Whistle-Blower Woes

The big question, of course, is how to separate the wheat from the chaff when confronted with an allegation. In fact, attorneys say the threshold for launching an investigation is pretty low. "If it violates the laws of nature, you don't have any obligation to investigate," says Jeff Stone, an attorney with McDermott, Will and Emery in Chicago. "But if it could be true, the prudent and wise thing to do would be to conduct an investigation." Indeed, at UTC, Gnazzo will check out accounting-related complaints even when the financial exposure is extremely low, or even zero. "If you take care of the $120 cases, you take care of the larger issues at the same time," he says.

Once a complaint is received, companies need to make every effort to protect a whistle-blower's anonymity, attorneys say. That task is considerably easier at big companies like UTC, where internal audits are routine. At smaller companies, they say, the best option may be to question senior-level managers in confidence before broadening the inquiry to rank-and-file workers.

Companies should also keep track of complaints, since OSHA's 90-day statute of limitations starts when the alleged retaliation occurs, not when the concerns are raised. "This means every time you let someone go or reduce compensation or turn them aside for a promotion, the audit committee has to ask the question: Has this person in any way questioned our audit practices?" says Neil Aronson, a partner at Mintz Levin Cohn Ferris Glovsky and Popeo. "Theoretically, you could disagree now with the CFO, and then bring a claim when the CFO demotes you two years later."

So is it ever OK to fire someone who has previously raised concerns? Of course, say attorneys. "If it turns out the person has maliciously spread false information about the company, you'd have good grounds to consider terminating that relationship," says Stone.

Neither of these attorneys, however, advocates rewarding employees who report allegations that turn out to be true. Says Aronson: "What you're asking them to do is their job, and you don't want to create a bounty system that might further skew incentives." —A.N.

Telling on Yourself

Almost from the day he joined medical-equipment maker Vital Signs Inc. in late 2001, Joseph Bourgart had suspicions about the Totowa, New Jersey­ based company's accounting choices. As a result, he approached CEO Terry Wall, audit-committee members, and the general counsel as many as 30 times between January and November 2002 about what he considered to be inflated valuations for inventory and an investment in China, as well as understated values for expenses such as supplier rebates and taxes, among other issues.

Bourgart was summarily demoted and then forced to resign in January. Since then, the $175 million firm has taken charges of about 40 cents per share to correct many of those concerns. So why hasn't he been protected by whistle-blower statutes? Bourgart was CFO at the time, and as such certified the financial statements he was challenging.

Bourgart filed a civil lawsuit in New Jersey state court in May. His attorney, Jon Green, of Green Lucas Savitz and Marose LLC, insists that his client was bullied into signing the statements by Wall, who is also chairman, founder, and majority stockholder, but later realized the error of his ways. Wall, meanwhile, claims Bourgart had conceded that the accounting was appropriate after an audit-committee review last summer and furthermore "voiced no objection" to any part of the 10-K in December. Vital Signs has moved to dismiss the case, and has threatened to countersue. Under Section 906 of Sarbanes-Oxley, Bourgart could face fines of up to $1 million or 10 years in jail for "knowingly" signing erroneous statements. Meanwhile, Green says he has eschewed the law's whistle-blower statutes, "because we felt they didn't provide adequate protection." Instead, Bourgart is making his case under the long-standing New Jersey Conscientious Employee Protection Act, a whistle-blower-protection law with higher damage payouts.

Other attorneys say that, hypothetically, such a case isn't impossible for a CFO to win. "The question is really whether he exhausted his responsibilities of due diligence before he signed, and took action on anything that didn't pass the smell test," says Jeff Lerer, an attorney with Foley Hoag in Boston. Provided Bourgart can show why he couldn't have known the truth at the time of the filing, he's probably off the hook, Lerer speculates, at least for criminal penalties. —A.N.

Blowing the Whistle: Six Recent Cases

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