Shearman & Sterling LLP | Government Regulatory Enforcement Blog | <br > SEC Enters Into First Settlement Agreements Penalizing Companies for Attempting to Block Employees from Receiving Whistleblower Reward Payments<br >  
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  • SEC Enters Into First Settlement Agreements Penalizing Companies for Attempting to Block Employees from Receiving Whistleblower Reward Payments
     
    08/22/2016
    On August 10, 2016, the Securities and Exchange Commission (“SEC”) instituted a settled administrative proceeding against a building products distributor.  The allegations focused on the distributor’s use of severance agreements that required outgoing employees to forego their ability to recover monetary rewards under various whistleblower statutes.  In the Matter of BlueLinx Holdings, Inc., Admin. Proc. File no. 3-17371 (Aug. 10, 2016).  Six days later, the SEC instituted another settled administrative proceeding that raised similar allegations regarding the use of such severance agreements; this time, involving a health insurance provider.  In the Matter of Health Net, Inc., Admin. Proc. File No. 3-17396 (Aug. 16, 2016).  The details of both settlements are set forth below:
     
    • The first settlement was with Atlanta-based building products distributor BlueLinx Holdings, Inc.  BlueLinx agreed to settle charges that it violated SEC Rule 21F-17 by requiring its employees to sign severance agreements that waived their rights to monetary recovery under applicable whistleblower statutes.  According to the SEC’s Order of Settlement, BlueLinx added this provision to its severance agreements in mid-2013, in violation of SEC Rule 21F-17, which prohibits employers from impeding individuals from communicating with the SEC about possible securities law violations.  In addition to paying a $265,000 penalty, BlueLinx agreed to amend its severance agreements to make clear that employees may report possible securities law violations to the SEC and other federal agencies without BlueLinx’s prior approval and without having to forfeit any resulting whistleblower award.
    • The second settlement was with California-based health insurance provider Health Net, Inc., which agreed to pay a $340,000 penalty for conduct similar to that of BlueLinx.  Like BlueLinx, Health Net began using these objectionable provisions in its severance agreements in August 2011, in violation of SEC Rule 21F-17.  Although Health Net amended its severance agreements in 2015 to remove such restrictive language, the SEC still pursued this enforcement action.
    These settlements are the latest in a series of SEC enforcement actions aimed at strengthening and supporting the SEC’s whistleblower program.  In 2015, for example, the SEC brought an enforcement action against KBR, a Texas engineering company, for using improperly restrictive language in confidentiality agreements which had the potential to stifle whistleblowers.  In June 2016, the SEC also filed an action against Merrill Lynch for “using language in severance agreements that operated to impede employees from voluntarily providing information to the SEC.”

    The contemporaneous announcement of these two settlements in the wake of similar actions over the last two years reflects the SEC’s vigorous monitoring of perceived corporate sanctioned practices that could inhibit whistleblower reports to the SEC.  In the August 16 press release announcing the SEC’s settlement with Health Net, Antonia Chion, Associate Director of the SEC Enforcement Division, noted that “[f]inancial incentives in the form of whistleblower awards, as Congress recognized, are integral to promoting whistleblowing to the Commission.”  Accordingly, companies should pay close heed to any of their practices—including provisions of employment or severance agreements—that could be perceived to impact the effectiveness of government whistleblower programs.  

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