Supreme Court looks back at Enron scandal in case over whistle-blower protections

WASHINGTON – The Supreme Court looked back Tuesday at the collapse of energy giant Enron to determine who is protected from retaliation after blowing the whistle on a company’s misdeeds.

The justices heard arguments in an appeal brought by two former employees of companies that run the Fidelity family of mutual funds. The workers claimed they faced retaliation after they reported allegations of fraud affecting Fidelity funds.

They argue that a provision of the Sarbanes-Oxley Act, passed in 2002 in response to the Enron scandal, protects their whistle-blower activity.

But the court spent most of an hour Tuesday discussing Enron’s bankruptcy in 2001 amid startling revelations that its top executives manipulated the company’s earnings and stock price by lying to employees and investors about Enron’s financial health.

The scandal also took down the Arthur Andersen accounting firm that failed to uncover efforts by Enron to hide its debts among spinoffs it created with “Star Wars”-inspired names like Chewco and Jedi.

Andersen was convicted of obstruction of justice for shredding documents relating to its audit of Enron, though the Supreme Court overturned the conviction in 2005.

In 2002, Congress responded to scandals at Enron and other companies by passing the Sarbanes-Oxley law.

The provision at issue at the Supreme Court protects people who expose the kind of corporate misdeeds that arose at Enron. But there is a dispute over whether the protection covers only employees of publicly traded companies or also applies to contractors hired by the companies.

“What happens if another Enron situation comes along and the corporation’s accounting firm retaliates against an employee of the accounting firm because that employee wants to report illegal activity by the corporation?” Justice Samuel Alito asked Mark Perry, the lawyer representing the companies that manage the Fidelity funds.

Perry said accounting firms and their employees might be covered by another provision of the law, but not the whistle-blower section in front of the court.

Justice Department lawyer Nicole Saharsky disagreed.

“The statute protects an employee of a contractor from retaliation. That’s what the text says. That’s what Congress intended to cover, these accountants, lawyers and outside auditors who were so central to the fall of Enron,” Saharsky said.

The federal appeals court in Boston sided with Perry’s clients.

A decision is expected by spring.

The case is Lawson v FMR, 12-3.