In the wake of the Enron and other business scandals earlier in the decade, Congress passed a series of reform measures in the Sarbanes-Oxley Act (SOX).  Among other things, SOX prohibits employers from retaliating against employees who internally or externally report financial misconduct by publicly traded corporations.  A new case from the Fourth Circuit Court of Appeals (which includes North and South Carolina) illustrates lower federal courts’ reasoning in determining exactly what types of complaints fall within SOX’s definition of protected activity.

The plaintiff in Welch v. Chao was the Chief Financial Officer for a publicly traded bank whose job responsibilities included various securities filings.  He alleged that he complained internally about improper accounting procedures as well as his restricted access to the bank’s auditor.  He ultimately refused to certify the company’s financial returns and was subsequently terminated after he refused to meet with the bank’s president and board of directors without his attorney present.  He sued, alleging retaliatory termination under SOX.

The Department of Labor dismissed the administrative complaint, finding that the plaintiff was not fired for engaging in protected activity under SOX.  DOL drew a distinction between his protected complaints, and his behavior that resulted in his termination.  The Fourth Circuit agreed, affirming dismissal of the SOX complaint.  In affirming DOL’s decision, the court also noted that the plaintiff failed to tie some of his SOX complaints to specific alleged violation of securities laws.  For example, his contention that restricting his access to the bank’s auditors is not specifically prohibited by federal securities laws.

This decision illustrates the need for careful pleadings by plaintiffs in SOX actions.  For employers, the bank helped its case by clearly documenting its attempts to meet with the plaintiff to discuss his concerns.  The bank also thoroughly investigated and found meritless the plaintiff’s claims of financial impropriety.  Especially for public companies, employee complaints of financial misconduct must be addressed in a serious, systematic manner in order to avoid later claims of retaliation.