As we discussed, in early August the SEC sued BlueLinx Holdings, Inc. (link is external) for violations of Rule 21F-17(a) for the way it structured its severance agreements to prevent departing employees from collecting monetary awards if they became SEC whistleblowers. On August 16th, the SEC struck again, suing Health Net Inc. (link is external) for violating the same rule.

Again, here’s the rule:

No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

Allegations

The SEC says that from 2011 through October 2015, Health Net entered into voluntary severance agreements with employees who were leaving the company. These agreements included a Waiver and Release of Claims that listed various potential claims against Respondent that a departing employee waived as a condition of being paid monetary severance payments and receiving other voluntarily provided consideration from Respondent.

After the Commission adopted Rule 21F-17 in August 2011, Health Net allegedly amended the Waiver and Release of Claims. Among other things, the company specified that, while not prohibited from participating in a government investigation, the former employee was prohibited from applying for or accepting a whistleblower award from the SEC. Roughly 600 employees signed agreements that contained this provision, which Health Net used from approximately August 2011 to June 2013.

In June 2013, Health Net allegedly further amended the Waiver and Release of Claims. The company removed the language expressly prohibiting employees from applying for whistleblower awards pursuant to Exchange Act Section 21F and added that “[n]othing herein shall be construed to impede the employee from communicating directly with, cooperating with or providing information to any government regulator.” But Health Net still retained restrictions in the Waiver and Release of Claims that removed the financial incentive for its former employees who executed that agreement to communicate with Commission staff concerning possible securities law violations at Health Net.

The SEC’s Thoughts

Though the Commission wasn’t aware of any instances in which the severance agreements were used to prevent whistleblowers from reporting to the SEC still said they “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.”

Health Net had to pay a $340,000 penalty. It didn’t agree in the order (link is external) to specific language to replace the provisions the SEC hated so much.

My Thoughts

In all seriousness, was there some sort of industry-wide conventional wisdom in 2013 that (1) technically allowing whistleblowers to make reports to the government, but (2) cutting off the possibility of monetary awards for whistleblowing, was an acceptable means of limiting that potential liability? It’s too late at night and I’m too tired to look it up. As I said in my post on BlueLinx, I don’t know how this question would come out in actual litigation. And I would happily litigate it! But only after being very clear with the client that a loss was quite possible and after getting all of the legal fees paid up front. Being on the cutting edge of this area of the law seems like a risk the companies are not being compensated to take.