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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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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.

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