In a corporate compliance world, companies need to be constantly on the lookout for business practices undertaken by their employees that could expose the company to significant liability, even (or especially) where the company management is unaware of these activities. A couple of recent cases drive this point home.
The Fifth Circuit held that a corporate entity could be gouged for the unauthorized kickback activity of its employees under the provisions of Anti-Kickback Act. In this particular case, employers of the federal contractor were accepting meals, drinks and recreational activities from subcontractors in exchange for providing the subcontractors with, well, subcontracts. Two employees brought a qui tam suit for the alleged kickbacks and the USDOJ intervened, filing its own complaint under the kickback statute. The Fifth Circuit determined that the Anti-Kickback Act not only allowed recovery from a “person” , but that the term “person” was broadly enough defined to include corporations and other business entities. The Court then held that the acts of the corporation’s agents and employees could be imputed of the corporation under a theory of vicarious liability.
This is a a new holding and a scary one. Employers must assure that their employees are aware of the anti-bribery and anti-kickback statutes. Moreover, companies should be taking steps to periodically monitor the conduct of their employees to insure problems (in this case routine acceptance of gifts), or even the opportunity for problems, is not arising.
Along these same lines, publicly held companies should be aware of the differing standards of liability that arise out of the Sarbanes-Oxley and the Dodd-Frank Acts. Both statutes protect whistle blowers, i.e, employees who raise concerns about potential SEC violations with their employers and then suffer some type of adverse employment action. Here is the key difference – Dodd-Frank requires a report by the employee not only to the employer, but to the SEC as well. Sarbanes-Oxley only requires a report to the employer (although other Sarbanes-Oxley provisions are not quite as employee friendly as Dodd-Frank). There is a good discussion in this recent Fifth Circuit case.
An employee who makes an internal complaint regarding the company’s securities practices should set off a red flag in any event, but be aware that Dodd-Frank liability only attaches under one set of circumstances, versus the easier reporting requirements of Sarbanes-Oxley . There are differences in how you respond to each one.