Securities Litigation

The SEC announced its second enforcement action in a week against a company using severance or confidentiality agreements requiring employees to waive whistleblower bounties or their right to bring a qui tam action.

In this week's settled action, the SEC fined publicly-traded Health Net $340,000 for having used severance agreements (over 4 years) that expressly allowed government reporting and cooperation in investigations but required waiver of monetary awards and qui tam actions. The offending agreements included waivers of:

"the right to file an application for award for original information submitted pursuant to Section 21F of the Securities Exchange Act of 1934,"

and provided

"nothing in this Release precludes Employee from participating in any investigation or proceeding before any federal or state agency, or governmental body . . . however, while Employee may file a charge and participate in any such proceeding, by signing this Release, Employee waives any right to bring a lawsuit against the Company, and waives any right to any individual monetary recovery in any such proceeding or lawsuit or in any proceeding brought based on any communication by Employee to any federal, state, or local government agency or department."

Notably, Health Net regularly reviewed and amended its agreement and the SEC admitted it was unaware that any former Health Net employee ever communicated with the SEC or that Health Net ever tried to enforce the clauses. Nevertheless, the Commission took offense at the language it said "- directly targeted the SEC's whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.

The Dodd-Frank Act added '34 Act § 21F encouraging whistleblower programs. The SEC adopted Rule 21F-17 providing:

(a) 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.

The requirements are not limited to public companies. Moreover, Dodd-Frank amendments also gave the SEC administrative jurisdiction over companies it does not regulate directly.

Last week's action against BlueLinx also involved a company's attempt to limit whistleblower financial incentives or qui tam actions, even while acknowledging awareness of the Dodd-Frank whistleblower requirements. The BlueLinx Order went further - specifying SEC-approved language in the Company's undertakings:

"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."

This week's Order, In the Matter of Health Net, Inc., Rel. No. 34-78590, AP File No. 3-17396 (SEC Aug. 16, 2016) is here.

The prior Order, In the Matter of BlueLinx Holdings, Inc., Rel. No. 34-78528, AP File No. 3-17371 (SEC Aug. 10, 2016) is here.

Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.

© 2016 by Thomas K. Potter, III (all rights reserved).