Gibson Dunn | Client Alert

Client Alert

May 31, 2006

Supreme Court’s Decision That Statements Made in the Course of Official Job Duties Are Not Protected Has Implications for Sarbanes-Oxley Whistle

The Supreme Court’s decision yesterday regarding the First Amendment rights of government employee “whistleblowers” may also have important implications for whistleblower litigation involving private employers, including litigation under the whistleblower protection provision of the Sarbanes-Oxley Act. In Garcetti v. Ceballos, the Supreme Court ruled 5-4 that statements made by public employees in the course of performing their official job duties are not protected by the First Amendment and may be the basis for discipline by the employer. In that case, Ceballos, a member of the Los Angeles County District Attorney’s office, prepared as part of his job duties a memorandum recommending dismissal of a case. Although his recommendation was overruled, Ceballos informed defense counsel of his concerns regarding certain prosecution evidence and ultimately was called as a witness for the defense in an evidence suppression hearing. Claiming that his superiors retaliated against him on the basis of his statements evaluating the case, Ceballos brought suit, alleging violation of the First and Fourteenth Amendments. Reversing a Ninth Circuit ruling that statements by Ceballos regarding the prosecution’s case were protected under the First Amendment, the Supreme Court held that public employees speaking pursuant to their official duties do not speak as citizens for First Amendment purposes, and therefore the Constitution does not insulate them from employer discipline for such speech. The Court explained that without a significant degree of control over its employees’ words and actions, a government employer cannot efficiently provide public services. The Court expressed concern that a contrary rule would result in extensive and intrusive “judicial oversight of communications between and among government employees and their superiors in the course of official business.”A similar issue regarding the degree of protection afforded whistleblowers can arise under the Sarbanes-Oxley Act. Among other things, Sarbanes-Oxley protects employees who disclose to a supervisor what they reasonably believe to be a violation of any provision of federal law relating to fraud against shareholders. It remains unclear, however, whether such reporting is protected if it is a normal part of the employee’s job. For example, should statements regarding a company’s financial practices made by an internal auditor in the course of performing her normal job duties be treated as protected whistleblower activity under Sarbanes-Oxley? If such statements are treated as protected regardless of whether the employee specifically identified her concern as related to legal compliance or otherwise went beyond performing her regular job duties, the private employer - like the public employer in Ceballos - would be constrained in its ability to make legitimate performance and management decisions regarding employees in sensitive finance and accounting positions. Such a rule would be particularly troubling in the context of Sarbanes-Oxley, which was enacted for the specific purpose of enhancing the competence and accountability of internal corporate controls.Under the federal Whistleblower Protection Act and other federal statutes protecting employee reporting, the courts have addressed this concern by providing that employees do not engage in protected activity when they merely fulfill the fiduciary duties required by their job, and do not take additional steps to voice their concerns. See, e.g., Sasse v. Department of Justice, 409 F.3d 773 (6th Cir. 2005), and Huffman v. Office of Personnel Management, 263 F.3d 1341 (Fed. Cir. 2001). Although legislation has been introduced in Congress to expand the protections afforded private employees under such decisions, enactment of a legislative response appears unlikely in the near future. Accordingly, the Supreme Court’s decision in Ceballos is significant additional precedent for a narrower view of the protections provided under Sarbanes-Oxley and other whistleblower statutes applicable to private employers.   With its combined expertise in labor and employment matters and securities law, Gibson, Dunn & Crutcher is uniquely positioned to represent corporations and audit committees in Sarbanes-Oxley whistleblower matters. The firm has tried numerous whistleblower cases before the Department of Labor, and has considerable experience representing corporations and audit committees in connection with Sarbanes-Oxley "whistleblower" matters, including internal investigations; representations in federal court and Labor Department investigations; and representations before Labor Department administrative law judges and the Department's Administrative Review Board. In handling these matters, we are mindful of the importance of seriously examining the whistleblower allegations while also providing a thorough representation to our client, be it the company or the audit committee. We are able to bring to bear the expertise of our nationally-respected Securities Litigation practice group to ensure that implications under the securities laws - as well as the employment-related aspects - are fully appreciated and addressed. For more information on our Labor and Employment practice, please contact Deborah Clarke  at 213-229-7000, Eugene Scalia at 202-955-8500, or Karl Nelson at 214-698-3203.© 2006 Gibson, Dunn & Crutcher LLPThe enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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May 25, 2006

Client Caution: Settlement Discussions and Documents May Not Be Protected from Future Discovery

When a company engages in settlement discussions with the federal government or a civil plaintiff in one case, can those communications be the subject of discovery in a different lawsuit? The DC Circuit recently held that the existence of a federal settlement privilege is an "open question" in federal courts.  Gibson Dunn partner David Battaglia and associate Julian Poon are co-authors of "Willing to Settle? Think Twice," [PDF] an article recently published by The National Law Journal which provides an in-depth analysis of these issues. Reprinted with permission from the May 15 issue of The National Law Journal, © 2006 ALM Properties, Inc..
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May 23, 2006

SEC and PCAOB Announce Plans for Improving Implementation of Section 404 Internal Control Reporting Requirements

 The Securities and Exchange Commission ("SEC") and the Public Company Accounting Oversight Board ("PCAOB") issued separate press releases on May 17, 2006, announcing their plans to improve the implementation of the Section 404 internal control reporting requirements of the Sarbanes-Oxley Act of 2002. The SEC’s press release noted that, among other things, it plans to issue a “concept release” for public comment in order to solicit views on the Section 404 management assessment process and ways to improve this process. For its part, the PCAOB noted in its press release that it “plans to consider amendments” to Auditing Standard No. 2, the standard governing the auditor’s internal control audit. Although neither the SEC nor the PCAOB provided a timetable for the issuance of the “concept release” or the proposed amendments to Auditing Standard No. 2, companies should be aware that an opportunity to comment on these two important subjects will be forthcoming.The SEC’s release announcing the proposed steps can be found at: The PCAOB’s announcement can be found at: SEC’s Next Steps on Section 404Based on comments it has received in the past year, the SEC’s plan for improving the Section 404 process includes the following steps: Concept Release On Section 404 Application: The SEC plans to issue for public comment a concept release that will address the management assessment process and the role of outside auditors in management’s assessment process. The SEC also noted that the guidance it issues in the wake of the concept release will address the manner in which management can perform top-down, risk-based assessments of internal control over financial reporting. According to the release, any guidance that is ultimately issued also will take into account the fact that companies have already made substantial investments to their internal control programs and procedures.Application of Section 404 to Smaller Public Companies: The SEC stated in the release that it plans to consider forthcoming guidance from the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) on the application of Section 404 to smaller public companies and will consider, in light of COSO’s guidance, whether additional guidance from the SEC on the application of the Section 404 requirements to smaller public companies is warranted. For now, the SEC declined to accept the recommendation from its own advisory committee that smaller public companies be exempted from the Section 404 requirements.Review Of PCAOB Inspections: As part of its oversight responsibility for the PCAOB, the SEC stated in its release that it plans to review the PCAOB’s 2006 inspection process for registered public accounting firms. In particular, the SEC noted this review will include an inquiry into whether the PCAOB inspections have been effective in encouraging audit firms to implement principles characterized as “cost-saving efficiencies” that the PCAOB outlined in prior guidance issued in 2005. Extension Of Compliance Deadline For Non-Accelerated Filers: The SEC said that it expects to issue a “short postponement” of the effective date for the Section 404 rules for non-accelerated filers. The exact date of the postponement is not specified in the release. As it currently stands, non-accelerated filers (including foreign private issuers that qualify as non-accelerated filers) do not have to comply with the Section 404 rules until such company files its first annual report for fiscal years ending on or after July 15, 2007. The SEC release made no mention of an extension of the deadline for foreign private issuers meeting the accelerated filer definition, which currently must comply with the Section 404 rules for annual reports filed for fiscal years ending on or after July 15, 2006. PCAOB’s PlanThe PCAOB stated in its release that it anticipates instituting a four-point plan designed to improve implementation of Section 404 of the Sarbanes-Oxley Act and Auditing Standard No. 2. The provisions of the four-point plan are:Amend Auditing Standard No. 2: The PCAOB will propose amendments to Auditing Standard No. 2 that it says will be designed to ensure that auditors focus on areas that pose the highest risk of fraud or material error during integrated audits. The PCAOB indicated that the amendments will clarify the auditor’s role, if any, with respect to the evaluation of a company’s assessment of its internal control effectiveness. The SEC stated in its release that it plans to work with the PCAOB in reviewing and approving amendments to Auditing Standard No. 2. Among the other additional areas within Auditing Standard No. 2 that are “being considered” for amendment by the PCAOB include: Clarifying the definitions of “significant deficiency” and “material weakness” in internal control;Reconsidering the “strong indicators of material weakness” identified in Auditing Standard No. 2 to allow for more judgment in making material weakness assessments;Guiding auditors to increase their use of the work of others;Clarifying materiality and scope decisions; andEmphasizing the integration of the audit of internal control with the audit of the financial statements.Reinforce Auditor Efficiency through PCAOB Inspections: The PCAOB stated that it plans to focus its 2006 inspections of registered public accounting firms on the firms’ efficiency in conducting internal audits.Guidance and Education for Auditors of Smaller Companies: The PCAOB plans to develop implementation guidance for the auditors of smaller public companies and explore ways to ensure that those auditors have access to obtain effective training on auditing internal control over financial reporting.Continue PCAOB Forums on Auditing in the Small Business: The PCAOB plans to hold eight forums in 2006 for the auditors, directors, and financial officers of smaller public companies to provide general education about PCAOB issues and also to gather “real-time” reactions to the internal control implementation changes.Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or John F. Olson (202-955-8522,, Ronald O. Mueller (202-955-8671,,Brian J. Lane (202-887-3646,, Amy L. Goodman (202-955-8653, or Michael J. Scanlon (202-887-3668, the firm's Washington, D.C. office.© 2006 Gibson, Dunn & Crutcher LLPThe enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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May 17, 2006

OFAC Adopts New Regulations Concerning Business Transactions with the Palestinian Authority

Effective May 10, 2006, OFAC amended its Global Terrorism Sanctions Regulations, Terrorism Sanctions Regulations and Foreign Terrorist Organizations Sanctions Regulations to add general licenses (referred to below as "the May 10 amendments") authorizing certain transactions with the Palestinian Authority (PA). OFAC determined that, as a result of recent elections, HAMAS, a designated terrorist organization, has a property interest in the transactions of the PA. Thus, U.S. persons are generally prohibited from doing business with the PA. The May 10 amendments codify certain exceptions to this prohibition. In the introduction to the Final Rule implementing the amendments, OFAC clarifies that "the prohibitions involving the Palestinian Authority do not bar all transactions involving individuals and entities in Palestinian territory." The May 10 amendments authorize transactions with the Palestinian Authority by (i) persons who conduct official business on behalf of the United Nations; (ii) U.S. persons who are employees of the governments of states bordering the West Bank or Gaza; (iii) U.S. persons engaging in transactions incident to travel, employment, residence and maintenance within the jurisdiction of the PA; (iv) U.S. persons paying taxes and fees to the PA; (v) U.S. persons dealing with the Palestinian Authority Presidency (as defined in the regulations), the Palestinian Judiciary, Palestinian legislators not affiliated with HAMAS, and certain independent agencies; and (vi) U.S. persons providing in-kind donations of medicine. These general licenses are subject to the provision that no authorized payment may include a debit to an account of the PA on the books of a U.S. financial institution, or to any other blocked account. Thus, U.S. companies may continue to transact business with individuals and entities in Palestinian territory who are not affiliated with the PA, as well as with the PA itself under the limited circumstances summarized above. For further information, please contact Judith A. Lee (202-887-3591) or Radu Costinescu (202-955-8259) in Gibson, Dunn & Crutcher's Washington, D.C. office.© 2006 Gibson, Dunn & Crutcher LLPThe enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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May 13, 2006

Acting in Concert

Munich partner Philip Martinius and associate Markus Nauheim are authors of "Acting in Concert" [PDF in German] published in the German capital markets magazine GoingPublic.  The article deals with the legal watch-outs regarding the acting in concert of investors as stock holders of German companies.Reprinted with Permission
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April 27, 2006

Poison Pills “à la française”: France Implements the EU Directive on Takeovers

On April 1, 2006, France implemented the April 21, 2004 EU Directive on Takeovers. These new rules, effective immediately, will be followed by new regulations issued by the French equivalent of the SEC (Autorité des marchés financiers or AMF) a first draft of which was released on April 25, 2004.Pursuant to the new French rules: (i) the board of a French target must remain passive in the face of a takeover and is proscribed from any action, other than searching for a "white knight", unless it receives specific shareholder approval during the takeover period ("Passivity Rule");(ii) however, if the bidder (or its controlling shareholders) is not itself subject to rules with similar effect, the board of the French target may take any action to fight the takeover provided that the shareholders have approved of such actions less than 18 months before the takeover ("Reciprocity Rule");(iii) French companies may, during takeover periods, suspend existing mechanisms put in place to frustrate bids, such as restrictions on transfer of securities or on voting rights, as provided in their constitutional documents or shareholders' agreements; and(iv) French companies may adopt poison pill mechanisms.France's problematic implementation of reciprocity Pursuant to the EU Directive, since France (as opposed to French companies individually as allowed under the EU Directive) has decided to implement the "Passivity Rule", French targets should be subject to this rule regardless of whether the bidder is itself subject to rules with similar effect. In other words, French law could, on this matter, be contrary to the EU Directive. As a result, actions taken by the boards of French targets to discourage offers may be invalid failing specific shareholder approval during the takeover period.In addition, disputes as to whether a bidder (or its controlling shareholders) applies, in its home country, rules similar to the "Passivity Rule" and, as a consequence, whether the board of the French target must remain passive, will be resolved by a French authority, the AMF, regardless of the bidder's jurisdiction of incorporation.Poison pills "à la française"French targets are now allowed to issue to their existing shareholders U.S.-like poison pills (free warrants convertible into shares that are then issued at a discounted price), thus making any takeover more expensive and encouraging friendly negotiations.Again, there is much uncertainty as to whether these pills may be validly used against bidders who would not have access to similar defenses. According to the EU Internal Market Commissioner, these poison pills "à la française" are contrary to the intent of the EU Directive. The implementation of a U.S. mechanism in a French corporate governance environment that is different to that prevailing in the U.S. is also likely to raise concerns. As a matter of example, French board members have far less stringent fiduciary duties than their U.S. counterparts. French courts will thus have (as U.S. courts did in the 1980s) the important duty of setting the conditions for the proper use of these new pills (e.g., informed view of the "intrinsic" value of the target, enhanced business judgment rule and a tougher and objective "reasonable in relation to the threat posed" test). Early disclosure of the bidder's intent to launch a takeover on a French companyInspired by the UK Takeover Panel's precedent, French takeover rules now oblige any individual or entity whom the AMF has reasonable grounds to believe is preparing a takeover (evidenced by movements in trade price and volumes, discussions between the bidder and the target or the appointment of advisors) to publicly disclose its intention. In addition, the AMF will be entitled to prohibit a bidder from launching a takeover following a six-month period should such bidder have denied its intent to do so.In summary, despite the EU Directive's purpose, France's new takeover rules do allow French companies to maintain a certain level of takeover defense. At the same time, France's problematic transposition of the EU Directive may weaken defenses taken by the boards of French targets failing specific shareholder approval during the takeover period. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Benoît Fleury ( or Sophie Resplandy-Bernard ( at +33 1 56 43 13 00 in the firm's Paris office.© 2006 Gibson, Dunn & Crutcher LLPThe enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.
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