Surfing the Newest Wave of SEC Whistleblower “Pretaliation” Cases
A Knotty Situation
Let’s say you’re a publicly traded company and you have a mid-level manager, Π, who has engaged in some level of malfeasance or incompetence. You know that for sure, and this person has to go. But also:
Your business is somewhat complicated, which is to say you have multiple sources of revenue and long supply chains and different types of customers.
Π has some complaints about age or sex discrimination. You’re genuinely confident they’re unfounded but it’s messy.
Π also says your accounting is messed up and has been misstating revenue for the last two quarters. You’re quite sure that this allegation is baseless, but it will take some forensic investigation to document that with certainty.
You decide to terminate Π and now you have to come to a severance agreement. Your CFO is mad that there’s any severance agreement at all and says, “Well, obviously write in there that this is it and they can’t sue us or go complain to the government.”
You inclination to agree will be powerful. Π is terrible! They need to be fired! How can you not write that in explicitly?
The Law
But . . . Exchange Act Section 21F(h)(1)(a) says:
No employer may discharge, demote, suspend, threaten, harass . . . , or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower— (i) in providing information to the [SEC] . . . .
And Rule 21F-17 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.
The SEC takes all this to mean, you better not write that severance agreement the way your CFO wants you to. And if you do, Π might become a whistleblower as to that agreement even if Π’s underlying claims were nonsense, as you correctly believed all along. The SEC brings enforcement actions for these “pretaliation” cases all the time.
Seven More Cases
Well, on September 9th it brought seven more against seven different issuers. These administrative cases involved employment, severance, separation, retention, settlement, and consulting agreements that somehow tried to limit the counterparties’ rights in making reports to the SEC. These matters were settled, not litigated, so we don’t know if the “facts” are facts, but here are some noteworthy aspects of these seven administrative orders:
Two of the companies prohibited counterparties from suing them directly.
Of course this seems fine. I’m not sure how a company wouldn’t be able to include this provision, and the SEC didn’t highlight that language in its orders.
All of these companies had at least one agreement that explicitly allowed participation in whistleblower programs but prohibited receipt of a monetary award from those programs.
The SEC says you can’t do that.
Five of these companies included provisions where the counterparties “acknowledged” that they were not waiving rights that were unwaiveable under the law or required waiver only “to the maximum extent permitted by law.”
That might seem like a neat legal trick, but the SEC says you can’t do that.
Two of the companies required counterparties to notify the companies within some number of days if they made any disclosure to a government agency required under law or by court order.
The SEC says you can’t do that.
In each case the SEC notes that it “is unaware of any instances in which” these agreements were enforced or in which counterparties declined to speak with the staff. But it does not care. It wants a glide path between potential whistleblowers and the Commission, and it looks like it will keep suing to ensure that it has one.