Why it matters
Continuing its crackdown on severance agreements that purportedly limit whistleblower rights, the Securities and Exchange Commission (SEC) announced two new settlements. Virginia-based NeuStar Inc. included an overly broad nondisparagement clause forbidding former employees from engaging with the SEC and other regulators "in any communication that disparages, denigrates, maligns or impugns" the company, the agency said, with employees compelled to forfeit all but $100 of their severance pay for breaching the clause. The company agreed to pay a $180,000 penalty to settle charges that it violated the agency's whistleblower protection rule. In a second case, SandRidge Energy Inc. will pay $1.4 million after the SEC accused the employer of continuing to use restrictive language in its separation agreements after the whistleblower rule took effect in August 2011 and firing an internal whistleblower who raised concerns about public reports of oil and gas reserves. The actions provide an important reminder to employers, Jane Norberg, Chief of the SEC's Office of the Whistleblower, said in a statement, as they demonstrate "our continued strong enforcement of this critically important whistleblower protection rule and underscore our ongoing commitment to ensuring that potential whistleblowers can freely communicate with the SEC about possible securities law violations."
The Dodd-Frank Wall Street Reform and Consumer Protection Act established a whistleblower program for the financial services industries overseen by the Securities and Exchange Commission (SEC) in 2010.
Regulations promulgated by the agency prohibit companies from interfering with or restricting employees from reporting potential violations to the agency. Rule 21F-17 makes it a separate violation of law to "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."
Over the last few years, the SEC has taken several actions to enforce the rule, including two recently announced settlements.
Virginia-based NeuStar, Inc. began using a broad nondisparagement clause in its severance agreements in 2008, pursuant to which departing employees agreed "not to engage in any communication that disparages, denigrates, maligns or impugns" NeuStar and its various employees to regulators, including the SEC. Employees were compelled to forfeit all but $100 of any severance compensation in the event of such a breach. At least 246 employees signed agreements containing such language, the agency alleged. Further, although the Commission was unaware of any instances in which NeuStar took steps to enforce the nondisparagement clause, at least one former employee was impeded by the clause from reaching out to the SEC.
To settle the charges, NeuStar agreed to revise its severance agreement to remove any reference to "regulators" and replace it with language affirmatively advising former employees of their right to contact regulators with concerns about potential legal or regulatory violations. The nondisparagement clause now reads: "In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of a federal law or regulation."
NeuStar also promised to make reasonable efforts to contact former employees who signed a severance agreement with the challenged language to provide them with a statement that the company does not prohibit former employees from communicating their concerns with the SEC. The company will pay a civil money penalty of $180,000.
In the second case, the agency accused SandRidge Energy, Inc. of Oklahoma of similarly violating Rule 21F-17 by using separation agreements that prohibited voluntary, direct communication with the Commission after the rule took effect in August 2011 until April 2015.
The company used a "Future Activities" provision that stated a former employee could not "voluntarily contact or participate with any governmental agency in connection with any complaint or investigation pertaining to the Company." The agreement's "Confidential Information" and "Preserving Name and Reputation" clauses also imposed improper requirements on former employees, the SEC said.
Several employees requested that the problematic language be modified when they received the agreements, and SandRidge did modify the language when requested. However, approximately 546 former employees signed separation agreements that contained all or some of the relevant provisions, the SEC said.
"The potential for its officers and employees to communicate with the Commission was not merely a hypothetical concern for SandRidge," the agency wrote in its cease and desist order. "Many of the violative separation agreements were in place, and a large number of agreements were executed, at times when SandRidge was subject to investigation by the Commission."
The company also engaged in whistleblower retaliation against one employee responsible for oversight of reservoir engineers of the company's drilling program. After the whistleblower repeatedly raised concerns about the company's process in calculating oil and gas reserves—triggering an internal audit that was never completed—senior management terminated him for being "disruptive," electing to replace him with someone "who could do the work without creating all of the internal strife."
Pursuant to its agreement with the SEC, SandRidge agreed to cease and desist from violations of Rule 21F-17 and pay $1.4 million. The action was the first time the agency charged a company for retaliating against an internal whistleblower, noted Chief of the SEC's Office of the Whistleblower Jane Norberg. "Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC," she said in a statement.
To read the order in In the Matter of NeuStar, Inc., click here.
To read the order in In the Matter of SandRidge Energy, Inc., click here.