Sarbanes-Oxley: What you need to know

Sarbanes-Oxley Expands Criminal Liability Beyond Publicly Held Companies

Most people think the Sarbanes-Oxley Act applies only to publicly traded companies. Since President Bush signed SOX into law in July 2002, the bulk of the publicity has focused on the obligations of the highest levels of management of publicly traded companies to ensure the accuracy of financial information reported to shareholders.

But don’t let that fool you. There is “something for everybody” in SOX, including criminal penalties for retaliating against whistleblowers, tampering with witnesses, and destroying records. And these provisions apply to everyone—not just to publicly traded companies.

The “criminal” whistleblower provisions. Anyone is subject to criminal prosecution for taking “any action harmful to any person” for providing “to a law enforcement officer” “any truthful information relating to the commission or possible commission of any federal offense.” Violations of this provision can result in fines or 10 years in prison, or both. This provision is codified at 18 U.S.C. §1513(e).

Unlike SOX’s new civil whistleblower provisions, this new subsection subjects anyone to prosecution for committing one of the prohibited acts. Although included within its sweep, the focus of this new violation is not merely corporate wrongdoing; instead, this law makes it a crime to interfere with an informant’s livelihood in retaliation for the informant’s truthful reporting of possible wrongdoing in violation of federal criminal law. Thus, for example, §1513(e) would apply to a bank president who fired an internal auditor for reporting that the president was embezzling funds. But a much less obvious example—although no less true—is that §1513(e) would make it a federal crime to let the air out of the tires on the working vehicle of someone who reported a camper in a federal park for failing to extinguish his campfire.

In short, the sweep of §1513(e) is potentially vast. The only relevant issues are as follows:

• Did the informant report what he perceived to be federal criminal conduct to a law enforcement officer?

• Did the defendant interfere with the informant’s livelihood because he did so?

That’s it.

So far, it is not a federal crime to discriminate in employment, so §1513(e) will not suddenly render all retaliation in employment a federal crime. However, employers need to stay alert because the definition of a federal “crime” is constantly expanding and may someday encompass garden-variety employment discrimination. The Health Insurance Portability and Accountability Act ("HIPAA") and the immigration laws already contain criminal sanctions for certain violations. Thus, an employee who was retaliated against for reporting a violation of these laws might arguably have a claim under §1513(e) of SOX. Presumably, a failure to hire for a retaliatory reason would also constitute an “interference” with the informant’s livelihood.

Tampering with Documentary Evidence and Obstruction of Justice.

In § 1102 of SOX, Congress created another new crime by adding a new subsection to 18 U.S.C. § 1512. Section 1512(c) provides that it is a crime subject to fines or prison up to 20 years for anyone to "corruptly" alter, destroy, mutilate, or hide a record with the intent to “impair the object’s integrity or availability for use in an official proceeding.” The same criminal penalties apply to anyone who “otherwise obstructs, influences, or impedes any official proceeding, or attempts to do so.”

Presumably, Congress was motivated by perceived Enron/WorldCom shenanigans, but they omitted any requirement that this misconduct occur in the corporate context in order to sustain a prosecution.

Finally, 18 U.S.C. § 1519 provides for the same penalties in any case in which anyone “knowingly” alters or destroys records, or falsifies records, with the intent to “impede, obstruct, or influence the investigation or proper administration” of any matter involving departments or agencies of the federal government.

Because the regulatory scope of the federal government is so broad, this law can arguably apply far beyond the scope of “Enron-style” issues —to EEOC investigations, OFCCP audits, OSHA complaints, NLRB matters, Department of Labor investigations (including FLSA and FMLA), and on and on.

At this point, there are no signs that the federal government intends to use these provisions against employers involved in normal federal investigations. However, it is prudent to be ready, just in case. With that in mind, we offer the following suggestions:

• Carefully and strictly comply with federal document retention guidelines. A federal prosecutor may now contend that willful failure to comply with the guidelines is a crime and was carried out to avoid having the necessary documents available in the event of a federal investigation.

• Be scrupulous about preserving all evidence in the event of an agency charge or complaint. This includes preservation of electronic evidence. Employers should be particularly careful to deactivate any automatic purging of e-mails once they are on notice of a charge or complaint.

Is it likely that a federal prosecutor will try to use these SOX criminal provisions against an employer who violates one of the statutes in a misguided defense against an administrative agency investigation? The risk is clearly present if the employer’s intent is to frustrate the agency’s effort to find the truth. Employers (and their attorneys) should be very careful to make sure that defensive measures are clearly within the bounds of the law.

Extensis guides four clients through the ever increasing burdens of regulation and governmental mandates.  Our years of experience supporting New Jersey based small businesses makes us an ideal partner when charting a course for your businesses growth. Human Resources is more than a Health Insurance rate chart, it requires experience and the flexibility that Extensis can provide your business.

For more information, go to www.extensisgroup.com, or call 888-473-6398.