3rd Company Punished In Under Two Months for Imposing Terms in
Severance Agreements Chilling Employees from Reporting to the
SEC

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:

1. 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.

2. 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.

3. 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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