SEC Examines Companies’ Use of Employment Contracts to Discourage Whistleblowers

Posted by Kristin Graham Koehler and Kaitlyn Findley

On February 25, the Wall Street Journal (“WSJ”) reported that the SEC recently sent nonpublic letters to several companies asking them to disclose all confidentiality agreements, nondisclosure agreements, severance agreements, settlement agreements, any documents that “refer or relate to whistleblowing,” and a list of terminated employees since the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) went into effect.

SEC officials and “pro-whistleblower” stakeholders have expressed concern that clauses in these agreements undermine the efficacy of the agency’s whistleblower program by limiting employees’ ability to report a company’s potential wrongdoing or other securities-law violations to the SEC. For example, Congressional democrats recently have alleged that defense contractor KBR Inc. used such nondisclosure agreements to prohibit employees from reporting suspected violations to the government without first obtaining approval from KBR Inc.’s General Counsel — an allegation KBR denies. In addition, some agreements require employees to forego any share of settlement amounts obtained as the result of the employee’s tip, thereby eliminating the financial incentive to participate in the SEC whistleblower program.

The agency’s whistleblower program was created after passage of Dodd-Frank in 2010, which prohibits companies from interfering with employees’ reporting of potential securities-law violations to the SEC. Whistleblowers that participate in the program can recover 10% to 30% of the penalties collected if their information leads to an enforcement action with sanctions of more than $1 million. In 2014, the SEC received 3,620 tips regarding potential securities-law violations, which marks a 21% increase since 2012. Despite this steady increase in tips, SEC officials, including SEC Chairman Mary Jo White, remain concerned about companies’ treatment of internal whistleblowers and consider the issue a “high priority” action item for the agency.