SEC Punishes 2nd Company in under a Week for Forcing Employees
to Waive their Rights to SEC Whistleblower Awards

Yesterday, the SEC imposed sanctions on Health Net, Inc., for
inserting terms into its severance agreements requiring
departing employees to waive their rights to receive SEC
whistleblower awards.

From 2011 – 2013, Health Net made approximately 600 departing
employees sign severance agreements that required them to
waive “the right to file an application for award for original
information submitted pursuant to Section 21F of the
Securities Exchange Act of 1934.”

In addition, the severance agreements stated that while
“nothing in this Release precludes Employee from participating
in any investigation or proceeding before any federal or state
agency or governmental body … by signing this Release,
Employee waives any right … to any individual monetary
recovery … in any proceeding brought based on any
communication by Employee to any federal, state, or local
government agency or department.”

Health Net amended its severance agreements in 2013.  The new
agreements removed the references to Section 21F.  However,
the new revised waiver stated that “… while Employee may file
a charge, provide information, or participate in any
investigation or proceeding, by signing this Release,
Employee, to the maximum extent permitted by law … waives any
right to any individual monetary recovery … in any proceeding
brought based on any communication by Employee to any federal,
state or local government agency or department.”

The SEC noted that it was not aware of any instances in which
any Health Net employee did not communicate to the Commission
about potential securities law violations because of the
waivers in the severance agreements.  Nor was the SEC aware of
Health Net taking any actions to enforce the waivers in its
severance agreements.  Nevertheless, the SEC considered the
waivers to be so important that it imposed the sanctions on
Health Net anyway, explaining that the severance agreements:

… directly targeted the SEC’s whistleblower program by
removing the critically important financial incentives that
are intended to encourage persons to communicate directly with
the Commission staff about possible securities law
violations.  Such restrictions on accepting financial awards
for providing information regarding possible securities law
violations to the Commission undermine the purpose of Section
21F and Rule 21F-17(a), which is to ‘encourag[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.” 
(Internal citation omitted.)

As a result, the SEC imposed a $340,000 penalty on Health
Net.  The
Cease-and-Desist Order
also required Health Net to contact former employees who
signed the severance agreements and provide them with an
Internet link to a copy of the Order along with the specific
“statement that Health Net does not prohibit former employees
from seeking and obtaining a whistleblower award from the
Securities and Exchange Commission…”

In addition, the Order required Health Net to certify in
writing that it has complied with these undertakings, provide
written evidence of its compliance to the SEC in narrative
form, and provide the SEC with exhibits sufficient to
demonstrate its compliance.

Expressing the seriousness
with which the SEC takes its whistleblower program and its
ability to give awards to its whistleblowers, the Associate
Director of the SEC’s Enforcement Division stated:  “Financial
incentives in the form of whistleblower awards, as Congress
recognized, are integral to promoting whistleblowing to the
Commission … Health Net used its severance agreements with
departing employees to strip away those financial incentives,
directly targeting the Commission’s whistleblower program.”

As I wrote about
in my last post, these sanctions against Health Net come less than one week
after the SEC imposed sanctions on another public company,
BlueLinx Holdings, for similarly requiring employees to sign
severance agreements waiving their rights to receive SEC
whistleblower awards.

These two back-to-back Orders demonstrate the aggressiveness
with which the SEC is pursuing public companies that attempt
to prevent their employees from communicating with the SEC
about possible securities law violations and/or that attempt
to prevent their employees from receiving SEC whistleblower
awards.

* * *

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