Today the U.S. Court of Appeals for the Fifth Circuit issued a disappointing decision for international tax whistleblower William Villanueva. The Court held that Villanueva’s disclosure that a Core Labs subsidiary was cheating the Columbian government out of lawfully due taxes as no protection under the Sarbanes-Oxley Act (SOX). The Court says that it did not have to reach the issue of whether SOX has any extraterritorial application. However, it is hard to imagine that the Court would say that a disclosure about a publicly traded company cheating the IRS out of taxes would also have no protection.
I explained Villanueva’s case as follows in this prior blog post:
Core Laboratories NV is a publicly traded company based in Houston, Texas. It provides services to the petroleum industry. For 16 years, William Villanueva worked as CEO of Saybolt Columbia, Core’s subsidiary.
In 2008, Villanueva sent emails to corporate executives in Houston reporting how other company executives were engaged in tax transfer schemes that falsely transferred profits to low-tax Curacao, an island in the Caribbean Sea. He also reported that Core accountants in Columbia were making false claims to evade the Columbian value added tax (VAT). After Villanueva refused to sign a false tax return, Core fired him.
Villanueva filed a complaint with the Department of Labor (DOL) claiming that he was fired in retaliation for raising his concerns. He claimed that his discharge violated the 2002 Sarbanes-Oxley Act (SOX). An administrative law judge (ALJ) granted Core’s motion to dismiss on grounds that Villanueva worked outside the U.S. Villanueva appealed to DOL’s Administrative Review Board. The ARB considered the effect of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, 561 U.S. ___, 130 S. Ct. 2869 (2010) and held that Villanueva had no protection.
Villanueva appealed to the Fifth Circuit U.S. Court of Appeals. In 2012, I filed an amicus brief in his case. My brief pointed out how Core Labs’s tax fraud violated not only Columbian law, but also U.S. securities law. Villanueva’s disclosures about Core Labs’ obligation to pay Columbian taxes is also a disclosure that its officers planned to file a false report to the SEC about its liabilities. Villanueva’s superiors intended to evade the Columbian taxes by concealing its income. As such, they could not report the known Columbian tax liability to the SEC. Doing so would make the income known to the whole world, including Columbia. The fraud on the SEC was essential to the overall scheme. As Villanueva was raising a concern about this scheme, his actions are protected by SOX.
Sadly, the Court today did not address this reasoning. It did say the right thing about the scope of protection under SOX, affirming the ARB decision in Sylvester:
We agree with the Board that § 806’s “critical focus is on whether the employee reported conduct that he or she reasonably believes constituted a violation of federal law.” Sylvester v. Parexel Int’l LLC, ARB No. 07-123, 2011 WL 2165854, at *15 (ARB May 25, 2011) (first emphasis added). Admittedly, “[a]n employee need not cite a code section he believes was violated in his communications to his employer, but the employee’s communications must identify the specific conduct that the employee believes to be illegal.” Welch v. Chao, 536 F.3d 269, 276 (4th Cir. 2008) (internal quotation marks omitted).
Here is where the Court’s opinion errs:
In this case, the “specific conduct” that Villanueva asserted was illegal was Saybolt Colombia’s underreporting of taxes due to the Colombian government. In his reply brief, Villanueva claims that he repeatedly objected to the conduct of Core Labs officials in Houston, sufficient to satisfy Welch’s point about notice to the employer, but the conduct to which he objected was the supposed orchestration of violations of Colombia tax law, not the violation of U.S. mail or wire laws to effectuate those purported Colombian law violations. Consequently, Villanueva has not demonstrated that he engaged in any protected activity, and, given this, we cannot say, as required by Allen, that Core Labs knew that Villanueva engaged in a protected activity that was a contributing factor in the unfavorable actions of withholding his pay raise and ultimately terminating him. See 18 U.S.C. § 1514A; Allen, 514 F.3d at 475-76.
If the Court had read my amicus brief, they would have known that concealing the non-payment of lawfully due Columbian taxes is a violation of SEC law. If they had read the whole Sylvester decision, they would have known from page 15 that:
The reasonable belief standard requires an examination of the reasonableness of a complainant’s beliefs, but not whether the complainant actually communicated the reasonableness of those beliefs to management or the authorities. See, e.g., Knox v. U.S. Dept. of Labor, 434 F.3d 721, 725 (4th Cir. 2006).
The issue of whether SOX protects corporate fraud whistleblowers outside the U.S. remains open in the Fifth Circuit and elsewhere. However, whistleblowers everywhere have one more reason to be concerned that the protections granted by Congress can fall off the edges of an appellate decision.
The case is Villanueva v. U.S. Dept. of Labor, No. 12-60122 (5th Cir. 2-12-2014) (published).