Expanded Whistleblower Protection in Public Companies

Expanded Whistleblower Protection in Public Companies

The Sarbanes-Oxley Act imposed higher standards of conduct on publicly-traded companies, to avoid massive stock fraud and other ills in complex companies whose shares traded on public exchanges. The Act also created a degree of protection for whistleblowing employees who had a reasonable belief that their company was violating the law. The problem in implementing the law was the “reasonable belief” part; that created incentives to challenge the employee’s belief and basis.

The law was revised by the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law this month. Now, employees who complain to the Securities and Exchange Commission are automatically covered by the anti-retaliation provision. They are also entitled to double their back pay if the retaliation cost them their job. An employee who objects only within the company is protected from retaliation, but still must satisfy the reasonable belief standard. Finally, the law invalidates any effort to require claims to be arbitrated rather than go to court and be heard before a jury.

Naturally the hope is that employees, usually in the best position to detect fraud, will come forward to prevent the future Enron situations. The protection for internal complaints is helpful, too. Companies should reward employees for whistleblowing activities, given the stakes. Most employers would rather deal with problems internally rather than risk the SEC launching an investigation.

When the fraud is significant, however, the employee is best served by going directly to the SEC. The employee whose complaint leads to a recovery by the SEC is entitled to a share of the fine.

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