SEC Files Another Action To Protect Whistleblowers
Undermining the protections of Exchange Act Section 21E which protect whistleblowers was the subject of a recent, settled enforcement action. Now the Commission has brought a similar action, again centered on provisions in severance agreements that might impede former employees from participating in the whistleblower program. In the Matter of Health Net, Inc., Adm. Proc. File No. 3-17396 (August 16, 2016).
Health Net is a California based firm whose shares were listed on the New York Stock Exchange during the relevant period. Beginning prior to August 12, 2011, and continuing through late October 2015, the firm entered into voluntary severance agreements with departing employees. Those agreements contained a Waiver and Release of Claims provision. It listed potential claims against the firm that were waived by departing employees as a condition of being given severance payments and other consideration. The agreement specified that the departing employee specifically waived the “right to file an application for an award for original information submitted pursuant to Section 21F of the Securities Exchange Act of 1934.”
The waiver provision did not preclude the employee from participating in any investigation before a federal agency. A subsequent paragraph in the agreement reiterated this point, stating that nothing in the agreement precluded the employee from participating in any investigation before any federal agency. The paragraph went on, however, to state that the right to any monetary recovery from the investigation was waived. About 600 employees signed agreements with these provisions.
In June 2013, as part of a regular review and update of its agreements, Health Net amended the Waiver and Release of Claims. The sentence referencing Section 21F was deleted. A new provision was added stating that nothing in the agreement precluded an employee from communicating directly with, cooperating with or providing information to any government regulator. Another section of the revised agreement reiterated the point but went on to specify that “by signing this Release, Employee, to the maximum extent permitted by law . . . waives any right to any individual monetary recovery . . . in any proceeding based on any communication by Employee to any federal, state or local government agency or department.”
The Order specifies that the Commission is not aware of any instance in which a former employee who executed an agreement containing one of the clauses noted above, did not communicate directly with the agency about potential violations of the securities laws. Likewise, the SEC is not aware of any instance in which the firm took action to enforce one of the provisions. Nevertheless, the provisions undermine the intent of Exchange Act Section 21F by “removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations,” according to the Order.
To resolve the proceeding Health Net agreed to an undertaking to notify former employees who executed agreements with the clauses cited in the Order and inform them that they are not prohibited from communicating with the SEC and seeking or receiving a whistleblower award. The firm will certify compliance with this undertaking to the Enforcement Division.
Health Net consented to the entry of a cease and desist order based on Rule 21F-17. The firm will also pay a penalty of $340,000.