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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:

  1. Pay a civil monetary penalty of $265,000
  2. 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.

  3. 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 …”
  4. 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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About the Pickholz Law Offices LLC

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.

The Pickholz Law Offices has represented employees, officers, and others in SEC whistleblower cases involving financial institutions and public companies listed in the Fortune Top 10, Top 20, Top 50, Top 100, Top 500, and the Forbes Global 2000. We were the first law firm ever to win an SEC whistleblower award for a client on appeal to the full Commission in Washington. Inside Counsel magazine named this achievement one of the five key events of the SEC whistleblower program. Examples of the Firm’s SEC whistleblower cases are available here.

In addition to representing SEC whistleblowers, since 1995 the Firm’s founder, Jason R. Pickholz, has also represented many clients in securities enforcement investigations conducted by the SEC, FINRA, the U.S. Department of Justice and US Attorney’s Offices, State authorities, and more. Examples of some of the many securities enforcement cases that Mr. Pickholz has been involved with are available here.

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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.

The Firm’s founder, Jason Pickholz, is the author of the two-volume book Securities Crimes, has appeared on tv and radio, and has taught continuing legal education courses. A former BigLaw partner, he has been representing clients in financial and securities fraud cases since 1995. In recognition of his many achievements, Mr. Pickholz was elected by his legal peers to be a Fellow of The New York Bar Foundation, an honor limited to just 1% of all attorneys in the New York State Bar Association.

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.

If you want to speak with a CFTC, IRS, or SEC whistleblower lawyer, or with a white collar defense lawyer, you can call the Firm at 347-746-1222.

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