• Victory for Whistleblowers Reporting Fraud under Sarbanes Oxley
  • May 2, 2013
  • Law Firm: Berger Montague P.C. - Philadelphia Office
  • In a major victory for employees reporting fraud under the Sarbanes Oxley Act (SOX), the Third Circuit Court of Appeals recently revived whistleblower claims brought against Tyco Electronics Corp. by an accountant who reported improper expenditures and was allegedly terminated as a result. The highly-anticipated decision in Wiest et al. v. Lynch et al. potentially expands the scope of SOX's retaliation provision, rejecting a stricter interpretation approved by the Fourth Circuit and instead bringing the standard in line with the U.S. Department of Labor's more worker-friendly interpretation.

    The appeals court's 2-1 opinion said a lower court had erred by holding that Tyco accounting department veteran Jeffrey Wiest had to allege that his disclosures to supervisors "definitively and specifically" related to an existing violation of a particular anti-fraud law.

    Decision Defers to Department of Labor Ruling

    The decision brings the law in line with the U.S. Department of Labor Administrative Review Board's (ARB) May 2011 ruling in Sylvester v. Parexel, which rejected the "definitive and specific" standard that had been announced in Platone v. FLYi and later affirmed by the Fourth Circuit. The Third Circuit court concluded that the ARB's rejection of this standard was entitled to court deference. The ARB's interpretation of the "reasonable belief" standard was similarly entitled to deference, according to the Court.

    According to the majority, whistleblowers only have to have a "reasonable belief" that their employer has violated or will violate the law or U.S. Securities and Exchange Commission rules. As a result, the majority's decision partially reversed the dismissal of Wiest's federal whistleblower claims and vacated the dismissal of his state law claim.

    Under the standard articulated in the Third Circuit's opinion, "an employee must establish not only a subjective, good-faith belief that his or her employer violated a provision listed in SOX, but also that his or her belief was objectively reasonable." The whistleblower's belief is objectively reasonable when a person with the same training and experience would think the conduct at issue could run afoul of one of the provisions in SOX's Section 806, it said.

    The ARB had held that SOX whistleblower protections could apply if a worker reasonably believed a violation was going to occur. Following that decision, the Third Circuit held that communications don't have to relate to an existing violation of the law to be protected. Thus, the Court held that the lower court had erred by requiring that an employee's communication had to assert elements of securities fraud to be protected.

    Example of Significant Victory for Whistleblowers Reporting Fraud

    For whistleblowers and their attorneys, the decision is a major victory. The new standard makes it easier for employees to report misconduct or fraud and to be protected if their employer attempts to retaliate against the employee for blowing the whistle. As a result of the ruling, employees without a legal background can report violations to their supervisors without having to spell out specific legal rules or statutes that have already been violated. The result is an expansion of the protections for employees that will hopefully lead to earlier and more frequent reporting of misconduct and fraud.