When Matthew Whitley was laid off from his job last March as a finance manager at The Coca-Cola Co., along with about 1,000 other employees, he didn't take it lying down. Two months later, Whitley approached his former employer seeking a whopping settlement-$44.4 million-on the grounds that he had been fired in retaliation for raising concerns about accounting fraud. When Coke balked, Whitley turned for relief to a new ally: the Sarbanes-Oxley Act of 2002. He filed for whistle-blower protection under the act's Section 806 provisions, and initiated federal and state lawsuits that charged seven Coke executives, including CFO Gary Fayard, with crimes ranging from racketeering to mail and wire fraud.
"This disgruntled former employee has made a number of allegations accompanied by an ultimatum: that the company pay him almost $45 million or he would go to the media," said Coke in a May statement announcing the claims. Since then, a Georgia state court judge has dismissed most of the charges, including those related to racketeering and breaches of fiduciary responsibility. While Coke may still have to defend itself against claims related to wrongful termination, "we are confident we will prevail once the facts are presented in a court of law," said Coke in a statement.
One of Whitley's allegations, however, has already had some effect. His contention that Coke falsified a marketing test of Frozen Coke at Burger King restaurants in Virginia led the company to make a public apology and an offer to pay Burger King $21 million. In July, the Department of Justice (DoJ) announced it was launching a criminal investigation of the alleged fraud.
CFOs may be forgiven for fearing that cases like Whitley's are a harbinger of things to come-that, thanks to the protections afforded by Sarbanes-Oxley, irate workers will accuse their employers of financial wrongdoing in order to wring large settlements from them. Indeed, on August 27, a federal judge refused to dismiss a whistle-blower lawsuit accusing TXU Corp., an energy company, of earnings manipulation; unless the case is settled, it will become the second suit filed under Section 806 to reach a federal court (the first involved JDS Uniphase Corp.).
But it remains to be seen whether Sarbanes-Oxley will have a significant impact on whistle-blower litigation.
Although the number of such filings has increased, most will probably be dismissed as lacking merit. And even with the new protections of Section 806, would-be whistle-blowers still face a painful cost-benefit decision: whether a lawsuit with uncertain chances of success is worth the professional and personal sacrifices that will assuredly be required.
A Reasonable Belief
In theory, disgruntled ex-employees have always been able to accuse their ex-employers of misdeeds in order to claim wrongful termination. But until the passage of Sarbanes-Oxley, most public-company employees had little to gain financially if the company denied the charges and refused to settle. Since the mid-1980s, the federal government has protected whistle-blowers whose work affects public welfare, including, for example, federal employees, government contractors, power-plant operators, and airline staff. But people who spoke out about financial fraud had no legal protection except for a handful of state laws-and then, often, only if the matter affected the general public.
Today, the law says that an employee needs only "a reasonable belief" that his or her employer is violating a securities law or is in any other way imperiling shareholder value to qualify for government protection from retaliation. "Retaliation" encompasses everything from firing to verbal threats and missed promotions. Within 90 days of experiencing retaliation, an employee can file for protection, which means anything from reinstatement with back pay to a full federal court trial with the potential of compensation for pain and suffering. These protections apply even if the employee is wrong about his or her accusations.
"The employee could be wrong, but if they have a reasonable belief there's been a violation and the company retaliates against them in any way, it triggers the whistle-blower protection in Section 806 and leaves the company wide open," says Neil Aronson, a partner with Mintz Levin Cohn Ferris Glovsky and Popeo in Boston.
A separate section of the law puts managers who allow retaliation against a whistle-blower at risk of jail time or fines. That, in turn, exacerbates the enormous public-relations risk to the company. Add to that the praise heaped on whistle-blowers like Enron's Sherron Watkins and WorldCom's Cynthia Cooper, and what does an angry employee have to lose?
Plenty, it turns out. Most people who have publicly accused their companies of securities fraud say Sarbanes-Oxley does little to mitigate the high personal price of coming forward.
"It's the exception that a whistle-blower is looking to get even, because it's very painful to break ranks with [your company], even if [you] have strong legal rights," says Thomas Devine, an attorney who has counseled more than 2,000 whistle-blowers protected by other federal statutes through the Government Accountability Project, a nonprofit group based in Washington, D.C. Even with legal protection, once whistle-blowers go public, their reputations are called into question and their future career prospects hampered, all for the dubious goal of reinstatement to a work environment in which they are considered troublemakers.
Even if a case does go all the way to a federal court, whistle-blowers would probably have to change industries if they ever want to work again, says Devine, since they will be considered "wild cards" regardless of the outcome. And despite the attention given Watkins et al., most whistle-blowers are rebuffed, not supported, by the federal government. Since Sarbanes-Oxley was passed, about 131 public-company employees have reported violations of whistle-blower protections to the Occupational Safety and Health Administration (OSHA) of the Department of Labor (DoL). (The agency was directed to oversee these violations because it has handled the industry-specific whistle-blower statutes.) Most of these investigations-83 percent of the 60 completed so far-have been dismissed or withdrawn.
True, the percentage of cases upheld may increase, since about one-third of claims have been thrown out for technical reasons-for instance, because the company is private or the alleged retaliation began before passage of the law. But in general, says John Spear, OSHA's head of investigative services, 75 percent of cases brought each year under other whistle-blower statutes are found to lack merit.
Even when the claims of fraud and retaliation are justified, it's unclear what the whistle-blower will gain. Attorneys can name wildly different figures depending on whether the underlying assumption is that the whistle-blower will never work again, will work but won't be promoted, or will have to retrain for a new profession. No one yet knows what civil juries or federal-court judges will accept.
A whistle-blower's allegations of fraud, in general, fall to more-powerful agencies, like the DoJ and the SEC. But those agencies also offer little in the way of subsequent reward, protection, or even information about the case. "The SEC is kind of a one-way street," says Stone, who had provided documents to the SEC's regional Atlanta office. So far he has not been deposed by the SEC, which is reportedly investigating Duke.
Others complain that investigations go nowhere. Roy Olofson, a former vice president of finance at Global Crossing who made allegations of accounting fraud, was interviewed only once-by the U.S. Attorney's office in winter 2002, according to his attorney, Paul Murphy. "After that, we saw no follow-up," says Murphy. The investigation has since been dropped, despite a $1 billion earnings restatement related to Olofson's concerns in late 2002.
Some whistle-blowers say they can't get heard at all. "I'm starting to feel like the wallflower at the dance," says Lynn Brewer, who worked in various divisions of Enron from 1998 to 2000. She has been trying to share her Enron documents and experiences with the DoJ and various members of Congress since the day the company filed for bankruptcy in December 2001 and nullified her confidentiality agreement with Enron. "At that point, I was getting desperate to get my story out there, because I was getting concerned about my own culpability," she says.
In the long run, of course, there's hope that Sarbanes-Oxley may have the desired effects on whistle-blowing. "A case could be made that there will be fewer claims in the future," says OSHA's Spear, "because the act puts more mechanisms in place for companies to hear from whistle-blowers early. Plus, there's a criminal penalty attached to [retaliation], which tends to get people's attention."
But reporting ethics violations is still perilous. While Coke, for example, now has a link on its Website for employees who want to report issues regarding accounting, controls, auditing, or other matters, all comments are forwarded to senior management rather than to the board or a third party. And while the site's FAQs section assures employees that they can "report suspected violations of the [conduct] code without fear of reprisal or retaliation," few are likely to do so after Whitley's experience.
Meanwhile, whistle-blowers still have to find their next job. Olofson is now consulting as he looks for permanent employment. "While this cloud is hanging over him, it's very difficult for him to find work that would make sense for him otherwise," says Murphy, his attorney. "His career path has been dramatically impacted by coming forward with his concerns."
And after sending out about 150 résumés, networking with about 50 people, and working with six recruiters, Whitley has had one interview in three months. For anyone else, that could be chalked up to the state of the economy. But Whitley has no doubt what has blown an ill wind on his job prospects: blowing the whistle at Coke.
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