On January 17, 2017, the SEC issued its latest sanction, a $340,000 penalty against BlackRock Inc., (NYSE: BLK — the world’s largest investment management firm) for interfering with the right of its employees to obtain whistleblower rewards under the SEC’s Dodd-Frank Act whistleblower reward program. SEC Rule 21F-17 was adopted in response to the whistleblower reward provisions found in the Dodd-Frank Act. Rule 21F-17 forbids a covered employer from taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”
The enforcement test case for a Rule 21F-17 enforcement action came in response to the February 19, 2014 complaint Kohn Kohn & Colapinto, LLP (KKC) filed against the giant government contracting firm KBR Inc. While litigating against KBR the firm documented an entrenched practice at KBR that forced all of its employees with knowledge of fraud to sign non-disclosure agreements that threaten them with termination if they chose to reveal fraud allegations to anyone outside of KBR’s legal department. The SEC took enforcement action on that complaint on April 1, 2015 and issued the first penalty against any company for attempting to silence a whistleblower. KBR was forced to pay a $130,000 penalty and agreed to cease this practice. The KBR enforcement action was widely applauded and served as the springboard for the series of related enforcement actions that followed.
In June 2016, an enforcement action was issued against Merrill Lynch for prohibiting its employees from disclosing confidential information “except pursuant to formal legal process or unless the former employee first obtained the written approval” from Merrill Lynch for the disclosure. In August 2016 the SEC, penalized Health Net Inc. $340,000 for including it its severance agreements a prohibition that prevented employees from being able to obtain a monetary reward under SEC’s whistleblower program. Blue Linx Holdings was also penalized $265,000 when the company had departing employees waive their right to recover a reward for any whistleblower complaints to be filed. In September 2016, the SEC hit Anheuser-Busch In Bev with a $6 million fine for engaging in misconduct under the Foreign Corrupt Practices Act that included the unlawful attempt to impeded a whistleblower from reporting misconduct. In December 2017 SEC issued a $1.4 million penalty against SandRidge Energy Inc. for retaliating against a whistleblower who refused to sign an illegal confidentiality agreement and that same month issued a cease and desist order and fined NeuStar Inc. $180,000 for violating the risk alert issued to all advisers and brokers on October 24, 2016.
Well before KKC’s efforts to get the SEC to police the use of restrictive non-disclosure agreements, KKC successfully led the efforts to outlaw a similar practice that was occurring in the nuclear industry. In the late 1980’s nuclear whistleblowers were silenced with restrictive agreements that forbid the raising of safety concerns to government regulators, which was the norm of the industry in those days. KKC’s work in this area resulted in a nationwide ban on restrictive settlements in all federal nuclear and environmental cases, requiring government approval to ensure the right of employees to blow the whistle on safety and environmental issues was not compromised during the settlement process.