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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.

SEC Order SandRidge Energy
  • 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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The Pickholz Law Offices represents U.S. and international clients in securities and white collar cases. The Firm has helped whistleblowers report frauds to the SEC, CFTC, and IRS, and has defended clients in investigations by the SEC, CFTC, DOJ, FINRA, and other financial and securities enforcement regulators.

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Mr. Pickholz has been counsel in many high-profile cases. He was the first attorney ever to win an SEC whistleblower award on appeal to the Commission, which Inside Counsel magazine called one of the five key events in the history of the SEC whistleblower program. On the defense side, Mr. Pickholz has defended clients in the SEC’s COVID-19 investigations, the CFTC’s cryptocurrency cases, and a former US Senator, among others.

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