SEC Warns Employers to Stay Clear of “Pre-taliatory” Acts

In 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law and established the SEC Office of the Whistleblower. This act was in response to the Great Recession and the need for greater transparency and accountability in the financial system.  The SEC Office of the Whistleblower allows whistleblowers to provide the government with information of possible securities law violations.  The SEC whistleblower program has been a huge success with 3,620 whistleblower tips in Fiscal Year 2014, and tens of millions of dollars in whistleblower awards already.

With the number of whistleblower claims increasing, corporations are attempting to take measures to prevent employees from reporting violations to government authorities. Sean McKessy, Chief of the Securities and Exchange Commission Whistleblower Office, refers to such actions as “pre-taliation.”  Pre-taliation includes using language in confidentiality agreements severance agreements and other employment contracts, where employees are essentially prevented from revealing information about the company’s business practices without facing grave consequences.  The language incorporated into these agreements goes well beyond the content of common contract terms intended to protect proprietary information.  For example, some agreements might stipulate that if an employee blows the whistle, the employee must forfeit any award received from the SEC.  Some of these agreements also threaten the employee with termination if they contact the SEC.  Other agreements threaten lawsuits against employees who do not comply.  Even though this contractual language would not be enforceable, it is meant to scare employees from blowing the whistle on corporation violations.  Other corporations are employing more subtle tactics, like requiring employees to disclose agency investigations internally.

The SEC has already begun to crack down on pre-taliation.  In 2014, the SEC opened an investigation, reviewing the confidentiality statement employees are required to sign at KBR, one of the United States’ largest government contractors.  On February 25, 2015, the Wall Street Journal reported that the SEC sent letters to several companies asking for nondisclosure agreements and employment contracts.  Companies cannot “impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . .” If they do, the SEC will not hesitate to prosecute the company for violating the Dodd-Frank Act. In fact, McKessy stated during a speech at Georgetown University, that his office is “actively looking for examples of confidentiality agreements, separation agreements, [and] employee agreements” where employee benefits are conditioned on not reporting violations to the SEC. He also cautioned corporate counsel that, should they draft such provisions, they could be barred from practicing before the SEC.

The message is clear: the SEC will not tolerate pre-taliation efforts. The Office is taking extensive measures to ensure that whistleblowers are protected.

The attorneys at Loevy & Loevy have extensive experience with whistleblower claims. If you have information about fraudulent activity and are considering making a claim, we encourage you to learn more about our SEC & Financial Fraud practice. It is important to involve an attorney early in the process to achieve the highest level of protection and success. 


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