May 11 (Bloomberg) -- Two Boeing Co. auditors in 2007 thought they found weaknesses in the security of the firm’s financial reporting data. They complained, setting off a chain of events that may chill whistleblower leaks to news outlets.
Nicholas Tides and Matthew Neumann say they told Boeing it might be violating the Sarbanes-Oxley investor-protection law by urging them to say data controls were in place that weren’t. Ignored and then pressured to look the other way, they said, the two spoke with a Seattle Post-Intelligencer reporter who had left messages asking about auditing problems.
“Computer security faults put Boeing at risk,” a subsequent headline said. The airplane maker, already suspecting leaks, investigated and fired the men for unauthorized talking to the news media. They sued, citing Sarbanes-Oxley’s whistleblower protection, and lost. An appeals court said last week that the law doesn’t protect tipping off journalists.
The ruling is now the law in nine western states. It will make hiding company wrongdoing easier, according to Ken Paulson, a former editor of USA Today who is president of the First Amendment Center, which follows free-speech issues.
“Fewer whistleblowers will share information with the news media,” Paulson said. “There is no faster path to reform or to disclosure of corporate misdeeds than putting that information on the front page of a newspaper.”
The Seattle paper covers Chicago-based Boeing, the world’s largest aerospace company, because its headquarters used to be in Seattle and it has aircraft factories in the area.
Bill in Congress
The May 3 ruling in the Boeing case comes as whistleblower protections in the new Dodd-Frank law are under assault in Congress. A draft bill that opponents say would discourage insiders from reporting wrongdoing and give companies a chance to cover-up misconduct is up for a hearing today in the House.
The Boeing case was brought under the Sarbanes-Oxley law, enacted in 2002 in the wake of the Enron Corp. and WorldCom Inc. accounting scandals. The court said the law is clear in protecting corporate whistleblowers only when they tip off federal authorities, Congress or a supervisor.
“If Congress wanted to protect reports to the media, it could have listed the media as one of the entities to which protected reports may be made,” the court ruled.
The decision was made by a unanimous three-judge panel. Tides and Neumann will ask for a review of the ruling by a larger panel, said John J. Tollefsen, their Seattle attorney.
Effect on Investors
The decision “excludes whistleblowers from talking, in a sense, to investors about fraud,” said Stephen M. Kohn, executive director of the National Whistleblowers Center in Washington, an advocacy group financed by individuals and foundations that filed a brief in the accountants’ behalf.
Paul Hodgson, senior research associate at Governance-Metrics International, a research firm in New York, said Sarbanes-Oxley is “supposed to cut down on fraud,” which undermines the value of investments.
“Not just investors but insurance companies are keenly interested in this being detected as quickly as possible,” he said.
The statute may not be “strong enough to protect employees” and a change in the law might be needed, he said. Employees who go to journalists after reporting to supervisors and regulators fails shouldn’t be fired, he said.
The auditors’ lawyers contended that talking to the press can be indirectly protected by a statute that doesn’t mention journalists, since news reports can be the most effective way to provide information to regulators and Congress.
That’s the view of the U.S. Labor Department, which enforces laws protecting employees who report company safety, environmental and health violations.
The Energy Reorganization Act, for example, says nuclear power plant workers can’t be fired for disclosing safety violations to the government. That law doesn’t mention the press.
Telling a reporter about safety concerns at a plant can be protected nonetheless, because news stories may lead to official action, according to a 2001 department ruling on a fired worker.
The agency viewed Sarbanes-Oxley in the same way, according to a 2008 letter to a Boeing lawyer from the Labor Department’s Occupational Health and Safety Administration.
The Boeing appeals court saw it differently.
“We decline to adopt such a boundless interpretation of the statute,” the panel said. No other federal appeals court has decided whether whistleblower contacts with the press can be covered when the law doesn’t specifically say so.
Law Is ‘Clear’
“I can see how an argument could be made that these people should be protected,” said Kyle T. Fogt, an employment lawyer at Faegre & Benson in Minneapolis not involved in the case. “But I don’t think it’s the court’s job to do that. The statute is pretty clear.”
Sarbanes-Oxley requires public companies to have policies providing a way for whistleblowers to communicate information to management without fear of retaliation.
“Congress set up this mechanism so people would work through those systems,” Fogt said. If that doesn’t work, they can go to regulators, law enforcers or Congress and get job protection, he said.
Charles M. Elson, director of the University of Delaware’s Center for Corporate Governance, said established authorities are best able to investigate claims of wrongdoing.
In-house lawyers welcome the appeals court ruling, said Amar D. Sarwal, associate general counsel of the Association of Corporate Counsel.
Employees who spot wrongdoing should first report it internally, and Sarbanes-Oxley encourages them to do that, Sarwal said. Companies depend on insiders to report what they see so that problems can be resolved, he said.
The association thinks the awards whistleblowers can receive under the new Dodd-Frank law for reporting potential wrongdoing to the U.S. Securities and Exchange Commission might overwhelm the agency with tips, many of them false.
The group urged the SEC to write rules that require whistleblowers to first report the misdeeds internally.
That requirement is contained in the draft bill to amend the Dodd-Frank law, the Security Exchange Act. By instructing employees to report the problems internally first, it would warn companies to hide misconduct from investors, according to the National Whistleblower Center and the National Coordinating Committee for Multiemployer Plans, which represents pension plans.
Sponsored by New York Republican Michael G. Grimm, the bill would also remove some financial incentives for reporting wrongdoing to the SEC. The House Capital Markets Subcommittee is holding a hearing on the measure today.
Adair Morse, a teacher of finance at the University of Chicago, said in an interview that whistleblowers should be rewarded.
“None of them remain on their jobs,” because they are fired or quit, said Morse, co-author of an article on the subject. Finding a new job is hard, she said. “You have to pay whistleblowers to go into retirement.”
Neumann, an engineer, found work at a lesser salary in 2008, and Tides got a job last November in regulatory compliance, their attorney Tollefsen said.
Boeing looked into the auditors’ allegations and “found the internal controls to be effective and adequate,” said John Dern, a company spokesman.
The SEC never investigated, even after the newspaper story and “eight or nine” Boeing auditors contacted the agency, some of them several times, Tollefsen said.
The agency took no action against Boeing, said John J. Nester, an SEC spokesman.
The appeal case is Tides v. Boeing Co., 10-35238, U.S. Court of Appeals for the Ninth Circuit (San Francisco). The original case is Tides v. Boeing Co., 2:08-cv-01601, U.S. District Court, Western District of Washington (Seattle).
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