Don’t Tread on the SEC’s Whistleblower Program (Through Confidentiality Agreements)

Thomas KlebestreifenWhistleblowers are a problem for corporations and a boon for the SEC.

The SEC relies in part on whistleblowers to identify possible wrongdoing within publicly-traded companies. From the agency’s perspective, the employees and officers of a company are in the perfect position to report on their company’s securities violations.

KBR recently learned the hard way that any perceived effort to restrict employees from participating in the SEC’s whistleblower program will not be well received. Luckily for KBR, the penalty was slight: $130,000 fine and a mandated revision of its employee confidentiality policy.

The Basics of the SEC’s Whistleblower Program

According to the SEC:

Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission. Through their knowledge of the circumstances and individuals involved, whistleblowers can help the Commission identify possible fraud and other violations much earlier than might otherwise have been possible. That allows the Commission to minimize the harm to investors, better preserve the integrity of the United States’ capital markets, and more swiftly hold accountable those responsible for unlawful conduct.

But all this help doesn’t come cheap.

The Dodd-Frank Act authorized the SEC to offer financial rewards to whistleblowers. To date, the largest award to a single whistleblower was just over $14 million. SEC whistleblower awards range between ten and thirty percent of the money from a sanction arising out of the investigation.

The SEC’s Office of the Whistleblower administers this program and retains some discretion as to whether to reward a whistleblower and the amount of the award.

Limitations on Whistleblowers

There are some limitations for obtaining a whistleblower award (many of which mirror False Claims Act limitations). Here are a few of them:

  • An “eligible whistleblower” must report the wrongdoing—a person who “voluntarily provides [the SEC] with original information about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur.”
  • The final monetary penalty arising from the investigation must exceed $1 million.
  • A company or organization may not be a whistleblower, though you do not need to be an employee of the organization to report its wrongdoing and seek an award.
  • The information must be “voluntary,” meaning that it was not requested from the whistleblower (or her lawyer) by the SEC or another agency.
  • The “original information” must come from personal knowledge, not publicly available sources.
  • You may submit a tip anonymously, but to do so, you must have a lawyer represent you.

 Recent Whistleblower Award After Internal Report

The SEC recently made an award under the program, though the details are vague. An unnamed former officer of a similarly unnamed company was awarded an undefined percentage of the company’s sanction, which amounted to between $475,00 and $575,000.

What is interesting about this award is that the officer learned about the wrongdoing from a subordinate. Normally, this would render him or her ineligible for an award because he would lack personal knowledge of the violations.

However, the officer benefited from an exception to the general rule. If a securities violation is escalated to a company’s compliance department and it fails to remedy the problem for 120 days, the exclusion does not apply. After 120 days are up, a whistleblower is eligible for an SEC award even if she learns about the violations from a subordinate.

No Retaliation Allowed

Companies are not permitted to retaliate against whistleblowers, and they do so at their peril. According to the SEC:

Employers may not discharge, demote, suspend, harass, or in any way discriminate against you because of any lawful act done by you in providing information to us under the whistleblower program or assisting us in any investigation or proceeding based on the information submitted.

The SEC also provides helpful information for employees who believe they have been the subject of such retaliation:

If you believe that your employer has wrongfully retaliated against you, you may bring a private action in federal court against your employer. If you prevail, you may be entitled to reinstatement, double back pay, litigation costs, expert witness fees, and attorneys’ fees. The Commission can also take legal action in an enforcement proceeding against any employer who retaliates against a whistleblower for reporting information to us.

Also, under the Sarbanes-Oxley Act, you may be entitled to file a complaint with the Department of Labor if you are retaliated against for reporting possible securities law violations, including making internal reports to your company.

The KBR Settlement

The SEC also recently made clear that it will not tolerate indirect efforts by companies to restrict whistleblowers.

KBR, Inc. is an American construction and engineering behemoth and former Halliburton subsidiary. KBR performed troop base logistic support for the U.S. military during its time in Iraq.

It recently settled a case with the SEC related to overly restrictive confidentiality agreements.

According to KBR’s settlement, the company conducted internal investigations and audits of some 200 military bases. During these investigations, the company wanted to protect the information discovered.

KBR had its employee-witnesses overseas sign broad confidentiality agreements. When KBR returned its focus to the United States, it continued to use the same language in its stateside confidentiality agreements:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

According to the SEC, the language of KBR’s confidentiality agreements violated SEC Rule 21F-17, which prohibits retaliation against whistleblowers.

Rule 21F-17 states that

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 (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) with respect to such communications.

KBR and the SEC have since entered into a settlement. KBR has agreed to reform its confidentiality agreements and pay the SEC $130,000 in return for a release from the enforcement action without admitting fault.

The revised confidentiality agreement reads:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

An Employee’s Guide to Confidentiality Agreements

KBR’s improper confidentiality agreements can help employees understand what to look for when scrutinizing their own employer’s confidentiality agreement.

Some takeaways:

  • An agreement that requires employees get prior authorization before going to the SEC, or any other enforcement agency is cause for concern. KBR required its employees first run their disclosures by the legal department, a procedure with which the SEC had a serious problem.
  • Penalties for reporting to the SEC might violate Rule 21F-17. If an agreement threatens employees with termination, that is a red flag. However, even lesser sanctions might chill reporting and be seen as retaliation against whistleblowers.
  • The fact that the agreement has never actually restricted an employee from communicating with an enforcement agency does not protect the company from an enforcement action. In KBR’s case, the SEC could not name any instances where a KBR employee was prevented from coming forward about securities violations.
  • A disclaimer can rehabilitate an otherwise improper confidentiality agreement. As shown by the revised language, a strong disclaimer as to the ability of the employee to report wrongdoing to the government can save a confidentiality agreement.

 

 

 

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