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Dodd-Frank Act Prohibits Public Companies’ Subsidiaries and Affiliates From Retaliating Against Employees Who Report Fraud

  • By: David Rich
  • Published: October 18, 2010

On July 21, 2010, President Obama signed into law, effective July 22, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act,” “Dodd-Frank,” or the “Act”), H.R. 4173. Sections 922 and 929A of the Dodd-Frank strengthen and expand the whistleblower provision of the Sarbanes-Oxley Act (“SOX”) by, among other changes, prohibiting publicly-traded companies’ subsidiaries and affiliates from retaliating against employees who report fraud against shareholders, lengthening the statute of limitation from 90 days to 180 days, and prohibiting mandatory arbitration of whistleblower actions.

How The Dodd-Frank Act Strengthens Sarbanes-Oxley

Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A, prohibits a publicly-traded company from terminating, demoting, suspending, threatening, or harassing an employee because the employee reported, to the federal government or to a supervisor, fraud against shareholders or a violation of Securities and Exchange Commission rules.

Section 929A of the Dodd-Frank Act expands section 806 of the Sarbanes-Oxley Act by extending its whistleblower protections to employees of “any subsidiary or affiliate [of a publicly-traded company] whose financial information is included in the consolidated financial statements of such company.” Section 922 of Dodd-Frank further enlarges section 806 of SOX by extending its whistleblower protections to employees of any “nationally recognized statistical rating organization.”

Section 922 of the Dodd-Frank Act lengthens, from 90 days to 180 days, the period of time after the date of the fraud or after the violation of the SEC rule within which the retaliated-against employee must file a complaint with the Secretary of Labor. See 18 U.S.C.§ 1514A(b)(2)(D). Under section 806 of SOX, a whistleblowing employee must file such an administrative complaint before he or she brings a lawsuit against the company.

Further, section 922 of the Dodd-Frank Act specifies that, if a complainant employee does not become aware of the fraud against shareholders or of the violation of an SEC rule, as the case may be, until some time after that fraud or rule violation occurred, then the above-mentioned, 180-day statute of limitation does not begin to run until the employee learned of the fraud or rule violation.

Again, section 922 of Dodd-Frank provides that an employee who brings a lawsuit against his former company for retaliating against him in violation of the Sarbanes-Oxley Act’s whistleblower provision is entitled to a trial by jury.

Moreover, section 922 of the Act renders unenforceable that portion of any agreement of employment purporting to waive a worker’s rights under SOX’s whistleblower provision. So, too, Section 922 of the Act renders invalid that portion of any employment agreement purporting to force an employee to arbitrate, rather than litigate, disputes arising under section 806 of SOX.

How Employers Ought To Respond

Given that subsidiaries and affiliates of public companies may now be held liable for retaliating against certain whistleblowing employees, those subsidiaries and affiliates must make certain that managers and supervisors are trained to be receptive to, to promptly and thoroughly investigate, and to take appropriate action based on, good-faith complaints from employees of asserted fraud against shareholders or of purported violations of SEC rules.

If your company needs assistance or guidance on a labor or employment law issue and your company is located in the Manhattan, NYC area, call Attorney David S. Rich at (347) 603-1143.

David Rich, Esq.

David Rich David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
a Manhattan Employment and Business Litigation Law Firm, in New
York City and in Englewood Cliffs, New Jersey...View Profile