Compliance Hotline

FASB Delays Stock-Option Rule

The Financial Accounting Standards Board will delay by 6 months the effective date for public companies to implement the proposed standard that would require companies to expense the value of employee stock options in the income statement. The original FASB's exposure draft proposed an effective date for public companies of Jan. 1, 2005. By a 5-to-2 vote, the Board agreed that the proposed rule should become effective for periods beginning after June 15, 2005, or the third quarter for companies on a calendar-year financial reporting cycle. FASB also agreed to allow companies to restate their profits for the first two quarters of 2005 to reflect options expensing using calculations from existing footnote disclosures.

Whistleblower Claim Under SOX Does Not Need to Allege Specific Fraud

The District Court for the Northern District of Georgia has ruled that while the severity or specificity of the plaintiff's allegations in support of her whistleblower claims under SOX did not rise to the level of complaints raised in the Enron matter, this does not mean that the legislation was not meant to protect her. Collins v. Beazer Homes USA Inc., No. 1:03-CV-1374-RWS (Sept. 2).

The plaintiff was hired as director of marketing of a home building company, subject to a mutual 90-day assessment review period. Shortly after being hired she began having conflicts with her manager and the director of sales stemming from the use of an advertising agency that the plaintiff did not favor. She expressed concern that this agency was still being used behind her back even after she had terminated the agency. In addition, she was concerned with the way the division's marketing costs were being categorized. After the plaintiff made other similar complaints over the next few months, she was terminated. The primary reason stated was that she could not get along with any of her fellow employees. The plaintiff filed a complaint with the Department of Labor Occupational Safety and Health Administration (OSHA) and later the instant complaint asserting claims under SOX, and Florida's Whistleblower's Act. Specifically, she claimed her termination was in retaliation for reporting violations of the defendants' internal accounting controls, which was supported by the fact that she was terminated 14 days after she first met with the Vice President of Human Resources to report the violations and 8 days after emailing the CEO of the company. The employer filed a motion for summary judgment, claiming that she did not engage in any activities protected by SOX and that she was terminated during her probationary period because of personality conflicts with her coworkers and not for any protected activity. The district court disagreed.

The court noted that SOX protects employees who provide information that they reasonably believe constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. Further, that 'a plaintiff is not required to show an actual violation of the law, but only that she 'reasonably believed' that there was a violation of one of the enumerated laws or regulations.' Here, the defendants argued that the plaintiff did not engage in protected activity because she never specifically alleged securities or accounting fraud and because her complaints were too vague to constitute protected activity.

In support of this argument, the defendants contrasted the plaintiff's disclosures to those made by Sherron Watkins, the former Enron Vice President, noting that Watkins, an accountant, had expressed concerns that specific securities laws were being violated. The plaintiff here was a marketing director 'who expressed only vague concerns that amounted to nothing more than personality conflicts and differences in marketing strategies.' In rebuttal, the plaintiff cited four specific disclosures that came within the coverage of SOX. First, that the division was knowingly overpaying invoices to an advertising agency; second, that is was using this agency because of a personal relationship between management and the agency; third, that the director of sales was violating the division's commissions scheme by overpaying sales agents who were her personal friends; and fourth, that kickbacks were suspected with regard to the purchase of lumber. The plaintiff contended that these disclosures are protected because they allege attempts to circumvent the company's system of internal accounting controls and therefore state a violation of Section 13 of the Exchange Act.

The court found that thought it was a close case, the defendants cannot establish as a matter of law that the plaintiff did not engage in protected activity under SOX. Further, that while the plaintiff's complaints did not rise to the level of complaints that were raised in the Enron matter, 'the mere fact that the severity or specificity of her complaints does not rise to the level of action that would spur Congress to draft legislation does not mean that the legislation it did draft was not meant to protect her. In short, if Congress had intended to limit the protection of [SOX] to accountants, or to have required complainants to specifically identify the code section that they believe was being violated, it could have done so. It did not. Congress instead protected 'employees' and adopted the 'reasonable belief' standard for those who 'blow the whistle on fraud and protect investors.”

FASB Delays Stock-Option Rule

The Financial Accounting Standards Board will delay by 6 months the effective date for public companies to implement the proposed standard that would require companies to expense the value of employee stock options in the income statement. The original FASB's exposure draft proposed an effective date for public companies of Jan. 1, 2005. By a 5-to-2 vote, the Board agreed that the proposed rule should become effective for periods beginning after June 15, 2005, or the third quarter for companies on a calendar-year financial reporting cycle. FASB also agreed to allow companies to restate their profits for the first two quarters of 2005 to reflect options expensing using calculations from existing footnote disclosures.

Whistleblower Claim Under SOX Does Not Need to Allege Specific Fraud

The District Court for the Northern District of Georgia has ruled that while the severity or specificity of the plaintiff's allegations in support of her whistleblower claims under SOX did not rise to the level of complaints raised in the Enron matter, this does not mean that the legislation was not meant to protect her. Collins v. Beazer Homes USA Inc., No. 1:03-CV-1374-RWS (Sept. 2).

The plaintiff was hired as director of marketing of a home building company, subject to a mutual 90-day assessment review period. Shortly after being hired she began having conflicts with her manager and the director of sales stemming from the use of an advertising agency that the plaintiff did not favor. She expressed concern that this agency was still being used behind her back even after she had terminated the agency. In addition, she was concerned with the way the division's marketing costs were being categorized. After the plaintiff made other similar complaints over the next few months, she was terminated. The primary reason stated was that she could not get along with any of her fellow employees. The plaintiff filed a complaint with the Department of Labor Occupational Safety and Health Administration (OSHA) and later the instant complaint asserting claims under SOX, and Florida's Whistleblower's Act. Specifically, she claimed her termination was in retaliation for reporting violations of the defendants' internal accounting controls, which was supported by the fact that she was terminated 14 days after she first met with the Vice President of Human Resources to report the violations and 8 days after emailing the CEO of the company. The employer filed a motion for summary judgment, claiming that she did not engage in any activities protected by SOX and that she was terminated during her probationary period because of personality conflicts with her coworkers and not for any protected activity. The district court disagreed.

The court noted that SOX protects employees who provide information that they reasonably believe constitutes a violation of section 1341, 1343, 1344, or 1348, any rule or regulation of the Securities and Exchange Commission, or any provision of Federal law relating to fraud against shareholders. Further, that 'a plaintiff is not required to show an actual violation of the law, but only that she 'reasonably believed' that there was a violation of one of the enumerated laws or regulations.' Here, the defendants argued that the plaintiff did not engage in protected activity because she never specifically alleged securities or accounting fraud and because her complaints were too vague to constitute protected activity.

In support of this argument, the defendants contrasted the plaintiff's disclosures to those made by Sherron Watkins, the former Enron Vice President, noting that Watkins, an accountant, had expressed concerns that specific securities laws were being violated. The plaintiff here was a marketing director 'who expressed only vague concerns that amounted to nothing more than personality conflicts and differences in marketing strategies.' In rebuttal, the plaintiff cited four specific disclosures that came within the coverage of SOX. First, that the division was knowingly overpaying invoices to an advertising agency; second, that is was using this agency because of a personal relationship between management and the agency; third, that the director of sales was violating the division's commissions scheme by overpaying sales agents who were her personal friends; and fourth, that kickbacks were suspected with regard to the purchase of lumber. The plaintiff contended that these disclosures are protected because they allege attempts to circumvent the company's system of internal accounting controls and therefore state a violation of Section 13 of the Exchange Act.

The court found that thought it was a close case, the defendants cannot establish as a matter of law that the plaintiff did not engage in protected activity under SOX. Further, that while the plaintiff's complaints did not rise to the level of complaints that were raised in the Enron matter, 'the mere fact that the severity or specificity of her complaints does not rise to the level of action that would spur Congress to draft legislation does not mean that the legislation it did draft was not meant to protect her. In short, if Congress had intended to limit the protection of [SOX] to accountants, or to have required complainants to specifically identify the code section that they believe was being violated, it could have done so. It did not. Congress instead protected 'employees' and adopted the 'reasonable belief' standard for those who 'blow the whistle on fraud and protect investors.”