Shearman & Sterling LLP | Government Regulatory Enforcement Blog | SandRidge Energy Settles Claims Of Whistleblower Retaliation And Overly Restrictive Settlement Agreements<br >  
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  • SandRidge Energy Settles Claims Of Whistleblower Retaliation And Overly Restrictive Settlement Agreements
    On December 20, 2016, the Securities and Exchange Commission (“SEC”) filed a settled administrative proceeding against SandRidge Energy, Inc. (“SandRidge”) for allegedly using inappropriately restrictive language in employee separation agreements and for retaliating against a whistleblower, the fifth such claim the SEC brought in 2016.  SandRidge, without admitting or denying the SEC’s findings, agreed to pay a $1.4 million penalty, subject to the company’s ongoing bankruptcy proceedings, to resolve the SEC’s claims.  In the Matter of SandRidge Energy, Inc., Admin. Proc. File No. 3-17739 (Dec. 20, 2016). 

    According to the SEC, between 2011 and April 2015, SandRidge entered into separation agreements that unduly prohibited outgoing employees from communicating with the SEC and other government agencies, in violation of Rule 21F-17, which was promulgated following Dodd-Frank.  Specifically, the SEC took issue with language in SandRidge’s separation agreements that said, among other things, that a former employee could not “at any time in the future voluntarily contact or participate with any governmental agency in connection with any complaint or investigation pertaining to the Company,” and which had confidentiality provisions and non-disparagement clauses that contained no exceptions for whistleblowing.  According to the SEC, when an employee would explicitly request that SandRidge modify this language, the company would agree, but otherwise included the language in its form separation agreement. 

    The SEC alleged that on May 11, 2015, after the SEC contacted SandRidge about its agreements, SandRidge revised its form agreement to cure these issues; however, the SEC clearly took issue with the fact that SandRidge had evaluated these agreements multiple times since the issuance of Rule 21F-17 and yet had not modified them earlier.  Moreover, the SEC noted that these agreements had a real impact; the SEC alleged that when SEC staff contacted a former employee of SandRidge in February 2016, the former employee refused to speak with the SEC staff, citing the language in the separation agreement. 

    Separately, the SEC alleged that SandRidge had retaliated against a whistleblower in 2015. The SEC stated that the whistleblower raised concerns about SandRidge’s calculation of oil and gas reserves that were reported in the company’s reports filed with the SEC; however, rather than fully investigating those concerns, the company investigated whether he had made disparaging remarks about the company externally and, ultimately, terminated him, citing the disruptive manner with which the employee raised concerns.  Notably, the SEC did not claim that the whistleblower’s concerns were in fact justified, or otherwise credit his claims; the focus of the SEC’s findings was purely on the manner in which he had been terminated, including the fact that SandRidge initially included the same standard language in his separation agreement.

    The SandRidge settlement represents a continuation of the SEC’s focus on whistleblower retaliation and provisions in severance agreements that could have a chilling effect on whistleblower activity.  As noted above, the SEC brought its first such action against KBR, Inc., on April 1, 2015, and since that time has brought similar claims against three other companies before SandRidge.  In this case, it appears that SandRidge’s remediation efforts were far-reaching, including contacting former employees to notify the former employees of the amendments to the severance agreements.  Notwithstanding these extensive remediation measures, the SEC deemed it appropriate to impose a civil money penalty on SandRidge—likely in part due to the fact that SandRidge continued using the agreements after the SEC had announced its action against KBR.  It is yet another stark reminder that companies should carefully review all standard language in their agreements for compliance with Rule 21F-17.