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Other Recent Significant SOX Decisions (Part I)

May 16, 2013

The video we released earlier today discussed a recent significant SOX decision.

Mark’s paper discusses many such cases. Today’s posts will also look at those cases.

The ARB Rules That Employer Breaches Of SOX-Mandated Confidentiality May Themselves Give Rise To Liability, Even If The Employee Did Not Suffer A Traditional Adverse Employment Action

In September 2011, the ARB adopted a new standard governing “adverse employment actions” in some types of cases brought under Section 806 in the case of Menendez v. Halliburton, Inc., No. 09-002, 2011 WL 4439090 (ARB Sept. 13, 2011). This case also contains a serious cautionary tale for employers in how they handle litigation hold notices for complaints made by current employees.

The case involved Anthony Menendez, the former Director of Technical Accounting Research & Training at Halliburton, Inc., where he was charged with monitoring and researching technical accounting issues as well as advising field accountants. After issuing a memorandum taking a position against what he believed were current violations of generally accepted accounting principles, Menendez’s supervisor allegedly told him in a meeting regarding the memo that he was not a “team player,” that he was insensitive to Halliburton’s politics, and that he should collaborate more with his colleagues on such issues. Id. at *2.

Menendez contacted the SEC as well as the company’s “confidential” whistleblower hotline with his concern that the company was engaging in “questionable” accounting practices with respect to revenue recognition. After receiving the SEC complaint, Halliburton’s General Counsel sent out document hold notices to various employees that identified Menendez. Id. at *3. The General Counsel may have believed he was merely complying with the company’s obligations to retain potentially relevant documents, but Menendez regarded it (and other e-mails that identified him as the complainant) as being “outed” to his coworkers. Specifically, when Menendez realized his identity had been revealed, he testified that he was stunned, and that it was likely the worst day of his life. Id. He testified that his coworkers began avoiding him, he was soon isolated at work, and Halliburton eventually placed him on administrative leave for the remainder of the investigations.

Both the SEC and the company’s audit committee found no basis for Menendez’s questionable accounting allegations. Id. at *4. Menendez was then reassigned from directly reporting to the chief accounting officer to reporting to the director of external reporting. He subsequently resigned, claiming he believed he was demoted by being required to report to a lower ranking officer. Menendez then filed a complaint with the Department of Labor under Section 806 of the SOX claiming he was retaliated against as a whistleblower and suffered an “adverse action.”

Regarding Menendez’s specific claim of being “outed,” Halliburton argued that exposing Menendez’s identity to his co-workers had no “tangible consequence” to Menendez in part because those co-workers already knew that Menendez was the whistleblower. The ARB rejected a requirement that there be a “tangible consequence” in order for adverse action to be found and adopted the standard set forth in its decision in Williams v. American Airlines, Inc., No. 09-018 (ARB Dec. 29, 2010) that an “adverse action” encompasses any “nontrivial unfavorable employment action,” either as a single event or in combination with other actions. The ARB refused to apply the narrower standard from Burlington N. & Santa Fe Railroad Co. v. White, 548 U.S. 53 (2006), that an adverse action is one that would deter a reasonable worker from engaging in the protected activity. However, the ARB noted that Burlington does serve as “a helpful guide for the analysis of adverse actions under SOX.” Menendez, 2011 WL 4439090 at *10.

The ARB stated: “SOX Section 806’s plain language states that no company ‘may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment.’ By explicitly proscribing non-tangible activity, this language bespeaks a clear congressional intent to prohibit a very broad spectrum of adverse action against SOX whistleblowers.” Id. at *9.

The ARB found that because Section 301 of SOX requires a company to have a procedure for the anonymous receipt of complaints, Menendez had a right to confidentiality that was a “term and condition of his employment.” According to the ARB, Halliburton denied Menendez that right when it “outed” him in its e-mails, resulting in an adverse action. The ARB concluded that “a reasonable employee in Menendez’s position would be deterred from filing a confidential disclosure regarding misconduct if there existed the prospect that his identity would be revealed to the very people implicated in the alleged misconduct.” Id. at *16.

The Menendez case indicates that the DOL will set a low threshold for SOX retaliation against a whistleblower. Although it remains to be seen whether many federal courts will follow the ARB in applying the lower standard for adverse action, employers should be cautious in taking action in response to an employee’s claim of financial misconduct. At least one federal court has expressly agreed with, and followed Menendez so far. See Guitron v. Wells Fargo Bank, N.A., NO. C 10-3461 CW, 2012 WL 2708517, at *16 (N.D. Cal. July 6, 2012) (plaintiff’s poor reviews and suspension were actionable under the Menendez standard).

The Menendez case also indicates the need for employers to train executives and members of legal and human resources departments on internal complaint procedures to ensure that those procedures are specifically being followed, particularly with respect to confidentiality. That a litigation hold notice could be used to find, in part, that an adverse action occurred likely did not occur to Halliburton at the time its General Counsel sent the notice. Other companies’ in-house lawyers need to be wary of falling into this same trap.

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