SEC Probes Companies’ Treatment of Whistleblowers; Agency Officials Concerned About Corporate Backlash Against Whistleblowers

http://www.wsj.com/articles/sec-probes-companies-treatment-of-whistleblowers-1424916002

SEC Probes Companies’ Treatment of Whistleblowers

Agency Officials Concerned About Corporate Backlash Against Whistleblowers

The Securities and Exchange Commisssion has made a push to bring more whistleblower cases since the 2010 passage of the Dodd-Frank financial-reform bill, which created the agency’s whistleblower program. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES

RACHEL LOUISE ENSIGN

Feb. 25, 2015 9:00 p.m. ET

The Securities and Exchange Commission is probing whether companies are muzzling corporate whistleblowers.

In recent weeks the agency has sent letters to a number of companies asking for years of nondisclosure agreements, employment contracts and other documents, according to people familiar with the matter and an agency letter viewed by The Wall Street Journal. The inquiries come as SEC officials have expressed concern about a possible corporate backlash against whistleblowers.Some of these types of documents sometimes include clauses that impede employees from telling the government about wrongdoing at the company or other potential securities-law violations, according to lawyers who handle whistleblower cases and some members of Congress. In some cases, the firms require employees to agree to forgo any benefits from government probes, effectively removing the financial incentive for participating in the SEC program.

ENLARGE

In a separate January letter to Rep. Maxine Waters (D., Calif.) that was reviewed by the Journal, SEC Chairman Mary Jo White said she was concerned about the agreements.

The SEC has made a push to bring more whistleblower cases since the 2010 passage of the Dodd-Frank financial-reform bill, which created the agency’s whistleblower program.

Whistleblowers have flocked to the SEC program, with the number of tips increasing each year. The agency fielded 3,620 tips on potential securities-law violations in the 2014 fiscal year, up 21% from two years before.

As part of the program, tipsters can get between 10% and 30% of the sum of penalties collected if their information leads to an SEC enforcement action with sanctions of more than $1 million. The program handed out anaward for more than $30 million last year to an undisclosed foreign tipster, which was its largest ever.

Dodd-Frank regulations prohibit companies from interfering with employees reporting potential securities-law violations to the agency.

An SEC spokesman declined to comment.

There is growing momentum for other programs similar to the SEC’s. New York’s Attorney General Eric Schneiderman on Thursday is expected to propose legislation that establishes a bounty program modeled after the SEC’s. The move could offer new incentives to tipsters in the banking industry, since both Mr. Schneiderman and New York Department of Financial Services superintendent Benjamin Lawsky have struck high-profile bank settlements.

Attorney General Eric Holder in September also said he wanted to motivate more tipsters by boosting the potential payouts under a different whistleblower initiative, which caps the rewards in cases involving banks.

SEC officials have said they are doing more than just handing out bounties and have taken steps to police the way companies treat internal whistleblowers. But the probe into the agreements is new. It couldn’t be determined how many companies were sent the letters, which specific companies they were sent to, or what penalties the SEC could potentially levy in the probe.

The agency has asked the firms to turn over every nondisclosure agreement, confidentiality agreement, severance agreement and settlement agreement they entered into with employees since Dodd-Frank went into effect, as well as documents related to corporate training on confidentiality, according to the letter and the people familiar with the matter. The agency letter viewed by the Journal also asked for “all documents that refer or relate to whistleblowing” and a list of terminated employees.

Companies and groups representing whistleblowers have opposing views on how frequently such agreements are used. “Corporations have become increasingly bold at defying, and creative in circumventing” the rule on not impeding employee whistleblowing, said pro-whistleblower Government Accountability Project and law firm Labaton Sucharow LLP in a 2014 memo accompanying a proposal to get the SEC to take action on the issue.

A group of Democratic members of congress sent Ms. White a letter last year expressing similar worries that the employment agreements were potentially threatening the effectiveness of the SEC’s whistleblower program. “I share your concerns about the misuse of employee confidentiality, severance and other kinds of agreements,” Ms. White said in a previously unreported response to Rep. Waters in January, adding that the issue is “a high priority.”

Several corporate lawyers said that their clients are taking steps to avoid these agreements, but that the SEC’s probe into the matter will likely reinforce that trend.

Defense contractor KBR Inc. ’s alleged use of such agreements has been scrutinized recently. Congressional Democrats have said that KBR used a nondisclosure agreement that prohibited certain employees from reporting wrongdoing to the government without getting approval from the company’s general counsel.

“Any allegation that KBR has prevented, or currently prevents, employees from reporting wrongdoing is absolutely false,” Stuart Bradie, president and CEO of KBR said in a statement this week. “In fact, KBR has voluntarily modified its forms to make clear that employees are free to report to any government entity.”

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