Tag Archives: Dodd–Frank Wall Street Reform and Consumer Protection Act

Employers Beware – SEC Charges Company for Stifling Whistleblower Activity

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Employers conducting internal investigations often have employees sign agreements requiring them to acknowledge the confidential nature of employee interviews. Less common are agreements that prohibit employees from discussing the interview with anyone outside the company on the pain of possible termination for such disclosure. On April 1, 2015, the SEC found such an agreement, required by a global engineering firm, to violate SEC Rule 21F-17. That Rule, adopted pursuant to Dodd-Frank, prohibits companies from taking, “any action to impede an individual from communicating directly with the [SEC] about a possible securities violation, including … threatening to enforce a confidentiality agreement.”

The firm, KBR Inc., had required witnesses in internal investigations to sign confidentiality statements with language warning that they could face discipline or be fired if they discussed the matters with persons outside KBR. Although there was no evidence that KBR had actually sought to enforce the confidentiality statement, KBR nonetheless agreed to pay a $130,000 penalty and amend its confidentiality statement to make clear that employees may report potential securities violations to the SEC and other federal agencies without fear of retribution.

Bottom line: Companies conducting internal investigations that want to have witnesses acknowledge the confidential nature of interviews should amend their agreements and statements to reflect that employees may report potential violations to the Government without fear of any adverse employment action. In fact, companies seeking to avoid this problem may want to consult the amended language adopted by KBR in the SEC Order –   http://www.sec.gov/litigation/admin/2015/34-74619.pdf.

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Whistleblowers (and Companies) Beware – Court Rules That Employees Must “Report Out” to SEC in Order to Claim Whistleblower Status Under Dodd-Frank

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On July 17, 2013, the Fifth Circuit Court of Appeals ruled that an ex-employee of a regulated entity, who internally reported alleged violations of the Foreign Corrupt Practices Act (FCPA) but failed to provide the information to the SEC, is not entitled to “whistleblower” status under Dodd-Frank, 15 U.S.C. § 78u-6(a)–(h), and is therefore cut-off from an anti-retaliation lawsuit and possible recovery of enhanced back pay.[1]   In rendering its decision, the Court explicitly rejected the SEC’s own interpretation of the statute, set forth in a final SEC Rule.[2]  The Court also rejected the decisions of the federal district courts that have considered the issue.[3]

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This has tremendous implications, at least in cases arising in the Fifth Circuit, both for employees and their regulated employers.  Employees who want to be treated as a Dodd-Frank whistleblower and take advantage of its enhanced protections will have to provide information to the SEC of violations by the former employer.[4]  That means that the SEC will be involved much earlier in any internal corporate investigations that may be taking place.  This is a bad idea for two reasons.

First, it undermines the extensive statutory and regulatory scheme already in place, which is designed to encourage companies to conduct rigorous internal investigation and then self-report to the SEC and/or DOJ.  For example, under the Sentencing Guidelines, the DOJ’s Principals of Federal Prosecution of Business Organizations, and the SEC’s Cooperation Initiative, “cooperation” credit may be awarded for self-reporting.  Under Asadi, however, corporations may be forced to race to the SEC or DOJ before an employee does without the benefit of knowing if something wrongful has actually occurred.

Second, the rule in Asadi, if widely adopted, has the potential to undo the detailed compliance programs painstakingly put into place by in-house counsel and compliance officers for internal reporting, review, analysis, and disclosure to the government.  If Asadi becomes the law of the land, corporate law and compliance departments will have to substantially overhaul those programs and deal with the uncertainty that it injects into the compliance realm.

[1] See Asadi v. G.E. Energy (USA), LLC, No. 12-20522, 2013 WL 3742492 (5th Cir. July 13, 2013).

[2] See 17 C.F.R. § 240.21F-2(b)(1).

[3] See, e.g., Kramer v. Trans-Lux Corp., 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F. Supp. 2d 986, 994 n. 9 (M.D. Tenn. 2012); Egan v. TradingScreen, Inc., 2011 WL 1672066, at **4-5 (S.D.N.Y. May 4, 2011).

[4] Such persons are still, however, entitled to a private cause of action for retaliation under Sarbanes-Oxley.  See 18 U.S.C. § 1514A.