The Sarbanes-Oxley Act of 2002 is a federal law that established major auditing and financial regulations for public companies. In response to the collapse of two multibillion dollar publicly traded companies – ENRON and WORLDCOM – lawmakers created the legislation to help protect shareholders, employees and the public from accounting errors and fraudulent financial practices. It also required publicly traded companies to establish independent Audit Committees, and confidential employee concerns programs.
Section 806 of Sarbanes-Oxley creates a federal civil right of action on behalf of any employee of a publicly traded company, or any employee of a contractor of a publicly traded company, who is subject to discrimination in retaliation for engaging in protected whistleblower conduct, such as reporting corporate fraud or accounting abuses.
Protected activity is narrowly defined as complaining internally to supervisors, complaining to regulators, or complaining in connection with an investigation that the company violated a federal rule related to fraud on shareholders. An employee who complains about violations of state governments regulation, without reference to possible federal regulation violations, is not engaged in protected activity under Sarbanes-Oxley.
An employee engages in protected whistleblower conduct by providing information that he or she reasonably believes is a violation of:
- Federal mail, wire, bank, or securities fraud
- Federal law relating to fraud against shareholders
- Any rule or regulation of the Securities and Exchange Commission (SEC)
Section 806 of SOX extends its protection to any whistleblower who is an officer, employee, contractor, subcontractor, or agent of a publicly traded company, subsidiary of a publicly traded company or a nationally recognized statistical ratings organization.
When Congress passed SOX, they explicitly incorporated all of its provisions into the Securities and Exchange Act. They included a provision allowing the SEC to enforce every provision of SOX pursuant to its authorities under the Exchange Act. In other words, a violation of SOX is a violation of the Securities and Exchange Act.
The Dodd-Frank Act, which does contain an explicit whistleblower qui tam or reward law, provides for paying whistleblowers compensation for any violation of the securities laws. Thus, a whistleblower who identified violation of SOX must apply for an award using the rules governing the Dodd-Frank Act.