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Dodd Frank’s Revisions To SOX (Part I)

May 17, 2013

Our video today discusses Dodd Frank’s revisions to SOX, a topic that our paper covers, as well.

SOX’s Coverage Of Private Subsidiaries Of Publicly Traded Companies Whose Financial Information Is Included In Consolidated Financial Statements

Courts That Have Applied This Revision Retroactively

Dodd-Frank Section 929A provides that the whistleblower protection provision of the Sarbanes-Oxley Act (SOX), 18 U.S.C. § 1514A, applies to employees of subsidiaries of publicly-traded companies “whose financial information is included in the consolidated financial statements of [a publicly] traded company.” Prior to this amendment some courts found that publicly-traded companies were not covered by SOX because the parent company that filed reports with the SEC had few, if any, direct employees, and instead employed most of its workforce through non-publicly traded subsidiaries. See, e.g., Rao v. Daimler Chrysler Corp., No. 06-13723, 2007 WL 1424220 (E.D. Mich. May 14, 2007). The report of the Senate Committee on Banking, Housing, and Urban Affairs accompanying Dodd–Frank explained that section 929A of that Act amended § 1514A(a) “to make clear that subsidiaries and affiliates of issuers may not retaliate against whistleblowers.” S.Rep. No. 111–176, at 114 (2010). The committee believed such a clarification was necessary because “[t]he language of [§ 1514A(a)] may be read as providing a remedy only for retaliation by the issuer, and not by subsidiaries of an issuer.” Id.

In Gladitsch v. Neo@Ogilvy, No. 11 Civ. 919 DAB, 2012 WL 1003513 (S.D.N.Y. Mar. 21, 2012), the plaintiff asserted a SOX retaliation claim that arose before the date this amendment took effect. The companies the plaintiff had worked for were subsidiaries of WPP PLC, a publicly traded media communications services company. The subsidiary companies’ financial information were consolidated in WPP PLC’s financial statements. The defendants argued that because the plaintiff did not work for the publically traded company itself, her SOX retaliation claim had to be dismissed under the pre-amendment cases holding that only employees of publicly traded companies themselves are covered by SOX, not such companies’ subsidiaries. But the district court refused to dismiss the plaintiff’s claims, holding that “[b]ecause it is a “clarifying” amendment, functioning to correct a misinterpretation rather than effect a substantive change in the law, Section 929A applies to pending cases.” Id. at *4 (citing Johnson v. Siemens Building Technologies, Inc., Case No. 08–032, 2011 WL 1247202, at *11 (ARB Mar. 31, 2011)).

In Leshinsky v. Telvent GIT, S.A., 873 F. Supp. 2d 582, 605 (S.D.N.Y. 2012), the district court reached the same conclusion, stating, “the Court concludes that the Dodd–Frank amendment to Section 806 of Sarbanes–Oxley applies retroactively as a clarification of the statute. Plaintiff, as an employee of the subsidiary of a public company whose financial information is included in the consolidated financial statements of the public company, is a covered employee under Section 806. The Court therefore has subject matter jurisdiction over this case, and Defendants motion to dismiss is denied.”

A Court Refusing To Apply This Revision Retroactively

In contrast, the district court in Mart v. Gozdecki, Del Giudice, Americus & Farkas LLP, 2012 WL 5830627 (N.D. Ill. Nov. 16, 2012), refused to follow Johnson or Leshinsky, and held that Dodd-Frank altered, rather than clarified, SOX Section 806, so that this particular amendment was not retroactive. Id. at *7-9. As a result, the defendant in the case – a private subsidiary of a publicly traded company, Berkshire-Hathaway, Inc. – won dismissal of the SOX claim against it. Id. at *9.

Section 922(b) further expanded the coverage of section 806 of SOX to include employees of nationally recognized statistical ratings organizations, including A.M. Best Company, Inc., Moody’s Investors Service, Inc., and Standard & Poor’s Ratings Service.

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