SEC Fines Company for Severance Agreements Waiving Rewards

Another publicly traded company has been reprimanded by the Securities and Exchange Commission for attempting to thwart its whistleblower program. This time it is BlueLinx Holdings, Inc., a building products distributor which trades on the New York Stock Exchange with a market capitalization of approximately $84 million, which ran afoul of SEC Rule 21F-17.

SEC Rule 21F-17 prohibits any person from taking an action to “impede an individual from communicating directly with the Commission staff about a possible securities law violation ….” According to the press release issued by the SEC, the company required outgoing employees to waive their right to a monetary recovery from any whistleblower award as part of their severance agreements starting in mid-2013.

The SEC brought an administrative proceeding seeking a cease and desist order. The company agreed to settle without admitting or denying the finding. As a result, it will pay the SEC a penalty of $265,000, attempt to contact former employees to notify them that they are not prohibited from reporting to the SEC or accepting awards, and modify the agreements going forward.

It’s great to see the SEC step up and make clear that this tactic is not permitted in severance agreements. The SEC has so far been a strong advocate for whistleblower rights, using its rules to protect whistleblowers on several fronts:

In June 2014, it charged the first company, Paradigm Capital Management, under its anti-retaliation authority as part of the settlement of an enforcement action for the violation of federal securities laws.

In April 2015, the SEC brought its first enforcement action under the rule against KBR Inc. KBR required witnesses in some internal investigations to sign confidentiality agreements requiring them to get approval from the legal department to disclose the information to outside parties, or face discipline up to and including termination.

And for at least the past year, the SEC has filed amicus briefs in individual retaliation lawsuits defending its rule prohibiting retaliation against whistleblowers who internally reported yet did not contact the SEC. The Second Circuit approved its interpretation in Berman v. Neo@Ogilvy LLC.

To speak to our SEC whistleblower attorneys about this information or for an evaluation of a potential submission to the SEC, please call 1-800-590-4116.

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