Sarbanes-Oxley Act: Application To Private Employers - DD 12/03

Defense Digest

Sarbanes-Oxley Act: Application To Private Employers

In the wake of the Enron/Arthur Anderson scandal, Congress passed Title VIII of the Corporate and Criminal Fraud Accountability Act of 2002, known as the Sarbanes-Oxley Act (“Sarbanes-Oxley” or “Act”).  The Act applies civil whistleblower protections, rules governing chief financial officer ethics, and attorney rules of professional responsibility to security firms.   Although the laws are primarily aimed at publicly traded companies and their auditors, a few provisions apply to privately held companies.

Specifically, the Act contains criminal provisions imposing obligations and liability on publicly traded companies and on privately held businesses and individuals. These criminal sanctions apply to employers and individuals for: (1) retaliating against a person providing truthful information to a law enforcement officer concerning a federal offense; and (2) tampering with a record or otherwise impeding an official proceeding.  These provisions are explained below.

Retaliating Against A Person Providing Truthful Information To A Law Enforcement Officer Concerning A Federal Offense.

Sarbanes-Oxley establishes criminal penalties for retaliation against a witness, victim or informant.  If “any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense” is taken “knowingly and with the intent to retaliate,” criminal sanctions will be imposed.  Since the penalties apply to “any federal offense,” the statute may broadly apply to any federal crime.  It is unclear whether “offense” means any federal civil law, thereby significantly expanding the Act.  At the minimum, a change in the terms and conditions of a person’s employment, if done in retaliation for his or her reporting any federal crime, will satisfy the criminal section of the Act.

Tampering With A Record Or Otherwise Impeding An Official Proceeding

The Act also creates sanctions for actions that constitute tampering with a record or impeding an official proceeding.  Criminal sanctions apply to anyone who “corruptly” (1) alters, destroys, mutilates, or conceals a record, document, or other object, or attempts to do so with the intent of impairing the object's integrity or availability for use in an official proceeding; or (2) otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so.  "Official proceeding" is defined as a proceeding before any federal judge or court (such as tax court, federal claims); the Congress; a federal government agency; or any insurance regulatory agency involving the insurance business whose activities affect interstate commerce.

This provision applies in the employment context because “a federal government agency” includes the Equal Employment Opportunity Commission (“EEOC”) and Department of Labor.  Any time an individual or company is found to have “corruptly” engaged in document destruction while appearing before an administrative agency, that person, under a broad definition, will be subject to criminal penalties.  The section appears to create new criminal exposure for employers — and individuals acting as supervisors — for interfering with employee participation in a variety of activities, including standard administrative agency proceedings. 

To enforce the Act’s employment discrimination provisions, Congress organized a mandatory administrative enforcement procedure before an employee can resort to the courts. The complainant must file a complaint with the Department of Labor (“DOL”) within 90 days of the alleged violation. The DOL must investigate the complaint within 60 days, determine if reasonable cause exists, and then notify the parties of its findings, including a remedy. Either party may object within 30 days; otherwise, the findings are final. If a hearing is required, an administrative law judge must hold a hearing as quickly as possible and enter a ruling within 120 days. Any appeal is to the United States Court of Appeals. The DOL may seek enforcement in the local United States District Court.

Employers should consider revising their employee handbooks and policies to confirm the company’s anti-retaliation policy. Once an employee has begun an agency proceeding, employers need to ensure that careful attention is paid to records and documents.  As always, complaints and “whistle-blowing” should be documented and taken seriously.

*Sharri is an associate in our Cherry Hill, NJ office.  She can be reached at (856) 414-6017 or shorrowitz@mdwcg.com.