Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

HealthSouth and Whistle Blower Protection

After the Enron debacle, the US enacted whistle blower protection into Section 806 of the Sarbanes-Oxley Act. Many companies around the world adopted whistle blower policies in accordance with the requirement of this law.

But much of this protection is quite useless if judges and prosecutors are insensitive to the organizational ground realities within which whistle blowers have to function. The verdicts in the HealthSouth case in the United States provide an excellent example of how things can go badly wrong. HealthSouth’s founder Chairman and CEO was acquitted on all counts in June. A few other employees and former employees received mild sentences. As if to compensate for all these failures, the prosecution sought tough penalities against the whistle blower himself. Last week, the judge imposed the longest prison sentence in the case so far on the whistle blower Weston Smith!

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