Severance Agreements Violate SEC Whistleblower Provisions
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.