The SEC wants you to know that it means business about its whistleblowing program. On April 1, 2015, in the latest in a series of steps to protect and encourage whistleblowers, the agency entered an order in an enforcement action against KBR saying that the company’s confidentiality requirements for internal investigation witnesses violated the agency’s whistleblowing rules. In the KBR enforcement action as well as other steps the SEC has taken, the agency has made it clear that it intends not only to encourage whistleblowing and protect whistleblowers, but also to put down any efforts the agency thinks could stifle whistleblowing.
KBR required witnesses involved in the company’s internal investigations to sign a form confidentiality statement that required the witness to agree that “I understand that … I am prohibited from discussing any particulars regarding this interview and the subject matter discussed … without the prior authorization of the Law Department.” The provision also states that the witness understands that any unauthorized disclosure “may be grounds for disciplinary action up to an including termination of employment.”
The SEC said that this provision violated Commission Rule 21F-17, which provides that “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement, with respect to such communications.”
Interestingly, the agency’s order expressly notes that the agency is unaware of any instance where a KBR employee in fact was prevented from communicating with the agency or that KBR took action to enforce the confidentiality agreement or otherwise to prevent communication.
The SEC’s concern was not any specific actions the company had taken; rather, the agency was concerned with the mere existence of the confidentiality provisions. In the order, the agency states that “the language found in the form confidentiality statement impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action including termination of employment.”
The SEC imposed a cease and desist order on KBR as well as a civil money penalty of $130,000. KBR also agreed to amend its confidentiality agreement to include the following statement:
Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblowing provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.
It is not as if the agency didn’t give warning that it was going to be targeting measures that it believed tried to suppress whistleblowers or to keep them from communicating with the agency. In a March 2014 speech at Georgetown University, Sean McKessy, the chief of the SEC’s Office of the Whistleblower, declared that the agency was looking at company contract or agreements attempting to deter whistleblowers from making reports to the agency. Among other things, he said that “we are actively looking for examples in confidentiality agreements [and] employee agreements that … in substance say ‘as a prerequisite to get this benefit you agree you’re not going to come to the commission or you’re not going to report anything to a regulator.’”
It seems probable that the agency will take further actions against companies that have confidentiality requirements or employment agreements that the agency beliefs are intended to suppress whistleblower reports to the SEC. Indeed, in his speech, McKessy specifically forewarned that they the agency may go after the lawyers that drafted the language.
The SEC’s enforcement action against KBR is merely the latest in a series of actions the company has taken to encourage whistleblowing and to suppress efforts to stifle whistleblowers. For starters, the agency has a number of whistleblower awards pursuant to the Dodd-Frank Act’s whistleblower bounty provisions. While the agency has to date made only a small number of awards, the awards so far include last year’s record-setting whistleblower bounty payment of over $30 million.
In addition, in June 2014, the agency brought its first action under the Dodd-Frank Act’s anti-retaliation provisions. The agency charged that the hedge fund Paradigm Capital Management and its owner Candace King Weir, had violated the securities laws and then retaliated against the employee who reported the trading activity to the SEC. After learning that the employee had reported the trades to the SEC, the employee, a former head trader, had been demoted to a compliance assistant.
In March 2015, the agency took the unusual step of making a bounty payment of between $475,000 and $575,000 to a corporate officer that had reported information he had learned of from another employee’s report. In making the award, the agency said that “corporate officers have front-row seats overseeing the activities of their companies, and this particular officer should be commended for stepping up to report a securities law violation when it became apparent that the company’s internal compliance system was not functioning well enough to address it.”
In other words, the SEC has made it clear not only that it is going to deploy the Dodd-Frank’s bounty provisions to reward whistleblowers and encourage whistleblowing, but that it is going to seek out and try to subdue efforts to suppress whistleblowing.
As the Latham & Watkins law firm stated in its memo about the case, the lessons from the SEC’s action against KBR are that companies should avoid any action to impede a whistleblower from communicating directly with the SEC, including by enforcing or threatening to enforce a confidentiality agreement, and that companies should eliminate language from forms and policies that expressly require employees to report internally before reporting to U.S. authorities.
The larger lesson is that companies should avoid taking any actions that SEC could interpret as an effort to deter whistleblowers from reporting wrongdoing to the agency.
In Defense of Stockholder Appraisal Litigation: In an April 16, 2015 article in the New York Times Dealbook column (here), Case Western Reserve University law Professor Charles Korsmo and Brooklyn Law School Professor Minor Myers make their case that stockholder appraisal litigation, as opposed to the more common (and much bemoaned) merger objection litigation, “plays a strongly beneficial role in mergers and acquisitions.”
In a stockholder appraisal lawsuit, a shareholder goes to court to contest the price paid in a corporate buyout. The authors contend that it is a form of shareholder suit “where the merits actually matter.” Their studies show that “appraisal litigation is significantly associated with buyouts with an unusually low deal price and where insiders are part of the acquiring group.” The authors argue that the appraisal litigation benefits shareholders in two ways; directly, when the litigation results in improved terms, and indirectly, for the “genuine deterrence” the litigation provides. To the critics who contend that appraisal rights should be curbed because they deter transactions, the authors say that “the evidence suggests that appraisal litigation deters transactions that ought to be deterred.” The authors argue against current efforts to curtail shareholder appraisal rights.
A Colloquy on Dr. Seuss: The other night at dinner with friends, the conversation inexplicably turned to the question of which is the best of the many books written and illustrated by the children’s author, Dr. Seuss. Despite the fact that the group consisted only of adults whose children are all themselves now adults, the conversation was surprisingly detailed and animated.
At the outset of the discussion, there was a general consensus that we all loved the short, rhyming easy reader books like One Fish, Two Fish, Red Fish, Blue Fish and Fox in Socks. Green Eggs and Ham was a particular favorite. The Dads at the table confessed a general affection for Hop on Pop. But as much fun as these beginners’ books are, they are not Dr. Seuss’ best.
There was a substantial groundswell of support at the dinner table for The Lorax, which I agree is one of the author’s better books. But for me the book, which is a sort of environmentalist fable, has too much of a self-consciously moralist purpose. I think Dr. Seuss’ better books are the ones that aren’t about anything at all. Seuss wrote a number of books that provided social commentary – The Sneetches, Yertle the Turtle – and I never liked those as much as some of his others.
There were those at the table who argued in favor of The Cat in the Hat. I always thought the book was more than a little bit creepy. For heaven’s sake, what is a weird, adult human-sized cat doing in the house while mother is away for the day? I have the same problem with The Grinch Who Stole Christmas. Little Cindy Lou Who should not have to worry about a disguised antisocial misanthrope sneaking around her house at night.
In my view, some of the best Seuss books are the ones that are not as well remembered these days, especially the ones that tell a story, like And to Think That I Saw it on Mulberry Street, and the two Bartholomew Cubbins books, Bartholomew and the Oobleck, and The 500 Hats of Bartholomew Cubbins. I also liked his endearing books about animals with a streak of nobility and a heightened sense of duty, particularly Horton Hears a Who, Horton Hatches an Egg and Thidwick the Big-Hearted Moose.
But for me the best Seuss books are the ones that simply bypass the constraints of ordinary life. The imaginative possibilities unleashed in On Beyond Zebra is a great example of this type of book. But the absolute triumph of the form is the book If I Ran the Circus, in which Little Morris McGurk dreams up increasingly outlandish embellishments he would make to the Circus McGurkus, each one increasingly dependent on the innocent but compliant Mr. Sneelock. If I Ran the Circus is a book for a kid that imagines growing up to be a professional baseball player or an astronaut. It is a book about possibilities. If you can’t dream about possibilities when you are a kid, when can you dream?