United States: SEC Whistleblower Enforcement Actions Related To Severance Agreements

On August 30, 2016, the U.S. Securities and Exchange Commission ("SEC" or the "Commission") reaffirmed its commitment to its whistleblower program by issuing the second largest award in its five-year history. While admittedly less dramatic than this $22 million payment, however, the Commission's recent enforcement activity is similarly compelling evidence of the value that the agency places on its whistleblower program. Specifically, on August 10 and August 16, 2016, the Commission announced settlements with two companies based on language in employee severance agreements that discouraged employees from reporting possible securities law violations to the SEC, including by restricting the employees' ability to seek a monetary award from the SEC. These settlements reflect the Commission's broad interpretation of the whistleblower protection provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and its continuing focus on internal confidentiality and severance agreements as an enforcement priority.

I. RULE 21F-17

Consistent with its goal of promoting corporate transparency and accountability, Dodd-Frank amended the Securities and Exchange Act to include whistleblower incentives and protections. The Commission promulgated Rule 21F-17 on August 12, 2011 to prohibit employer conduct that impedes communications with the SEC about potential securities law violations, "including enforcing, or threatening to enforce, a confidentiality agreement." While SEC Chair Mary Jo White has emphasized that the rule is not "a sweeping prohibition on the use of confidentiality agreements," the Commission has taken an expansive view of its scope, using it to police any language that raises the mere possibility that tipsters will be discouraged from coming forward.

For example, in its first Rule 21F-17 enforcement action, the SEC brought charges against KBR, Inc. on April 1, 2015 for language in a confidentiality agreement that prohibited employees from discussing the details of interviews conducted in the course of an internal investigation without prior authorization from the company's general counsel. The SEC did not suggest that the stated purpose of the provision at issue – "to protect the integrity of the review" – was pre-textual or otherwise improper. Nor was there any evidence that KBR intended to enforce the provision or that it deterred any whistleblowing activity. Nonetheless, the Commission took the position that the provision violated Rule 21F-17 because it did not make an exception for an employee's right to communicate directly with the Commission about potential misconduct at the company. In addition to paying a $130,000 fine, KBR voluntarily amended its confidentiality agreement to explicitly acknowledge that nothing in the company's confidentiality agreement "prohibits [the employee] from reporting possible violations of federal law or regulation to any government agency or entity" without "the prior authorization of the Law Department [.]"

II. BlueLinx Holdings, Inc. ("BlueLinx")

On August 10, 2016, the SEC filed and simultaneously settled charges with BlueLinx concerning language that the company included in severance agreements with certain former employees. The severance agreement required employees to (i) refrain from sharing confidential information about BlueLinx that the employee learned while employed by the company unless compelled to do so by law or legal process; (ii) notify the company prior to disclosing information to any third parties and/or (iii) forego any monetary recovery in connection with any "complaint or charge" that the employee may file with an administrative agency. The SEC took the view that "[r]estrictions on the ability of employees to share confidential corporate information regarding possible securities law violations with the Commission and to accept financial awards for providing information to the Commission . . . undermine the purpose of Section 21F, which is to 'encourage individuals to report to the Commission,' and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission staff about possible securities law violations."

In addition to imposing a fine of $265,000, the settlement required BlueLinx to incorporate the following provision in all of its severance agreements, as well as in any other agreements with employees that include prohibitions on the use or disclosure of confidential information relating to the company:

Protected Rights. Employee understands that nothing contained in this Agreement limits Employees' ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission ("Government Agencies"). Employee further understands that this Agreement does not limit Employees' ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employees' right to receive an award for information provided to any Government Agencies.

III. HEALTH NET, INC. ("HEALTH NET")

On August 16, 2016, the SEC filed and simultaneously settled charges with Health Net alleging that the company's severance agreements required employees to relinquish their ability to seek whistleblower rewards in violation of Rule 21F-17. The severance agreements included language that explicitly targeted the SEC's whistleblower program, waiving the employee's "right to file an application for an award for original information submitted pursuant to Section 21F of the Securities Exchange Act of 1934." As part of a regular periodic review and update of its agreements, Health Net voluntarily deleted this language in June 2013 and added a provision clarifying that "[n]othing herein shall be construed to impede the employee from communicating directly with, cooperating with or providing information to any government regulator." However, the severance agreements retained general restrictions on the employee's ability to recover money in connection with a proceeding by "any federal, state, or local government agency or department," even as they recognized that the employee "may file charges and participate in any such proceeding." This provision was removed in October 2015.

The SEC acknowledged that there was no evidence that Health Net had ever tried to enforce any provisions in the severance agreement that could discourage whistleblowers from communicating with the Commission, or that any potential whistleblower was in fact silenced as a result of the provision. However, the SEC noted that the provisions undermined the purpose of Rule 21F-17 "by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations." As part of the settlement, Health Net agreed to pay a $340,000 fine and to contact impacted former employees to inform them of the settlement and make clear that they are not prohibited from seeking and obtaining a whistleblower award from the SEC.

IV. RECOMMENDATIONS FOR EMPLOYERS REGULATED BY THE SEC

Given the SEC's broad interpretation of Rule 21F-17, employers regulated by the SEC would be well-advised to review their current confidentiality and severance agreements to ensure that there is no language that could potentially prohibit or discourage whistleblowers from communicating with the SEC. In the event that there is language restricting employees from communicating with third parties or from recovering monetary awards, legal counsel should be consulted about whether and how to revise the agreements to reflect evolving best practices in the industry and the SEC's recent focus on provisions that the agency believes may impede whistleblowing activity. Employers should also consider reviewing previous confidentiality and severance agreements to identify potentially problematic language and consult with legal counsel to determine whether it may be advisable to take appropriate remedial measures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.