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Federal bureaucracy dismisses most Sarbanes-Oxley whistleblower claims

Department of Labor official orders “top to bottom” review

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Whistleblower protections passed after the Enron accounting scandal have been largely gutted by the federal bureaucracy responsible for protecting employees who try to expose corporate fraud, according to worker advocates and a senior lawmaker who helped write the provisions.

Since Congress passed the landmark Sarbanes-Oxley corporate reform law in 2002, the U.S. Department of Labor has upheld 25 whistleblower claims under the law — and tossed out 1,066 claims, according to figures available through June 30. That translates into a winning percentage of little more than 2 percent for workers seeking whistleblower status.

Corporate defense attorneys argue that employees rarely win so-called “Sarbox” claims inside the Labor Department because their complaints are weak or involve “garden-variety” workplace disagreements. But Assistant Secretary of Labor David Michaels told the Center for Public Integrity that he has ordered a “top to bottom” review of the Labor Department’s handling of Sarbox cases, as well as least 15 other whistleblower statutes that the department oversees.

“I’m concerned with the statistics that I’ve seen,” Michaels said. “The question is: Are we doing all that we should be doing for whistleblowers? I don’t think we are.”

Michaels noted that few employees on Wall Street or in the mortgage industry came forward to report the questionable conduct that helped fuel the 2007-2008 financial meltdown. If workers felt comfortable identifying problems to employers and authorities, he said, “we might have avoided some of the very significant crises that this country has experienced.” .

Michaels’ comments and the revelation of workers’ low victory rates in Sarbox cases come at a time when Washington is showing concern for whistleblowers. The sweeping financial reform law signed by the President Wednesday includes substantial cash rewards for whistleblowers who expose securities violations and expands the number of employees covered by Sarbox protections.

Up to now, say workers’ attorneys, Labor Department officials have so narrowly interpreted the law that many claims are dismissed out of hand, with the agency decreeing that the workers don’t qualify as whistleblowers.

“The very whistleblowers who inspired this thing — the Enron whistleblowers — wouldn’t be protected” under the agency’s reading of the law,” said Lynne Bernabei, a Washington, D.C., employment lawyer.

Some labor attorneys say there are already signs that Michaels and other Obama administration appointees will be more aggressive in protecting whistleblowers than their counterparts during the Bush era. But they worry that the Labor Department lacks sufficient staff and resources to investigate whistleblower cases.

In the nine months ending June 30, the Labor Department upheld four Sarbox whistleblower claims and rejected 87. That’s a better winning percentage than in previous years — the agency upheld zero claims in fiscal 2006, 2007 and 2008 — but it still represents a lopsided margin for employers.

When the Sarbanes-Oxley Act was enacted, it raised hopes that whistleblowers would more freely come forward with information that would help head off future corporate scandals. The law decrees that publicly traded companies can’t discharge, demote, or harass employees who report violations of securities rules or fraud against shareholders. It gives the Labor Department the power to the order employers to swiftly reinstate whistleblowers with back pay. One legal scholar hailed Sarbox as “the most important whistleblower protection law in the world.”

Now Democratic Sen. Patrick Leahy of Vermont, co-author of the Sarbox whistleblower provisions, says he is concerned that the law has “resulted in very little actual protection for the men and women who risk their careers to step forward.” In a written statement to the Center, Leahy says, “When just over 2 percent of the cases brought to the Department of Labor are found in favor of the whistleblower, something is not working in the system.”

Republican Sen. Charles Grassley of Iowa, a long-time supporter of whistleblowers, echoed Leahy’s misgivings.

“The whistleblower provisions in the Sarbanes-Oxley law were intended as a safety valve to protect the public, shareholders and Americans’ confidence in the marketplace,” said Grassley. “The Department of Labor’s dismal record for the whistleblowers who have come forward is of obvious concern and appears to fly in the face of the purpose of the protections in the law.”

OSHA Responsible for Sarbox Claims

Investigations of Sarbanes-Oxley whistleblower claims are handled by the Labor Department’s Occupational Safety and Health Administration, an agency whose primary responsibility is policing worker safety.

In addition to the 1,066 Sarbox claims that OSHA has dismissed and the 25 cases in which it found merit in workers’ claims, OSHA has also overseen 230 Sarbox settlements between employees and employers. OSHA maintains that those settlements should be counted as findings of merit in favor of whistleblowers. However, attorneys who handle these cases say this isn’t necessarily so; rather than reinstating a fired employee, a settlement might simply involve an agreement to provide the worker with a letter of recommendation, or be a modest “nuisance settlement” paid to avoid the cost of more litigation.

Daniel Westman, a corporate attorney and lead author of the book, Whistleblowing: The Law of Retaliatory Discharge, said many Sarbox claims have reflected “a misunderstanding of the statute or attempts to stretch it in ways that were not intended.” In one early example cited by defense attorneys, an employee filed a Sarbox claim alleging that she had been fired for complaining about a ventilation hazard in her workplace. A Department of Labor administrative law judge dismissed her claim because it “had nothing to do with fraud or the protection of investors.”

Workers’ attorneys contend, though, that many legitimate Sarbox claims have been dismissed by the agency.

In one example, OSHA ruled that North Carolina-based BB&T Corp. had not taken retaliatory action when it fired Amy Stroupe, a fraud investigator who uncovered a massive real estate Ponzi scheme created with the help of $20 million in loans from the bank. Stroupe claimed she was fired because she pushed too hard on the investigation, raising fears among BB&T executives that the bank would be liable not only for the money it had put into the venture but also for more than $100 million in loans made on the project by other banks. In one instance, Stroupe alleged, a bank attorney told her he didn’t want her in a meeting about the case with the FBI agents, because “if they ask you a question, you’ll answer it.”

Stroupe appealed OSHA’s judgment, and an administrative law judge ruled that the bank had indeed retaliated against her. The judge wrote that he found it “virtually unfathomable that BB&T would fire an employee as highly regarded as Stroupe, and who had just recently provided invaluable service to BB&T, over one or two essentially minor issues.”

After the judge’s ruling, Stroupe and the bank settled the matter on undisclosed terms. BB&T denied any wrongdoing.

Tom Devine, legal director for the Government Accountability Project, an independent advocacy group, said Sarbox claims did not get the in-depth investigations they deserved from OSHA during the Bush administration. Some Labor Department officials were motivated by an “unabashed hostility to employee rights,” Devine said.

Devine and other worker advocates said that during the Bush years, the agency’s Administrative Review Board, which hears appeals of whistleblower claims and establishes precedents, consistently made rulings that created roadblocks for employees seeking whistleblower protections. OSHA also made things difficult for employees by withholding information about the company’s response or witness interviews, Devine said. “It’s like boxing with a ghost,” he said.

Michaels, the assistant labor secretary, told the Center for Public Integrity that the department had recently decided that it will soon begin providing workers with copies of their employers’ responses in all whistleblower cases. He added that OSHA is also in the process of hiring 25 more investigators, bringing to 93 the number dedicated exclusively to handling whistleblower claims.

Many corporate attorneys aren’t convinced that an overhaul of the whistleblower program is needed. They say OSHA has done a good job of vetting whistleblower claims by dismissing clearly frivolous complaints, as well as claims over issues that don’t have a real effect on shareholders. For a company that makes hundreds of millions or billions of dollars in revenues, they say, a problem involving a few thousand dollars isn’t likely to have an effect on shareholders. “There are many hurdles to overcome” for employees to win a claim, said Renee Phillips, a New York attorney who defends employers. “But rightly so,” she added, because accusing a company of covering up fraud is a serious charge and should not be dealt with lightly.

Edwin Foulke, who served as assistant labor secretary from 2006 to 2008, said he disagrees “100 percent” with the notion that the agency didn’t do much to protect workers during the Bush years. “When I was there, I know we were pushing enforcement and making sure that laws were enforced,” Foulke said.

As for the agency’s handling of whistleblower cases, Foulke noted that when workers’ claims are dismissed, they have the right to appeals in front an administrative law judge and the Administrative Review Board. “The system is set up to give whistleblowers an opportunity to have their claims fully reviewed,” he said.

Reform Bill Expands Whistleblower Protection

One area of controversy may be cleared up by the financial reform legislation that was just signed into law by President Obama.

The bill would make it clear that employees of privately-held subsidiaries of publicly-traded companies are covered by Sarbox whistleblower provisions. Rulings by the Department of Labor and administrative law judges had made it difficult for employees of privately-owned subsidiaries of public companies to seek protection.

Richard Moberly, an associate professor of law at the University of Nebraska who has studied Sarbanes-Oxley’s whistleblower provisions, notes that since the 2008 elections Congress has focused attention on defending employees who try to report fraud, writing whistleblower safeguards into the banking bailout and other legislation. But Moberly noted that “how those legal protections get applied is where the rubber hits the road.”

Michael Hudson is a staff writer with the Center for Public Integrity and author of the forthcoming book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America—and Spawned a Global Crisis.