Enron Revisited as Court Reviews Whistle-Blower Shield

The U.S. Supreme Court revisited the Enron Corp. collapse as the justices debated whether whistle-blower protections in a 2002 law cover employees of auditors, law firms and other advisers to publicly traded companies.

Hearing arguments today in the case of two former mutual-fund industry workers, the justices tried to sort out a law that represented Congress’s response to the accounting fraud behind Enron’s 2001 failure. The fast-paced session was laced with questions about a hypothetical butler working for the late Kenneth Lay, who was Enron’s chairman, and the role of the company’s accounting firm, Arthur Andersen LLP.

The case will determine the scope of whistle-blower protections that watchdog groups say are important to prevent another Enron-like catastrophe. The dispute pits business groups against President Barack Obama’s administration, which is seeking a broad interpretation of the whistle-blower provision.

“That’s what Congress intended to cover: these accountants, lawyers and outside auditors who were so central to the fall of Enron,” said Nicole Saharsky, a Justice Department lawyer. Enron, once the world’s largest energy trader, collapsed after using off-books partnerships to hide billions of dollars in losses and debt. That also brought down Arthur Andersen.

Sarbanes-Oxley Law

The dispute turns on a provision in the 2002 Sarbanes-Oxley law barring publicly traded companies and their contractors and subcontractors from discriminating against an “employee” who reports fraud or a violation of securities regulations. The central question is whether that provision allows retaliation lawsuits only by the employees of the public company, or by those of its contractors as well.

The case is significant for the mutual fund industry. While the funds themselves are publicly traded, they typically have few if any employees, instead using privately held companies to conduct day-to-day activities.

The suing employees, Jackie Hosang Lawson and Jonathan M. Zang, worked for units of privately held FMR LLC. The units provide investment advice and management services to publicly traded Fidelity mutual funds.

The workers say they lost their jobs after reporting fraud. Lawson complained that expenses were being inflated and, ultimately, passed on to fund shareholders. Zang contended that a Fidelity statement filed with the Securities and Exchange Commission misrepresented how portfolio managers were compensated.

Appeals Court

FMR denies the allegations and says both employees had performance problems. Zang was fired in 2005 and Lawson resigned in 2007.

A federal appeals court ruled that Lawson and Zang can’t sue for retaliation under Sarbanes-Oxley because they didn’t work for publicly traded companies.

The workers’ lawyer, Eric Schnapper, said the lower court ruling “has the implausible consequence of permitting the very type of retaliation that we know Congress was concerned about, retaliation by an accountant such as Arthur Andersen.”

Several justices suggested Schnapper’s interpretation of the law -- as protecting all the employees of a publicly traded company’s contractors and subcontractors -- would sweep too broadly.

Justice Stephen Breyer asked whether Schnapper’s approach would allow lawsuits by employees of a gardening company that cuts the grass outside a company’s office building.

‘Mom-and-Pop Shop’

Does the statute “make every mom-and-pop shop in the country, when they have one employee, suddenly subject to the whistle-blower protection for any fraud, even those frauds that have nothing to do with any publicly traded company?” Breyer asked Schnapper.

Schnapper said his interpretation of the statute wouldn’t apply to employees of the company’s officers, including “Ken Lay’s butler.”

Chief Justice John Roberts wondered why the statute didn’t reach that far. “What about the butler who does, in fact, hear all this information about a conspiracy and wire fraud?” he asked FMR’s lawyer, Mark Perry.

Perry said that butler could file a complaint with the Securities and Exchange Commission.

“And if he gets fired, he’s completely protected and has reinstatement and back pay,” Perry said.

‘Workout Firm’

Perry said the reference to contractors and subcontractors in the disputed provision applies only to a “workout firm” brought in to wind down the affairs of a bankrupt company. He said Congress addressed accounting firms and law firms in a different part of the 2002 statute, letting two federal agencies issue regulations to protect those workers.

Under questioning from Justice Ruth Bader Ginsburg, Perry said the agencies hadn’t issued any such rules.

Saharsky said the court could limit the provision by binding contractors only when the alleged fraud involved work for the public company. Justice Antonin Scalia questioned whether that approach could be squared with the language of the statute.

“It’s a very sensible limitation,” Scalia said. “Unfortunately, it’s not there.”

The case, which the court will decide by July, is Lawson v. FMR LLC, 12-3.

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