Sarbanes-Oxley celebrated its 9th anniversary this week, on Tuesday, June 28, 2011, but the employees of targeted corporations have little celebrate.
Among the provisions of Sarbanes-Oxley, is a “whistleblower” protection for employees who report violations of securities laws or fraud against shareholders.
In response to the Enron accounting scandal, Congress enacted Sarbanes-Oxley to, in part, to provide that publicly traded companies compensate employees who are discharged, demoted or harassed as a result of reports they make to the SEC or other regulatory agencies concerning misleading financial disclosures. The employee’s problem is that the law has no teeth to fully compensate them. They only get back pay, possible reinstatement and attorney fees. The law should provide a punitive damages claim for a successful whistleblower.
I filed the first-ever Sarbanes-Oxley whistleblower case in North Carolina for a client terminated from Wyeth in 2002. The U.S. District Court dismissed the case, and the Fourth Circuit Court of Appeals affirmed in a split decision in 2008 -- 6 years after the termination.
The attorney fees cannot be justified in a claim of this magnitude where the most an employee can hope for is back pay and possibly reinstatement or modest future pay. The employee loses their career when they blow the whistle while the company goes on making billion dollar profits.
I represented Mark Livingston as local counsel to the Government Accountability Project in a suit filed against Wyeth in 2003. The Fourth Circuit Court of Appeals kindly published all the facts about the case in Livingston v. Wyeth (2008) to enlighten shareholders, policymakers, attorneys and other courts about the intricacies involved with a Sarbanes-Oxley whistleblower case.
The publication of the facts for a whistleblower is itself a victory for employees since the record of their termination can be revealed without violating any confidentiality restrictions imposed by their employer or the court. These cases are litigated under seal, leaving the public to only guess about the merits of the controversy.
Some facts are easy to understand, while others should’ve required intensive jury deliberations. Wyeth had $14.1 billion in net revenues for 2001. Mr. Livingston’s job entailed verifying employee’s had adequate job training skills to assist with manufacturing requirements for pharmaceutical products at the Sanford site in North Carolina.
Wyeth was under a consent decree with the FDA for shipping adulterated products from a Pearl River, New York facility and Marietta, Pennsylvania facilities. Wyeth disclosed the Consent Decree signed in October, 2000 to shareholders and the SEC in its annual Form 10K filing. Mr. Livingston’s verification was essential for Wyeth to both satisfy shareholder appetites for higher profits and the FDA’s demand for good manufacturing practices at all company manufacturing facilities, pursuant to the Consent Decree.
The problems for Mr. Livingston began when he reported a problem with a target verification date. After he reported problems with a September, 2002 verification deadline for job training changes the company felt were required under the Consent Decree, his job was allegedly threatened by the Managing Director of the Sanford site. Soon thereafter, Livingston was terminated over an incident involving a Christmas holiday party.
Mr. Livingston asked an uninvited Human Resources executive to leave a holiday party he hosted for his team of employees. Livingston wasn’t nice about it. The Department of Labor, the U.S. District Court and the Fourth Circuit Court of Appeals all found that Wyeth had adequate justification for Livingston’s termination based on this exchange with a Human Resources director at a Christmas party.
The Fourth Circuit also found that Livingston failed to articulate a material financial concern for shareholders regarding his termination. The Dissenting Opinion in the Fourth Circuit Court of Appeals felt the reason for Livingston’s termination should’ve been decided by a jury.
If Wyeth’s termination related to Mr. Livingston’s refusal to verify good manufacturing readiness at the Sanford site under an important deadline to shareholders, the company would’ve been liable for back pay and possibly reinstatement of his job or modest front pay damages. Mr. Livingston would’ve also been entitled to attorney fees, but no punitive damages.
What is the point of a law designed to give employees incentive to report corporate financial disinformation, if the costs of doing so are too high to justify? Employees and their attorneys have to factor every issue into a decision whether to litigate or appease employer demands for fast and certain profits. The amount of recovery in a claim is certainly an issue.
Punitive damages are designed to punish corporations for putting profits over safety. They should be available for use against pharmaceutical giants who stand to lose profits by missing target verification dates in a Sarbanes-Oxley claim.
Robert Church is an attorney licensed to practice law in NC, MD and DC. Robert’s private practice is primarily focused on family law and child custody issues in North Carolina. However, Robert has extensive litigation experience in both the federal and state courts of North Carolina and Maryland. Follow him at robertchurchblog.com.