SOX as employment law

A lot of the criticism of SOX is centered on the 404 internal controls disclosures and the accounting provisions. But as I discussed in my initial 2002 article on SOX, Market v. Regulatory Responses to Corporate Fraud, 28 J. Corp. L. 1 (2002) (SSRN), and as Henry Butler and I discussed in The Sarbanes-Oxley Debacle, there’s a lot more to the misguidedness of SOX.

An op-ed in today’s WSJ about the SOX whistle-blowing provisions confirms this:

About 1,000 whistleblowing claims have been filed under Sarbox. Only 17 were determined after federal investigation to have merit and only six of this group have kept their wins after full evidentiary hearings before administrative law judges. * * *

Sarbox whistleblowers rarely win because most claimants are using, or some might say, misusing, the law as a club in garden-variety workplace disputes. The examples are legion.

* * Many . . . cases dismissed after hearings involved employees who engaged in serious misconduct or poor job performance, and then claimed that the "real" reason for termination was their alleged whistleblower activities. For example, in Heinrich v. Ecolab, an administrative law judge found that Mr. Heinrich had been fired for falsifying inspection records, not for as he claimed, reporting accounting irregularities. In Townsend v. Big Dog Holdings, a judge found it was the 29 grievances from employees the company had received about Ms. Townsend's behavior and her insubordination to management, not her contacts with the SEC and other government agencies, that justified her discharge. * * *

The one-two financial punch of legal defense costs and drop in share value precipitated by wholly inappropriate whistleblower cases totally devoid of merit has cost U.S. companies millions of dollars.

No surprise here. As I said in the online version of my 2002 article, with a similar discussion at p. 49 of the book

the strong protection afforded whistle-blowers (§806) in effect creates a new subtopic in employment law. Workers who have been demoted or terminated for any reason now have an incentive to “cause information to be provided” concerning a securities violation to the SEC, Congress or “a person with supervisory authority over the employee,” and those who are concerned about a potential demotion or termination have an incentive to threaten such action. Litigation is likely over whether the employee “reasonably believes,” the information shows a securities law violation and whether the action against the employee was because of the whistle-blowing. But whatever courts do, the new law obviously can give significant leverage to employees, including in cases where the firm has good reason to take action against the employee. It is an open question whether the benefits of exposing fraud will outweigh the disruptive effects of this new form of job protection.

As I've been saying for years, the problems of SOX were quite predictable.