Sarbanes-Oxley Act

Circuit Split on Whistleblower Protections Widens

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On March 8, 2017, a divided panel of the Ninth Circuit issued an opinion in Somers v. Digital Realty Trust Inc. that further widened a circuit split on the issue of whether the anti-retaliation provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act apply to whistleblowers who claim retaliation after reporting internally or instead only to those who report information to the SEC.  Following the Second Circuit’s 2015 decision in Berman v. Neo@Ogilvy LLC, the Ninth Circuit panel held that Dodd-Frank protections apply to internal whistleblowers.  By contrast, the Fifth Circuit considered this issue in its 2013 decision in Asadi v. G.E. Energy (USA), LLC and found that the Dodd-Frank anti-retaliation provisions unambiguously protect only those whistleblowers who report directly to the SEC.

Plaintiff Paul Somers alleged that Digital Realty Trust fired him after he made several reports to senior management regarding possible securities law violations. Somers only reported these possible violations internally at the company, and not to the SEC.  After his employment was terminated, Somers sued Digital Realty, alleging violations of state and federal securities laws, including violations of the whistleblower protections under Dodd-Frank.  Digital Realty moved to dismiss on the ground that Somers was not a “whistleblower” under Dodd-Frank.  The district court denied the motion, deferring to the SEC’s interpretation that internal reporters are also protected from retaliation under Dodd-Frank.

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SEC Announces Settlement With “Big Four” China Accounting Firms Over Production of Documents Located in China

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Today, the Securities and Exchange Commission (“SEC” or “Commission”) announced the terms of a settlement with four of the Respondents in In the Matter of BDO China Dhaua CPA Co., Ltd. The four Respondents are the China affiliates of the “Big Four” international accounting firms —Deloitte Touche Tohmatsu Certified Public Accountants Ltd., Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership), and PricewaterhouseCoopers Zhong Tian CPAs Limited. The settlement resolves an administrative proceeding brought by the Commission against Respondents pursuant to Rule 102(e) of the SEC’s Rules of Practice over requests made by the SEC for the production of audit work papers located in China.

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Texas Court Rules that Regardless of Fault, CEOs and CFOs Will Have to Pay Up Under Sarbanes-Oxley Section 304

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Gavel and Hundred-Dollar Bill

A Texas federal judge denied defendants ArthoCare CEO Michael A. Baker and CFO Michael T. Gluk’s motion to dismiss the SEC’s claim against them under Sarbanes-Oxley (“SOX”) Section 304’s clawback provision. Section 304 requires CEOs and CFOs to reimburse their company for any bonus or similar compensations, or any profits realized from the sale of company stock, for the 12-month period following a financial report, if the company is required to prepare an accounting restatement due to material noncompliance committed as a result of misconduct.

Baker and Gluk, who were not alleged to have participated in the misconduct that led to ArthoCare’s restatement, challenged Section 304 as unconstitutional, arguing that the SEC could not require them to repay bonus compensation and profits from stock sales for merely holding CEO and CFO positions during the time of the alleged misconduct. In particular, they argued that Section 304 is vague and is unconstitutional because it does not require a reasonable relationship between the triggering conduct and the penalty as is required by the Due Process Clause.

Judge Sam Sparks of the Western District of Texas rejected the Officer-Defendants’ constitutional arguments. Judge Sparks first held that Section 304 was not vague because it clearly referred to misconduct on behalf of the issuer of the allegedly false financial statement. Judge Sparks noted that Defendants “should have been monitoring the various internal controls to guard against such misconduct; they signed the SEC filings in question, and represented they in fact were actively guarding against noncompliance. As such, they shouldered the risk of Section 304 reimbursement when noncompliance nevertheless occurred.” READ MORE →

Sprint Offers Unlimited Data, But Not for Shareholders: KPMG Documents Prepared for the PCAOB Mostly Privileged Under SOX

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On October 10, 2012, a federal district judge in Missouri granted in part and denied in part class action plaintiffs’ motion to compel certain documents that KPMG had supplied to the Public Company Accounting Oversight Board (“PCAOB”) in a 2006 investigation.

Judge Ortrie D. Smith held that KPMG was not required to produce the bulk of its withheld documents relating to a 2006 PCAOB inspection because those documents were privileged under SOX. Specifically, SOX provides that documents and information prepared or received by or specifically for the PCAOB are confidential and privileged and not subject to disclosure. Not all documents fell under the privilege, the court held: documents from the underlying transaction and work that was the subject of the investigation were not prepared for the PCAOB and so could not claim the privilege protection.

The court rejected plaintiffs’ arguments that the SOX privilege only covers documents “in the hands” of the PCAOB and not third parties, like KPMG, because the privilege covered materials both prepared for, and received by, the PCAOB. Finally, KPMG had not waived the privilege when it shared some of the information with Sprint employees or defendants in the litigation.