Fifth Circuit reinstates SOX whistleblower claim

In a unanimous panel decision last Friday, the Fifth Circuit U.S. Court of Appeals reinstated Kevin Wallace’s SOX whistleblower claim and returned his case to the district court’s docket.
Wallace worked for the petroleum company Tesoro as Vice President of Pricing and Commercial Analysis. He discovered structural flaws in Tesoro’s accounting system that garbled important financial results used by management, the Board of Directors, and Tesoro’s public filings. Wallace confirmed his findings with internal experts and reported them to his direct supervisor, Claude Moreau, SVP Marketing, Tracy Jackson, Head of internal audit, and Steven Grapstein, head of the audit committee of Tesoro’s Board of Directors. On March 12, 2010, Wallace noted, in a certification required by Tesoro’s Code of Business Conduct, that he was being retaliated against. He was fired within hours of the certification.
Wallace filed an OSHA complaint under the Sarbanes-Oxley Act (SOX). After waiting the required time, he filed his retaliation lawsuit in federal court in San Antonio, Texas. After much procedural wrangling, Tesoro asked the court to dismiss Wallace’s lawsuit because it raised facts that had not been presented to OSHA. The court granted that request and dismissed.
In reversing, the Court of Appeals said that Wallace adequately explained how he believed Tesoro’s practices violated rules of the Securities and Exchange Commission (SEC). Specifically, the Court held that, “Tesoro has not shown that it disclosed all of the taxes Wallace alleges were improperly recorded.”
The Court made a particularly helpful holding for whistleblowers, finding that they are protected while “providing information about potential fraud or assisting in a nascent fraud investigation[.]” Those whistleblowers are protected even though they “might not know who is making the false representations or what that person is obtaining by the fraud[.]” This is comparable to protecting employees who are collecting information about possible fraud, “before they have put all the pieces of the puzzle together.” Quoting, U.S. ex rel. Yesudian v. Howard University, 153 F.3d 731, 739-40 (D.C. Cir. 1998). The Fifth Circuit adds, “Leaving those employees unprotected would have grave consequences for the statutory scheme of employee protection[.]” In Wallace, the Court respected that whistleblowers serve an important public function by uncovering frauds, and they must be protected from their first step to their last.
To deter frauds, Congress required companies to implement their own compliance programs, disclosure hotlines, internal controls and certifications. Wallace contended that these programs are “proceedings” to enforce SOX, and his participation in them should be protected under SOX’s participation clause. 18 U.S.C. § 1514A(a)(2). The Court declined to decide that question because, “It would not have been obvious to the district court, at the time, that ‘proceeding’ was so defined.” Presumably, that issue should now be obvious to future courts, and whistleblowers today should be able to cite this decision for support.
Through SOX, Congress seeks to change the culture of public corporations so that employees will feel encouraged to raise compliance concerns, instead of afraid to do so. Congress is mindful that employee tips are the most commons means of detecting frauds. More and more American companies are getting the message and consciously changing their cultures to encourage employee reports. The decision in Kevin Wallace’s case should encourage other companies to take their compliance responsibilities more seriously.
The undersigned was counsel for Mr. Wallace on appeal, co-counseling with San Antonio attorneys Christopher McKinney and Alex Katzman. The U.S. Department of Labor, Office of the Solicitor of Labor, participated with an amicusbrief asking the Fifth Circuit to reverse.
The case is Wallace v. Tesoro Corp., No. 13-51010 (5th Cir. 7-31-2015).