by T. GormanPosted on Posted in SECActions

The SEC has a robust whistleblower program which is considered an important adjunct to its enforcement efforts. To that end the Commission has participated in whistleblower cases as an amicus and brought actions regarding restrictions on the ability of employees to participate in the program.

A new enforcement action centered on severance agreements not only continues this trend, but provides guidance on the kind of clause the agency considers appropriate in agreements. In the Matter of Blue Linx Holdings Inc., Adm. Proc. File No. 3-17371 (August 10, 2016).

BlueLinx is an Atlanta based company whose shares are traded on the NYSE. Beginning at some point prior to August 2011, and continuing to the present, the firm entered into certain severance agreements with departing employees which define the rights and responsibilities of both parties. The firm used several forms of agreement. Most management employees who left the firm were requested to sign Letter Agreements.

While the exact form of the agreements vary, the Letter Agreements typically contained a confidentiality provision and required the employee to either provide written notice to the company or obtain its consent to furnish confidential information pursuant to legal process. Termination agreements typically defined confidential information as that which relates to the business of the firm, has been disclosed to the employee or which the employee became aware of during their employment. Release Agreements, Separation Agreements and Settlement Agreements typically stipulate that the employee shall hold “in a fiduciary capacity for the benefit of the Company . . .” all confidential information.

In June 2013, about two years after the Commission enacted Rule 21F-17 which prohibits impeding an individual from communicating directly with the Commission staff about possible securities law violations, the firm amended its agreements. Now the agreements provide that the former employee is not restricted from disclosing or using confidential information as required “by law, court or other legal process” provided the company is given sufficient notice to seek a protective order. Another provision was added to the Letter and Severance Agreements which provides in part that the employee is not prohibited from filing a charge with the EEOC, the NLRB, OSHA, “the Securities and Exchange Commission or any other administrative agency if applicable law requires . . . however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint . . .” A number of employees have executed agreements which contain either the pre- or post- 2013 provisions.

By including these clauses in agreements BlueLinx “raised impediments to participation by its employees in the SEC’s whistleblower program,” according to the Order. The requirement that prior notice be given, as well as the stipulation that any monetary award be waived, both are contrary to the whistleblower provisions of Dodd-Frank and the Commission’s rules. The Order thus alleges a violation of Exchange Act Rule 21F-17.

To resolve the proceeding the firm agreed to implement an undertaking which requires it to include a provision regarding the disclosure of confidential information in its agreements. That provision states in part that “this Agreement does not limit Employee’s ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee’s right to receive an award for information provided to any Government Agencies.”

In addition, the firm consented to the entry of a cease and desist order based on the Rule cited in the order. BlueLinx will also pay a penalty of $265,000.

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by T. GormanPosted on Posted in SECActions

While the Commission’s venue selection determinations have been repeatedly challenged, each of the decisions in favor of the agency at the circuit court level has failed to reach the merits of the Constitutional claim. Rather, the actions have been dismissed for lack of jurisdiction. In contrast, district courts have reached the merits of the Appointments Clause claim regarding the appointment of SEC ALJs and ruled against the agency.

In Raymond J. Lucia Companies, Inc. v. SEC, No. 15-1345 (D.C. Cir August 9, 2016) however, the circuit court reached the merits. The Commission prevailed. The Circuit Court held that the agency had not violated the Appointment Clause when retaining its ALJs.

The case was before the court on a petition to review a decision of the Commission from an administrative proceeding. The proceeding alleged that the firm violated the antifraud provisions of the Advisers Act in marketing its retirement wealth strategy to prospective clients. Following a hearing the ALJ issued an initial decision finding liability on one of four charges. Sanctions were imposed, including a life time bar. The Commission sua spontre remanded the case for further findings on the three charges the ALJ had not addressed. A revised initial decision was issued. After granting a petition for review the SEC concluded that petitioners had violated the antifraud provisions. It also rejected a claim that the administrative proceeding was unconstitutional because the ALJ had been appointed in violation of the Appointments Clause.

The Circuit Court considered the Appointments Clause issue, noting that the government had not claimed that the agency decision could be upheld if the presiding ALJ was unconstitutionally appointed. The Commission acknowledges that the ALJ was not appointed in accord with the Clause. It did not argue harmless error.

The Appointments Clause provides that the President “shall nominate, and with the Advice and Consent of the Senate, shall appoint . . . Officers of the United States, whose Appointments are not herein otherwise provided for . . . but the Congress may by Law vest the Appointment of such inferior Officers . . . in the President alone . . .” All officers of the United States are to be appointed in accord with the Clause unless provided for elsewhere in the Constitution. This includes executive officers, judicial officers and those of administrative agencies. Only those who are “lesser functionaries” need not be selected in accord with the Clause. This is an important structural safeguard of the Constitution, the court noted.

Generally, the appointee is considered an Officer rather than an employee if he or she exercises “significant authority pursuant to the laws of the United States.” (internal citations omitted). In assessing the appointee’s authority, it is important to look at the facts of the particular case and also the duties of the person. If the appointee’s position was established by law and the position’s duties are specified by statute the critical question is the meaning of “substantial authority.” Three criteria are considered: 1) the significance of the matters resolved by the official; 2) the discretion they exercise in reaching their decisions; and 3) the finality of those decisions.

Here the critical question is the finality of the decisions. Under Exchange Act Section 78d-1 the Commission has the authority to delegate any of its functions to a division, an individual or an employee. Section 78d-1(c) specified that when the ALJ’s determination is not reviewed it “shall . . . be deemed the action of the Commission.” Petitioner claims that this provision substantiates their point regarding the Appointments Clause. Under the Commission’s rules, however, “[u]ntil the Commission determines not to order review . . . there is no final decision that can ‘be deemed the action of the Commission.’” 15 U.S.C. Section 78d-1(c). Therefore the initial decision only becomes final when the Commission issues the finality order. “Put otherwise, the Commission’s ALJs neither have been delegated sovereign authority to act independently of the Commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit.” Accordingly, they need not be appointed in accord with the Appointments Clause. The petition for review was denied.

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