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Thursday, Jan. 5, 2012

SC Johnson Whistleblower Case Moves Forward

Former accountant says Racine company fired him for reporting tax fraud

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To the general public, Racine-based SC Johnson & Son is "the family company" that makes the trustworthy household products Pledge, Ziploc, Windex, Glade and Raid, among others.

But to accountant Michael DeGuelle, SC Johnson is the company that fired him after he blew the whistle on alleged fraudulent tax schemes that reportedly generated a windfall of millions of dollars for the privately owned company.

Since 2009, SC Johnson and DeGuelle have been locked in a bitter legal battle over the former employee's efforts to report the company's allegedly fraudulent tax returns to federal authorities.

DeGuelle said that after he refused to accept a higher salary in exchange for dropping his claims, SC Johnson fired him. The company has sued him for defamation in state court.

The company won the first round in Racine County. DeGuelle is appealing that decision.

DeGuelle is suing SC Johnson in federal court, and in December DeGuelle won the second round when a three-judge panel of the U.S. Court of Appeals for the Seventh Circuit found that he could sue his former employers in federal court for racketeering.

DeGuelle said he's happy with the appellate judges' decision, since it affirms protections granted to whistleblowers in 2002's Sarbanes-Oxley Act, which was passed after Enron's collapse.

"I think what it mostly brought out is that this case is much bigger than myself or, for that matter, SC Johnson," DeGuelle said. "The significance of the case is humongous: that now an employee is free to do the right thing for no reason other than that it's the right thing to do and an employer simply can no longer retaliate against them. That's humongous. That is the very heart of what happened at Enron. Enron wouldn't have happened if employees could have spoken up and reported the fraud."

SC Johnson played down DeGuelle's court victory.

Christopher Beard, SC Johnson's director of public affairs, responded to the Shepherd's inquiries with an emailed statement: "The Seventh Circuit Court of Appeals held that Mr. DeGuelle's complaint included enough unproven claims to start a lawsuit. However, Mr. DeGuelle's federal court lawsuit essentially attempts to re-litigate the Racine County suit where that court decided in SC Johnson's favor, dismissing all of DeGuelle's claims and awarding SC Johnson damages on its claims. Like the Racine County case, we believe we will prevail in the District Court and that the case will be dismissed."

The decision comes on the heels of an investigation by the Institute for Wisconsin's Future that found that SC Johnson had not paid state income taxes from 2000 to 2008. The company claimed that it received enough state research and development tax credits to wipe out its tax liability in Wisconsin. But Pulitzer Prize-winning journalist David Cay Johnston reported that the company uses sophisticated tax schemes involving its subsidiaries outside of the state to zero out its tax liability in Wisconsin.

Pattern of Dubious Tax Accounting?

The U.S. appellate court's summary of the case appears to show a history of DeGuelle's attempts to report on dubious tax accounting, as well as SC Johnson's retaliation against him for blowing the whistle.

DeGuelle alleges in court documents that SC Johnson seized on a mistake made by the IRS, which netted the company an extra $5 million in foreign tax credits, then altered and destroyed records so that it could take advantage of that mistake.

According to court documents, in 2001 DeGuelle reported the initial mistake to a superior, Daniel Wenzel, who told DeGuelle that they should wait and "this is why I go to church on Sundays."

In 2002, Wenzel allegedly instructed DeGuelle and another employee to exploit accounting rules and destroy documents so that it could reduce its tax liability by an estimated $2 million.

In 2005, Wenzel allegedly told DeGuelle to fraudulently alter an income statement, which would reap SC Johnson approximately $3.7 million.

Later, DeGuelle met with SC Johnson executives about working in a hostile environment and his concerns about the company's dubious tax claims. In March 2008 he received a negative performance review "even though such mid-year reviews were not routine, and despite the fact that DeGuelle received an Officer's Award in recognition of his superior job performance in January of that year."

DeGuelle continued to alert superiors about his tax fraud concerns and he received yet another negative performance review. He then informed human resources that he would report the tax fraud to state or federal agencies.

Allegedly, SC Johnson then decided to negotiate with DeGuelle, revoking his negative review and offering him a higher salary and a transfer if he'd drop his whistleblower claim with the U.S. Department of Labor. DeGuelle refused the offer and filed his claim on Dec. 18, 2008. He was terminated in April 2009. The company claimed DeGuelle distributed confidential documents outside of the company; DeGuelle claims he only shared them with federal investigators. SC Johnson filed suit in circuit court; DeGuelle sued the company in federal court.

DeGuelle said he's confident he'll win a jury trial on the racketeering charges and will prevail in his appeal in state court. But he said his attempt to do the right thing has come at a high personal and professional cost. DeGuelle had been out of work for two years. He now works as a state tax auditor, earning half of what he had made at SC Johnson. He said companies that had attempted to recruit him away from SC Johnson no longer want to bring him in for interviews.

He said that the battle with SC Johnson and his disillusionment with the court system led to severe levels of depression. The latest decision, however, has helped to brighten his view of the legal system and protections for whistleblowers.

"I feel an incredible level of vindication," DeGuelle said. "I had a lot of people tell me that I couldn't do it. And I've been able to do what I've said all along that I should be able to do."