lawyers in India

Whistle blowers and the law - The Sarbanes-Oxley Act

Written By: Abeer Kumar - student
Law of WILLS
Legal Service
  • Defined as the process by which employees working in a public or private corporation blow the whistle or disclose claims of malpractices by or within the organizations. It is also disclosing information about acts of corruption or dangers to the public or environment. This is generally done where the interest of the public is involved. This is particularly true where the projects are financed by the tax payers money. Another definition made by investigators in the field is the disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control their employers to persons or organizations that maybe able to effect action.

    The term whistle blowing is a universal phenomenon. A person goes public with the claims usually after failing to remedy the matters from the inside, at great personal risks to themselves. The person making the said allegations is termed as the whistleblower. Whistleblowers cannot remain silent and usually speak out on the face of improper behaviour. A person is termed as a whistleblower only when he/she discloses serious malpractices. India too has witnessed the appearance of whistleblowers from V.P.Singh to Manoj Prabhakar to P. Dinakar. Such practices range from corruption and fraud in defence procurement to cheating and plagiarism in scientific research. It is in this context that a whistleblower or whistle blowing is differentiated from other related practices such as in-house criticism, anonymous leaks etc.

    Object and consequences:
    Since the primary object to be achieved by the disclosure of a malpractice is to awaken the public about the wrongful acts of an organization, it also serves the purpose of filling in gaps or overcoming any lacunae which might have occurred due to inefficiency on the part of the corporation. Also, the goal is to stop the improper actions, penalize the wrongdoers and redress or compensate any victims, if any. This forms a reform perspective, in which the solution to problems is to replace corrupt people with honest ones and to establish good processes for monitoring and dealing with problems. The consequences suffered by a whistleblower after he discloses the information to the public is generally grave and irregular. It varies from ostracism to blacklisting. A whistleblower is subjected to numerous acts of cruelty ranging from petty harassment, spreading rumours, formal reprimands, transfer, suspension and can also become targets of termination. This is commonly termed as Shoot-the-messenger syndrome, though not many whistleblowers are physically shot, barring a few exceptions like Satyendra Dubey.

    Taking the example of Frank Serpico, who joined the New York Police Force in 1960, where payoffs and kickbacks were rampant in the department at that time. When he refused to take the money, his fellow officers saw him as a potential danger. He approached the New York Times after his complaint about the corruption prevailing in the NYPD was ignored by the Police Commissioner and the Mayor. As a result of this brave act he became a target of his colleagues and criminals who tried to terminate him. The disclosure lead the then-Mayor John Lindsay to create an independent committee, the Knapp Commission, to investigate Police corruption in the NYPD. On June 18th of that year, Serpico testified against a former partner. Death threats continued and it all came to a head when he was shot point blank in the face while making a drug bust in Brooklyn. His colleagues did not call for help. He resigned from the force on June 15, 1972 and was awarded a medal of honour for conspicuous bravery and action.

    Also, when Jeffrey Wigand simply told the truth, about what he saw and experienced as the head of research and development for Brown & Williamson Tobacco Corporation (B&W), the country's third largest tobacco company- How the company misled consumers about the highly addictive nature of nicotine, how it ignored research indicating that some of the additives used to improve flavour caused cancer, how it hid and encoded documents that could be used against the company in lawsuits brought by sick or dying smokers. Wigand too become a victim of his honesty as he amid lawsuits, countersuits and an exhaustive smear campaign orchestrated by his company, Wigand lost his family, his privacy and his reputation. His wife divorced him, and their two daughters went to live with her. Despite these consequences he made front page news when he revealed that his former employer knew exactly how addictive and lethal cigarettes were. He delivered an impressive deposition in a Mississippi courtroom that eventually lead to the tobacco industry's $246 Billion litigation settlement. This story lead to the making of a critically acclaimed movie called, The Insider, starring Russell Crowe.

    Even in India when G.R. Khairnar a middle ranking public servant was reinstated at a time when he only had a month of service left before retirement. The object of pro-longing the appeal was to keep him out of service for most of his productive years.

    This is generally the fate of those who decide to stand up against the system. Instead of evaluating the information provided by the whistleblower, the full power of the organization is turned against him. Whistleblowers are generally hardworking, conscientious employees who believe in the system. It is only when they see that there has been grave malpractice, they speak out in the expectation that their complaint will be treated seriously. When they are attacked instead, they seek immediate relief from some higher body that will dispense justice. But it has often been observed from experience that formal
    channels are part of the problem. The reason behind this is that Appeal bodies are part of the system and usually seek or reach accommodation with other powerful groups. Hence, such bodies are hesitant to provide protection to whistleblowers who are employees of certain major organizations. Ideally, a government department and certain enterprises should voluntarily establish an internal procedure for whistleblowers as a matter of best practice. Providing for a speedy remedy within the organization is to be preferred for a number of reasons. Perhaps the foremost of these is that internal procedures may form part of a strategy to remove the stigma associated with justifiable cases of whistleblowing.

    Employee's duty:
    In this regard an article published in Fortune, noted that 200 major U.S. Corps have recently appointed ethics officers, usually senior managers of long experience, to serve as ombudsmen and encourage whistleblowing. But this is highly dependent upon the truth in the statement made by the whistleblower. The individual who is making the disclosure must have sufficient information. If not, this can lead to consequences such as sound co-operative relationships in the organization can be unduly damaged Using force can contribute to an atmosphere or belief culture that the only way to get things done is through force. As noted, it would be considered as a mistake to think that the whistle blowing as a forcing strategy exhausts the opportunities for making an appropriate response to wrongdoing. The ideal framework is likely to include a combination of both internal and external reporting agencies. This will result in establishing guidelines that help to differentiate between circumstances when it is proper to utilize internal mechanisms or those when recourse should be had to an external agency. This however is inadvertently dependent upon whether or no the whistleblower should go public. There would seem to be a consensus of opinion that in circumstances where public exposure can be justified by an overwhelming and immediate concern for the public interest, such as when public safety maybe at risk or when there is no other alternative.

    It is also required from employees that they should, as a matter of duty, be bound to disclose information or evidence in support of any acts of corruption. Therefore, the question arises of whether or not there should be a positive duty to report wrongdoing. It is worth noting that many corporations have now introduced codes of business conduct.

    The code of one such company Coca-Cola Amatil has the following provision:
    Each employee shall be alert to any action or omission in Connection with his or her work which might constitute a violation Of this Code, shall attempt to prevent Code violations and shall Take prompt corrective action necessary to remedy and prevent any Recurring violation of this Code. Where personal corrective action is not possible or practicable, the employee should immediately bring the matter to the attention of his or her supervisor, the functional Executive Director or the Managing Director.

    It goes on: Any failure by an employee to report a Code violation in accordance with this Code section shall itself constitute a Code violation. Also, legislative provisions such as Section 11 of the Independent Commission Against Corruption Act, 1988 (NSW) impose duties on certain officers to report incidences of suspected corruption.

    Role of the media:

    The media can play an essential role in uncovering and reporting on cases where a person commits the offence of taking detrimental action against another person making a protected disclosure. As such the media would be taking a positive position in the task of whistleblower protection. Circumstances maybe as such that may arise where it is essential that the public be informed immediately of the allegations made by a whistleblower. The Electoral and Administrative Reform Commission in Queensland (EARC) has taken the view that whistleblowers should not be protected after disclosing information to the media except where there is a serious, specific and immediate danger to the health or safety of the public It is also argued that, except in circumstances such as these outlined above, a whistleblower who goes to the media should bear in mind the consequences of that decision. The public interest is served, in part, by the ability of the media to help to ensure that matters of concern are given proper attention and to act as an additional safety net lest important matters be set aside.

    Lawyer's duties:

    Recent corporate scandals in the U.S. brought the role of accountants-and lawyers- into sharp focus. Many felt that with accountants, securities, lawyers were also responsible for the irregularities committed. Lawyers were, or should have been aware of the illegalities their corporate clients were perpetrating at the expense of shareholders, employees and creditors. It was time to bring them under direct suspension.

    For example, The Sarbanes-Oxley Act, 2002 thus required the U.S. Securities and Exchange Commission to prescribe minimum standards of professional conduct for securities lawyers. A particular requirement was to have a rule necessitating lawyers who practice before the SEC (representing issuers) to report evidence of a material violation of securities law or breach of fiduciary duty "up the ladder" to the company's Chief Legal Officer (or both CLO and CEO), audit committee, (if there is no audit committee), to another committee composed solely of independent directors; and if none, to the full board of directors. The aim is to make sure that lawyers' in addition to accountants and company executives' do not violate the law and ensure that the law is being followed.

    The rules take an expansive view of "appearing and practicing" before the SEC. Attorneys must report evidence of a material violation by the issuer or any officer, director, employee or agent of the issuer. This reporting must be "up the ladder", as discussed above. At each stage, there must be categorical responses from the issuer. An outside attorney who has not received an appropriate response and reasonably believes that a material violation is ongoing or is about to occur and is likely to result in substantial injury to the financial interest or property of the issuer or the investors must forthwith withdraw from representing the issuer, notify the SEC of the withdrawal ("noisy withdrawal") and promptly "disaffirm" any tainted submissions.

    Should whistleblowers be protected?

    It has often been argued whether protection should be given to whistleblowers or not. However, it seems that in light of the unfortunate detriment action being taken against any whistleblower has resulted in a public outcry for immediate relief from arbitrary actions being taken by public and private persons. The following examples establish sufficient evidence of the necessity for enacting legislations:

    The following experience from an American study is fairly typical of the long-term impact of whistle blowing. In 1973 Joseph Rose became an in-house attorney for the Associated Milk Producers in San Antonio, Texas. He discovered illegal contributions to the committee to re- elect President Nixon. He reported his findings internally and was rejected. He knew that he could be implicated in a criminal conspiracy as the Watergate saga was unfolding, but, equally, disclosure could lay him open to charges of violating attorney /client privilege. Thirty-five years old with five children and an ill wife, he was dismissed for raising his concerns, losing not only his job and undermining his financial security, but also, he was deliberately isolated in the community where his erstwhile employers had enormous influence. Having acted from ethical and professional considerations, he was shunned by other attorneys and blacklisted across the United States. Some years later he managed to establish a private practice and when a favourable article about him appeared in the Wall Street Journal new clients sought him out. In 1987, almost 15 years after his ethical activities, finally, he was offered a job by another corporation.

    India has also recently witnessed the murder of Satyendra Dubey, an IIT graduate who was assassinated as a result of disclosing in a letter addressed to the PMO about the widespread irregularities and corruption that NHAI officials and contractors were engaged in. his request for keeping his identity secret was duly rejected by the officials. Dubey ended up paying with his life for drawing the PMO's attention to the corruption in the system. It is suspected that the contractor mafia was behind his killing. The PMO could have averted his death if they had kept his identity a secret, but denied the request. A public interest litigation filed in the Supreme Court has sought the setting up of an enquiry commission. According to reports, over the past decade, 57 engineers have been killed. It is important that the government takes steps to protect whistle blowers. In 1999, Prime Minister Atal Behari Vajpayee had advocated a Whistleblower Act.

    Although such legislation found support with the Central Vigilance Commission and the Constitutional Review Commission, the proposal remains in cold storage to date. Public outrage has now prompted leaders across political parties to express support for legislation to protect whistleblowers.

    Two years after the murder of the IIT graduate, Satyendra Dubey, pressure from the Supreme Court which heard the PIL on the Dubey murder case, the NDA government announced an interim arrangement to protect whistleblowers pending the enactment of a law.
    On 3rd March, 2006, The Whistleblowers (Protection in Public Interest Disclosures) Bill, 2006 was introduced to provide for protection from criminal or civil liability, departmental inquiry, demotion, harassment and discrimination of whistle blowers, i.e., the persons who bring to light specific instances of illegality, criminality, corruption in any Government, public or private enterprise. However the bill is yet to be passed and assented to by the President.
    Every Nation or Commonwealth Parliament should legislate to protect bona-fide whistleblowers. Legislation may have both negative and positive elements:

    On the positive side:
    1. Recognize the role of bona fide whistleblowers,
    2. Promote the establishment of 'internal' mechanisms by which relevant issues of concern might be reported and addressed define the conditions under which a disclosure might be protected and
    3. Any principles / prohibitions relating to the maintenance of confidentiality,
    4. Establish a framework to ensure that those subject to complaint or allegations are treated according to principles of natural justice.

    On the negative side:
    1. Create an offence of engaging in acts of recrimination against a bona Fide whistleblower,
    2. Fix penalties for such an offence.

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