Whistleblower protection does not require fraud on shareholders

A recent decision has clarified the reach of the protections offered to whistleblowers under Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”).  In the matter of Lockheed Martin Corporation v. Administrative Review Board, United States Department of Labor, it has been determined that SOX whistleblower protection extends beyond employee reporting of frauds on shareholders.  Lockheed had attempted to argue that the type of activity reported by the whistleblower was not fraud perpetrated against shareholders and therefore not subject to SOX protection.

In the above referenced matter, a Lockheed employee claimed to have been constructively discharged after reporting that a supervisor was having affairs with various soldiers in Lockheed’s pen pal program and using company funds for related inappropriate purposes, among other things.  The employee testified that she believed the inappropriate expenses were being billed to the customer (in many cases, the government).

In this case, the argument was whether the reporting of mail or wire fraud was an appropriate basis for whistleblower protection under SOX. Lockheed argued that employee reports of mail and wire fraud that do not allege shareholder fraud are not protected under Section 806 of SOX, basically asserting that the phrase “relating to fraud against shareholders” was a modifier to all of the violations described therein.  The Court confirmed that reporting of each of the violations outlined in Section 806 were covered, with or without a general allegation of fraud against shareholders.

The broader coverage confirmed by the Court should encourage management to treat all employee whistleblower activity with the appropriate level of care. A more detailed discussion of Section 806 and this particular ruling can be found here.  For further information,see Best Practices in Whistleblower Systems.

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