Supreme Court extends whistle-blower protections under anti-fraud law

WASHINGTON -- The Supreme Court on Tuesday expanded protections for whistle blowers covered by an anti-fraud law passed following the collapse of energy giant Enron, ruling outside accountants, auditors and lawyers cannot be fired or punished for exposing fraud.

The 6-3 decision will have an effect in the mutual fund and financial services industries, the court said, because they rely heavily on outside contractors and advisers.

The case before the court arose when two employees of a firm that did research for the Fidelity family of mutual funds revealed the funds were overstating expenses. They alleged that in some instances, Fidelity was operating “veiled index funds” while collecting a fee as though they were actively managed.

The two employees say they were reprimanded and ultimately dismissed for having exposed this fraud. When they sued their employer under the Sarbannes-Oxley Act, they lost when an appeals court ruled the law’s protection for whistle blowers covered only employees of public firms, not outside advisers and accountants.

In their appeal to the high court, they said this would reimpose “the very code of silence” that allowed massive frauds such as Enron to occur.

Justice Ruth Bader Ginsburg, speaking for the court, said Congress meant to broadly protect whistle blowers who could expose wrongdoing. It made no sense, she said, to think “a Congress, prompted by the Enron debacle, would exclude from whistle-blower protection countless professionals equipped to bring fraud on investors to a halt.”

Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, Stephen G. Breyer and Elena Kagan agreed.

A dissent was filed by Justice Sonia Sotomayor who said the law covered only “employees” of public companies, not outside advisers. Justices Anthony Kennedy and Samuel Alito agreed with her.

The whistle-blower provisions in the law protect those who reveal frauds from retaliation, and they also allow them to receive a share of money that is recovered if a fraud is exposed.