The SEC’s whistleblower program is still in its infancy. Created by the Dodd Frank Act in 2010, it has only paid out about a dozen awards, although last month the agency announced a whopping $30 million award. The IRS and federal False Claims Act whistleblower programs have been around for decades and have paid out thousands of awards (the False Claims Act was passed during the CiviL War)! Unlike its most older siblings, however, the SEC program has a great deal of formal rules. One of those rules addresses interference with whistleblowers.
SEC Rule 21 F-17 warns companies that “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation…”
Today, Corporate Counsel’s online magazine posted a story about the SEC’s increased attention to this rule. They report that earlier this year,Sean McKessy, head of the SEC’s whistleblower office, told an audience of corporate lawyers that the SEC is ready to take action against companies who try to use confidentiality agreements or contracts to prevent employees from reporting wrongdoing. He even warned that even lawyers who draft these contracts could be in trouble too.
We have seen at least one company try to link a severance package to not speaking with regulators. The inference is clear; if you blow the whistle you run the risk of receiving no severance pay. We also have heard of employment agreements that require the employee to simultaneously disclose any information provided to the SEC also to the company. We say these and similar arrangements are illegal, although there is very little reported case law as the program is so new.
The net effect on such agreements is to create a huge chilling effect on whistleblowing and reporting wrongdoing. Unfortunately, the corporate culture at many businesses is such that whistleblowers are ostracized and punished if they report wrongdoing.
We have seen cases in the False Claims Act arena in which a company contractually requires an employee to waive any right to collect a whistleblower award. Businesses know they can’t stop employees from reporting illegal conduct but they can try to make it so that the whistleblower doesn’t receive any financial gain. According to Corporate Counsel, this issue has not yet been addressed by the SEC.
Companies should embrace whistleblowers. Unfortunately, greed and avarice often create a bigger incentive for some businesses. That means bad businesses hate whistleblowers. Although they can’t stop and employee from speaking with the SEC, they can make things difficult for the whistleblower.
Anti-retaliation regulations are an important protection for whistleblowers. We hope the SEC is serious about its promise to focus on businesses that try to interfere with whistleblowers. More importantly, we are glad to see that Corporate Counsel magazine is warning its members to be careful.
Post by Brian Mahany, Esq.