SEC Agreement with KBR over treatment of Whistle-blower Strengthens Dodd-Frank
Whistle-blowing has become a more accepted practice in business in order to stem the tide of financial fraud and other criminal offenses by corporations in the aftermath of the passage of the Dodd-Frank Financial Reform Act by Congress in 2010. The SEC has made a push to bring more whistle-blower cases since the 2010 passage of the Dodd-Frank law, which created the agency’s whistle-blower program.
As part of the program, tipsters can get between 10% and 30% of the sum of penalties collected if their information leads to an SEC enforcement action with sanctions of more than $1 million. Generally speaking, these individuals should first make every effort possible to get the company to right the wrong before going to the SEC and blowing the whistle.
SEC officials have said they are doing more than just handing out bounties and have taken steps to police the way companies treat internal whistle-blowers. Dodd-Frank whistle-blower regulations prohibit companies from interfering with employees reporting potential securities-law violations to the agency.
The SEC strengthened the position and provided additional protection for would-be whistle-blowers under Dodd-Frank last week when it reached the first settlement with a company accused of silencing tipsters through restrictive employment agreements.
Engineering and construction firm KBR Inc. agreed to settle the agency’s allegations that the company required witnesses in internal investigations to sign confidentiality statements that could have kept them from reporting possible securities-law violations to outside authorities. The settlement is expected to have broad ramifications in how other companies draft employment agreements.
KBR agreed to pay $130,000 indicating its culpability and providing fuel for the SEC’s broader probe into whether companies are stifling corporate whistle-blowers. The agency has recently sent letters to several companies asking for years of nondisclosure agreements, employment contracts and other documents.
The message from this case is that all companies that are using confidentiality agreements need to review those documents to ensure they don’t contain language that runs afoul of the rule. Retaliatory action will not be tolerated by the SEC, as the settlement with KBR suggests.
According to the SEC, KBR required witnesses in certain internal investigations to sign confidentiality statements with language warning they could face discipline, including termination, if they discussed the matters with outside parties without the prior company approval.
The SEC said there were no apparent instances in which KBR actually prevented employees from communicating with the agency, but instead that a “blanket prohibition” on discussing internal investigations with outsiders has a “a potential chilling effect on whistle-blowers’ willingness to report illegal conduct to the SEC.” KBR’s use of such agreements has been scrutinized by congressional Democrats as well.
While lawyers say confidentiality and other employment agreements are essential tools for companies in sensitive situations, they also say these documents need to be drawn up carefully to comply with regulations—especially in light of the SEC’s new enforcement push.
Of course, lawyers care little about the ethics of the practice, focusing instead on the legalities of confidentiality agreements. However, it should be pointed out that for a company to require an employee to sign a confidentiality agreement promising not to divulge sensitive information that might qualify for a whistle-blowing action by the SEC or other regulatory agency is unethical and fails to protect the public interest. The public has a right to know when an organization commits a crime and violates securities or other laws. Imagine if such actions go unreported from the perspective of investors and creditors who have a financial stake in the companies.
There are increasingly huge awards at stake for tipsters under Dodd-Frank, and I believe this is a good thing for society. The SEC in September announced that an unidentified informer would collect more than $30 million, more than twice as much as the agency’s previous high award.
In December, three individuals and a small New Jersey mortgage company split more than $170 million for their roles in helping investigators get a record $16.65 billion penalty against Bank of America. The award was among the biggest whistle-blower payouts.
Some will say that whistle-blowing violates an employee’s loyalty obligation to the company that hires the person and pays his or her salary. However, we must realize that the act of whistle-blowing is a last resort after all else has been tried to alter the company’s actions and behaviors. Loyalty should never be used to mask an employee’s ethical obligation to act responsibly and with integrity. After all, if the employee in the know decides not to act, perhaps because of having signed a confidentiality agreement, then who can protect the public?
Blog posted by Steven Mintz, aka Ethics Sage on April 8, 2015. Dr. Mintz is a professor in the Orfalea College of Business at Cal Poly, San Luis Obispo. He also blogs at ethicssage.com.