Virginia Lawyers Weekly

Once again, the 4th U.S. Circuit Court of Appeals is looking at what kind of a report of corporate “fraud” is protected under the Sarbanes-Oxley Act.

Just weeks after handing down its SOX whistleblower decision in Welch v. Chao, a panel heard argument Sept. 22 in another closely watched case, Platone v. U.S. Dep’t of Labor, No. 07-1635.

Former airline official Stacy Platone appealed DOL’s reversal of her whistleblower award, one of the few whistleblower wins since SOX was adopted in 2002.

In 2003, Platone filed

a SOX administrative charge, alleging that her former employer, Atlantic Coast Airlines Holdings Inc., violated Section 806 when it fired her after she complained that Atlantic airline officials were going along with pilots’ efforts to game a system for “flight loss pay” for union work, in order to curry favor with pilot union officials and win concessions in upcoming negotiations.

Platone said in her administrative complaint that the flight-loss pay scheme had cost the company $125,000 and violated federal mail and wire fraud statutes, as well as federal securities law.

The employer said it fired Platone not for her complaint, but for a conflict of interest, because she had failed to disclose the full extent of her personal relationship with the pilots’ union official who recommended her for the position of labor relations manager with Atlantic.

A DOL administrative law judge recommended awarding Platone damages, costs and attorney’s fees in 2004, but the agency’s Administrative Review Board reversed that decision in September 2006, saying Platone’s complaints were not “protected activity” under the statute.

SOX protects employees who provide information regarding conduct the employee “reasonably believes” constitutes mail fraud, wire fraud or securities fraud, according to the ARB decision. Platone’s allegations of fraud failed because the alleged fraudulent conduct was not the “type that would be adverse to investors’ interest,” the ARB said.

Last Monday’s argument in Richmond revolved around interpreting the SOX protection for reporting “fraud against shareholders,” and whether the alleged mail or wire fraud reported by Platone adversely affected investors’ interests.

Judge Karen Williams asked what level of deference is due the agency decision in SOX cases.

No deference under Chevron USA Inc. v. Natural Resources Defense Council Inc., 467 U.S. 837 (1984), said Reston lawyer Michael M. York, who represents Platone. The Chevron standard calls for judicial deference to an agency’s interpretation of its own statutory mandate.
York said the agency had used an “inside-out way of looking at the statute,” and that the type of reporting covered by SOX “has to be corporate fraud where the corporation can be criminally liable.” In setting aside Platone’s damage award, York said the ARB “is clearly mistaking intent for effect.”

“Any time an employee exposes a corporation” to criminal prosecution, “that’s by definition adverse to shareholder interest,” York said. The ARB “has erected a false term, ‘shareholder fraud,’ when the appropriate term is ‘corporate fraud.’”

But “there has to be a limitation on this statute that’s going to require Chevron deference,” queried Judge William Traxler Jr.
The legislative history of Sarbanes-Oxley, adopted after the Enron scandal, demonstrates that the statute “is geared toward fraudulent conduct that can affect investors,” said Theresa S. Fromm, the DOL attorney who argued to uphold the agency decision.

Platone’s communications to her supervisor, Fromm said, contained “nothing related to fraud perpetrated by her employer. Fromm said that what Platone “actually complained about to her supervisor was not what she put in her” SOX complaint filed with the Occupational Safety & Health Administration, which administers Sarbanes-Oxley.

Platone never communicated with the employer that her supervisor was somehow involved in looking the other way on the flight-loss issue, so he could get concessions from the union officials later on, Fromm said.

A whistleblower’s complaint has to be assessed in terms of communications to the employer, not the content of the OSHA charge, according to the ARB decision.

But what if the employee doesn’t understand the scope of the fraud being perpetrated when making a complaint to the employer, asked Traxler.

“Isn’t there some protection for the employee, perhaps wrong in the details” but who may in reality be right about a larger scheme? Traxler asked.

Isn’t the nature of the employee’s claim “determined at the time she made the complaint?” asked Judge Roger Gregory, the third 4th Circuit panelist.

None of Platone’s communications to her employer “alluded to fraud at the time of her report,” Fromm responded.

The statute is clear, Fromm said. “It’s not just fraud in the air, anywhere, but fraud that could potentially hurt shareholders.”

Because the statutory language is clear, the agency decision deserves deference, she said.

© Copyright 2010 Virginia Lawyers Media. All Rights Reserved.