“Sacked for telling tales”- The Economist

Sacked for telling tales

Tollefsen Law in the Economist

Jul 7th 2011, 16:32

by Bhuma Shrivastava  | NEW YORK

SNITCHING on your bosses’ dodgy doings has never been more rewarding. In May America’s Securities and Exchange Commission (SEC) announced a programme to make payments to whistleblowers whose tip-offs lead to their employers being fined $1m or more. The SEC was given the powers to set up the scheme under the Dodd-Frank financial-reform law, passed in the wake of the credit crunch. An earlier post-crisis law, Sarbanes-Oxley, passed in 2002 after accounting scandals at Enron and other big companies, included legal protections for individuals who speak out about corporate wrongdoing. But a recent court appeal raises doubts about how much protection whistleblowers can count on.

Nicholas Tides and Matthew Neumann, both internal auditors at Boeing, were sacked for talking to a reporter from the Seattle Post-Intelligencer about their concerns over the planemaker’s internal controls. The two men said they had gone to the newspaper after they had raised their worries with their bosses 27 times but had been ignored. They sued their former employer, claiming protection under Sarbanes-Oxley, but the district court and, in May, a federal appeals court ruled that Boeing did have the right to fire them.

Lawyers for the two auditors had argued that disclosures made “through” the news media were a means to “cause information to be provided” to federal regulators, law-enforcers or Congress. Boeing’s lawyers argued that the sacked men had made a disclosure “to” the press, whereas Sarbanes-Oxley only protects people who report their suspicions directly to the relevant authorities. The judges found Boeing’s arguments the more convincing.

The whistleblowers’ lawyer, John Tollefsen, is now seeking to rally support from federal agencies, with a view to persuading the Supreme Court to take up the case. He argues that the news media play an important role of amplifying the sound of the whistle for those who most need to hear it—investors as well as enforcement authorities.

Boeing argued during the court hearings that journalists lack expertise to understand complex financial and accounting issues, are “completely unaccountable to the public or shareholders” and cannot obtain complete information, unlike enforcement agencies. However, such agencies sometimes fail to act on complaints promptly or thoroughly, and it takes pressure from the news media to jolt them into action. In the Enron affair, newspaper reports questioning the energy conglomerate’s accounting practices helped spur the SEC to launch its inquiry. Harry Markopolos, an accountant, spent years unsuccessfully trying to get the SEC to investigate Bernie Madoff, whose massive Ponzi scheme only came to light after journalists started writing about Mr Markopolos’s suspicions. A study by the University of Chicago found that the news media uncovered more than 15% of corporate-fraud cases in America, whereas regulators, government agencies and self-regulatory bodies unearthed slightly fewer, 14%.

The protections introduced in the Sarbanes-Oxley act have led to a lot of whistleblower cases being brought. The Occupational Safety and Health Administration, a federal regulator, says it has so far received 1,850 whistleblower complaints under the law, though only 317 of these resulted in favourable outcomes for the tipsters. Stephen Kohn of the National Whistleblowers Centre worries that the appeal court’s ruling in the Boeing case will have a “chilling effect” on employees considering reporting corporate misdeeds. Company bosses, on the other hand, fear what would happen if the courts or Congress extended whistleblower protection to anyone who went telling tales to the press: not only would they be tied up in countless lawsuits; they would suffer having all sorts of confidential information dragged out into public view.

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