Private companies are covered if they are contractors for public firms


A decision by the U.S. Supreme Court earlier this month has expanded the protections of the Sarbanes-Oxley whistleblower provision to include some privately held companies.

In the case of Lawson v. FMR LLC, the Supreme Court found that the Sarbanes-Oxley Act whistleblower provision includes employees of privately held companies that are contractors or subcontractors for a covered publicly traded company.

In the case, two former employees of FMR, which was contracted to advise or manage mutual funds, claimed they suffered retaliation after blowing the whistle on fraud related to those mutual funds. FMR maintained that, as a privately held company, its employees were not protected under the whistleblower provision.

The justices said, based on the wording of the law, the provision shelters employees of private contractors and subcontractors, just as it shelters employees of public companies served by the contractors and subcontractors.

“Basically, what Sarbanes-Oxley added to the statute said that ‘no officer, employee, contractor, subcontractor or agent of a publicly traded company may discharge, demote, suspend, threaten, harass or in any other manner discriminate against an employee in the terms and conditions of employment if the employee engages in whistleblower activity,” said Jeffrey Ott, a partner with Warner Norcross and Judd.

He said the case was important because it is the first high court decision that has interpreted one of the whistleblower provisions that was added to the Sarbanes-Oxley Act.

In its opinion, the Supreme Court pointed to the original purpose of the Sarbanes-Oxley Act, which was passed in 2002 following the collapse of Enron in an effort to safeguard investors in public companies and to restore trust in the financial markets.

According to the court’s opinion: “In the Enron scandal that prompted the Sarbanes-Oxley Act, contractors and subcontractors, including the accounting firm Arthur Andersen, participated in Enron’s fraud and its cover-up. When employees of those contractors attempted to bring misconduct to light, they encountered retaliation by their employers. The Sarbanes-Oxley Act contains numerous provisions aimed at controlling the conduct of accountants, auditors and lawyers who work with public companies.”

Ott said mutual funds are unique because they are publicly traded companies that do not have any employees.

“They are managed by investment advisors or managers that are separate companies. In this case the manager was FMR,” he said.

“Basically, it left the court in a box, if you will, because if they took a narrow interpretation that basically said it only applies to employees of the public companies, effectively then the entire mutual fund industry would not have been covered by this because the publicly traded mutual funds don’t have employees, because of the way it was set up.”

Ott said he expects the court would have ruled the same way regardless, but the involvement of a mutual fund made it easier.

Because the Sarbanes-Oxley Act primarily deals with publicly traded companies, private companies might not have really considered the law’s implications for them — until now.

“The takeaway is that companies that are contractors performing services for publicly traded companies need to be aware of this and should have adequate procedures in place so that their employees can report problems that they discover in the course of their work with these public companies,” Ott said.

He mentioned some of the key businesses included in the expansion: accounting firms, law firms, public relations and investor relations firms, and companies providing security services. He stressed, however, that the law is not limited to these types of companies.

Under the whistleblower provision, Ott said an employee could recover back pay, be reinstated, and recover attorney fees if it’s found the employee was retaliated against.

The whistleblower provision is limited to specific activities occurring at publicly held companies, including fraud, wire fraud, bank fraud, securities fraud, shareholder fraud, or a violation of SEC rules.

There are other provisions of the Sarbanes-Oxley Act that deal with other types of whistleblowing.

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