March 2007

Sarbanes-Oxley Act: Don’t Let Personnel be a Missing Puzzle Piece

It has been several years since Congress enacted the Sarbanes-Oxley Act (“Sarbanes-Oxley” or “SOX”), Public Law 107-204 (2002), mandating that public companies demonstrate due diligence when disclosing financial information to the investing public and third-party lenders and imposing heightened scrutiny, both internally and externally, over corporate governance and audit relationships.   Generally, these obligations may be met by implementing codes of ethical conduct, maintaining strict internal audit controls, populating audit committees with outside directors (including at least one financial expert), using outside financial and legal advisors when warranted, and providing a confidential procedure for reporting and responding to allegations of corporate fraud or abuse.  Although attention has focused most often upon the financial and/or informational aspects of SOX compliance, e.g., safeguarding internal controls and processes, securing financial information, and shoring-up the composition and function of audit committees, public companies are well-advised to devote equal attention to the human element of Sarbanes-Oxley.   For companies subject to Sarbanes-Oxley, however, tending to SOX’s personnel side is a necessary piece of compliance.  (Not a public company?  Read on…the “best practices” discussed below are equally beneficial to any company called upon to defend its internal corporate and employment practices.)

Title VIII of Sarbanes-Oxley, designated the “Corporate and Criminal Fraud Accountability Act of 2002,” codified at 18 U.S.C. § 1514A, provides a wide range of protections to employee-whistleblowers involved in various SOX investigations or proceedings.  Under SOX, certain public companies are prohibited from “retaliating” against employees who provide information to their employer, a Federal agency, or Congress relating to certain securities violations including alleged fraud against shareholders.  Id.  Also, employees who file, cause to be filed, or otherwise participate in a proceeding relating to certain securities violations and/or suspected fraud against shareholders are protected from corporate retaliations.  18 U.S.C. § 1514A(a)(1) & (2).  Prohibited “retaliation” includes discharge, demotion, suspension, threats, harassment, or any other manner of discrimination in the terms and conditions of employment because of that employee’s lawful act as a whistleblower.  Id. Employees who believe they have been subjected to unlawful SOX retaliation may file an employee-whistleblower complaint with the Assistant Secretary for the Occupational Safety and Health Administration (“OSHA”) of the U.S. Department of Labor (“DOL”).  As many may know, DOL is the federal agency responsible for overseeing workplace safety and a plethora of related employee pay and leave laws.   Currently, OSHA is authorized to receive SOX discrimination claims filed by employees, conduct investigations, and issue findings and preliminary orders regarding employee-whistleblower discrimination claims. 29 C.F.R. §§ 1980.103-105.  An employee-whistleblower alleging discharge or other retaliatory conduct in violation of Sarbanes-Oxley can seek job restoration with the same seniority the employee would have had but for the discrimination, backpay with interest, and special damages including litigation costs, expert witness fees, and reasonable attorney fees.  18 U.S.C. § 1514A(c).

Interestingly, the regulations spelling out the procedures for handling whistleblower discrimination claims allow a wide range of “employees” to file such claims.  The term “employee” includes three categories of claimants, including: (1) an individual presently or formerly working for a company or company representative; (2) an individual applying to work for a company or company representative; or (3) an individual whose employment could be affected by a company or company representative.  29 C.F.R. § 1980.101.  The scope of “employees” who can file SOX retaliation claims is much broader than other categories of discrimination claimants and has the potential to increase the company’s risk of exposure to liability.  For example, white males can now rely on SOX to bring claims of retaliation against public companies whereas they had very limited bases to assert traditional race, sex, or age discrimination claims. Also, Sarbanes-Oxley extends liability not only to companies, but to “company representatives” as well.  See e.g., 29 C.F.R. § 1980.101 (casting wide net over persons who can be guilty of discrimination, i.e., company or “company representative” including “any officer, employee, contractor, subcontractor, or agent of a company”).  Although this particular aspect of SOX has not yet been applied by the courts, the language opens the door to whistleblower complaints brought by individuals whose employment could be affected by a contractor, subcontractor, or company agent even if the contractor, subcontractor, or company agent did not directly employ the individual.

The costs of business interruption in responding to whistleblower discrimination/retaliation claims, the potential for heightened scrutiny of the company, and the exposure to significant monetary damages are reasons enough to ensure that companies have their “personnel” piece of the puzzle in hand.  Maintaining a corporate environment that fosters compliance with Sarbanes-Oxley should be on management’s check list for the coming year.  Consider implementing the following in your company’s personnel framework:

Personnel “Best Practices” Under Sarbanes-Oxley

• Develop a Code of Ethical Conduct (“Code”) and discuss on a company-wide basis
• Publish the Code in employee handbooks and on the company’s Intranet (Note: employee handbooks and company employment policies should be reviewed by legal counsel at least every three (3) years to keep pace with changing federal, state, and local laws)
• Alert company representatives of their obligations under Sarbanes-Oxley
• Provide a specific, confidential  procedure for routing concerns/complaints of suspected corporate fraud or abuse to the Audit Committee
• Consult with legal counsel to determine the proper scope of investigations into allegations of suspected corporate fraud or abuse
• Emphasize and employ a strict non-retaliation policy for employee-whistleblowers
• For current employees — encourage management to keep employee communication lines open so potential concerns or problems are properly resolved at the earliest opportunity; take action on employee complaints in accordance with the company’s published procedure and document the action taken
• For current employees — work with the company’s Human Resources Office to ensure that adverse employment actions are based upon performance and/or discipline failings, not whistleblower activities, i.e., follow company progressive discipline policies and maintain an adequate paper trail to support demotions/terminations resulting from unresolved performance problems
• For former employees — refrain from discussing a former employee’s SOX activities with prospective employers or  any other third parties
• For job applicants — develop job or position descriptions which accurately describe the required/preferred credentials and experience for the posted position; consistently use those descriptions as the basis upon which vacancies are filled
• For job applicants — when checking credentials/former employment, focus on the applicant’s job performance or other job-related criteria, not the applicant’s tendency to file grievances or create work-place problems
• For individuals whose employment could be affected by your company — provide Code to your company representatives, i.e., contractors, subcontractors, and company agents

In closing, it should come as no surprise that disgruntled employees of public companies often file claims for discrimination as a way to “get even” with employers when adverse actions are taken against them by employers.  Even if there is no factual or legal basis for such claims, it still costs companies time and money — not to mention the lost productivity that may never be recouped — to respond to and defend discrimination claims. SOX provides current and former employees, job applicants, and employee’s of company representatives with yet another avenue to seek redress for workplace wrongs.  By encouraging your management team to implement “best practices” to address personnel problems at the earliest opportunity, most workplace disputes can be resolved before a SOX retaliation complaint arises.  At a minimum, these “best practices” can put your company in the best position possible to comply with the personnel aspects of Sarbanes-Oxley and to defend against a SOX complaint should one be filed.  Even if your company is not subject to Sarbanes-Oxley, by applying the recommended “best practices” to other workplace employment policies, your company can establish a positive work environment and, if necessary, defend against other employment-related discrimination or retaliation claims.

Please contact Linda Cooley at (317) 238-6232 with any questions you may have about these personnel issues.

If you have questions on these or any other financial institution issues, please contact any of the professionals below:
 
Michael J. Messaglia, Chair - (317) 238-6249 - mmessaglia@kdlegal.com

Calvin E. Bellamy - (219) 933-9833 - cbellamy@kdlegal.com

Matthew C. Branic - (317) 238-6338 - mbranic@kdlegal.com

John E. Chevigny - (219) 933-2319 - jchevigny@kdlegal.com

Nicholas J. Chulos - (317) 238-6224 - nchulos@kdlegal.com

Paul J. Dunne - (317) 238-6245 - pdunne@kdlegal.com

Nicole R. Finelli - (317) 238-6374 - nfinelli@kdlegal.com

Bradley S. Fuson - (317) 238-6227 - bfuson@kdlegal.com

Patrick J. Galvin - (219) 933-2322 - pgalvin@kdlegal.com

Stephan H. Geisler - (317) 238-6270 - sgeisler@kdlegal.com

Robert A. Greising - (317) 238-6215 - rgreising@kdlegal.com

Michael L. Griffin - (317) 238-6298 - mgriffin@kdlegal.com

Timothy M. Harden - (317) 238-6213 - tharden@kdlegal.com

Frank A. Hoffman - (317) 238-6240 - fhoffman@kdlegal.com

Paul F. Lindemann - (317) 238-6210 - plindemann@kdlegal.com

C. Daniel Motsinger - (317) 238-6237 - cmotsinger@kdlegal.com

William R. Neale - (317) 238-6209 - wneale@kdlegal.com

John W. Tanselle - (317) 238-6216 - jtanselle@kdlegal.com

Larry C. Tomlin - (317) 238-6289 - ltomlin@kdlegal.com

Michael E. Williams - (317) 238-6220 - mwilliams@kdlegal.com

Karen Ball Woods - (317) 238-6246 - kwoods@kdlegal.com

Financial Institutions Practice Group Newsletter is published by the law firm of Krieg DeVault LLP for general information purposes only.  Material contained herein is not to be considered legal advice to any particular person.  Each person's circumstances are unique and must be evaluated individually.  Competent legal counsel should be sought before taking any action in reliance upon the information contained in this newsletter.  The contents of this newsletter may not be reproduced, transmitted or distributed without the express written consent of Krieg DeVault LLP.

© 2007, Krieg DeVault LLP