by Cydney Posner
In a new whistleblower protection case, the SEC’s Office of the Whistleblower settled charges against BlueLinx Holdings, Inc. that the company’s severance agreements violated the securities laws. The agreements included confidentiality restrictions without exclusions for whistleblower reporting and required terminating employees to waive possible whistleblower awards or risk losing their severance and other post-employment benefits. Rule 21F-17 prohibits any action to impede an individual from communicating directly with the SEC staff “about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
As discussed in this PubCo post, the former director of the SEC’s whistleblower office said in an interview in 2014 that he was encouraging his staff to be “on the hunt” for instances involving problematic severance, employment or confidentiality agreements that included language in the agreement that crossed the “fine line” from “encouraging” to effectively “forcing” internal reporting to the exclusion of reporting to the SEC, even if the prohibition on external reporting was not explicit. They found their first case back in 2015, when a company was charged with using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process. (See this PubCo post.)
His interim successor appears to be continuing the pursuit of these cases. In this instance, most of the company’s severance agreements contained some form of a provision that prohibited the employee from sharing confidential information, unless compelled to do so by law or legal process (in which case, the employee was either required to provided notice to the company or to obtain prior consent); however, there was no exception permitting the employee to provide information voluntarily to the SEC. In addition, in 2013, the company revised its standard severance agreements to add provisions that allowed the departing employee to file a charge with a variety of regulatory agencies, including the SEC, if applicable law required that the employee be permitted to do so; however, the employee was required to waive the right to any monetary recovery in connection with any charge filed. Signing this agreement, including this waiver, was a condition to receipt of severance payments and other consideration from the company.
The SEC order provides that by
“including those clauses in its Severance Agreements, BlueLinx raised impediments to participation by its employees in the SEC’s whistleblower program. By requiring departing employees to notify the company’s Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits…. Further, by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”
The order concluded that these types of restrictions undermine the purpose of the whistleblower rule and violate Rule 21F-17(a) by impeding individuals from communicating with the SEC staff about possible securities law violations.
In addition to paying a monetary penalty of $265,000 and contacting former employees to advise them of the SEC order, the company was required to amend its standard form of severance agreement to add the following provision:
“Protected Rights. Employee understands that nothing contained in this Agreement limits Employee’s ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission (“Government Agencies”). Employee further understands 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.”