SEC Sanctions Another Firm For Restricting Whistleblowers
Whistleblowers are an important source of information for the Commission’s enforcement program. This is reflected by the periodic monetary awards handed out by the agency. It is also evidenced by the increasing number of actions brought by the SEC to protect the ability of would-be whistleblowers to assist its enforcement efforts. The most recent action in this regard involved a firm that tried to bar employees from acting as whistleblowers while retaliating against an employee who raised concerns about misconduct. In the Matter of SandRidge Energy, Inc., Adm. Proc. File No. 3-17739 (December 20, 2016).
SandRidge Energy, based in Oklahoma City, was listed on the NYSE but was delisted. Later the firm filed for bankruptcy protection, emerged from Chapter 11, and again had its shares listed on the NYSE.
Beginning prior to August 12, 2011 when the Commission issued rules implementing Exchange Act Section 21F, SandRidge used a form of separation agreement for departing employees that contained three provisions that impeded whistleblowers. First, the agreements contained a Future Activities provision. This section stipulated that former employees could not voluntarily cooperate with any government agency in any complaint or investigation concerning the company. Second, a Confidential Information clause prohibited the former employee from making any use of, or disclosing to anyone including a government agency, any confidential company information without written consent. Third, the ageement contained a Preserving Name and Reputation section that prohibited the former employee from disparaging, embarrassing or harming the firm or its employees to any government or regulatory agency or in the media.
Following the enactment of the Commission’s whistleblower rule SandRidge would agree to modify the restrictive provisions on request. In some instances the firm agreed to remove part of the restrictive language. In a few agreements all of the provisions were eliminated. The company, however, continued to use the clauses in most of its agreements. For example, on and after April 1, 2015, the date of the Commission’s first enforcement action charging a violation of Rule 21F-17, the firm implemented a planned reduction in force as to 113 employees. The severance agreements contained the restrictive clauses. After receiving a number of client alerts about the SEC action, SandRidge modified its form of separation agreements but not those from the reduction in force.
On May 11, 2015 the staff contacted SandRidge regarding its agreements based on copies attached to Commission filings. The firm agreed to remediate the issue and undertook amendments. Former employees were told of the remediation. Nevertheless, when a former employee was contacted in February 2016 the person refused to speak with the staff, citing the terms of the severance agreement.
On March 31, 2015 the company terminated an employee identified only as Whistleblower. Senior executives of the firm decided to terminate Whistleblower because the person was expressing concerns regarding the process by which the company calculated oil and gas reserved. Whistleblower had a history of raising such concerns which traced back to the time he was hired in 2012.
The senior executives considered restructuring Whistleblower’s reporting. A review of his emails was made using key word searches based on his complaint. The company decided to terminate Whistleblower because he was disruptive. At the time, no investigation of his claims had been made. The Order alleges violations of Exchange Act Section 21F and Rule 21F-17.
To resolve the matter the firm consented to the entry of a cease and desist order based on the Section and Rule cited in the Order. The firm also agreed to pay a penalty of $1.4 million.