Preventing Whistleblower Claims: Lessons Learned From Another Year of Sarbanes-Oxley

1. Preventing Whistleblower Claims: Lessons Learned From Another Year of Sarbanes-Oxley AGG Employment Law Seminar June 10, 2004 Robert F. Dow Arnall Golden Gregory LLP 1201 West Peachtree St., Ste. 2800 Atlanta, Georgia 30309 (404) 873-8706 robert.dow@agg.com

2. Sarbanes-OxleyWhistleblower Provisions • Civil remedies for retaliation against employees reporting securities fraud to company supervisors, law enforcement or Congress (Sec. 806) • Criminal remedies for retaliation against informants reporting violations of any federal law to law enforcement (Sec. 1107) • Audit committees must establish procedures for handling complaints about accounting and auditing issues (Sec. 301) • Requires a code of ethics addressing compliance with laws and internal reporting of violations (Sec. 406)

3. Section 806 Civil Remedies

4. Section 806 What Actions Are Protected • Providing information or otherwise assisting in an investigation OR • Filing, testifying, participating in or otherwise assisting in a proceeding that is • Filed or • About to be filed (with any knowledge of the employer)

5. Section 806 What Investigations Are Covered Investigations involving violations of: • Federal criminal law involving securities fraud, mail fraud, bank fraud, or wire, radio and television fraud • SEC rules or regulations; or • Federal law relating to fraud against shareholders.

6. Section 806 Blowing The Whistle – To Whom? • Federal regulatory or law enforcement agency • Any member or committee of Congress • Persons working for the employer: • Supervisory authority over employee • Authority to investigate, discover, or terminate misconduct

7. Procedure ForSeeking Remedies • Complainant has 90 days after violation to file complaint with Department of Labor (DOL) • DOL must determine that the employee has made a showing that the protected conduct was a contributing factor in the employer’s action • If so, DOL opens an investigation

8. Procedure ForSeeking Remedies (cont’d) • DOL issues an order to either dismiss the complaint or impose sanction • Either party may appeal the order to an administrative law judge • If DOL does not resolve the complaint within 180 days, complainant may bring a claim in federal district court

9. Recent Case Activity

10. Morefield v. Exelon Services (Jan. 2004) • Plaintiff claims: • Management manipulated financial reports • Plaintiff fired when he complained • Company claimed the employee of a non-public subsidiary not covered by SOX • Lessons: • Can’t play corporate shell game to avoid liability • No materiality limit for accounting irregularities

11. Welch v. Cardinal Bankshares(Jan. 2004) • Plaintiff claims: • False accounting entries to inflate income • CFO access to auditors restricted • Too many non-finance personnel could make accounting entries without CFO approval • Company started an investigation into allegations • Plaintiff terminated when he refused to meet with audit committee without his attorney

12. Welch v. Cardinal Bankshares(Jan. 2004)(cont’d) • Lessons learned: • Employee needs only reasonablebelief • Company liable even if investigation indicates allegations were wrong • Can’t place conditions on communications • Protected activity only has to be a “contributing factor” in termination • Closeness in time may indicate that termination was in retaliation

13. Hopkins v. ATK Tactical/Sys. (May 2004) • Plaintiff claims he was fired because he complained about release of sludge into groundwater • Complaint dismissed because it was filed late and failed to show a cause covered by SOX • Lessons: • Close attention to procedures needed • SOX not that broad: only financial fraud • Employee’s best shot is to show there is no legitimate claim

14. Platone v. Atlantic Coast Airlines(April 2004) • Plaintiff claims she was terminated because she raised concerns about possible flight pay fraud • Company claims plaintiff was dismissed due to her personal relationship with a union representative/pilot • Lessons: • Employer must show proper motive by clear and convincing evidence • If dual motives can’t be separated, employer loses

15. Getman v. Southwest Securities, Inc.(Feb. 2004) • Plaintiff claims: • Pressured to give favorable analysts’ report on SSI client • Fired when she refused to sign a “buy” rating • Lessons: • Refusal to sign report is “whistleblowing” • Company can’t suddenly decide that this is a bad employee after protected conduct

16. Whitley v. Coca-Cola (Oct. 2003) • Plaintiff claims he was fired for raising issues about Coke’s fountain unit and Burger King • Settled for $540k: $240k to plaintiff and $300k to his attorney • Coke also wrote down $9 million in assets, and continues to be under an SEC investigation

17. Halloum v. Intel Corp. (Mar. 2004) • Plaintiff claims the company retaliated for his complaints about improper deferral of invoices by placing more stringent requirements on him • Company was able to establish that it would have taken these actions, regardless of the complaints, due to plaintiff’s poor performance and violations of policy • Lesson: Timely documentation of employee performance is key to defending whistleblower claims

18. Murray v. TXU Corp. et al. (Texas, April 2003) • Allegations in Murray’s complaint: • TXU had aggressive earnings targets • CFO engaged in “earnings management” • TXU didn’t disclose exposures in trading markets • Murray made numerous objections to management • Murray was terminated 8/1/02

19. Collins v. Beazer Homes(Georgia, May 2003) • Allegations from Collins: • Beazer was taking deposits on homes but misapplying the funds for other purposes • Collins suspected that Beazer division management was receiving kickbacks from a contractor • Collins complained to corporate management • Division management immediately terminated her

20. Section 1107 Criminal Penalties

21. Section 1107 Criminal Penalties – Overview • Very broad application • Applies to public and private companies • Whistleblowing of violations of any federal law • Employers and their agents may face: • Fines up to $500,000 ($250,000 for individuals) • Imprisonment up to 10 years

22. Federal Sentencing Guidelines Reward “Effective Compliance Program” • Compliance standards and procedures reasonably capable of reducing the prospect of criminal activity • Oversight by high-level personnel • Due care in delegating substantial discretionary authority • Effective communication to all levels of employees

23. Federal Sentencing Guidelines Reward “Effective Compliance Program” (cont’d) • Reasonable steps to achieve compliance, which include systems for monitoring, auditing, and reporting suspected wrongdoing without fear of reprisal • Consistent enforcement of compliance standards including disciplinary mechanisms • Reasonable steps to respond to and prevent further similar offenses upon detection of a violation

24. Jan. 2004 Amendment to Sentencing Guidelines • Reporting system must encourage employees to seek guidance regarding potential criminal conduct without fear of retribution • System to periodically evaluate compliance program’s effectiveness in: • Preventing and detecting criminal activity • Promoting a culture that encourages a commitment to compliance with law • Compliance training programs for directors, senior management and personnel with substantial authority

25. Section 301 Audit Committee Requirements for Complaint Procedures

26. Procedures for Handling Complaints Regarding Accounting Matters • Receipt, retention, and treatment of complaints • Regarding accounting, internal accounting controls or auditing matters • Including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters The SEC rules require the audit committee to establish procedures for:

27. Section 301 Effective Dates • Rule became effective 4/25/03 • Applies to all companies listed on national securities exchange or association (NYSE, AMEX, Nasdaq, etc.) • Most listed companies must comply by the earlier of: • First annual meeting after 1/15/04 or • 10/31/04e until 7/31/05

28. Survey by Deloitte & Touche (July 2003) (Top 4000 public companies) 79% - have a hotline or other mechanism to report ethics issues - 90% of those have anonymous reporting - 40% report results at least quarterly to Board of Directors 67% - have training on ethics and compliance