Department of Labor: WNEW SOX 072007 - [PDF Document] (2024)

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USDOL/OALJ SOX WHISTLEBLOWER NEWSLETTER 1

UNITED STATES DEPARTMENT OF LABOR OFFICE OF ADMINISTRATIVE LAWJUDGES

Whistleblower Newsletter

Sarbanes-Oxley ActJuly 30, 2007

U.S. Department of LaborOffice of Administrative Law Judges

800 K Street, NW, Suite 400-NWashington, DC 20001-8002

(202) 693-7500www.oalj.dol.gov

John M. Vittone

Chief Judge

NOTICE: This newsletter was created solely to assist the staffof the Office of Administrative Law Judges

in keeping up to date on whistleblower law. This newsletter inno way constitutes the official opinion of theOffice ofAdministrative Law Judges or the Department of Labor on anysubject. The newsletter should,

under no circ*mstances, substitute for a party's own researchinto the statutory, regulatory, and case lawauthorities on anysubject referred to therein. It is intended simply as a researchtool, and is not intendedas final legal authority and should not becited or relied upon as such.

Contents:

Chapter Title Page

II. REMOVAL TO FEDERAL DISTRICT COURT 2

IV. REQUEST FOR HEARING 2

V. FILING OF COMPLAINT 2

VI. PROCEDURE BEFORE ARB 6

VII. PROCEDURE BEFORE OALJ 8

X. COVERED RESPONDENT 8

XI. COVERED EMPLOYEE 10

XII. ARBITRATION AGREEMENTS; SEVERANCE AGREEMENTS 12

XIII.C. ADVERSE EMPLOYMENT ACTION 13XIII.D. CAUSATION 14

XIII.E. PROTECTED ACTIVITY 18

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XIII.H. CLEAR AND CONVINCING EVIDENCE 26

XV. FRIVOLOUS COMPLAINT; SANCTIONS 27

XVII. DISMISSALS AND WITHDRAWALS 27

II. REMOVAL TO FEDERAL DISTRICT COURT

DISTRICT COURT JURISDICTION; COMPLAINT MUST FIRST BE FILEDWITHTHE SECRETARY OF LABOR

In Mann v. Gannett Co., Inc., No. 2:06-CV-00888 (M.D.Ga. June 8,2007), thePlaintiff had reported to the Defendant's attorney herbelief that the Defendant wasdefrauding customers by overchargingfor advertisem*nts. The Plaintiff later suedthe Defendant under theVictim and Witness Protection Act of 1982. The courtgranted summaryjudgment for the Defendant, finding that the the VWPA doesnotprovide for a private right of action. In the ruling, the courtnoted that the Plaintiffhad mentioned in her brief that thewhistleblowing provision of the SOX supportedher case. The courtobserved that there may have been some confusion on the part

of the Plaintiff because the whistleblower provision of the SOXis found at 18 U.S.C. 1514A, while the VWPA is found at 18 U.S.C.1514. Assuming for purposes ofdecision that the Plaintiff meant torely on the SOX instead of, or in addition to, theVWPA, the courtstill found dismissal proper because a SOX complaint must befiledwith the Secretary of Labor before filing a lawsuit in federaldistrict court.

IV. REQUEST FOR HEARING

TIMELINESS OF REQUEST FOR HEARING; RECEIPT OF OSHADECISIONLETTER BY COMPLAINANT'S COUNSEL

In Savastano v. WPP Group, PLC, 2007-SOX-34 (ALJ July 18, 2007),the ALJfound that the request for an ALJ hearing was timely whereit had been filed on the30th day after the Complainant's counselreceived the OSHA decision letter.

V. FILING OF COMPLAINT

TIMELINESS OF COMPLAINT; PRESENCE OF NEGATIVE WRITE-UPINPERSONNEL FILE

In Pittman v. Siemens AG, 2007-SOX-15 (ALJ July 26, 2007), theComplainantargued that a negative write-up that had been placed inhis personnel file preventshis being rehired, and that every daythat it remains in the file triggers a new statute

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of limitations. The ALJ, assuming for purposes of argument thatthe write-up was anadverse employment action, found that theComplainant's almost two year later SOXfiling was untimely, notingthat the Complainant had not provided any evidence ofany specificacts of blacklisting or refusal to rehire based on the allegedwrite-up.

TIMELINESS OF COMPLAINT; DATE COMPLAINANT WAS PRESENTED WITH

"CAREER DECISION DATE" CHOICES RATHER THAN LATER DATEOFTERMINATION IS DATE THAT LIMITATIONS PERIOD BEGINS

In Rollins v. American Airlines, Inc., ARB No. 04 140, ALJ No.2004 AIR 9 (ARBApr. 3, 2007), a whistleblower complaint arisingunder both AIR21 and SOX, theRespondent issued to the Complainant a"Career Decision Day Advisory Letter"providing three choices: (1)commit to comply with the Respondent's rules andregulations(including satisfactory work performance and personal conduct)andaccept reassignment, (2) voluntarily resign with transitionalbenefits and agree notto file a grievance, or (3) accepttermination with grievance options. Five days laterthe Complainantinformed the Respondent that he would not agree to any oftheoptions, and on that same day the Complainant was provided aletter of termination.The whistleblower complaint would be timelyif measured from the date of the

termination letter, but untimely if measured from the date ofthe advisory letter. TheARB found that advisory letter providedfinal and unequivocal notice to theComplainant that the Respondenthad decided to terminate his employment. TheARB observed that underEnglish v. Whitfield, 858 F.2d 957, 962 (4th Cir. 1988),rev'd onother grounds, 496 U.S. 72 (1990) and Wagerle v. The Hosp. of theUniv. ofPa., 1993 ERA 1, slip op. at 3 6 (Sec'y Mar. 17, 1995), thepossibility that theComplainant could have avoided the effects ofthe advisory letter by resigningvoluntarily or accepting employmentin another division did not negate the effect ofthe advisoryletter's notification of intent to terminate theComplainant'semployment. Thus, the complaint was untimely.

TIMELINESS OF COMPLAINT; UNEQUIVOCAL VERBAL NOTICE OF

TERMINATION

In Salian v. Reedhycalog UK, 2007-SOX-20 (ALJ May 11, 2007), theALJ grantedsummary decision against the Complainant where theRespondent asserted that theComplainant was informed of thedecision to terminate him more than 90 daysbefore the SOX complaintwas filed, and the Complainant's only response was tocontend thatthe limitations period did not start to run until the date thathistermination became effective. The Complainant argued that thenotice of terminationhad not been given to him in writing. The ALJ,however, found that the law does notrequire that a notice oftermination be given in writing, and that since theRespondent hadgiven the Complainant an unequivocal verbal notice oftermination,the Complainant had adequate notice to trigger therunning of the statute oflimitations.

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TIMELINESS OF COMPLAINT; UNEQUIVOCAL NOTICE OFTERMINATION;OBJECTIVE ASSESSMENT OF COMMUNICATION RATHERTHANCOMPLAINANT'S SUBJECTIVE ASSESSMENT GOVERNS

In Sneed v. Radio One, Inc., 2007-SOX-18 (ALJ Apr. 16, 2007),the Respondent

filed a motion for summary decision based on the complaint beingnot timely filed.The Respondent asserted that the adverse actiontriggering the limitations periodwas June 29, 2006, while theComplainant asserted that she did not receiveunequivocal noticethat she would be fired until June 30, 2006. If the noticewasreceived on the earlier date, the complaint was untimely. TheALJ acknowledged thatthe Complainant may have been able toestablish a genuine issue of fact as towhether she subjectivelycomprehended that the communications between her andthe Respondentconstituted a final, definitive and unequivocal notice oftermination.However, the record contained e mails dated June 29,2006 that the ALJ found led tono reasonable objective conclusionother than the Complainant would be terminatedon June 30, 2006.Although there may have been subjective confusion ontheComplainant's part because of the negotiation of the terms of aseverance packageand the timing of public announcements, thosenegotiations did not relate to whether

the Complainant would continue to be employed by the Respondentafter June 30,2006. The ALJ rejected the Complainant's argumentthat the clock should not havestarted because the terminationnotice did not state a date certain for termination,because "such acertain date is not required, as long as notice of anunequivocaldecision to terminate was communicated." Slip op. at5.

TIMELINESS OF COMPLAINT; LIMITATIONS PERIOD BEGINS UPON NOTICEOFADVERSE ACTION, NOT UPON LEARNING OF THE MOTIVATION FOR THEADVERSEACTION

In Coppinger Martin v. Nordstrom, Inc., 2007-SOX-19 (ALJ Apr. 4,2007), theComplainant alleged that she believed that her positionwas being eliminated for

budgetary reasons, and did not suspect that the Respondent'sstated reasons foreliminating her position were untrue until shelater learned from another employeethat many of her job functionshad been transferred to other employees. TheComplainant argued thatshe did not have a basis for filing a SOX complaint untilobtainingthis information, and therefore the limitations period should runfrom thatdate rather than the date that she learned that she wouldbe terminated or the datethat she was actually terminated. The ALJheld that the ARB holding in Halpern v. XLCapital Ltd., 2004-SOX-54(ARB Aug. 31, 2005), precluded application of equitabletolling orequitable estoppel in this case. The ALJ observed that in Halpern,the ARBheld that "'[n]either [SOX] nor its implementing regulationsindicate that acomplainant must acquire evidence of retaliatorymotive before proceeding with acomplaint.' Y The complainant'sfailure to acquire evidence of the employer'smotivation forterminating him 'did not affect his rights or responsibilitiesfor

initiating a complaint pursuant to the SOX.'" Slip op. at 5,quoting Halpern (citationsomitted). The ALJ held that "Complainantwas required to file her claim within 90days of receiving "final,definitive, and unequivocal notice" of her termination,

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regardless of whether she suspected that Respondent's statedreasons werepretextual, had evidence of Respondent's notice, or wasaware that her terminationconstituted a legal wrong." Id.

TIMELINESS OF COMPLAINT; EQUITABLE ESTOPPEL;COMPLAINANT'SALLEGED FEAR OF RESPONDENT'S ALLEGED CRIMINALCONNECTIONS

In Farnham v. International Manufacturing Solutions,2006-SOX-111 (ALJ June18, 2007), the ALJ declined to applyequitable principles to permit the Complainantto proceed with hisuntimely filed SOX complaint, where the Complainant'sactionsundermined the credibility of his assertion that he was tooafraid to file the SOXcomplaint because of fears that theRespondent was associated with a drug cartel.The ALJ noted thatduring the time that the Complainant delayed sending a letter tohiscongressman seeking protection as a corporate whistleblower (theletter beingforwarded to OSHA, which treated it as a whistleblowercomplaint), the Complainantcontinued to work for the Respondent fora period of time, he contacted the FBI withmore information thanwould have been needed to file a complaint with OSHA, hefiled acounter suit in a civil suit brought by the Respondents, andcontacted currentand former employees of the Respondent to discussthe Respondent's alleged

fraudulent behavior. The ALJ found that the Respondent's actionsdid not cause theComplainant not to file his SOX complaint in atimely fashion.

TIMELINESS OF COMPLAINT; HOSTILE WORK ENVIRONMENT; AT LEASTONEACT MUST HAVE OCCURRED WITHIN 90 DAY LIMITATIONS PERIOD

In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), theComplainant arguedin a pre trial conference that retaliatoryconduct that occurred more than 90 daysbefore the filing of his SOXcomplaint with OSHA were part of a "hostile workenvironment" andtherefore would be actionable. The ALJ permitted the Complainanttoamend his complaint accordingly, citing authority to the effectthat an ALJ hassome responsibility to assist a pro se litigant inclarifying pleadings. The ALJ found

that allegations, such as non payment of a commission andreassignment ofaccounts, were discrete adverse actions that werenot actionable because theyoccurred outside the 90 day limitationsperiod. He found that some other actionswere not the type ofdiscrete actions that would have been individually actionableandtherefore subject to the 90 day limitations period; however, theonly act thatoccurred within the 90 day limitations period was theComplainant's termination Bwhich was a separate and discreteadverse employment action, and therefore notpart of the sameunlawful employment practice as the other actions thatallegedlycreated a hostile work environment. The ALJ, therefore,found the hostile workenvironment claim was time barred.

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VI. PROCEDURE BEFORE ARB

BRIEFS; LEAVE TO FILE SURREPLY

In Beck v. Citigroup, Inc., ARB 06 140, ALJ No. 2006-SOX-3 (ARBMay 23, 2007),

the ARB stated that it is guided by the Federal Rules ofAppellate Procedure, Rule 28,in determining whether to permit thefiling of a surreply. The ARB stated that asurreply may be filed toaddress new matters raised in a reply to which a partywouldotherwise be unable to respond, and that case law that issubstantially newand decided after the respondent had filed itsbrief may provide grounds for asurreply brief. In the instant case,however, the ARB did not find that grounds hadbeen demonstrated forleave to file a surreply (disparagement of the Respondent'slaw firmand citation of a new (and irrelevant) ARB decision).

MOTION FOR RECONSIDERATION; AUTHORITY OF THE ARB TORECONSIDERITS DECISIONS UNDER THE SOX WHISTLEBLOWER PROVISION; SUCHAMOTION MUST BE FILED WITHIN A REASONABLE TIME TO BETIMELY;SCREENING OF MOTIONS TO DETERMINE APPROPRIATENESSFORRECONSIDERATION

In Henrich v. Ecolab, Inc., ARB No. 05 030, ALJ No. 2004-SOX-51(ARB May 30,2007), the ARB ruled that it has the authority toreconsider a decision issuedpursuant to the whistleblower provisionof the Sarbanes Oxley Act. The ARB statedthat "unless some otherstandard applies to reconsideration of SOX decisions, or weor ourpredecessors have adopted a different standard for determiningtimeliness ofreconsideration petitions, we must apply a 'reasonabletime' standard whendetermining the timeliness of [such a]petition." USDOL/OALJ Reporter at 6.Reviewing the OALJ rules ofpractice and procedure, rules of procedure for federaldistrict andcircuit courts, and previous decisions of the ARB and itspredecessors,the ARB found that it had not adopted a differentstandard, and therefore the

"reasonable time" standard applied. In defining what constitutesa reasonable time,the ARB turned to a decision it had rendered in aService Contract Act proceeding,Thomas & Sons Bldg.Contractors, Inc., ARB No. 98 164, ALJ No. 1996 DBA 33 (ARBJune 8,2001). The ARB concluded that in Thomas & Sons, and otherdecisions of theARB and its predecessors, a three part approach hadbeen delineated:

In sum, the Board and its predecessors have presumed apetitiontimely when the petition was filed within a short timeafter thedecision. The Board and its predecessors also havegrantedreconsideration where a petition, though filed after alonger period,raised Rule 60(b) type grounds or showed "good cause"for the delay.Finally, the Board and its predecessors have rejectedas untimelythose petitions filed more than a short time after thedecision, whensuch petitions have neither raised Rule 60(b) typearguments norshown good cause for delay.

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USDOL/OALJ Reporter at 15. The Board then applied this test tothe Complainant'smotion for reconsideration. The Complainant'smotion was filed on the 60th day afterthe ARB's decision. The ARBsuggested that 14 to 30 days might be sufficiently shorta time, butdid not specifically so rule, holding only that 60 days was not a"short"time. The Board found that the Complainant's grounds forreconsideration presentedrehearing type arguments (which do notthemselves justify a delay in filing a petition

for reconsideration) rather than Rule 60(b) type grounds.Finally, the Board held thatthe Complainant 's belief that he wouldnot suffer penalty if he did not file within ashort time, and hisargument that the Respondent would not be prejudiced byareconsideration, did not show good cause for the delay.

The ARB then stated even if the Complainant's motion had beentimely, it wouldhave been rejected as failing to demonstrate thatthe Board's decision should bereconsidered. The ARB observed thatit is guided by federal court practice in applyingstandardscreening hurtles in determining whether reconsideration iswarranted. Inthe instant case, the Complainant's motion was basedin part on portions of hisdeposition which were not in evidence.The ARB cited caselaw to the effect that "[a]party that has notpresented known facts helpful to its cause when it hadtheopportunity cannot ordinarily avail itself of Rule 60(b) afterit has received an

adverse judgment." USDOL/OALJ Reporter at 20 (citationsomitted). Finally, the ARBfound that the Complainant's remainingarguments that it made errors in judgmentin determining whether theALJ's findings and credibility determinations weresupported bysubstantial evidence were not supported by any demonstrationsofmaterials errors of law, fact or process; or any changedcirc*mstances warrantingRule 60(b) relief; or any othercirc*mstance warranting reconsideration under ARBprecedent.

ALJ'S CREDIBILITY DETERMINATIONS NOT BASED ON DEMEANOR; INAIR21AND SOX CASES, SUCH DETERMINATIONS ARE REVIEWED UNDERTHESUBSTANTIAL EVIDENCE STANDARD RATHER THAN DE NOVO

In Walker v. American Airlines, Inc., ARB No. 05 028, ALJ No.2003 AIR 17 (ARBMar. 30, 2007), the Complainant argued on appealthat the ARB should overturn theALJ's credibility determinations.According to the Complainant, because the ALJdetermination was notdemeanor based it should be reviewed de novo. The ARBrejected theargument that de novo was the appropriate standard of review,notingthat the caselaw cited by the Complainant was all fromenvironmental whistleblowercases. In contrast, in AIR21 and SOXcases the ARB is required to review an ALJ'sfact determinationsunder the substantial evidence standard. Because theALJ'scredibility determinations were not explicitly based ondemeanor, the Board wouldnot afford those determinations the "greatdeference" that a demeanor baseddetermination would receive.Nonetheless, because they were factual findings, theARB wasrequired to uphold them if supported by substantial evidence.

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VII. PROCEDURE BEFORE OALJ

CONSOLIDATION; SAME OR SUBSTANTIALLY SIMILAR EVIDENCE STANDARDOF29 C.F.R. 18.11

In Davis v. The Home Depot U.S.A., Inc., 2006-SOX-17 (ALJ Mar.13, 2007),three Complainants moved under 29 C.F.R. 18.11 forconsolidation of their SOXcomplaints against the Respondent beforean administrative law judge who hadalready conducted an evidentiaryhearing in the first of the three cases. TheComplainants contended,inter alia, that all three cases involved retaliation forprotestingthe same type of actions by the Respondent. One of the two newcaseswas already scheduled for a hearing before that same ALJ,while a third new casewas scheduled to be heard by an ALJ from adifferent office. The Chief ALJ denied themotion to consolidatebased on the very different stages of litigation for thethreecases, because the complaints alleged different acts takingplace in different storesin different regions of the country. TheChief ALJ found that the complaints did notinvolve the "same orsubstantially similar evidence" and that the evidence in onehearingmay not be relevant or material in another.

X. COVERED RESPONDENT

COVERED EMPLOYEE; EMPLOYEE OF NON PUBLICLY TRADED SUBSIDIARY

In Rao v. Daimler Chrysler Corp., No. 2:06-CV-13723 (E.D.Mich.May 14, 2007)(case below 2006-SOX-78), the district court grantedsummary judgment against thePlaintiff in a SOX whistleblower suitwhere the Defendant was not itself a publiccompany, but only thesubsidiary of its publicly traded parent, and the publiclytradedparent had not been named in the complaint. The court reviewedALJ

decisions on this issue, and while recognizing some merit to theposition that thebackground to enactment of SOX might support theview that subsidiaries should becovered, observed that the clearstatutory text of section 1514A only lists employeesof publiccompanies as protected individuals. The court stated it was not itsjob torewrite the statute, especially in light of the corporate lawprinciple that parentcompanies are not ipso facto liable for theactions of their subsidiaries, and thatCongress had specificallyoverrode this principle in other portions of SOX.

The court then looked to common law agency principles todetermine whether theDefendant was acting as an agent for itsparent company in its actions towards thePlaintiff. The courtgranted summary judgment in favor of the Defendant on thisissuebecause the Plaintiff's amended complaint only mentioned employeesof the

Defendant as those who were aware of the situation and hiscomplaints, and did notassert that anyone at the parent company hadsuch knowledge.

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EXTRATERRITORIAL APPLICATION OF SOX WHISTLEBLOWER PROVISION;ARBFOLLOWS CARNERO RULING

In Ede v. The Swatch Group Ltd., ARB No. 05 053, ALJ Nos.2004-SOX-68 and 69(ARB June 27, 2007), the ARB found thatsubstantial evidence supported the ALJ'sfindings that theComplainants worked solely for foreign subsidiaries of the

Respondent in Switzerland, Hong Kong and Singapore; that theynever worked forthe Respondent within the United States; and thattheir SOX complaint wasgrounded in adverse actions that occurredoutside the United States. The ARB alsofound no reason to departfrom the First Circuit decision in Carnero v. BostonScientificCorp., 433 F.3d 1, 4, 6 7 (1st Cir. 2006), cert. denied, __ U.S.__, 126S.Ct. 2973 (June 26, 2006), that SOX section 806 does notprotect employees whowork exclusively outside the United States.The ARB therefore denied the complaint.

COVERED EMPLOYER; THE AMERICAN MEDICAL ASSOCIATION

In Fleszar v. American Medical Association, 2007-SOX-30 (ALJJune 13, 2007),the ALJ dismissed the Complainant's SOX complaintbecause the Respondent was notsubject to the provisions of 806 ofthe SOX, and thus not a properly named

Respondent. Specifically, the ALJ found that the "AMA is aprivate organization thathas not registered securities under 12 ofthe SEA. Similarly, 15(d) relates solelyto reports of registeredissuers of securities, and the AMA is not such anissuer.Consequently, I find the AMA does not fall under eitherspecific category of publiclytraded company subject to the 806whistleblower provisions." Slip op. at 3(footnotes omitted). TheComplainant alleged that the Respondent had filed reportsto the SECunder 15(d). The ALJ, however, found that the pleadings showedthatthose reports related to defined benefits plans that did notinvolve the issuance ofsecurities, and would not have been filedunder 15(d). The ALJ also rejected theComplainant's contention thatthe Respondent was covered under 806 because ithad contractualrelationships with publicly traded companies andgovernmentalentities, or due to real estate transactions or mutualfund activities.

COVERED EMPLOYER; NON PUBLICLY TRADED SUBSIDIARY WHICH WASNOTTHE PUBLICY TRADED PARENT COMPANY'S AGENT IN REGARD TOTHECOMPLAINANT'S EMPLOYMENT

In Savastano v. WPP Group, PLC, 2007-SOX-34 (ALJ July 18, 2007),theComplainant relied on the ALJ decision in Morefield v. ExelonServices, Inc., 2004-SOX-2 (ALJ Jan. 28, 2004), to argue that shequalified for coverage under thewhistleblower provision of SOX as acovered employee of a subsidiary of publiclytraded parent company.The ALJ, however, found that Morefield's approach to nonpublicsubsidiaries was inconsistent with the ARB's holding inKlopfenstein v. PCCFlow Technologies Holdings, Inc., ARB No. 04149, ALJ No. 2004-SOX-11 (ARB May31, 2006), and had not beenfollowed in later federal district court and ALJ decisions.

In Klopfenstein, the ARB held that a non public subsidiary of apublicly held parentcompany could be subject to the Act'swhistleblower provisions if the evidenceestablishes that it actedas an "agent" of its publicly held parent as determined under

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principles of general common law agency. The ALJ wrote that "foran employee of anonpublic subsidiary to be covered under Section806, the non public subsidiarymust act as an agent of its publiclyheld parent, and the agency must relate toemployment matters. Rao,2007 U.S. Dist. LEXIS 34922, at *15; Brady v. CalyonSecs. (USA),406 F. Supp. 2d 307, 318 n.6 (S.D.N.Y. 2005)." Slip op. at 7.

In the instant case, the ALJ found that the Complainant hadalleged no facts thatwould tend to support a finding that eitherher non publicly traded employer or itsnon publicly traded holdingcompany were acting as agents of the publicly tradedparent inconnection with the termination of her employment with heremployer. TheComplainant had not contradicted the Respondents'claims that: (1) the subsidiaryacted and was run independently fromthe parent; (2) there was no overlap in theofficers; (3) thecompanies had separate offices, operations and officers andwererarely, if ever, involved in one another's daily activities;(4) no officer or employee ofthe parent exerted any control overthe terms and conditions of the Complainant'semployment; and (5) noofficer or employee of the parent had anything to do withthedecision to hire or terminate the Complainant. The ALJ found that,while theComplainant had identified statements from the parent'sannual report indicatingthat its non public subsidiaries may act asits agents for purposes of collecting and

reporting financial data, there was no factual predicate forfinding an agencyrelationship pertaining to employment matters.Accordingly, the ALJ grantedsummary decision in favor of theRespondents.

XI. COVERED EMPLOYEE

COVERED EMPLOYEE; CONTRACTOR ENGAGED AS A PROJECT MANAGER ONSOXCOMPLIANCE

In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29,2007), theComplainant was engaged by the Respondent as anindependent contractor to serveas a project manager coordinatingSOX compliance. The contract was for a setperiod. The Respondenttook the position that the Complainant was not a coveredemployee orperson under the SOX whistleblower provision. The ALJ found thattheComplainant was not a covered "employee." Applying the commonlaw masterservant principles, the ALJ found that the testimonyuniformly showed that theComplainant had been hired with theunderstanding that he would work on acontract basis on a specifictask with an estimated time of completion. The nature oftheassignment compelled access to the Respondent's financial recordsfor testingand analysis; the ALJ found that his physical presenceand guidance from thecontroller in completion of his assignmentwere not indicia of employment, but ratherincidental to hisassignment. Rather, the Complainant was paid as a contractor,andenjoyed no formalities associated with employment as anemployee.

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The Complainant also contended that he was an "individualapplying to work for acompany" B an internal audit position asevidenced by conversations with hissupervisor concerning futureemployment. The ALJ rejected this contention, findingthat theComplainant never made formal application for the position, andthat hisconversations with the controller and CFO did notconstitute application for aposition. The Complainant was awarethat the controller did not have the authority to

hire for the internal audit position, and that the job did notexist at the time he hadthe conversations with the controller andthe CFO. The ALJ found that an employerdoes not have a duty toinform contractors of job openings.

The ALJ, however, agreed with the Complainant's contention thathe was "anindividual whose employment could be affected by acompany or companyrepresentative" and therefore an employee asdefined in 29 C.F.R. 1980.101. TheALJ observed that the regulationwas purposely broad, and that found that consistentwith SOX purposeof protecting investors, found that "the term "employment' asusedin 29 C.F.R. 1980.001 [sic] includes any service or activity forwhich anindividual was contracted to perform for compensation.Therefore, a contractor orsub contractor may be 'an individualwhose employment could be affected by acompany or companyrepresentative.' 29 C.F.R. 1980.001. [sic] Under this

definition, the only "employment" which the employer is capableof affecting, in itsterms and conditions, is the contracted forservices or assignment." Slip op. at 44.

In view of his finding that the Complainant was a coveredemployee within themeaning of section 1980.101, the ALJ did notreach the Complainant's argument thatfailure to extent coverage tohim would lead to an impermissible loophole incoverage that wouldsubvert the intent of Congress.

COVERED EMPLOYEE; AUDITOR OF WHOLLY OWNED SUBSIDIARYESTABLISHEDTO BE EMPLOYEE OF PARENT COMPANY'S INTERNAL AUDITDEPARTMENT

In Robinson v. Morgan Stanley, 2005-SOX-44 (ALJ Mar. 26, 2007),theRespondent Morgan Stanley was a publicly traded company, whilethe Respondent"Discover" was a wholly owned subsidiary. The ALJfound that he had jurisdictionover the Complainant's SOXwhistleblower complaint because although theComplainant worked inthe Discover office facilities, audited its credit cardservicefunctions, and was compensated by Discover's holding companyshe was principallyemployed as a senior auditor for MorganStanley's Internal Audit Department("IAD"). The ALJ found that theIAD had a supervisory chain descending from theAudit Committee ofthe Morgan Stanley Board of Directors down to theComplainant'simmediate supervisor, that the Complainant's work was assignedbyIAD supervisors which had ultimate authority for her level ofcompensation, and thatthe termination decision underlying the SOXcomplaint resided with a seniorexecutive officer of MorganStanley.

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XII. ARBITRATION AGREEMENTS; SEVERANCE AGREEMENTS

MOTION TO COMPEL ARBITRATION; PARTICIPATION IN DOLSOXPROCEEDINGS IS NOT A WAIVER OF THE RIGHT TO COMPEL

In Green v. Service Corp. Int'l, No. 4:06-CV-00833 (S.D.Tx. June30, 2006) (casebelow 2006-SOX-35), the Plaintiff had removed hisSOX whistleblower complaint tofederal district court. TheRespondent then moved to compel arbitration. Noting thatU.S.Supreme Court has held that any doubts concerning the scope ofarbitral issuesshould be resolved in favor of arbitration, thecourt rejected the Plaintiff's claim thatthe Defendant had waivedits right to compel arbitration when it defended itself intheadministrative proceedings before DOL. The court did not find anyFifth Circuitcase law on point, but found authoritative thedecision of the First Circuit in Brennanv. King, 139 F.3d 258, 264(1st Cir. 1998), which held that, in determining whethersuch awaiver occurred, reference is made to judicial rather thanadministrativeproceedings. The court also rejected the Plaintiff'sclaim that the arbitrationagreement was not enforceable because itdid not identify the Defendant as theparty which could enforce theagreement. Finally, the court denied the Plaintiff'srequest thathis case be dismissed rather than stayed. In Green v. ServiceCorp.

Int'l, No. 4:06-CV-00833 (S.D.Tx. Aug. 17, 2006), the courtdenied reconsideration.The court recognized that the DOLproceedings resembled the judicial process quiteclosely, butnonetheless found no authority that states that invoking a processthatresemble a judicial process operates as a waiver of the rightto compel arbitration.The Plaintiff appealed to the Fifth Circuit,which found that under 16(b) of the FAA, 9U.S.C. 16(b), it had nojurisdiction, the case being still pending before thedistrictcourt. Green v. Service Corp. Int'l, No. 06 20732 (5th Cir.May 30, 2007).

ARBITRATION; CLAUSE IN ARBITRATION CONTRACT COVERING "ANYCLAIMSINVOLVING RIGHT PROTECTED BY ANY FEDERAL STATUTE"CAPTURES SOXWHISTLEBLOWER CLAIM, EVEN THOUGH CONTRACT

PRECEDED ENACTMENT OF SOX

In Kimpson v. Fannie Mae Corp., No. 1:06-CV-00018 (D.D.C. Mar.31, 2007), thePlaintiff did not deny the existence of a validagreement to arbitrate employmentdisputes with the Defendant, butargued that he did not consent to arbitrate SOXclaims because SOXwas not listed among the statutes stated to be covered bythedispute resolution policy. The Defendant responded that thecomprehensive languageof the policy applied to the Plaintiff's SOXclaims. The court agreed with theDefendant. Even though SOX had notyet been passed when the arbitration contractwas entered into, thecourt found that language in the agreement regarding theinclusionof "any claims involving rights protected by any federal Y statute"capturedthe Plaintiff's SOX claim. Pursuant to the FederalArbitration Act, 9 U.S.C. 3, thecourt stayed the district courtsuit pending the conclusion of arbitration.

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XIII.C. ADVERSE EMPLOYMENT ACTION

HOSTILE WORK ENVIRONMENT; ROUTINE WORKPLACE IRRITATIONSANDINCONVENIENCES

In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), the ALJfound that theComplainant failed to establish the existence of ahostile work environment where,after being reinstated, theComplainant had problems with his company e mail andVirtual PrivateNetwork. The Complainant did not report the problems to ITpersonnelbecause he "was not interested in tracking down technicalsupport to figure outsomething that was terminated purposely by mymanagement." Slip op. at 20(quoting transcript). Neither did theComplainant inquire with his managers aboutthe problems. The ALJfound that a reasonable person would have contactedtechnicalsupport before assuming that the problems related to a sinisterconspiracy.The ALJ found that the remainder of the acts related toroutine workplace irritationsand inconveniences typicallyexperienced by new employees, without alteringworking conditions ordetrimentally affecting a reasonable person (delay in gettingalaptop and business cards; loss or mishandling of personneldocuments).

EMPLOYEE; ADVERSE ACTION; FILING OF ANTI-SLAPP SUIT

In Pittman v. Siemens AG, 2007-SOX-15 (ALJ July 26, 2007), theComplainantalleged that the Respondents engaged in adverse actionwhen they filed an anti-SLAPP claim against the Complainantrelating to a defamation suit in state court. TheComplainantalleged that this suit was in retaliation for his filing of the SOXclaimwith OSHA. The ALJ, however, found that the Complainant hadnot been anemployee of the Respondent for more than one and a halfyears prior to the filing ofthe anti-SLAPP motion. Since he was notan employee at time, and the anti-SLAPPsuit was not blacklisting orinterference with employment, the ALJ found that it wasnot adverseaction under the whistleblower provision of the SOX.

EMPLOYEE; ADVERSE ACTION; SLANDEROUS RUMORS AGAINSTFORMEREMPLOYEE

In Pittman v. Siemens AG, 2007-SOX-15 (ALJ July 26, 2007), theComplainantcontended that a former co-worker had informed him thatofficers of the Respondentwere spreading slanderous rumors abouthim. The ALJ noted that, except forblacklisting or interferencewith subsequent employment, the SOX only protects anemployee fromretaliation for his protected activity while the complainant isanemployee of the respondent. Since the alleged slanders occuredtwo years after theComplainant's employment with the Respondent hadbeen terminated, he was not anemployee at the time of the allegedadverse action and the claim was not coveredunder SOX.

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XIII.D. CAUSATION

CONTRIBUTING FACTOR; FIRING FOR INSUBORDINATION FOR REFUSINGTOCOOPERATE IN INVESTIGATION

In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), the ALJfound that theComplainant did not meet his burden of proving by apreponderance of the evidencethat protected activity was acontributing factor in his termination. The ALJacknowledged thatthe SOX contributing factor standard is a relatively low hurdle,butfound that the evidence clearly showed that rather thancontributing to histermination, protected activity if anythinginsulated the Complainant from adverseactions for a period of timeand effectively delayed the termination decision whichwas not basedon conduct protected under SOX. The decision to terminatetheComplainant was initiated when the Complainant failed to appearat a mandatorytraining session by a manager who at that time didnot know about theComplainant's protected activity. Rather, whenother managers learned of theprotected activity, the Complainantwas immediately reinstated. The ALJ found thatat this point, theComplainant "had blown the whistle, and [the Respondent] wasreadyto listen. However, over the next several weeks, [the Complainant]swallowedthe whistle and decided not to cooperate with [theRespondent] in investigating hisconcerns...." Slip op. at 27. TheComplainant argued that he was entitled tosomething like asylumafter "entering protected activity." The ALJ rejectedthiscontention, finding that the legislative history of SOX"expresses an implicitexpectation that when an employee makes aprotected disclosure of fraudulentactivity to an employer, theemployee would not unreasonably refuse to cooperate intheemployer's lawful investigation into the disclosure." Slip op. at27. It was whenthe Complainant refused to cooperate in theinvestigation and stopped working thathe was discharged forinsubordination. The ALJ found that the Complainant hadoffered noevidence that he had a valid reason to be wary of theRespondent'sgeneral counsel, who tried repeatedly with no successto meet with the Complainant

to discuss the allegations.

20 MONTH GAP BETWEEN PROTECTED ACTIVITY AND ADVERSE ACTIONFOUNDTO ESTABLISH THAT PROTECTED ACTIVITY WAS NOT ACONTRIBUTING FACTORIN THE PLAINTIFF'S TERMINATION

InJohnson v. Stein Mart, Inc., No. 3:06-CV-00341 (M.D.Fla. June20, 2007) (casebelow 2006-SOX-52), the district court found that Bnot only did a 20 month gapbetween the protected activity and theadverse action fail to indicate a temporal linksufficient toestablish causation B but in fact showed that the protectedactivity wasnot a contributing factor in the Plaintiff'stermination.

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TEMPORAL PROXIMITY MAY ESTABLISH CAUSATION, BUT IS NOtit*ELFSUFFICIENT TO ESTABLISH RETALIATORY INTENT

In Taylor v. Wells Fargo Bank, NA, ARB No. 05 062, ALJ No.2004-SOX-43 (ARBJune 28, 2007), the ARB wrote: "Temporal proximitydoes not establish retaliatory

intent, but may establish the causal connection component of theprima facie case.The ultimate burden of persuasion that therespondent intentionally discriminatedbecause of complainant'sprotected activity remains at all times with thecomplainant."USDOL/OALJ Reporter at n.12 (citation omitted).

CAUSATION; EVIDENCE OF PERFORMANCE DEFICIENCIES BOTH PRIOR TOANDAFTER PROTECTED ACTIVITY; SUPERVISOR WHO INITIATEDEMPLOYMENTACTIONS AGAINST THE COMPLAINANT DID NOT KNOW ANYDETAILS ABOUT THEPROTECTED ACTIVITY

In Robinson v. Morgan Stanley, 2005-SOX-44 (ALJ Mar. 26, 2007),theComplainant was a senior internal auditor who engaged inprotected activity whenshe submitted a memorandum to seniorexecutives setting out her concern that

banking regulations were being violated in regard to the promptcharge off of creditcard bankruptcies. The ALJ, however, found thatthe Complainant failed to prove thatthis protected activitycontributed to her discharge. Although temporal proximityprovidedsome circ*mstantial evidence of a causal link between the protectedactivityand the discharge, the record demonstrated that theComplainant had welldocumented, pre existing performance issues inthe areas of professionalcommunications, timely work product, andacceptance of feedback, all of which wereunrelated to any protectedactivity. Moreover, the same performance deficienciespersistedafter the protected activity. The direct supervisor who initiatedtheComplainant's post protected activity job actions was only awarethat theComplainant had submitted a memorandum that generated aninvestigation. Thissupervisor did not know the nature or extent ofthe memorandum and related

investigation, did not discuss the memorandum with theComplainant, and no onefrom the investigation or HR contacted thesupervisor about the memorandum. TheALJ found, therefore, that theprotected activity would not have been a basis for thissupervisor'sdecision to terminate the Complainant's employment. The ALJfoundbased on credible testimony that the supervisor initiated thepost protected activity job actions on her own. The executive whoapproved the supervisor's terminationdecision was aware of theComplainant's protected activity, the expense of theconsequentinvestigation, and the fact that it produced no significantfindings.Nonetheless, the ALJ found credible this executive'stestimony that his decision toaccept the termination decision(which was initiated by the supervisor and not theexecutive) wasbased solely on the documented performance issues and notprotectedactivity.

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EMPLOYER'S KNOWLEDGE; DISCLOSURE TO PERSON WITH AUTHORITYTOINVESTIVATE, DISCOVER OR TERMINATE MISCONDUCT; ALJ FINDS THATSOXREQUIRES AN EXPRESS, NOT MERELY A CONSTRUCTIVE,COMMUNICATION

In Frederickson v. The Home Depot, U.S.A., Inc., 2007-SOX-13(ALJ July 10,2007), the Complainant, a department supervisor, hadused some hooks in hisdepartment, and was told by a supervisor fora different department (who had nosupervisory authority over theComplainant) that nothing was to be marked in thestore computer asfor store use, but rather entered as damaged goods. WhentheComplainant protested, the other supervisor told him that thesewere the orders ofthe store manager. Another employee was present.After the incident, theComplainant mentioned it to several othernon supervisory employees. He did notdiscuss it with his directsupervisor or the store manager. Several days later, heentered someother items into the store computer under the "store use"category.The Complainant knew that the store manager watched thebooks closely andconcluded that the manager would become aware thathe had contravened hisinstructions as relayed by the othersupervisor. The Respondent filed a motion for

summary decision arguing that none of the persons that theComplainant complainedto had the authority to act on thecomplaints. The Complainant responded that thiswas an issue offact, which could not be determined based upon theRespondent'sassertions and self serving affidavits.

The ALJ noted that the SOX:

. . . anticipates and encourages employees to reportfraudulentconduct, to outside agencies, Congress, and companypersonnel ina supervisory capacity over the employee or "such otherpersonworking for the employer who has the authority toinvestigate,discover, or terminate misconduct." 18 U.S.C. 1514A(a)(1)(c).

Communication of an employee to their supervisor would be anaturalcourse of reporting, following established lines ofauthority. Likewise,reporting wrongful conduct to another employeevested with the powerto take remedial steps would be a logicalcourse to effect change.However, communication of wrongful conductto parties lackingsupervisory authority over the whistleblower, or"authority toinvestigate, discover, or terminate misconduct," doesnot constituted[sic] protected activity, as it does not serve theunderlying purpose ofthe Act.

Slip op. at 10 (emphasis as in original). The ALJ found that theComplainant'scommunications with the other supervisor and nonsupervisory employees could notconstitute protected activitybecause none had supervisory authority over the

Complainant or the authority to investigate, discover orterminate misconduct. TheALJ found that the Complainant'sassumption that the store manager would discoverhis computerentries would, at best, constitute a constructive communication ofthe

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issue of proper input of items for store use. The ALJ found thatthe SOX encouragesemployees to come forward with information ofwrongdoing, but does not indicate anintent to protect constructivecommunications. Thus,

. . . the Act seeks to protect employees from retaliation fortheirpurposeful protected communications. There is nothing in theAct to

indicate that it intended to protect any constructivecommunication, assuch does not require purposeful effort by theemployee and thuswould not subject him to retaliation for sucheffort. Therefore, for acommunication to be protected, it arguablymust be an express, notconstructive, communication.

Slip op. at 11.

EMPLOYER'S KNOWLEDGE; DISCLOSURE TO PERSON WITH AUTHORITYTOINVESTIVATE, DISCOVER OR TERMINATE MISCONDUCT; OUTSIDE LAWFIRMENGAGED BY AUDIT COMMITTEE; EXTERNAL AUDITORS

In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29,2007), the ALJ

found that disclosures made to a law firm hired by the auditcommittee to investigateallegations made by the Complainant weredisclosures to "such other person workingfor the employer who hasthe authority to investigate, discover or terminatemisconduct." See18 U.S.C. 1514(A)(1)(c). The ALJ, applying a broadinterpretation tocomport with the intent of SOX, also found that disclosures madetoan external auditor fit within the "complaint to a proper person"element of a SOXwhistleblower complaint.

EMPLOYER'S KNOWLEDGE; CONSTRUCTIVE KNOWLEDGE

In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29,2007), the ALJ,although denying the claim because he found that theComplainant had not engaged

in protected activity, noted that:

A complainant is not required to prove "direct personalknowledge" onthe part of the employer's final decision maker thathe engaged inprotected activity. The law will not permit anemployer to insulateitself from liability by creating "layers ofbureaucratic ignorance"between a whistleblower's direct line ofmanagement and the finaldecision maker. Frazier v. Merit SystemsProtection Board, 672 F.2d150, 166 (D.C. Cir. 1982). Therefore,constructive knowledge of theprotected activity can be attributedto the final decision maker. Id.;see also Larry v. Detroit EdisonCo., Case No. 1986 ERA 32 @ 6 (ALJOctober 17, 1986); Platone,supra.

Slip op. at 61 62.

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XIII.E. PROTECTED ACTIVITY

PROTECTED ACTIVITY; COMPLAINT ABOUT CHANGE OF REVENUEFORECASTINGFORMULA DURING CORPORATE ACQUISITION; ACTUALVIOLATION NEED NOT BEPROVED, BUT ONLY REASONABLE BELIEF BY

EMPLOYEE IN COMPLAINANT'S POSITION

In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), theComplainantcomplained to management that a new formula whichincreased revenue projectionstenfold during a time when the companywas being acquired by another companycould defraud investors. TheALJ found that, although the record did not establishthat thecompany reckless or fraudulently inflated its revenue forecasts forthepurpose of drawing a higher purchase offer from the acquiringcompany, theComplainant was not required to prove an actualviolation of securities law. Becausethe Complainant was a salesmanwith no specialized training or expertise in the areaof corporateacquisitions, and there was no evidence that the Complainant didnotactually believe that the revised revenue forecast overstatedexpected income, theALJ found it not unreasonable for a person inthe Complainant's position to believethat the new formula presentedinvestors with a materially misleading picture of thecompany'sfinancial condition. The ALJ found, therefore, that theComplainantengaged in protected activity.

PROTECTED ACTIVITY; EMPLOYEE'S CONTACT WITH THE SEC INCONNECTIONWITH A REASONABLE BELIEF OF A VIOLATION OFSECURITIES LAW FOUND TOBE PROTECTED EVEN IF THE SEC DID NOTINSTITUTE A FORMALPROCEEDING

In Grove v. EMC Corp., 2006-SOX-99 (ALJ July 2, 20007), theComplainant, asalesman, testified that he called an SEC attorney toget information after he readabout the "arrest" by the SEC of aperson who had dealings with his employer

relating to his accounts. The Complainant reported to the SECattorney his concernsabout anomalous activity and GAAP violations,and inquired whether otherarrangements were legal. The Complainant,however, specifically refused to provideany evidence, optinginstead to pursue his concerns internally with the Respondent.TheALJ wrote: "On these facts, one might conclude that Grove's contactwith theSEC is not protected because he never initiated orparticipated in any proceedingbefore that agency. In my view,however, this would require a narrow and overlytechnical reading ofthe Act that would run counter to the legislative historywhichreflects that 'the law was intentionally written to sweepbroadly, protecting anyemployee of a publicly traded company whotook such reasonable action to try toprotect investors and themarket'" Slip op. at 23 24 (citation omitted). The ALJ notedthatthe ARB had recognized that whistleblower laws should beinterpreted liberally,and had suggested in a ERA case that anemployee's contact with a governmentagency for the purpose ofobtaining a legal opinion related to the employee's raisingofprotected concerns is protected activity. Accordingly, the ALJ heldthat "when anemployee contacts the SEC in connection with areasonable belief of a securities law

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violation within the scope of Sarbanes Oxley ... that action isprotected even if noformal SEC proceeding is ever initiated."

PROTECTED ACTIVITY; REASONABLENESS OF PLAINTIFF'S BELIEFINACCOUNTING VIOLATION; DEFENDANT'S INTERNAL INVESTIGATION ASARESULT

InJohnson v. Stein Mart, Inc., No. 3:06-CV-00341 (M.D.Fla. June20, 2007) (casebelow 2006-SOX-52), the Plaintiff had been hired asa Buyer at the Defendant'scorporate headquarters, and was laterpromoted to be a Planner, in which capacityshe complained tomanagement about (1) the collection of markdown allowancesfromvendors, (2) the changing of season codes on older inventory, and(3) theaccounting for the value of inventory. The Defendant arguedthat the Plaintiff failedto establish a prima facie case on theelement of protected activity because she didnot have a reasonablebelief that these practices were illegal because she hadnoaccounting background and had no knowledge of the Defendant'saccountingpractices. The Defendant argued that its vendor markdownallowances and seasoncode changes were in line with generalindustry practices. The district court rejectedthis argumentbecause the Defendant had treated the Plaintiff's complaints

reasonable enough to have warranted an internalinvestigation.

PROTECTED ACTIVITY; REPORTS OF MAIL OR WIRE FRAUD NEED NOTBELINKED TO FRAUD AGAINST SHAREHOLDERS TO BE PROTECTED UNDERTHESOX

In Reyna v. Conagra Foods, Inc., No. 3:04-CV-00039 (M.D.Ga. June11, 2007),the Plaintiffs (who were employees in the Defendant's HRDepartment) contendedthat the Defendant violated the whistleblowerprovision of the Sarbanes Oxley Actwhen they were terminated forreporting two incidents of fraud: (1) a fraudulentinsurance schemein which a supervisor falsely requested that individualsheidentified as his wife and son (who were in fact his sister andnephew) be added to

his company provided health insurance as dependents, and (2) aninstance in whicha HR supervisor and a benefits coordinatorprovided a fake social security card for anemployee in order tosatisfy the I 9 requirements of the immigration law. ThePlaintiffscontended that these fraudulent activities necessarily involved theuse ofmail or the internet, and thus the reporting of theactivities was protected under theSOX. The Defendant filed a motionfor summary judgment arguing that the reportingwas not protectedactivity because the reports of mail fraud and wire fraud didnotrelate to "fraud against shareholders." Employing principles ofstatutoryinterpretation, the court denied summary judgment,holding:

The statute clearly protects an employee against retaliationbasedupon that employee's reporting of mail fraud or wire fraudregardlessof whether that fraud involves a shareholder of thecompany. The

Court rejects Defendants' interpretation that the last phrase oftheprovision, "relating to fraud against shareholders," modifieseach ofthe preceding phrases in the provision. Defendants seek toredraft the

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statute to read that the employee is protected only if hereasonablybelieves that the conduct constitutes a "violation ofsection 1341 [mailfraud] 'relating to fraud against shareholders,'section 1343 [wirefraud] 'relating to fraud against shareholders,'"etc.

Slip op. at 39.

PROTECTED ACTIVITY; REASONABLE BELIEF TEST

In Welch v. Cardinal Bankshares Corp., ARB No. 05 064, ALJ No.2003-SOX-15(ARB May 31, 2007), the Complainant B who was theRespondent's CFO expressedconcerns that the Respondent hadoverstated income in a quarterly SEC reportbecause it hadimproperly treated $195,000 in loan recoveries as income whentheyshould have been allocated to the "loan reserve" account. TheComplainant arguedthat error improperly inflated the Respondent'sincome by 13.7%, and thereforecould have materially misledinvestors. The ARB reversed the ALJ's finding that thiswasprotected activity. The ARB wrote:

The "reasonable belief" standard requires Welch to prove boththat he

actually believed that the SEC report overstated income and thataperson with his expertise and knowledge would havereasonablybelieved that as well. Furthermore, "[b]ecause theanalysis fordetermining whether an employee reasonably believes apractice isunlawful is an objective one, the issue may be resolvedas a matter oflaw."

USDOL/OALJ Reporter at 10 (footnotes omitted). The ARB foundthat an experiencedCPA/CFO like the Complainant could not havereasonably believed that the quarterlySEC report presented amisleading picture of the Respondent's financial conditionbecausewhether reported as income or as a credit to expenses, the factremainedthat the Respondent had $195,000 that it previously did nothave.

PROTECTED ACTIVITY; VIOLATION OF GAAP AND FFIECACCOUNTINGSTANDARDS IS NOT IPSO FACTO A VIOLATION OF FEDERALSECURITIESLAW

In Welch v. Cardinal Bankshares Corp., ARB No. 05 064, ALJ No.2003-SOX-15(ARB May 31, 2007), the Complainant B who was theRespondent's CFO expressedconcerns that when the Respondentmisclassified loan recoveries as income ratherthan crediting theloan loss account, it violated GAAP accounting standardsandaccounting rules that the Federal Financial InstitutionsExamination Council (FFIEC)developed for banks. The Complainantessentially argued that violation of thoseaccounting standardsconstituted a violation the clear mandate of Sarbanes Oxley,andtherefore such errors were ipso facto violations of federalsecurities laws. The

ARB found that this argument amounted to wholesale re writing ofSOX's section1514A, and it would not accept such a contention inthe absence of citation of legalauthority.

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PROTECTED ACTIVITY; CFO'S COMPLAINT OF INSUFFICIENT ACCESS TOANOUTSIDE AUDITOR

In Welch v. Cardinal Bankshares Corp., ARB No. 05 064, ALJ No.2003-SOX-15(ARB May 31, 2007), the Complainant B who was theRespondent's CFO B

complained that he had been denied sufficient access to anoutside auditor, whoinstead chose to communicate with the company'sCEO. The ARB found that suchcomplaints were not protected activityunder SOX. The ARB wrote: "But Welch didnot prove by apreponderance of evidence how his unhappiness about access to[theoutside auditor] constituted a reasonable belief that Cardinalwas violating or mightviolate the enumerated fraud statutes, anySEC rule or regulation, or any federal lawrelating to fraud againstshareholders. To be protected, an employee's SOXcomplaint mustdefinitively and specifically relate to the listed categories offraud orsecurities violation." USDOL/OALJ Reporter at 13 (footnoteomitted).

PROTECTED ACTIVITY; REJECTION OF CFO'S ADVICE ONACCOUNTINGMATTERS IS NOT INHERENTLY A VIOLATION OF FEDERALSECURITIES LAW

In Welch v. Cardinal Bankshares Corp., ARB No. 05 064, ALJ No.2003-SOX-15(ARB May 31, 2007), the Complainant B who was theRespondent's CFO Bcomplained that the Respondent had deficientinternal accounting controls becausepersons without accountingexpertise had unrestricted access to the general ledger.TheComplainant argued that when he briefed Respondent's staff aboutthe problem,and they disregarded his advice, such disregard becamefraud because failure tofollow the CFO's advice was reflective ofan intent to leave things in a deceptivestate. The ARB rejectedthis argument, finding that the Complainant had failed tocite anylegal authority to support "the proposition that rejecting theCFO's advice onaccounting matters violates or could reasonably beregarded as violating the federalsecurities laws." USDOL/OALJReporter at 14.

PROTECTED ACTIVITY; PLEADING OF ACTUAL FRAUD AGAINSTSHAREHOLDERSIS NOT REQUIRED, BUT RATHER ONLY A REASONABLEBELIEF OF VIOLATION OFA LAW RELATING TO FRAUD AGAINSTSHAREHOLDERS

In Smith v. Corning, Inc., No. 06-CV-6516 (W.D.N.Y. July 12,2007), the courtdenied the Defendants' motion to dismiss thePlaintiff's SOX suit under FRCP12(b)(6). The motion was based on acontention that the Plaintiff did not engage inprotected activitywhen he raised concerns that PeopleSoft 8.8, an enterpriseresourceplanning software application, was being implemented in a way thatwasnot correctly reporting financial data with resultant impact onthe integrity ofquarterly reports.

The court rejected the Defendants' contention that the complaintwas deficientbecause the Plaintiff had not alleged an actual fraudagainst shareholders. The courtfound that 1514A only requires aplaintiff to have reasonably believed that the

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problem constituted a violation of a provision of Federal lawrelating to fraud againstshareholders. The court found that thePlaintiff's complaint met this standard insofaras it alleged thatthe Plaintiff reasonably believed that the company was violating15U.S.C. 78m(b)(2)(B)(ii), and that he believed that78m(b)(2)(B)(ii) was relatedto fraud against shareholders. In otherwords, the Plaintiff alleged that the companywas implementing afinancial reporting system that was not GAAP compliant in

violation of 78m(b)(2)(B)(ii), and that the company was refusingto correctproblems with the program, which would have resulted inthe issuance of incorrectlyquarterly reports which could havemisled investors. Moreover, the court indicatedthat the submissionof quarterly reports that were not prepared in accordance withGAAPwould also violate a SEC rule, namely 17 C.F.R. 210.4 01(a)(1),citingRichards v. Lexmark Int'l, Inc., 2004-SOX-49 (ALJ June 20,2006).

The court also rejected the Defendants' contention that thePlaintiff's complaintswere not protected in that they involved aninternal accounting dispute, and onlypertained to a potential forfraud occurring in the future. The court distinguishedcases citedby the Defendants because in those cases the plaintiffs had notallegedviolation of any law covered by 1514A, whereas in theinstant case, the Plaintiffhad alleged that the Defendantsrepeatedly refused to address a problem that was

resulting in incorrect financial information being reported tothe company's generalledger B a sufficient allegation to survive aRule 12(b)(6) motion.

Finally, the court rejected the Defendants' contention that thePlaintiff's complaintwas deficient because he only complained aboutthe PeopleSoft application, andtherefore could not allege a basisfor reasonably believing that the company's entiresystem ofaccounting controls was so inadequate as to violate 78m(b)(2),whichspeaks to systems rather than portions of accounting systems.The court found thatbased on facts alleged in the complaint and atthis stage in the litigation, it could notsay as a matter of lawthat it was unreasonable for the Plaintiff to believe thatthecompany was violating 78m(b)(2)(B)(ii) when it refused toaddress problems withPeopleSoft.

PROTECTED ACTIVITY; ELEMENTS SUBJECTIVE AND OBJECTIVEREASONABLEBELIEF; INTENT TO DEFRAUD; MATERIALITY OFINFORMATION DISSEMINATEDTO INVESTORS; INTERNAL CONTROLS

In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29,2007), the ALJreviewed the still evolving law on what constitutesprotected activity under SOX. TheALJ started by observing that thelaw includes a "reasonable belief" test, which mustbe scrutinizedunder both subjective and objective standards: the complainantmusthave actually believed that the employer was in violation ofthe relevant law orregulations, and that belief must be reasonable.Reasonable belief is determinedbased on the knowledge available toa reasonable person in the circ*mstances withthe employee'straining and experience. The ALJ then observed that fraud is an

integral element under the SOX whistleblower provision, which inthe securities area,may include dissemination of false informationin to the market on which areasonable investor may rely. The intentto deceive is implicit. The ALJ noted a split

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in authority over whether SOX whistleblower protection islimited to fraud "againstshareholders," and after reviewing thenature of that split, found that his conclusionwas consistent withthat of the ARB B that an allegation of "shareholder fraud" isanessential element of a cause of action under SOX. The ALJconcluded, therefore, thatmateriality was required for allegedconduct to rise to the level of shareholder fraud.In summation, theALJ wrote:

Therefore, under subjective and objective standards,Complainantmust actually and reasonably believe, based on theknowledgeavailable to a reasonable person, that Respondentintentionally actedfraudulently, and that such conduct wassufficiently material so as toconstitute fraud against theshareholders. In cases where allegationsof shareholder fraud arebased on potential or actual dissemination offraudulentinformation, there must exist a "substantial likelihood" thatthedisclosure of the omitted or misstated information would havebeenviewed by the reasonable investor as having significantlyalteredthe 'total mix' of information made available.

Slip op. at 50. Finally, the ALJ addressed specifically theissue of internal controls,

writing,

In securities fraud cases, it has been observed that inadequacyofinternal accounting controls "are probative of scienter[defendant'sintent to deceive, manipulate, or defraud] . . . andcan add to thestrength of a case based on other allegations."Crowell v. Ionics, Inc.,343 F.Supp.2d 1, 12, 20 (D. Mass. 2004).Therefore, a significantdeficiency in internal controls, at leastwhen combined with othersignificant issues, would constitute acirc*mstance likely to be "viewedby the reasonable investor ashaving significantly altered the >totalmix' of information madeavailable." As a company's management isunder a statutory duty todisclose significant deficiencies in internal

control, a willful attempt to conceal such deficiencies orsubvert thepublished attestation of auditors concerning internalcontrols, wouldconstitute "shareholder fraud" for purposes ofprotected activity underthe Act.

Slip op. at 51. In the instant case, the ALJ considered whetherany of the internalcontrol deficiencies complained of by theComplainant constituted protected activity,either singularly orcollectively, and found that they did not. The ALJ found thattheonly potential financial impact of the alleged fraudulentactivity was an additionalexpense of $200,000 (also observing thatvarying computations in the recordshowed a lower amount). The ALJfound this amount arguably not material whencompared with theRespondent's overall revenue and losses. The onlyevidenceintroduced to suggest that this amount would be material toshareholders was the

Complainant's subjective opinion. External auditors chose not toadjust the expenseby the final determined amount of $60,000 becausethey considered it not to bematerial. An audit committee engaged alaw firm to investigate allegations raised by

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the auditor; this investigation included some of theComplainant's contentions. TheALJ found that this action indicatedthat auditor and audit committee consideredissues raised by theaudit to be significant, but did not lead to the conclusion thattheconcerns acted upon were those raised by the Complainant.

[Editor's note: See also Frederickson v. The Home Depot, U.S.A.,Inc., 2007-

SOX-13 (ALJ July 10, 2007) for a similar summary of the elementof protectedactivity in a SOX whistleblower case.].

PROTECTED ACTIVITY; ALLEGED FRAUDULENT POLICY OF SINGLESTOREFOUND NOT TO HAVE BEEN OF SUFFICIENT MAGNITUDE TO MATTER TOAREASONABLE INVESTOR

In Frederickson v. The Home Depot, U.S.A., Inc., 2007-SOX-13(ALJ July 10,2007), the ALJ found that the Complainant failed toestablish a prima facie case of aSOX whistleblower complaint wherehe did not, under the facts presented, show thathe had a reasonablebelief of actionable fraudulent activity. Specifically,theComplainant maintained that he had a reasonable belief of fraudrelating to therecording of items as damaged rather than for "storeuse," whereby refunds for such

merchandise were wrongfully extracted from vendors (theComplainant had usedsome hooks in his department, and wasinstructed to record them in the storecomputer as damaged). The ALJfound, however, that the Complainant had noreasonable basis tobelieve that this policy extended beyond the store at whichheworked, and that such an alleged fraudulent policy, isolated to asingle store, even iftrue, would not have been of sufficientmagnitude to believe that a reasonableinvestor would rely on suchinformation.

PROTECTED ACTIVITY; AUDITOR WHO IS MERELY PERFORMINGASSIGNEDDUTIES VERSUS AUDITOR WHO GOES BEYOND ASSIGNED DUTIESTOREPORT REASONABLY PERCEIVED PROBLEMS TO UPPER MANAGEMENT

In Robinson v. Morgan Stanley, 2005-SOX-44 (ALJ Mar. 26, 2007),theComplainant was a senior internal auditor for MorganStanley/Discover. Frustratedbased on her perception that herconcerns about identifiable deficiencies in thecompany's financialoperations were not reaching higher levels of management,theComplainant submitted a detailed memorandum to senior executivesat Discoversetting out numerous failures in audit controls andexamples of management fraud.Based on the circ*mstances and natureof the memorandum, the Complainantcontended that the report was aprotected activity under SOX, despite heremployment status as aninternal auditor.

The ALJ detailed the holding of the ARB in Platone v. FLYi,Inc., ARB No. 04 154(Sept. 29, 2006), and the Sixth Circuit inSasse v. USDOL No. 04 3245 (6th Cir.May 31, 2005) (cases below ARBNo. 02 077 and ALJ No. 1998 CAA 7), and

summarized the components that the Complainant would need toestablish in orderto prove that she engaged in protected activityunder SOX:

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First, the report or action must relate to a purported violationof afederal law or SEC rule or regulation relating to fraudagainstshareholders. Second, the complainant's belief about thepurportedviolation must be subjectively and objectively reasonable.Third, thecomplainant must communicate her concern to either heremployer,the federal government, or a member of Congress. Fourth,the report

or complaint must involve actions outside the complainant'sassignedduties.

Slip op. at 115 116. In regard to the element ofrelatedness/reasonableness, the ALJfound that most of the items inthe Complainant's memorandum failed to fit withinthe lawsenumerated in SOX or other law related to fraud againstshareholders. TheALJ found that a few items may have implicatedallegations of fraud, but that theComplainant had not presentedsufficient evidence to allow the ALJ to identify aspecific federallaw that may have been violated. The ALJ found that items relatedtoseveral hundred dollars of unreported misuse of company cellphones and callingcards did not rise to the level of materiality inregard to fraud against shareholders.The ALJ did, however, findthat one item in the memorandum B that auditmanagement dropped herfinding that Discover was not complying with banking

regulations in regards to the prompt charge off of credit cardbankruptcies and failedto take corrective action B fit thedefinition of protected activity under SOX (eventhough a resultantinternal investigation led to no significant findings ofimpropriety).The ALJ then turned to the question of whether theComplainant's action in sendingthe memorandum to upper managementwas exempt from SOX protection based onthe Complainant's role as anauditor. The ALJ found that the Complainant's discoveryof thebankruptcy reporting problem and presentation of her findings toauditmanagement was not a SOX protected activity because she wasmerely dischargingher auditor duties (i.e., under Sasse, she boreno employment risk in reporting thedeficiency as an auditor).However, the ALJ found that the Complainant engaged inprotectedactivity when she went beyond her assigned duties as an auditorbypresenting the bankruptcy issue in a memorandum to the DiscoverPresident and

CFO based on her belief that the issue was not getting to asufficiently high level ofmanagement for necessary correctiveaction. The ALJ ultimately found, however,that the Complainantfailed to prove that this protected activity contributed toherdischarge.

PROTECTED ACTIVITY; EMPLOYER'S KNOWLEDGE; REPORTING WITHINJOBDUTIES; WHETHER COMPLAINANT MUST EXPRESSLY IDENTIFYTHECOMPLAINED OF ACTIONS AS ILLEGAL

In Deremer v. Gulfmark Offshore Inc., 2006-SOX-2 (ALJ June 29,2007), theRespondent contended that the Complainant's SOXwhistleblower complaint wasbarred because his allegations fellwithin his job responsibilities and because hefailed to communicateto the Respondent that he believed the conduct to be illegal.

In support of the first contention, the Respondent cited severaldecisions in which itwas found that finding irregularities as partof one's job duties cannot constituteprotected activity B that theemployer must be put on notice that the reporting is

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being done to expose illegal acts rather than merely warning ofthe consequences ofits conduct. The ALJ distinguished the decisionsas arising under other laws withdifferent contexts, and returned tothe purposes of SOX in interpreting therespondent's knowledgeelement of protected activity. The ALJ concluded thatrestrictingprotected activity to exclude job duties would be contrarytoCongressional intent. The ALJ pointed out that the legislativehistory of SOX explicitly

discusses the case of Sherron Watkins, whose jobresponsibilities at Enron arguablyincluded reporting accountingfraud. The ALJ also pointed out that, to be actionable,a SOXwhistleblower complaint requires the respondent's knowledge ofprotectedactivity, and an adverse job action to which protectedactivity is a contributing factorB as the actor, the respondent isnecessarily aware of an adverse action and itsmotivation for suchaction.

In regard to the Respondent's second contention that acomplainant must expresslystate that he considers the conduct to beillegal, the ALJ found that an examinationmust be made of thecontext in which and to whom the statements were made. Intheinstant case, the statements were made to the controller, auditors,and aninvestigating law firm, all of whom should logically haverecognized fraudulentbehavior if the Complainant described it tothem, and that publishing of fraudulent

statements with the SEC was illegal. Thus, the ALJ found thatthe Complainant wasnot required to specifically state to theRespondent that the activity of which hecomplained was illegal.

XIII.H. CLEAR AND CONVINCING EVIDENCE

DISCHARGE REGARDLESS OF PROTECTED ACTIVITY; SUMMARYDECISIONWHERE COMPLAINANT ADMITTED INCIDENT LEADING TO DISCHARGETOOKPLACE, AND DID NOT PRESENT ANY EVIDENCE TO RAISEDISPUTEDMATERIAL FACTS ABOUT THE JOB ACTION

In Frederickson v. The Home Depot, U.S.A., Inc., 2007-SOX-13(ALJ July 10,2007), the ALJ granted summary decision based on theRespondent's contention thatthe Complainant was discharged for anincident in which he struck a vendor'srepresentative in the groin,and that the Complainant would have been dischargedregardless ofhis alleged protected activity. The ALJ observed that theComplainantdid not dispute that he was involved in the incident,although the circ*mstances andgravity of the conduct was disputed,and that the vendor's representative refused tospeak with him afterthe incident. The Respondent presented evidence that otheremployeeshad been discharged for conduct reasons, and had a written policy.TheComplainant presented no evidence to establish disputed materialfacts related tothe job action or disparity in its application.Moreover, the Complainant presented noevidence to support a findingthat the managers involved in the discharge hadknowledge of theprotected activity.

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XV. FRIVOLOUS COMPLAINT; SANCTIONS

ATTORNEY FEES FOR FRIVOLOUS OR BAD FAITH CLAIM

In Pittman v. Siemens AG, 2007-SOX-15 (ALJ July 26, 2007), theRespondentrequested that it be awarded $1,000 in attorney feesunder 29 C.F.R. 1980.109(b).The ALJ agreed that the complaint wasunmeritorious, but found that it was notcompletely frivolous andthat the pro se Complainant demonstrated a deep belief inhisclaims. The ALJ therefore denied the request.

XVII. DISMISSALS AND WITHDRAWALS

VOLUNTARY DISMISSAL WITHOUT PREJUDICE; AUTHORITY OF COURT TO

IMPOSE CONDITIONS

In Jones v. Smartvideo Technologies, Inc. , 1:06-CV-02760(N.D.Ga. June 4,2007), the Plaintiff filed a motion for voluntarydismissal without prejudice of his SOXwhistleblower case. TheDefendants opposed the motion, arguing that they would beprejudicedby a dismissal without prejudice. The court found no evidence ofbad faithby the Plaintiff or his counsel, that the Plaintiff hadnot failed to properly prosecutehis case, that discovery was notyet complete and no dispositive motions had beenfiled, and that theDefendants had not substantially prepared for trial. The courtalsofound that mere delay was not sufficient reason to denydismissal without prejudice.The court, however, found that theDefendant had been prejudiced in having toprepare for thePlaintiff's deposition. Accordingly, the court granted dismissalwithoutprejudice, but ordered that if the action was refiled (andwas not barred by the

applicable statute of limitations or other legal prohibitions),the Plaintiff must certifyto the court that he had paid theDefendant's costs and fees incurred to prepare forthe deposition(in an amount approved by the court). The court gave the Plaintiff10days to choose to withdraw the withdrawal and to proceed with thecase if he wasunwilling to accept the conditions on withdrawal.

WITHDRAWAL OF APPEAL RESULTS IN ALJ'S DECISION BECOMING THEFINALDECISION OF THE SECRETARY OF LABOR

In Hagman v. Washington Mutual Bank, Inc., 2005-SOX-73 (ALJ Dec.19, 2006), theALJ issued a recommended decision awarding front payand reduced attorney fees.The Respondent filed a petition seekingreview by the ARB. After the ARB issued a

Notice of Appeal and Briefing Schedule, the parties were grantedan extension oftime for mediation. Subsequently, the Respondentrequested that its petition forreview be withdrawn and its appealdismissed. In Hagman v. Washington MutualBank, Inc., ARB No. 07039, ALJ No. 2005-SOX-73 (ARB May 23, 2007), the ARB

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granted the request and dismissed the appeal, noting that theeffect would be thatthe ALJ's decision becomes the final decisionof the Secretary of Labor pursuant to29 C.F.R. ' 1980.109(c).

VOLUNTARY DISMISSAL OF APPEAL; COMPLAINANT MUST SPECIFYWHETHERDISMISSAL IS SOUGHT (1) BECAUSE OF WITHDRAWAL OF

OBJECTIONS TO THE ALJ'S ORDER, (2) BECAUSE OF A SETTLEMENT, OR(3)BECAUSE OF REMOVAL OF THE CASE TO FEDERAL DISTRICT COURT

In Vodicka v. Dobi Medical International, Inc., ARB No. 06 037,ALJ No. 2005-SOX-111 (ARB May 30, 2007), a Sarbanes Oxley Actwhistleblower claim, the ALJhad granted summary judgment for theRespondent, and the Complainant petitionedfor review by the ARB.The ARB granted the petition. Later, the ARB received a letterfromthe Complainant requesting dismissal of the whistleblower claimwith prejudice.The ARB issued an Order requiring the Complainant tospecify which of three optionshe wished to proceeding, noting:

The SOX implementing regulations provide three optionsforterminating a case pending at the Board prior to finaladjudication.

First, a party may withdraw his or her objections to thefindings ororder on appeal by filing a written withdrawal with theBoard. In thatcase the findings or order becomes the final order ofthe Secretary.Second, the parties may enter into an adjudicatorysettlement. If theparties enter into a settlement, the regulationsrequire the parties tofile a copy of the settlement with the Boardfor its review. Third, if theBoard has not issued a final decisionwithin 180 days of the filing ofthe complaint, the complainant maybring an action at law or equityfor de novo review in theappropriate United States district court.

USDOL/OALJ Reporter at 2 (footnotes omitted). The Complainant'scounselresponded that the Complainant was withdrawing hisobjections to the ALJ's

recommended decision and order. The ARB then approved the motionto withdraw,dismissed the appeal, and noted that the ALJ's decisionhad become the DOL's finalorder in the case.

DISMISSAL FOR CAUSE; FAILURE TO TIMELY RESPOND TORESPONDENT'SMOTION FOR SUMMARY DECISION

In Rowland v. National Association of Securities Dealers,2007-SOX-6 (ALJ July2, 2007), the ALJ dismissed the Complainant'sSOX complaint for failure to timelyrespond to the Respondent'smotion for summary decision, and for failure to respondto the ALJ'sorder to show cause why the complaint should not be dismissed forherfailure to comply with the ALJ's orders and timely file aresponse to the Respondent'smotions.