Saturday, February 16, 2008

Federal Court Rules Sarbanes-Oxley Whistleblower Statute Applies Outside US

In a seminal ruling of broad application, a federal judge held that the Sarbanes-Oxley whistleblower protection statute embraced a US employee of a foreign company who worked in the firm’s French subsidiary and who alleged that US-based executives retaliated against her for questioning the firm’s fraudulent evasion of French social security taxes. While the employee worked in France and was paid by the French subsidiary, said the court, the US was the center of gravity of the alleged retaliation. The court also broadly construed Section 806 to include allegations of mail and wire fraud unrelated to a fraud against shareholders. (O’Mahony v. Accenture, Ltd., SD NY, 07 Civ. 7916, Feb. 5, 2008).

The opinion was a broad construction of Section 806 on two levels. First, it means that the whistleblower statute applies outside the territory of the US. Second, the protected activity is not limited to only reporting fraud against shareholders.

The employee said that she informed the firm that it was committing mail and wire fraud by refusing to pay, and concealing the fact that it was obligated to pay, French social security taxes and that she would not be a party to tax fraud. : Less than two months, the firm reduced her level of responsibility with a corresponding reduction in pay.

The federal court asserted jurisdiction based upon the ``conduct test’’ used in the Second Circuit. The firm perpetrated the alleged fraud by deciding in the US not to pay French taxes and then acted upon that decision in the US by not making the payments in question. Further, the retaliation against the whistleblower was said to have been done by US-based executives. And, the decision to essentially reduce her compensation occurred in close proximity to her allegations of fraud against the firm.

The assertion of jurisdiction here does not raise the specter of a clash between US and French law, assured the court, since the whistleblower is not seeking enforcement of US law in France by requiring payment of French taxes. Rather, she is seeking the application of US law for money damages suffered due to the alleged retaliation that occurred in the US.

Section 806 protects whistleblower providing information about a violation of federal mail and wire fraud statutes, bank and securities fraud statutes, any SEC rule, or any provision of federal law relating to fraud against shareholders. The court rejected the argument that the whistleblower statute protects only an employee’s reporting of fraud against shareholders. There is no indication that Congress intended to link whistleblower protection for information on mail and wire fraud to a fraud against shareholders. Rather, the plain meaning of Section 806 is that an employee who alleges any of the frauds listed in the statute is protected regardless of whether the misconduct relates to shareholder fraud.

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