Company Sanctioned for Requiring Employees to Waive their Rights to Receive SEC Whistleblower Awards
Earlier today, the SEC imposed sanctions against a public company for imposing restrictions in its severance agreements that impeded its former employees from reporting potential securities violations to the SEC and forced them to waive their rights to receive SEC whistleblower awards.
The current Acting Chief of the SEC’s Office of the Whistleblower unambiguously declared: “Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forego potential whistleblower awards in order to receive their severance.” The Deputy Director of the SEC’s Enforcement Division confirmed that “We’re continuing to stand up for whistleblowers.”
In a Cease-and-Desist Order noteworthy for its aggressiveness, the SEC required the company, BlueLinx Holdings, to:
- Pay a civil monetary penalty of $265,000
Add the following provision to its severance agreements:
Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with … the Securities and Exchange Commission … Employee further understands that this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This agreement does not limit Employee’s right to receive an award for information provided to Government Agencies.
- Contact its former employees who had signed the severance agreements and provide them with an Internet link to both the Commission’s Cease-and-Desist Order, and a statement that the company does not prohibit its employees from “(1) providing information to, or communicating with, Commission staff without notice to the Company; or (2) accepting a whistleblower award from the Commission …”
- Certify to the Commission “in writing, its compliance with the undertakings above. The certification shall identify each undertaking, provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance.”
The SEC explained in the order imposing sanctions on BlueLinx that:
… by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.
Restrictions on the ability of employees to share confidential corporate information regarding possible securities law violations with the Commission and to accept financial awards for providing information to the Commission, such as those contained in the Severance Agreements, undermine the purpose of Section 21F, which is to “encourage individuals to report to the Commission,” and violate Rule 21F-17(a) by impeding individuals from communicating with the Commission staff about possible securities law violations.
The BlueLinx case follows on the heels of last year's case in which the SEC imposed sanctions on KBR, Inc., for using confidentiality agreements that prohibited its employees from discussing the substance of internal interviews without clearance from KBR's law department. According to the SEC, KBR’s confidentiality agreements violated Section 21F and Rule 21F-17(a) by impeding employees’ ability to report securities law violations to the SEC.
Like the SEC, federal courts, members of the U.S. House of Representatives, and FINRA have all come out strongly against companies attempting to use contracts and agreements to impede or prevent employees from reporting securities law violations to the SEC.
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The Pickholz Law Offices LLC is a law firm that focuses on representing clients involved with investigations conducted by the U.S. Securities and Exchange Commission, FINRA, and other securities regulators.
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