There have been lots of developments on the whistleblower front over the last couple months, and we’ve covered none of them here at Cady Bar the Door. Let’s try to catch up. Today we’ll discuss the first of this recent spate of cases: In re BlueLinx Holdings Inc., from August 10th.
The Rule
The BlueLinx administrative order is focused on Rule 21F-17(a), which says:
No person may take 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.
According to the SEC’s press release, BlueLinx violated this rule by “using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies.”
The Allegations
More specifically, here’s what the SEC alleges:
From Aug. 12, 2011 through the present, BlueLinx used several forms of severance agreements. Some of these were Letter Agreements, which came in the form of letters to the departing employees. Most of the non-management employees who left BlueLinx and who received severance payments were asked to sign Letter Agreements.
Though the Severance Agreements differed in certain respects, most of them, other than the Letter Agreements, contained some form of a provision that prohibited the employee from sharing with anyone confidential information concerning BlueLinx that the employee had learned while employed by the company, unless compelled to do so by law or legal process. The confidentiality provisions also required employees either to provide written notice to the company or to obtain written consent from the company’s legal department prior to providing confidential information pursuant to such legal process. None of the confidentiality provisions contained an exemption permitting an employee to provide information voluntarily to the Commission or other regulatory or law enforcement agencies.
In June 2013 – nearly two years after the Commission had adopted Rule 21F-17 – BlueLinx reviewed and revised each of its Severance Agreements, including the Letter Agreement, and either added or amended a number of provisions that a departing employee was required to accept as a condition for receiving monetary severance payments from BlueLinx.
One of these was a clause added to the general release provision specifically addressing interactions with governmental agencies and associated financial incentives. The new clause provided that:
Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with . . . the [EEOC], the [NLRB], [OSHA] the [SEC], or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Emphasis in order.)
Another clause said:
[The Employee shall not] disclose to any person or entity not expressly authorized by the Company any Confidential Information or Trade Secrets . . . . Anything herein to the contrary notwithstanding, you shall not be restricted from disclosing or using Confidential Information or Trade Secrets that are required to be disclosed by law, court or other legal process; provided, however, that in the event disclosure is required by law, you shall provide the Company’s Legal Department with prompt written notice of such requirement in time to permit the Company to seek an appropriate protective order or other similar protection prior to any such disclosure by you.
How the SEC Felt about All This
The SEC found that by including those clauses in its severance agreements, BlueLinx raised impediments to participation by its employees in the SEC’s whistleblower program under Rule 21F-17. By requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits.
Also, by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.
The SEC said that these restrictions 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.
Going forward, BlueLinx’s severance agreements will include the following paragraph:
Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s 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 Employee’s 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 Employee’s right to receive an award for information provided to any Government Agencies.
The company is paying a $265,000 civil penalty to move past all this.
My Take
At the ABA’s Southeastern White Collar Crime Institute last month, one of the panelists was irked about this case. He noted that it was a settled matter, and that a litigated case might end without a finding of a violation. Maybe; I don’t know. If a would-be whistleblower is allowed to report to the government, but isn’t allowed to collect an award for his report, has he been “impeded” under Rule 21F-17? Perhaps not, but I’d seen a provision like this within the last two years, and it seemed a little too cute to me. I wouldn’t have advised a company in BlueLinx’s position to bar monetary awards specifically. Anyway, the picture of what the SEC, at least, deems acceptable in this space is becoming more clear. We’ll be filling in the frame over the next couple weeks.
