participating in training conferences both to learn the law but also to perfect their attacks on these reforms. The jury is out whether the breakthrough in whistle-blower rights on paper will take root in our corporate culture."
According to Devine and others, corporations are fighting the whistle-blower protections on several fronts. The fight is part of the business community's broader assault on the Sarbanes-Oxley legislation, which includes provisions that give the auditing industry more oversight, require companies to disclose more to investors and hold top company officials more accountable for their actions.
One way companies are trying defend themselves against charges of illegal retaliation against whistle-blowers is by trying to narrow the definition of the kinds of complaints Sarbanes-Oxley will protect.
In one closely watched case, Nova Information Systems Inc., the third-largest credit card processor in the country and a subsidiary of U.S. Bancorp, has argued it was within its rights to fire computer employee Nell Walton after she complained that security controls were inadequate, that they increased the chance of identity theft and that they posed a threat that Securities and Exchange Commission rules require be reported to the firm's external auditors.
Nova, which denied Walton's charges, argued that -- even if she were right -- violations of SEC rules aren't protected by the law unless the rules relate to a direct fraud against shareholders.
Two weeks ago, the Labor Department's administrative review board made a preliminary ruling in Walton's favor, saying the activity she complained about is protected under the law, which the judge noted bars retaliation for reporting on the violation of any SEC rule. The board has not made a final decision, however, on whether Walton has proved the company illegally fired her because of her complaints.
The same issue is pending before a federal judge in North Carolina in a case against Wyeth Pharmaceuticals. Fired Wyeth employee Mark D. Livingston has exhausted the Labor Department process. Livingston, a former associate director of training at a Wyeth infant-vaccine plant in Sanford, N.C., says he was fired for raising concerns that some production personnel were inadequately trained, violating both general Food and Drug Administration rules and a consent decree the FDA had imposed on the company.
Wyeth says Livingston was fired for unruly behavior with fellow employees, but the company also is arguing that the case should be dismissed on grounds that, even if Livingston's claims were true, they are not the types of complaints the law protects. Wyeth argues that only claims of accounting fraud -- purposeful fiddling with a company's financial reports to mislead investors about a company's economic condition -- are protected.
Livingston, represented by lawyers at the Government Accountability Project, argues that SEC rules require disclosure to shareholders of any violation of federal law. Livingston argues that generally accepted accounting principles, which the SEC requires all public companies to use, require companies to reveal risks that can diminish the value of a company to investors.
Livingston argues that failure to properly train vaccine makers could have caused the FDA to shut down operations until problems were fixed or could have resulted in improperly prepared vaccines -- either of which could have hurt the company financially.
If the judge rules in Wyeth's favor, it would drastically curtail the effectiveness of the whistle-blower provisions, Devine said. It would reduce protections to claims of false or misleading bookkeeping.
Another tactic firms are using is to require employees to sign mandatory arbitration contracts. These compel workers who exhaust the Labor Department's process to submit allegations of Sarbanes-Oxley violations to binding arbitration rather than filing suit in federal court.
A year after the law was passed, Salomon Smith Barney Inc., the brokerage arm of Citigroup Inc., won its bid to force into arbitration a former research analyst who claimed he was fired for refusing to alter a research report. The allegation clearly is covered by the Sarbanes-Oxley Act, the court held, but that doesn't override the contract the worker signed agreeing to take complaints to arbitration.
This doesn't mean the companies don't take Sarbanes-Oxley seriously. Many have established policies and procedures to investigate complaints fully and fairly, and to act quickly to fix problems, say lawyers who advise companies and whistle-blowers.
But whistle-blower lawyers say that's also the bad news about the law. Executives are using those same policies and procedures to create paper trails to protect themselves from legal exposure if they demote or fire a complaining worker. Careful documentation has already helped some companies convince judges that they would have fired employees anyway for unruliness or incompetence, regardless of whatever claims were being made about the firm's operations. Lawyers say such portrayals play off the stereotype of whistle-blowers as mostly disgruntled losers. But with the right paperwork, it works, they say.
Sarbanes-Oxley is one of 14 whistle-blower laws passed since 1974 enforced by the Department of Labor, which with a few exceptions is the main overseer of such claims. Until Sarbanes-Oxley, however, most laws covered employees connected to specific topics: nuclear materials; airline, trucking and shipping safety; air and water pollution; abuse of migrant workers.
Business has tried to weaken Sarbanes-Oxley protections since the law was enacted, and the Bush administration has seemed willing to help. As Bush signed the legislation, he praised it for providing needed investor protections. More quietly, he issued a "signing statement" saying he interpreted the whistle-blower sections as extending protections only to employees who gave information to members of Congress engaged in an ongoing investigation. A few weeks later, the Labor Department filed a brief asserting the same interpretation.
Sens. Charles E. Grassley (R-Iowa) and Patrick J. Leahy (D-Vt.), who wrote the whistle-blower sections of the law, fumed. They sent letters to the White House and met several times with Labor Department officials to make clear that Congress intended a much broader interpretation.
The administration's stance would extend protection to employees "who are lucky enough to find the one member of Congress out of 535 who happens to be the chairman of the appropriate committee who also just happens to already be conducting an investigation, even though the problem identified may not have come to light yet," Grassley said at the time. "That's just nonsense."
Eventually Bush backed down. Alberto R. Gonzales -- then Bush's White House counsel and now attorney general -- wrote a letter acknowledging the point in late December 2002. Corporation consultants took notice.
Michael Delikat, who represented Salomon Smith Barney in the arbitration case and represents Wyeth against Livingston, won't comment on the cases, but he cites them on his Web site cautioning that the law's provisions "dramatically raise the stakes of even the most routine employment actions taken against employees." He and Shine, the attorney representing the employee in the Bank of Floyd case, often are on opposite sides in litigation and are in demand to appear together on panels discussing the effects of the law and how interpretations of it are evolving.
"While only a handful of claims to date have been decided on their merits, they offer important cautionary takes for corporations," two WilmerHale lawyers, Carrie Wofford and Lisa Stephanian Burton, write in one issue of Compliance Week.
Labor Department officials say they count settlements in Sarbanes-Oxley cases, which the agency must review and sign off on, as a win of sorts for an employee -- not as clear-cut as an out-and-out favorable ruling but still beneficial. Shine disagrees. Settlement agreements invariably are secret, so the public has only the word of the Labor Department to rely on, he said.
But settlements sometimes do save time and aggravation. In October 2003, mortgage giant Fannie Mae reached a settlement with Roger L. Barnes -- who claimed the company effectively demoted him when he questioned its accounting -- by paying him a reported $1 million-plus the day before the deadline expired for Barnes to file a claim with the Labor Department. Barnes, who was a mid-level manager in Fannie Mae's controller's office, has been identified by federal regulators as a key figure in helping them uncover accounting irregularities that ultimately led to the biggest earnings restatement in history.
The Labor Department reports every claim filed with it to the SEC. Some people think Fannie Mae decided to settle with Barnes to prevent an SEC referral. It didn't matter -- eventually the SEC ruled that Fannie Mae's accounting was flawed and, along with the Department of Justice, is investigating the mortgage giant's financial statements.
As for the Welch case -- viewed by the entire financial services industry as a test -- the Labor Department's administrative review board at the end of March said the Bank of Floyd must reinstate its former finance chief and give him back pay and other compensation. But the board then gave the bank 10 days to appeal that ruling.