Department of Labor’s Administrative Review Board Rules Against Fannie Mae and Issues Another Pro-Whistleblower Decision Concluding that Reports of Misconduct Already Known to Employer are Still Protected from Retaliation.

Yesterday this blog reported on the Department of Labor Administrative Review Board’s broad interpretations of protected activity under the whistleblower protection provisions of the Sarbanes-Oxley Act in a case brought against FedEx Corp. On June 28, 2011, the ARB issued yet another important ruling broadening protections afforded to SOX whistleblowers in a case brought against Fannie Mae. Rejecting arguments asserted by Fannie Mae, the ARB concluded that an employee’s reports of misconduct already known to the employer are still protected from retaliation under SOX.

The case, Inman v. Fannie Mae ARB No. 08-060, ALJ No. 2007-SOX-47 (ARB June 28, 2011) involves Fannie Mae’s handling of its Amortization Integration Modeling System (AIMS), which a 2003 external investigation by the Office of Federal Housing Enterprise Oversight (OFHEO) found to be responsible for weaknesses in Fannie Mae’s internal controls and practices that did not conform to Generally Accepted Accounting Principles (GAAP). In response to the investigation, Fannie Mae announced that the public should not rely upon its financial statements and auditors’ reports from January 2001 through the second quarter of 2004. A 2005 Fannie Mae white paper on their amortization practices in that period concluded that the processes, models, and assumptions used for amortization calculations were causing serious enough errors to warrant the design of a new amortization engine.

Thomas S. Inman was hired by Fannie Mae in November 2005 to serve as an FAS 91 Senior Manager, and was responsible for managing activities related to their FAS 91 accounting, establishing and maintaining “appropriate internal controls with SOX teams in Controllers,” and updating FAS 91 accounting and reporting practices. In January 2006, Inman noticed that AIMS had generated an overstated amortization expense based not on AIMS’ calculations, but on flawed and manipulated data, resulting in a $52.4 million expense overstatement and a $2.6 billion anomalous income result. After reporting this discrepancy to management, Inman was given a poor performance evaluation and then terminated five days after reporting the accounting flaw. Fannie Mae claims he was terminated “due to poor management skills.”

Inman filed a SOX complaint in August, 2006 charging that he was illegally terminated in retaliation for raising these accounting concerns. After an OSHA investigation found no cause to believe the termination was retaliatory, Inman requested a hearing before an Administrative Law Judge (ALJ). Prior to any ALJ hearing, Fannie Mae filed a Motion for Summary Judgment claiming that Inman “never raised any issued that fall under the SOX whistleblower protection provisions prior to his termination.” The ALJ granted Fannie Mae’s motion and dismissed Inman’s complaint. Inman appealed the ruling to the Administrative Review Board (ARB).

Citing Sylvester v. Paraxel Int'l, a ground breaking case issued by the ARB on May 25, 2011, the ARB rejected the ALJ’s conclusion that Inman did not engage in SOX-protected activity because he never complained “definitely and specifically” to anyone at Fannie Mae or otherwise. In reversing the ALJ’s decision, the ARB relied on its prior holding in Sylvester that the “definitively and specifically” standard “presents a potential conflict with the express statutory authority on Section 1514A, which prohibits a publicly traded company from discharging or in any other manner discriminating against an employee for providing information regarding conduct that the employee ‘reasonably believes’ constitutes a SOX violation.”

The ARB also rejected the ALJ’s denial that Inman engaged in SOX protected activity because he did not specifically report fraud. Again citing Sylvester, the ARB declared that any of the six enumerated categories of misconduct in SOX Section 806, including any practice in violation of the rules or regulations of the Securities and Exchange Commission, which includes Inman’s complaint, are protected under SOX.

Finally, the ARB rejected the ALJ’s reasoning that SOX protections did not apply to reports of misconduct like Inman’s, which reported on misconduct about which the employer was already aware. The ARB decision emphatically states that “neither the SOX nor its implementing regulations indicate that an employee does not engage in protected activity when he informs his employer about violations of which the employer is already aware.”

The ARB remanded the case to the ALJ for further proceedings.

Debra S. Katz, a partner at Katz, Marshall & Banks who specializes in the representation of whistleblowers, praised the ARB’s decision. “Sylvester and the steady stream of recent ARB decisions that have cited Sylvester to protect whistleblowers have done much to restore SOX whistleblower protections to their intended strength. After Sylvester reversed the pattern of decisions disarming SOX’s protections, whistleblowers have gained ground in the fight to protect themselves when exposing corporate wrongdoing.”