In Lockheed Martin Corp. v. Brown, No. 11-9524 (10th Cir. Jun. 4, 2013), the Tenth Circuit supported a broad interpretation of the claims that are protected under the anti-retaliation provisions of the Sarbanes-Oxley Act. The Tenth Circuit broadly described the case as follows:
“Lockheed Martin Corp. (“Lockheed”) seeks to set aside a decision of the Administrative Review Board of the Department of Labor (the “ARB” or the “Board”) concluding Lockheed violated Section 806 of the Sarbanes–Oxley Act of 2002 (“Sarbanes–Oxley” or the “Act”). See 18 U.S.C. § 1514A (a). The Board affirmed the decision of an administrative law judge (“ALJ”), who concluded Lockheed violated the Act by constructively discharging employee Andrea Brown after she had engaged in protected activity. Exercising jurisdiction pursuant to 18 U.S.C. § 1514A (b)(2)(A) and 49 U.S.C. § 42121(b)(4)(A)1, this court affirms the decision of the Board.”
But, as described below, perhaps the broader lesson of this case involves how simple mistakes performed by internal resources when reporting and investigating a whistleblower complaints can cause more serious problems for the employer.
1. Lockheed’s Poor Reporting of the Whistleblower Complaint
The conduct reported by the whistleblower involved used of Lockheed corporate funds to advance a Lockheed’s Vice President’s sexual advances. The Tenth Circuit described the wrongful conduct and how the complaint was reported, as follows:
[Lockheed] “ran a pen pals program for the company, through which Lockheed employees could correspond with members of the U.S. military deployed in Iraq. … Owen [a Lockheed Vice President] had developed sexual relationships with several of the soldiers in the program, had purchased a laptop computer for one soldier, sent inappropriate emails and sex toys to soldiers stationed in Iraq, and traveled to welcome-home ceremonies for soldiers on the pretext of business while actually taking soldiers to expensive hotels in limousines for intimate relations. … Owen was using company funds for these activities, and Brown understood that most employee expenses incurred were passed on to Lockheed’s customers, in this case the government. Brown [the whistleblower] thus became concerned Owen’s actions were fraudulent and illegal and that there could be media exposure which could lead to government audits and affect the company’s future contracts and stock price.
Brown brought her concerns to Jan Moncallo, Lockheed’s Vice President of Human Resources. Moncallo told Brown she would submit an anonymous ethics complaint on Brown’s behalf, and that she would be protected from retaliation because no one would know her identity. On May 25, 2006, Moncallo sent an email to Jean Pleasant, the office Ethics Director, for an investigation. The email detailed Brown’s allegations, including, inter alia, the purchase of a laptop with company funds, the use of company funds to rent limos to transport soldiers, the use of company funds for lodging with soldiers, the use of company funds to purchase gifts for soldiers, communications with staff stating she was meeting with generals when in fact she was meeting with soldiers, not responding to calls from staff due to non-business related meetings with soldiers, having affairs with soldiers, sending pornographic material to soldiers, using her position to influence staff to cover for her, and tarnishing Lockheed’s image. The email identified Brown as an individual who should have some knowledge about the allegations”
Note the last sentence in the above quote. This case provides a lesson in how not to report whistleblower activity. Since the wrongful activity involved expenditure of corporate funds, the matter should initially be investigated by a forensic accountant or auditor, using corporate accounting records. While employees (including perhaps the whistleblower) will no doubt be interviewed to learn more about what is shown in the accounting records, there is no need to identify the whistleblower’s name in the complaint. Identifying the whistleblower in the complaint submission, even though not explicitly stating that she is the whistleblower, subjects the employee to possible retaliation, and the employer to the type of claims litigated in this case.
Fulcrum operates independent whistleblower reporting systems using methods that protect both the whistleblower and the employer in these types of situation. When whistleblower reporting is instead handled by internal resources, the well-meaning employees often make simple but expensive mistakes (as occurred here). The insignificant cost savings from using internal reporting mechanisms (vs. outside independent vendors) to handle whistleblowers completely disappear when a single claim is not handled correctly.
2. Legal Precedent for the Scope of Whistleblower Protection
The Tenth Circuit addressed on a wide range of factual issues involving (i) the employee’ reasonable basis for believing that wrongdoing had occurred, and (ii) whether there was retaliation and constructive discharge. However, these findings are case specific and not particularly unusual or precedent setting. From a legal precedent perspective, the case is noteworthy because it address the scope of employee whistleblower protection. This ruling is certainly not the first to allow broad protections for whistleblowers under Sarbanes-Oxley, but the case is important because other courts have ruled for narrow employee protections.
Lockheed argued that the alleged wrongdoing was not a fraud against shareholders, so whistleblower activity was not protected under Sarbanes-Oxley. As to this defense, the Tenth Circuit ruled that the employee whistleblower activity was covered by Sarbanes-Oxley, using rationale that follows:
“The plain, unambiguous text of § 1514A (a)(1) establishes six categories of employer conduct against which an employee is protected from retaliation for reporting: violations of 18 U.S.C. § 1341 (mail fraud), § 1343 (wire fraud), § 1344 (bank fraud), § 1348 (securities fraud), any rule or regulation of the SEC, or any provision of Federal law relating to fraud against shareholders. Because 18 U.S.C. §§ 1341, 1343, 1344, and 1348 are all clearly provisions of federal law, Lockheed’s reading of the statute would render their enumeration in § 1514A (a)(1) wholly superfluous. It is a rudimentary canon of statutory construction that such superfluities are to be avoided. Congress could have accomplished the more limited purpose attributed to it by Lockheed by limiting whistleblower protection under Sarbanes–Oxley only to an employee who reports conduct “the employee reasonably believes constitutes a violation of any provision of Federal law relating to fraud against shareholders.” Because Congress did not so phrase the statute, the proper interpretation of § 1514A(a) gives each phrase distinct meaning and holds a claimant who reports violations of 18 U.S.C. §§ 1341, 1343, 1344, or 1348 need not also establish such violations relate to fraud against shareholders to be protected from retaliation under the Act. [Citations omitted]”
Plaintiffs could have directly addressed the Lockheed attempted defense by simply noting that spending of company money for inappropriate personal benefit lowers the company’s profit. Since shareholders (owners) are the beneficiaries of a company’s profit, the fraudulent expenses directly harm shareholders.
