Last week, the U.S. Securities and Exchange Commission (SEC) announced more than $3 million in collective settlements with seven public companies. The settlements resolve allegations the companies used employment and other agreements to prohibit whistleblowers from reporting misconduct to the SEC.
Acadia will pay roughly $1.386 million in civil penalties; AppFolio Inc. will pay $692,250; Brands Holding Corp. will pay $399,750; TransUnion will pay $312,000; LSB Industries will pay $156,000; IDEX Corporation will pay $75,000; and Smart for Life Inc. agreed to pay $19,500 to settle the allegations. In addition to the civil penalties, each company has agreed to make changes to the relevant employment agreements.
The SEC alleged that each company violated the SEC’s whistleblower protection rule, Rule 21F-17(a), which prohibits impeding individuals from communicating directly with the SEC about potential securities law violations.
According to the settlement orders, while the agreements did not prohibit participation in government whistleblower programs, at various times all seven companies required departing or current employees, contractors, or consultants to waive their right to recover a financial reward for participating in a government investigation. These waivers were contained in contracts including employment agreements, separation agreements, general release agreements, consulting agreements, transaction incentive agreements, change in control agreements, settlements with former employees, and retention agreements. Some of the agreements also prohibited voluntarily providing information to government agencies and required the employee, contractor or consultant to inform the company of any legally compelled disclosure of such information.
Notably, the Orders state that the SEC was not aware of any instances in which any of the companies took action to enforce these provisions, or where the individuals who had signed the agreements declined to speak with the SEC about potential violations of securities laws. Rather, the very existence of these provisions, without further action, created impediments for individuals seeking to participate in the SEC whistleblower program.
The SEC says that the provisions “created impediments to participation in the commission’s whistleblower program by having the employees forego the critically important financial incentives that are intended to encourage persons to communicate directly with the commission staff about possible securities law violations.”
“Ensuring that potential whistleblowers can communicate directly with the Commission is a critical part of the SEC’s oversight mandate,” said Creola Kelly, Chief of the SEC’s Office of the Whistleblower.
The Director of the SEC’s Denver regional office, Jason Burt said, “The SEC’s whistleblower program strengthens market integrity by providing protection and incentives for those who come forward and report potential violations of the securities laws … these companies required employees to waive their right to possible whistleblower monetary awards. This severely impedes would-be whistleblowers from reporting potential securities law violations to the SEC.”
These enforcement actions show the SEC remains serious about cracking down on companies that violate whistleblower protections. Earlier this year, JPMorgan Chase & Co. agreed to pay $18 million fine over confidentiality agreements that the SEC said violated whistleblower protections. And in 2023, Activision Blizzard Inc., the company behind video games Call of Duty and Candy Crush, agreed to pay $35 million to settle SEC accusations that it required exiting employees to sign agreements promising they would inform the company if a regulator contacted them during an investigation.
Ensuring the adequate enforcement of whistleblower reporting and anti-fraud retaliation protections is crucial to the integrity and success of the SEC’s whistleblower program. Last fiscal year, the SEC awarded nearly $600 million—the highest annual total by dollar value in the whistleblower program’s history, and received more than 18,000 whistleblower tips, almost 50% more than the previous record set in FY 2022.
If the SEC investigates allegations and recoups over $1 million in sanctions in an enforcement action, the whistleblower may receive a percentage of the recovery as an award. For a free, confidential review of your matter by experienced SEC whistleblower lawyers, contact Phillips & Cohen.