Top Menu

Words Matter As The First Circuit Concludes That The FCPA Is Not A “Rule Or Regulation” Of The SEC


Recently, the First Circuit concluded that the Foreign Corrupt Practices Act is not “a rule or regulation” of the SEC as that term is used in Section 1514A of Sarbanes-Oxley (a whistleblower protection provision).

In terms of background, Earl Donald Baker was an employee of Smith & Wesson (“S&W”) who was terminated. Thereafter, Baker filed a complaint against S&W asserting that S&W retaliated against him for reporting illegal conduct by S&W employees. He asserted, among other things, a claim under Section 1514A of Sarbanes-Oxley and alleged that the purported misconduct that he reported to S&W’s human resources and general counsel was that management employees received large bribes and provided improper preferential treatment to a vendor.

As stated by the court, “Baker argued that he engaged in protected activity because he reported conduct that he reasonably believed violated 15 U.S.C. § 78m(b)(5), an FCPA provision addressing accounting practices and internal controls.”

The First Circuit stated:

“To make out a prima facie case under Section 1514A, a plaintiff must allege the existence of facts and evidence showing:

(i) the employee engaged in a protected activity or conduct; (ii) the [employer] knew or suspected, actually or constructively, that the employee engaged in the protected activity; (iii) the employee suffered an unfavorable personnel action; and (iv) the circumstances were sufficient to raise the inference that the protected activity was a contributing factor in the unfavorable action.


On appeal, the parties dispute only whether Baker satisfied his burden of showing the first requirement, that he “engaged in a protected activity or conduct.” Section 1514A provides whistleblower protection to:

[A]ny lawful act done by the employee . . . to provide information, cause information to be provided, or otherwise assist in an investigation regarding any conduct which the employee reasonably believes 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, when the information or assistance is provided to or the investigation is conducted by . . . a person with supervisory authority over the employee . . . .

To satisfy the “protected activity” requirement, an employee must show that he had both a subjective belief and an objectively reasonable belief that the conduct that he reported constituted a violation of one of the provisions listed in Section 1514A(a)(1).


Baker argues that he has satisfied his burden of showing the “protected activity” requirement because he reported conduct that he reasonably believed violated Section 78m(b)(2), (5). He concedes that Section 78m(b)(2), (5) is not one of the fraud statutes listed in Section 1514A(a)(1) — Sections 1341 (mail fraud), 1343 (wire fraud), 1344 (bank fraud), or 1348 (securities fraud) — and is not a “provision of Federal law relating to fraud against shareholders.” 18 U.S.C. § 1514A(a)(1). He argues only that the FCPA, including Section 78m(b)(2), (5), is a “rule or regulation of the Securities and Exchange Commission.”

However, the First Circuit disagreed and held:

“The plain text of Section 1514A(a)(1) makes clear that the FCPA is not a “rule or regulation of the Securities and Exchange Commission.”


Based on the text of Section 1514A(a)(1), “any rule or regulation of the Securities and Exchange Commission” does not include federal statutes, such as the FCPA. As the Ninth Circuit explained in Wadler v. Bio-Rad Laboratories, Inc., “Congress uses the phrase ‘any rule or regulation of the [SEC]’ in the same list in which it uses ‘any provision of Federal law relating to fraud against shareholders,’ which strongly suggests that there is a difference between the meaning of ‘rule or regulation’ and ‘law.'” (See here for the prior post on the Ninth Circuit’s decision in Wadler).”


In case you are wondering, after passage of the FCPA the SEC did indeed adopt rules to further implement certain of the FCPA’s provisions.

So-called Rule 13b2-1 provides that “no person shall directly or indirectly, falsify or cause to be falsified, any book, record or account subject to” the books and records provisions.

So-called Rule 13b2-2 provides, in pertinent part, that “no director or officer of an issuer shall, directly or indirectly”

(1) Make or cause to be made a materially false or misleading statement to an accountant in connection with; or

(2) Omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading, to an accountant in connection with:

(i) Any audit, review or examination of the financial statements of the issuer required to be made pursuant to this subpart; or

(ii) The preparation or filing of any document or report required to be filed with the Commission pursuant to this subpart or otherwise.


As highlighted here, in 2014 Smith & Wesson resolved a $2 million SEC FCPA enforcement action concerning conduct in Pakistan, Indonesia, Turkey, Nepal and Bangladesh.

Save Money With FCPA Connect

Keep it simple. Not all FCPA issues warrant a team of lawyers or other professional advisers. Achieve client and business objectives in a more efficient manner through FCPA Connect. Candid, Comprehensive, and Cost-Effective.


Powered by WordPress. Designed by WooThemes