On October 27, 2014, eight Members of the U.S. House of Representatives sent a letter to Securities and Exchange Commission (SEC) Chairwoman Mary Jo White in support of increased SEC whistleblower protection. The letter, written on the letterhead of The House Committee on Financial Services, details some of the SEC whistleblower program’s successes, including its giving out over $50 million in SEC whistleblower awards since the program began.
It then goes on to state that it has come to the attention of Congress that some companies have been retaliating against SEC whistleblowers and/or trying to use provisions in confidentiality agreements to prevent SEC whistleblowers from reporting frauds to the Commission.
While acknowledging that there may be legitimate reasons for confidentiality agreements, the letter is emphatic that “…such agreements should be structured as narrowly as possible. Employees should also be clearly informed that these agreements in no way restrict their right to voluntarily report securities law violations to the Commission.”
The letter then goes on to state that “The use of confidentiality agreements, attestations, and other employment arrangements that do not abide by these principles appears to be in direct contravention to the SEC Rule 21F-17…” Rule 21F-17(a) states in relevant part 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…”
In its 2011 comments implementing the SEC whistleblower rules, the Commission explained that “Rule 21F-17(a) is necessary and appropriate because … efforts to impede an individual’s direct communication with Commission staff about a possible securities law violation would conflict with the statutory purpose of encouraging individuals to report to the Commission.” Implementation of the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, p. 201 (Release No. 34-64645, File No. 57-33-10) (effective date Aug. 12, 2011) (the “Implementing Release“).
In a footnote to those comments, the Commission cited two cases as examples of federal courts that have taken a similar position: In re JDS Uniphase Corp. Sec. Litig., 238 F.Supp.2d 1127, 1137 (N.D. Cal. 2002) (“To the extent that agreements preclude former employees from assisting in investigations of wrongdoing that have nothing to do with trade secrets or other confidential business information, they conflict with public policy in favor of allowing current employees to assist in securities fraud investigations”), and Chambers v. Capital Cities/ABC, 159 F.R.D. 441, 444 (S.D.N.Y. 1995) (“it is against public policy for parties to agree not to reveal … facts relating to alleged or potential violations of law”). Implementing Release, p. 201 n. 408.
In this blog approximately two weeks ago (October 14, 2014), I noted that FINRA recently issued Regulatory Notice 14-40, which states that during a FINRA arbitration proceeding, settlement agreements, discovery stipulations, and other confidentiality agreements cannot “prohibit or restrict a customer or any other person from communicating with the Securities and Exchange Commission (SEC) … regarding a possible securities law violation.” The SEC had staked out its position on this back in 2011: “confidentiality agreements or protective orders entered in SRO arbitration or adjudicatory proceedings may not be used to prevent a party from reporting to us possible securities law violations that he or she discovers during the proceedings … given that SRO’s are charged with helping us enforce the federal securities laws, it would be an odd result if one party in an SRO proceeding could use a protective order to prevent another party from reporting a possible securities law violation to us.” Implementing Release, p. 201 n. 407.
It therefore seems that Congress, the courts, the SEC, and FINRA are all in agreement on this issue.
The SEC’s 1st Anti-Retaliation Enforcement Action
The SEC brought its first enforcement proceeding against a company for retaliating against an SEC whistleblower in June of this year. In the Matter of Paradigm Capital Management, Securities Exchange Act Release No. 72393, Investment Advisers Act Release No. 3857, Admin. Proceeding File No. 3-15930 (June 16, 2014). In an SEC press release about that action, the Chief of the SEC’s Office of the Whistleblower was quoted as stating “We will continue to exercise our anti-retaliation authority in these and other types of situations where a whistleblower is wrongfully targeted for doing the right thing and reporting a possible securities law violation.” SEC Press Release 2014-118 (June 16, 2014).
What is therefore perhaps the most noteworthy thing about the House Representatives’ letter to the Commission, coming four months after the Paradigm Capital case, is its concluding call-to-action: “We urge the Commission to send a strong message to industry, including by bringing enforcement actions if necessary, that such [impeding and retaliatory] acts will not be tolerated.”
A copy of the House Representatives’ letter to Ms. White can be found here.
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As an SEC whistleblower law firm, The Pickholz Law Offices has represented employees, officers, and others in SEC whistleblower cases involving financial institutions and public companies listed in the Fortune Top 10, Top 20, Top 50, Top 100, Top 500, and the Forbes Global 2000. We were the first law firm ever to win an SEC whistleblower award for a client on appeal to the full Commission in Washington, an achievement that Inside Counsel magazine named one of the five milestones of the SEC whistleblower program.
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