Congress Seeks to Close Whistleblower Loophole


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December 1, 2009

Congress Seeks to Close Whistleblower Loophole

Congress Set to Act as Many Employee Suits Get Dismissed on a Technicality

By Jennifer Levitz

Congress wants to close a legislative loophole that has led to the dismissal of many corporate whistleblower complaints, undermining the government’s goal of protecting employees who report fraud at publicly traded companies.

Democratic lawmakers are seeking to amend the Sarbanes-Oxley Act’s whistleblower-protection provision. Under the law, employees who claim to have been dismissed for reporting wrongdoing can file an administrative complaint with the U.S. Department of Labor. Employees who prevail can win reinstatement, back wages with interest, and attorney’s fees.

In articles last year, The Wall Street Journal reported that the Labor Department has dismissed many whistleblower complaints on a technicality, saying the law, as written, doesn’t apply to corporate subsidiaries.

Since the law was passed in 2002, the government has ruled in favor of corporate whistleblowers in 21 out of 1,455 complaints. Another 996 cases have been dismissed. The rest of the cases were withdrawn, settled or are pending.

Many companies have successfully argued they were exempt from the law because their employees worked for a corporate subsidiary, says Richard Moberly, a University of Nebraska law professor who studies retaliation against whistleblowers.

The whistleblower amendment is included in the sweeping Investor Protection Act, sponsored by Rep. Paul Kanjorski, a Pennsylvania Democrat.

The House Financial Services Committee approved the whistleblower amendment, without Republican support.

Under the Bush administration, Labor Department lawyers issued a directive saying there is “no legal basis for the argument that subsidiaries of covered corporations are automatically covered,” because the language of the law doesn’t “expressly” mention subsidiaries.

Sen. Patrick Leahy, a Vermont Democrat and one of the main authors of the whistleblower provision, says Congress never meant to exclude subsidiaries. Some legislators and Labor officials say the only way to have the law interpreted more broadly is to amend it.

Among complaints rejected by the Labor Department are whistleblower filings against units of Siemens AG, WPP Group PLC, Raymond James Financial Inc.; Berkshire Hathaway Inc., Sodexho Alliance SA; American International Group Inc.; and Royal Dutch Shell PLC. Most of the companies declined comment. Raymond James’s general counsel, Paul Matecki, said “the claims were without merit.”

At least one Labor Department administrative judge has spoken out against exempting corporate subsidiaries. In a March ruling, Stuart Levin said the law was enacted precisely because of wrongdoing during the Enron Corp. era, when “subsidiaries were the vehicles through which the fraud was facilitated or accomplished.”

The case concerned an employee of a subsidiary of Deutsche Bank AG who claimed to have been dismissed after reporting a problem with trading compliance to his supervisors. The bank argued the employee worked at a subsidiary, Deutsche Bank Asset Management Schweiz, and couldn’t bring the complaint. After the judge refused to dismiss the case, Deutsche reached a confidential settlement in July. The bank declined comment.

SOURCE The Wall Street Journal

Read the full article here.




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