Feb. 14 --A fired general manager for a Colombian oil services firm affiliated with Core Laboratories NV, a Netherlands company whose stock is publicly traded in the U.S., has no retaliation claim under the Sarbanes-Oxley Act because his alleged whistle-blower complaints involved violations of Colombia's tax laws, the U.S. Court of Appeals for the Fifth Circuit ruled Feb. 12 (Villanueva v. Dep't of Labor, 2014 BL 38323, 5th Cir., No. 12-60122, 2/12/14).
Affirming the Labor Department's dismissal of a SOX Act complaint, the court said William Villanueva did not engage in protected activity under Section 806 of the act because he never alleged that he reasonably believed Saybolt de Colombia Limitada, his former employer, or Core Laboratories NV, the U.S.-traded affiliate, had violated any U.S. law enumerated in the act.
Rather, Villanueva claimed he was denied a pay raise and fired in April 2008 for warning executives at Saybolt Colombia and Core Labs about what Villanueva believed was Saybolt's fraudulent under-reporting of taxable revenue to the Colombian government, the court said.
Villanueva is not a U.S. citizen and has never worked in the U.S., but he alleged the involvement of Core Labs, whose stock is traded on U.S. stock exchanges and therefore is regulated by the Securities and Exchange Commission, was sufficient to bring his retaliation claim within the ambit of the SOX Act whistle-blower provision.
The Fifth Circuit declined to reach the issue of whether the SOX Act has extraterritorial application to a foreign employee working outside the U.S. who alleges fraudulent behavior by a multinational employer traded on U.S. stock exchanges.
Instead, the court said the Labor Department's Administrative Review Board properly dismissed Villanueva's complaint on the narrower grounds that he failed to allege SOX Act-protected activity.
“Section 806 prohibits retaliation only if the employee provides information regarding conduct that he or she reasonably believes violates one of six enumerated categories of U.S. law,” Judge James L. Dennis wrote.
“As the board held, in neither his complaint to [the DOL] nor in his communications to Core Labs and Saybolt Colombia did Villanueva indicate that he was providing information that he reasonably believed violated any of those six categories. He therefore failed to show that he engaged in any protected whistleblowing activity, making it unnecessary for us to decide whether § 806 can have extraterritorial application.”
Judges Edith Hollan Jones and Stephen A. Higginson joined in the decision.
A native of Colombia who worked for Saybolt Colombia for more than 24 years, Villanueva in January 2008 began raising concerns to several Core Labs and Saybolt Colombia employees that a transfer-pricing scheme the firms were using resulted in Saybolt Colombia wrongfully claiming a value-added tax exemption and the under-reporting of the company's taxable income to the Colombian government.
Villanueva addressed his concerns to Saybolt Colombia's controller and Core Labs's accounting assistant for Colombia and sent copies of his e-mails to Core Labs's U.S.-based chief accounting officer in Houston. Villanueva asked that Saybolt Colombia's controller correct the tax exemptions before closing the books on the company's tax year ending March 31, 2008.
But Core labs instead had two Colombia law firms send opinion letters to Villanueva stating there was no impropriety in the transfer pricing transactions or in claiming the VAT exemptions. Villanueva, who is a lawyer, disagreed with the firms' conclusions regarding Colombian law and refused to sign Saybolt Colombia's tax returns, which were due to Colombian tax authorities by April 17, 2008.
Villanueva alleged that as a result, he was passed over for a scheduled pay raise on April 3 and Saybolt Colombia fired him on April 29, 2008.
In June 2008, Villanueva filed a SOX Act complaint with the Labor Department's Occupational Safety and Health Commission, alleging Saybolt Colombia and Core Labs violated Section 806 of the act by retaliation against Villanueva for blowing the whistle on the companies' alleged scheme to violate Colombian tax law.
OSHA dismissed the complaint, reasoning that because the adverse employment actions--denial of the pay raise and termination--took place outside the U.S., the agency lacked jurisdiction over Villanueva's complaint.
Villanueva sought review, but a DOL administrative law judge affirmed dismissal. The ALJ ruled that applying Section 806 to the facts of Villanueva's case would entail extraterritorial application of the SOX Act's whistle-blower provision and that such application would be improper because Section 806 does not apply to non-U.S. citizens working outside the U.S. for foreign firms.
On review of the ALJ's decision, the ARB also concluded Villanueva's SOX Act complaint must be dismissed--but for different reasons. The board found it had jurisdiction, but affirmed dismissal on the “narrow grounds” that Villanueva's disclosures to company officials about alleged violations of Colombian law lacked “a sufficient connection to violations of [U.S.] law” to find Villanueva engaged in protected activity under the SOX Act (33 IER Cases 1818 (DOL ARB 2011)).
The ARB said SOX Act Section 806 limits its protection to six enumerated violations of U.S. laws pertaining to mail, wire or securities fraud, but Villanueva's claims of alleged fraud by Colombia Saybolt and Core Labs “involved Colombian laws with no stated violation or impact on U.S. securities or financial disclosure laws.”
Villanueva argued that even if Section 806 does not apply outside the U.S., his complaint would trigger only domestic applications, as Core Labs is publicly traded in the U.S. and played a key role in the alleged tax fraud scheme.
But the ARB reiterated that Villanueva's reporting of alleged foreign tax law violations fell outside the scope of Section 806.
Villanueva appealed to the Fifth Circuit.
The Fifth Circuit said it did not need to decide whether Section 806 has extraterritorial application because Villanueva's OSHA complaint and his earlier internal complaints to company officials did not allege protected activity under the act.
The SOX Act prohibits companies publicly traded in the U.S. from retaliating against employees who disclose or report suspected violations of six enumerated categories of U.S. law, the court said. Those categories include federal mail, wire, bank and securities fraud statutes, SEC rules and any other federal law related to fraud against shareholders, the court said.
But in his OSHA complaint, Villanueva alleged retaliation solely because of his reports about suspected violations of Colombian tax law, the court said.
Villanueva argued the SOX Act applies because the alleged fraud in Colombia was perpetrated at the “express direction” of Core Labs executives in Houston using mail, e-mail and telephones to accomplish the fraud.
But the court said Villanueva's “single reference” in his OSHA complaint to Core Labs's Houston executive using electronic means to communicate with their Colombian colleagues “is insufficient to demonstrate that he had a reasonable belief that there was a violation of the U.S. mail- and wire-fraud statutes.”
“Rather, as the [ARB] concluded, the focus of Villanueva's complaint to OSHA was that Core Labs retaliated against him because he complained of Saybolt Colombia's violation of Colombian tax laws,” the court said.
Similarly, Villanueva's underlying evidence does not indicate he complained to Core Labs or Saybolt Colombia executives that “they were violating U.S. law by using domestic mail or wires to orchestrate Colombian tax-law violations,” the court said.
The court said it agreed with the ARB the “critical focus” under Section 806 is “whether the employee reported conduct that he or she reasonably believes constituted a violation of federal law.”
Given that Villanueva's sole focus was on Saybolt Colombia's alleged unlawful under-reporting of taxes due to the Colombian government, he can't show protected activity under the SOX Act, the court said.
David N. Mair of Kaiser, Saurborn & Mair in New York represented Villanueva. Sharon Swingle, Steven J. Mandel and Mary E. McDonald of the DOL in Washington and Mark B. Stern of the Justice Department in Washington represented the DOL. W. Carl Jordan and Grace Ho of Vinson & Elkins in Houston represented intervenors Core Laboratories NV and Saybolt de Colombia Limitada.
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Text of the decision is available at http://www.bloomberglaw.com/public/document/WILLIAM_VILLANUEVA_Petitioner_v_UNITED_STATES_DEPARTMENT_OF_LABOR.
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