Co. Fined $1.4MM for Retaliating Against Internal
Whistleblower

In my
post last week, I mentioned that as an
SEC whistleblower lawyer, prospective clients often ask me whether terms in their
companies’ separation or confidentiality agreements preclude
them from blowing the whistle to the SEC.

After my last article was posted, later that afternoon the SEC
came out with another case against a company that put terms
into its separation agreements in order to prevent its
employees from reporting to the SEC.  It was the fifth case of
this kind that the SEC has brought in the past five months.

A precedent that you should take note of if you are an SEC
whistleblower or SEC whistleblower lawyer

In addition to the restrictive agreements, the company
retaliated against an employee who blew the whistle internally
at the company.  The employee did not blow the whistle to the
SEC.  This was the first time that the SEC has brought a case
involving a strictly internal whistleblower.

For the combined violations, the SEC fined the company $1.4
million.

Whether you are a prospective SEC whistleblower or an SEC
whistleblower lawyer, this case should interest you.  It
represents an extension of the SEC’s assertion of its powers
over public companies that we have not seen before.  It also
shows how far the SEC is willing to flex its muscles to
protect whistleblowers.

The restrictive separation agreements

In its
Order
imposing sanctions, the SEC found that the company, SandRidge
Energy, Inc., used separation agreements that prohibited its
former employees from having voluntary, direct communications
with the SEC.

• One section of the separation agreements was called “Future
  Activities.”  That section said, in part, that the former
  employee could not “at any time in the future voluntarily
  contact or participate with any governmental agency in
  connection with any complaint or investigation pertaining to
  the Company…”
• Another section of the separation agreements was called
  “Confidential Information”.  That section said, in part,
  that the former employee could not disclose to “any
  governmental agency, any of the Company’s confidential,
  proprietary information” without getting the company’s prior
  written consent.
• SandRidge’s separation agreements contained yet another
  section called “Preserving Name and Reputation.”  As in the
  NeuStar case that I reported on last week, that section said
  that former employees could not disparage the company or
  make remarks that could embarrass or cause harm to its name
  and reputation, to that of its officers and directors, or to
  a whole list of others.  The list of people and entities
  those remarks could not be made to included “any
  governmental or regulatory agency.”

Retaliation against an internal whistleblower

One of SandRidge’s employees raised concerns with senior
management about how the company was making certain
calculations that were reported in the company’s filings with
the SEC.  The employee continued to raise these concerns
internally at the company for approximately 2½ years.

The Order is unclear, but it appears that SandRidge either
reduced the employee’s responsibilities or contemplated it. 
The company also considered firing the employee.  Members of
SandRidge’s senior management called the employee
“disruptive”.  The Order says that they discussed their belief
that they could replace the employee with someone who would
not create “all the internal strife.”

In addition, SandRidge searched the employee’s e-mails for
terms related to the issues the employee raised.  One of the
search terms the company used was “SEC.”

According to the Order, the only thing that SandRidge did to
investigate the employee’s internal complaint was to conduct
what the SEC called an “incomplete internal audit.”

In the end, SandRidge terminated the employee.

The SEC stakes out its position on internal whistleblowers

In a
press release
about the SandRidge case, the Chief of the SEC’s Office of the
Whistleblower was blunt:  “Whistleblowers who step forward and
raise concerns internally to their companies about potential
securities law violations should be protected from retaliation
regardless of whether they have filed a complaint with the
SEC.”

She also pointed out that “This is the first time a company is
being charged for retaliating against an internal
whistleblower, and the second enforcement action this week
against a company for impeding employees from communicating
with the SEC.”

* * *

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