Stock Exchanges Aid Corporate Whistleblowers---Say What?

Employment Attorneys Serving Northern and Central New Jersey

Both the New York Stock Exchange (NYSE) and the NASDAQ have actually made it easier for employees of publicly traded companies listed on their exchanges to successfully bring whistleblower retaliation claims. The exchanges did so by passing rules requiring listed companies to develop procedures for whistle-blowing employees to report illegal corporate wrongdoing. Of course, both the NYSE and NASDAQ did not do this out of the goodness of their hearts but were directed to take action by the Securities and Exchange Commission pursuant to Section 406 of the 2002 Sarbanes Oxley Act. See 17 CFR 228.406(b)(3) and 229.406 (b)(3). That provision requires the SEC to pass regulations requiring companies to adopt codes of ethics that would bind a public corporation’s top management to abide by federal securities laws and to prohibit retaliation for raising or reporting to illegal conduct under those laws.

The NYSE and NASDAQ passed rules that require listed companies to do essentially the following: 1) promote standards regarding ethical handling of conflicts of interest, full and fair disclosure, and compliance with laws, rules and regulations (NASDAQ makes specific reference to prohibited conduct specified by the Sarbanes-Oxley Act while the NYSE does not); 2) contain an enforcement mechanism that ensures prompt and consistent enforcement of the code, protection for persons reporting questionable behavior, clear and objective standards for compliance, and a fair process by which to determine violations; and 3) ensure that illegal action must be dealt with swiftly and the violators reported to the appropriate authorities. See, NASDAQ Equity Rule 5610 (2009) and NYSE Manual §303A.10. (2009)

What does this mean for whistle-blowing employees of companies listed on these exchanges? If there is no applicable whistleblower statute that protects whistleblowing employees from retaliation, then the employee may still bring a contract action against the employer for retaliation. In many states, courts have recognized that where an employer has distributed a manual to its workforce, the provisions may be enforceable. These same courts have enabled employers to wiggle out of these manual provisions if a written disclaimer is inserted stating that the manual’s provisions do not create any legal obligations; the rationale is that an employer is not under any legal obligation to distribute a manual. However, a disclaimer to a code of ethics may not and should not be enforced by the courts because it then makes the code of ethics that is required by the stock exchanges utterly meaningless. One federal district court has recently ruled that an employer’s disclaimer to bar enforcement of an employer’s anti-retaliation code of conduct should be not be legally recognized since it would be “rationally at odds” with the purpose of the employer’s intent to eliminate illegal retaliation. See, e.g., Leyden v. American Accreditation Healthcare Commission, 83 F.Supp.3d 241, 247 (D.D.C. 2015).

Here, it would be even more irrational for an employer to hide behind a disclaimer because its listing on either the NYSE or NASDAQ depends on an effective code of conduct that is designed to eliminate it. Finally, even if the employer’s code of conduct limits itself to reporting only securities laws violations, that restrictive application will make the employer appear that it is just covering itself to avoid securities laws violations but couldn’t care less about employees who bring complaints of illegal wrongdoing about workplace discrimination, health and safety violations, environmental violations and other workplace legal protections.