SEC Fines Another Company for Using Severance Agreements that Chill Whistleblowing

SEC Fines Another Company for Using Severance Agreements that Chill Whistleblowing

September 6, 2016

In short order, the Securities and Exchange Commission fined two companies for using severance agreements with former employees that hampered the SEC’s whistleblower program.  We covered the first instance here, in which the SEC fined an Atlanta-based company $265,000 and required the company to modify its severance agreements and contact former employees who signed the allegedly illicit ones.  The SEC now has levied a larger $340,000 penalty against a California-based company for employing similar severance agreements.  Although the California company actually removed some problematic language from its severance agreements three years ago, it did not remove other language restricting potential recovery for whistleblowers until last year.  

The SEC has been relying on Rule 21F-17 to crack down on severance agreements that require outgoing employees to waive their right to recovery of potential whistleblower awards.  Rule 21F-17 proscribes hindering potential whistleblowers from contacting the SEC about possible securities law violations.  

In addition to the monetary fines the SEC can levy for Rule 21F-17 infractions, its recent actions demonstrate that it is likely to require companies to take further steps to re-establish the rights of potential whistleblowers. Accordingly, the SEC is requiring the California company to make reasonable efforts to inform former employees who signed the severance agreements between Aug. 12, 2011 and Oct. 22, 2015 that they are not barred from applying for SEC whistleblower awards.  The company must then certify to Enforcement Division staff that it completed this task. 

The increased activity by the SEC in this area underscores our recommendation that companies proceed with caution when drafting severance agreements.  Companies should also review prior severance agreements—even agreements that are years old—for compliance with Rule 21F-17 to determine whether they may currently face exposure for having used illicit agreements in the past.  

The SEC’s press release announcing this enforcement action can be found here. 

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