On Monday, the SEC announced an Enforcement sweep involving settled charges against seven companies for violation of the whistleblower statute and rule. The charges stemmed from provisions that the SEC claimed impeded whistleblowers from reporting potential misconduct to the SEC contained in employment, separation and an array of other agreements. In some instances, according to the Orders, the provisions expressly stated that they
did not preclude employees from filing an administrative charge or participating in whistleblower programs, but instead involved
only a waiver of their rights to recover a monetary award for participating in an investigation by a government agency. At least one of the companies sought to qualify the waiver of the recovery right “[t]o the extent permitted by law.” But, to no avail. In none of these cases was the SEC aware of actions by the charged company to enforce the waiver provisions or instances in which the affected employees declined to speak with the SEC about potential violations of securities laws. Nonetheless, the SEC viewed these agreements as creating impediments to participation in the SEC whistleblower program. The companies agreed to pay civil penalties of just over $3 million in the aggregate, revised their internal agreement forms and notified affected employees. According to the Director of the SEC’s Denver Regional Office, the “SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws….According to the SEC’s orders, among other things, these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.”
Reuters reported that a representative of TransUnion, one of the companies charged, characterized the “SEC’s engagement on this matter” as an example of “what good regulatory supervision can look like.”
As described in these Orders, Section 21F, “Whistleblower Incentives and Protection,” was enacted in 2010 as part of Dodd-Frank “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.” The Orders emphasized that “Congress explicitly noted the importance of providing financial incentives to promote whistleblowing to the Commission as it determined that ‘a critical component of the Whistleblower Program is the minimum payout that any individual could look towards in determining whether to take the enormous risk of blowing the whistle in calling attention to fraud.’” The SEC adopted Rule 21F-17 “to fulfill this Congressional purpose.” Rule 21F-17 prohibits a person from taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
The various Orders that comprise the sweep involved provisions not just in employment agreements, but also in severance and separation agreements, retention agreements, settlement agreements, transaction incentive agreements and change-in-control agreements. The Order regarding Acadia Healthcare, for example, charged that Acadia, which paid the highest civil penalty of $1,386,000, included problematic provisions in an aggregate of 156 employment agreements, separation agreements, retention agreements and settlement agreements. Of these agreements, 98 required employees to waive their rights to recover a monetary award for participating in an investigation by a government agency, although they did not waive the right to file an administrative charge or participate in an administrative investigation or proceeding, including, in the majority of instances, participation in government whistleblower programs; 56 separation and settlement agreements required employees to waive their rights to file a complaint with any federal government agency. While the SEC was not aware of any actions by Acadia “to enforce these provisions or in which the affected employees declined to speak with the Commission staff about potential violations of securities laws, these provisions created impediments to participation in the Commission’s whistleblower program by requiring employees to forego either their right to file a complaint with the Commission staff or the financial award they might receive for doing so. Through the conduct described above, Acadia violated Exchange Act Rule 21F17(a), which prohibits any person from taking any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.” The Order indicated that, prior to contact from the SEC, Acadia had revised some of its forms of internal agreement to eliminate the problematic provisions and advised “employees that they are not prohibited from disclosing information to any governmental or regulatory authority, or from collecting any related incentive awards.” After contact by the SEC, Acadia made the same changes to the rest of its agreement templates and also used reasonable efforts to notify affected employees that their agreements did not limit their ability to contact the SEC or to obtain a monetary award.
Smart for Life was charged with only two instances of violative provisions in separation agreements, both of which involved only waivers of the “right to monetary damages or other equitable or monetary relief as a result of any charge, complaint, investigation, or proceeding.” The agreements expressly permitted the employee to “file a charge with an administrative agency or participate in an agency investigation.” Although the SEC was not aware of any actions by Smart for Life to enforce the waiver provisions or any instances where affected employees declined to speak with the SEC as a result of these provisions, the SEC contended that these provisions “created impediments to participation in the Commission’s whistleblower program by having the former employees forego the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations. Such restrictions on accepting financial awards for providing information regarding possible securities law violations to the Commission undermine the purpose of Section 21F and Rule 21F-17(a), which is to ‘encourag[e] individuals to report to the Commission.’” Given that, in a recent Form 10-Q, the company raised “substantial doubt about its ability to continue as a going concern,” the Order stated that the SEC was “not imposing a penalty greater than $19,500.”
The Order regarding IDEX charged that the company entered into a separation agreement as well as settlement agreements that required employees to waive their rights to recover monetary awards for participating in investigations by government agencies. Although the agreements expressly permitted participation in government whistleblower programs, the SEC again maintained that the waiver provisions created impediments to participation in the SEC’s whistleblower program by requiring employees to forego the financial incentives. Notably, in this case, the settlement agreements qualified the waiver of monetary relief by the language “[t]o the extent permitted by law,” but that apparently did not do the trick. IDEX agreed to pay a $75,000 civil penalty.
In the TransUnion Order, the company was alleged to have included problematic provisions in severance agreements, general release agreements and transaction incentive agreements with employees, as well as in consulting agreements with independent contractors. While the 29 agreements with employees “expressly permitted participation in government whistleblower programs,” they also required waivers of the right “to recover a monetary award for participating in an investigation by a government agency.” In addition, TransUnion was alleged to have entered into three consulting agreements that “prohibited individual contractors from voluntarily providing information about TransUnion’s business operations to government agencies and required that these contractors notify TransUnion of any legally compelled disclosure of such information.” To settle the charges, TransUnion agreed to pay a civil penalty of $312,000.
The other companies charged in the sweep were a.k.a. Brands Holding Corp., which agreed to pay a $399,750 civil penalty; AppFolio, Inc., which agreed to pay a $692,250 civil penalty; and LSB Industries agreed to pay a $156,000 civil penalty.
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