SEC on the Prowl for Retaliation Actions: Are You Protected or Prepared To Defend?
In February 2015, the Securities and Exchange Commission (“SEC”) began probing whether companies are muzzling corporate whistleblowers and issued letters to a number of companies requesting years’ worth of documents. The SEC is planning to scour non-disclosure agreements and employment contracts for evidence of corporate backlash against whistleblowers.
These events follow a record year for the number of tips received by the SEC and the total bounty awards paid out to tipsters. The number of people willing to blow the whistle is growing and the reach of SEC enforcement programs is expanding.
Immediately following public disclosure of the SEC’s search for a muzzle case to bring, New York Attorney General Eric Schneiderman announced his proposed Financial Frauds Whistleblower Act, which would provide financial compensation to whistleblowers who voluntarily report fraud in their industry. If passed, the proposed legislation will give New York’s False Claims Act incentives similar to that of the SEC’s bounty program.
The anti-retaliation provisions covered by Dodd-Frank regulations apply broadly. For example, employees of private companies who blow the whistle on public companies with which they have contracted to do work are covered by Dodd-Frank.
The SEC has also increased its scrutiny of the role of general counsel, viewing these individuals as gatekeepers against corporate misconduct. As the SEC searches for a muzzle action to bring, it may look to the attorneys who drafted offending non-disclosure agreements and employment contracts as desirable targets for prosecution.
A successful muzzle case will require the SEC to show that the language at issue had an actual deterrent effect on a potential whistleblower.
The SEC’s most recent actions and quest for a whistleblower muzzle case should give companies motivation to undertake a careful evaluation of its existing agreements and policies. This review should include all corporate settlement agreements, severance agreements, non-disclosure agreements, employment contracts, confidentiality agreements, offer letters, release agreements, and policy handbooks. Counsel may also want to review recent terminations to confirm that there was a reasonable basis, absence of improper motive or actionable claim on the part of the newly unemployed.
The employer should also provide internal training about confidentiality, adequately inform employees of rights afforded to them, and establish a hotline or means by which employees may report concerns anonymously, without fear of retaliation. Confidentiality training should specifically advise corporations against attempting to identify an anonymous whistleblower.
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