Supreme Court Extends Whistleblower Protections Under Anti-Fraud Law

The Supreme Court on Tuesday expanded protections for whistleblowers covered by an anti-fraud law passed following the collapse of energy giant Enron, ruling that outside accountants, auditors and lawyers cannot be fired or punished for exposing fraud.

The 6-3 decision will have an effect in the mutual funds and financial services industries, the court said, because they rely heavily on outside contractors and advisers.

The case before the court arose when two employees of a firm that did research for the Fidelity family of mutual funds revealed that the funds were overstating expenses. They alleged that in some instances, Fidelity was operating “veiled index funds” while collecting a fee as though they were actively managed.

The two employees say they were reprimanded and ultimately dismissed for having exposed this fraud. When they sued their employer under the Sarbanes-Oxley Act, they lost when an appeals court ruled the law’s protection for whistleblowers covered only employees of public firms, not outside advisers and accountants.

In their appeal to the high court, they said this would reimpose “the very code of silence” that allowed massive fraud such as the Enron case to occur.

Justice Ruth Bader Ginsburg speaking for the court said Congress meant to broadly protect whistleblowers who could expose wrongdoing. It made no sense, she said, to think “a Congress, prompted by the Enron debacle, would exclude from whistle-blower protection countless professionals equipped to bring fraud on investors to a halt.”

Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, Stephen G. Breyer and Elena Kagan agreed.

A dissent was filed by Justice Sonia Sotomayor, who said the law covered only “employees” of public companies, not outside advisers. Justices Anthony Kennedy and Samuel Alito agreed with her.

The whistleblower provisions in the law protect from retaliation those who reveal frauds, and they also allow them to receive a share of money that is recovered if a fraud is exposed.

This article appeared in print on page 10 of the March 5th, 2014 edition of Hamodia.