Home » Dodd-Frank Act » Employers Beware; General Assertions of Alleged Fraud May be Enough to Trigger SOX Whistleblower Protection

Employers Beware; General Assertions of Alleged Fraud May be Enough to Trigger SOX Whistleblower Protection

Under Section 806 of the Sarbanes-Oxley Act (SOX), it is illegal for publicly traded companies to retaliate against employees who report suspected fraud. 18 U.S.C. § 1514A. Seemingly straightforward in many respects, this anti-retaliation provision has generated significant litigation since its passage by Congress. Among other things, for example, courts across the country have confronted questions concerning the scope of so-called protected activity; that is, examining the type of “whistleblowing” activity required of the employee to trigger the statute’s protection.

By statute, employees are protected if they engage in lawful acts to provide information regarding “any conduct which the employee reasonably believes constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders.” 18 U.S.C. § 1514A(a)(1). Employees must, generally speaking, blow the whistle on corporate fraud or, more to the point, what they reasonably believe to be corporate fraud.

Addressing this issue of protected activity, courts have struggled with defining the specificity required in the employee’s whistleblowing report to trigger protection. Companies often argue, understandably, that the whistleblowing must be specific as to the purported violation and must provide facts sufficient to establish each element of the alleged fraud. Conversely, whistleblowing employees suggest less specificity is required by statute.

The United States Court of Appeals for the Sixth Circuit recently weighed in on precisely this issue. In Rhinehimer v. US Bancorp Investments, Inc., a panel of the 6th Circuit unequivocally rejected the “definitively and specifically” standard proposed by the defendant publicly traded company (and previously adopted by the 2nd, 4th, and 5th Circuits). Instead, the Rhinehimer Court adopted the rule “that the employee’s reasonable belief is a simple factual question requiring no subset of findings that the employee had a justifiable belief as to each of the legally-defined elements of the suspected fraud.” As the court reasoned, “[t]he text and design of § 1514A does not suggest any heightened showing of a factual basis for the suspected fraud. . . . Indeed, at every juncture, the statute sweeps broadly, encompassing a wide swath of acts, limited only by their legality, to provide information or assistance to an investigation ‘regarding any conduct’ reasonably believed by the employee to constitute a violation of relevant law.”

In short, according to Rhinehimer, the employee whistleblower need not present a factual showing justifying the suspicion or reasonable belief in corporate fraud. Instead, “the complainant need only show that he or she ‘reasonably believes’ that the conduct complained of” violates one of the enumerated laws.

Employers, even those outside the jurisdiction of the 6th Circuit given legal trends, should be aware that a wider range of employee complaints may technically fall within the ambit of SOX protection. It remains important to promptly and seriously investigate and respond to those complaints. Doing so, as well as acting proactively, may significantly curtail potential liability exposure and legal expenses.

Rhinehimer v. U.S. Bancorp Investments, Inc., No. 13-6641 (6th Cir.) (May 28, 2015)


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