BY MICHAEL H. HURWITZ
A company officer who is responsible for overseeing his company’s pension plan discovers possible wrongdoing in the management of the pension plan, including an effort to hide the fact that the company had failed to make a required contribution to the plan.
He promptly notifies senior management about his discovery. He then sends a letter to the U.S. Securities and Exchange Commission (SEC).
How does management react to the news of possible wrongdoing in the pension plan?
A few hours after the officer alerts management of the problem, he receives a letter of reprimand from the company’s CEO. A few days later, the CEO orders the company’s lawyer to launch an investigation into whether the officer had failed to report certain payroll problems to management. The CEO also begins stripping the officer of many of his responsibilities. Finally, two months later, the company decides to fire its human resources personnel, including the officer.
This is what is charged in a 2011 complaint for wrongful dismissal filed by the officer in the U.S. District Court for the District of Connecticut (Kramer v. Trans-Lux Corp.).
While the case is still pending before the court, the judge in this case recently issued an important ruling that sends a strong message to employers who may think about taking retaliatory action against whistleblowing employees.
In his lawsuit, the officer sought to take advantage of the new anti-retaliation provision of the federal securities laws enacted in 2010 as part of the major overhaul of the nation’s financial and regulatory systems.
This provision declares that it is illegal for an employer to retaliate against an employee who reports possible wrongdoing to the SEC or assists the agency in its efforts to stop the wrongdoing. The law also prohibits an employer from retaliating against an employee who “make(s) disclosures that are required or protected” under the federal securities laws or the Sarbanes-Oxley Act, regardless of whether the employee contacted the SEC about his suspicions of wrongdoing.
The law thus protects an employee of a public company who reports information she reasonably believes constitutes a violation of the securities laws to her supervisor or other senior-level employees even if the person does not forward the information to the SEC. If the employee proves her case, she is entitled to reinstatement with the same seniority status that she would have had but for the discrimination, as well as two times the amount of back pay (plus interest) otherwise owed to the employee and compensation for her litigation costs and attorney fees.
In Kramer v. Trans-Lux, the company argued that the anti-retaliation protections did not apply because the officer had not provided his information to the SEC in the manner prescribed under the agency’s rules. Judge Stefan Underhill rejected this argument, noting that Trans-Lux’s interpretation “would dramatically narrow the available protections available to potential whistleblowers” and that “(s)uch a reading seems inconsistent with the goal of the (law), which was to improve the accountability and transparency of the financial system and create new incentives and protections for whistleblowers (internal citations omitted].”
Rather, Underhill ruled that all that is required to obtain the protection of the anti-retaliation provisions is that the employee “possessed a reasonable belief that the information provided relates to a possible securities law violation.” The judge concluded that the anti-retaliation protections applied because the officer had a reasonable belief that wrongdoing was occurring when he reported his suspicions to senior management and to the SEC.
When company leadership punishes an employee who reports wrongdoing, whether to senior management or to the SEC, they are not only violating the law, they also are injuring those they have a legal responsibility to protect: the company’s investors and the beneficiaries of its pension and retirement plans.
Most companies recognize the critical value of having an internal compliance system where employees can report evidence of possible malfeasance without fear of losing their job or being blacklisted. The anti-retaliation protections merely serve to reinforce a corporate culture that has zero toleration for financial or other misconduct.
However, for those companies that place personal interests over those of their investors and pension beneficiaries, the anti-retaliation provisions of the new law and Underhill’s ruling in Kramer v. Trans-Lux will serve as a clear warning that the law will not tolerate efforts to silence employees through a culture of intimidation and fear.
Michael H. Hurwitz is a Bridgeport, Conn., native and senior counsel in the SEC Office of the Whistleblower, which oversees the agency’s new program to financially reward people who provide evidence of securities fraud.