Yesterday, the SEC imposed sanctions on Anheuser-Busch InBev SA/NV (“AB”) for inserting terms into its severance agreements that inhibited or prevented departing employees from reporting securities law violations to the SEC. The SEC’s Order follows on the heels of two other recent cases in which the SEC punished companies for requiring departing employees to waive their rights to receive SEC whistleblower awards.
Background: FCPA Violations
The Order against AB came in the context of an SEC investigation into Foreign Corrupt Practices Act (“FCPA”) violations committed by Crown Beers India Private Limited (“Crown”). For further information about what the FCPA is, see my prior post here.
Crown was a wholly owned subsidiary of AB in India. AB operated in India through both Crown and another entity called IIPL. According to the Order, a Crown employee informed AB that, among other things, IIPL may have been making improper payments to government officials through third-party sales promoters. The Crown employee was subsequently terminated.
The Crown employee blew the whistle on the FCPA violations to the SEC.
The Separation Agreement
While the Crown employee was voluntarily communicating with the SEC, he settled an employment mediation against his former employer. The mediation settlement included a Separation Agreement containing the following terms, among others:
- Paragraph 7.A of the Separation Agreement includes the following language:
[The Crown Employee] agrees to keep in strict secrecy and confidence any and all unique, confidential and/or proprietary information and material belonging or relating to [the AB InBev subsidiary] that is not a matter of common knowledge or otherwise generally available to the public including, but not limited to, business, government affairs, communications, financial, trade, technical or technological information. [The Crown Employee] acknowledges and agrees that [the Crown Employee] remains subject to the “Employment Agreement as to Intellectual Property and Confidentiality,” which [the Crown Employee] previously signed and is incorporated into the Agreement by reference.
- Paragraph 7.C of the Separation Agreement includes the following language:
[The Crown Employee] agrees not to disclose, directly or indirectly, any information regarding the substance of this Agreement to any person other than [the Crown Employee’s] spouse, attorney, or financial or tax advisor, except to the extent such disclosure may be required for accounting or tax purposes or as otherwise required by law.
- Paragraph 7.D of the Separation Agreement includes the following language:
[The Crown Employee] agrees that, if [the Crown Employee] violates in any way any of the terms and conditions of paragraph 7, [the Crown Employee] shall be liable to [the AB InBev subsidiary], and shall immediately pay to [the AB InBev subsidiary] as liquidated damages and not as a penalty, the total sum of $250,000.00…
(Order, pp. 6-7.)
The Whistleblower is Chilled from Cooperating with the SEC
The whistleblower believed that if he continued communicating directly with the SEC, he would be in violation of the Separation Agreement and would risk triggering the $250,000 liquidated damages provision. As a result, the whistleblower stopped working with the SEC.
The SEC found that the Separation Agreement violated SEC Rule 21F-17(a) because it “contained language that impeded the Crown Employee from communicating directly with the Commission staff. Such restrictions on providing information regarding possible securities law violations to the Commission undermine the purpose of Section 21F, which is to ‘encourage[e] 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.”
In addition to imposing over $6 million in disgorgement, penalties, and interest on AB for the FCPA violations, the SEC required AB to contact its former employees who had also signed Separation Agreements with similar terms and provide them with (1) a copy of the sanctions Order, and (2) a statement that AB “does not prohibit former employees from contacting the Commission regarding possible violations of federal law or regulation”. The SEC further required AB to agree to provide it with a written certification that it has complied with this undertaking, “provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance”.
In a press release about the case, the new Chief of the SEC’s Office of the Whistleblower said that the Separation Agreement “chilled” the whistleblower from communicating with the SEC. She added that it is unacceptable to threaten financial punishment for whistleblowing, and asserted that the SEC “will continue to take a hard look at these types of provisions and fact patterns”.
The SEC Gets Aggressive: 3 Cases in Less Than 2 Months
These sanctions against Anheuser-Busch, along with the recent sanctions against Health Net and BlueLinx Holdings, demonstrate the aggressiveness with which the SEC is pursuing public companies that attempt to prevent their employees and former employees from voluntarily communicating with the SEC about possible securities law violations, as I wrote about in a prior post.
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