The U.S. Securities and Exchange Commission (SEC) began the new year by sending a clear message to companies trying to impede whistleblowing about possible securities law violations.
As part of a settlement with a unit of J.P. Morgan, the Commission announced on January 16th that J.P. Morgan will pay a $18 million penalty to resolve allegations that it used client confidentially agreements to impede reporting possible misconduct to the SEC.
According to the SEC’s order, J.P. Morgan allegedly violated Rule 21F-17 under the Securities Exchange Act of 1934, a whistleblower protection rule that prohibits taking any action to impede an individual from communicating directly with the SEC staff about possible securities law violations.
The SEC alleged that from March 2020 to June 2023, hundreds of J.P. Morgan advisory clients and brokerage customers were required to sign non-disclosure agreements when receiving settlements from J.P. Morgan of at least $1,000. The agreements included restrictions on the reporting of potential securities law violations to the SEC.
As part of the settlement, J.P. Morgan agreed to not include such language in employee non-disclosure agreements and pay a $18 million civil penalty – the largest ever in a stand-alone Rule 21F-17 action.
The previous record for the largest Rule 21F-17 violation penalty was $10 million in a settlement announced just a few months ago and resolving allegations against investment advisor D.E. Shaw & Co., L.P.
In September 2023, the SEC charged D. E. Shaw with violating Rule 21F-17 by requiring employees to sign agreements prohibiting the disclosure of confidential corporate information to third parties, without an exception for potential SEC whistleblowers, and by requiring departing employees to sign releases in order to receive deferred compensation affirming that they had not filed any complaints with the government.
The SEC’s recent cases and large financial penalties involving J.P. Morgan and D.E. Shaw demonstrate the Commission’s prioritization of enforcing whistleblower reporting and anti-fraud retaliation protections.
Indeed, in the SEC Office of the Whistleblower FY 2023 Annual Report to Congress, the Commission highlighted the enforcement of whistleblower protections. The report noted 5 anti-retaliation enforcement actions, including one involving the firing of an employee who repeatedly reported misconduct internally to the company’s management both before and after filing a complaint with the Commission. The report also emphasized that of the 21 enforcement actions to date involving violations of Rule 21F-17, 5 enforcement actions occurred in FY 2023, including the record-setting D. E. Shaw settlement.
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, which was created by Congress in 2010 as part of the Dodd-Frank Act. The program provides a way for whistleblowers to report suspected violations of securities laws.
In FY 2023, the Commission not only set records in enforcing Rule 21F-17, but also in the whistleblower program’s award amounts and public participation. The Commission 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 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.