The SEC Cracks Down on Illegal Activity: Putting the Efforts Where the Whistle Is

By Majda Muhic, Fall 2016 Student Intern

Encouraging and protecting self-reporting has been key to the SEC’s efforts to uncover and prevent illegal activity. The SEC has taken this portion of its enforcement program very seriously in fiscal year 2016: its whistleblower program awarded over $57 million to 13 whistleblowers – more than all of the previous years combined. The SEC further charged several large companies with violations of Exchange Act Rule 21F-17 – the SEC rule that explicitly prohibits actions that discourage whistleblowers form communicating the with the SEC. The focal point of these violations is generally chilling language in separation agreements, often in the form of strict non-disclosure provisions that prevent employees from voluntarily communicating with the SEC about potential misconduct. This chilling language in turn only makes worse any other potential violations. 

In addition to the Customer Protection Rule violations discussed in Part 4 of this Series, Merrill Lynch violated Exchange Act Rule 21F-17 by using language in its severance agreements that discouraged its employees from providing information to the SEC. In response to the charges, the financial giant agreed to implement signification changes: revising its agreements, policies, and procedures, providing its employees with a summary of their rights and protections under the SEC’s Whistleblower Program, and creating a mandatory whistleblower-training program for the company and its parent corporation, Bank of America.

The SEC charged Anheuser-BuschBlueLinx Holdings Inc., and Health Net Inc. with similar violations. In the separation agreement at issue, Anheuser-Busch imposed a substantial financial penalty for any violation of its strict non-disclosure terms – a financial punishment for whistleblowing. In this case, Anheuser-Busch agreed to pay a total of $6 million for its violation of the Foreign Corrupt Practices Act and an accompanying violation of Exchange Act Rule 21F-17. BlueLinx Holdings Inc., an Atlanta-based building products distributor, similarly agreed to pay $265,000 to settle the charges that it required its employees to waive their rights to monetary recovery if they filed a complaint with a federal agency, including the SEC. This language was, again, part of the company’s severance agreement.

The SEC went even further and brought its first stand-alone action for retaliation against a whistleblower. It found that the casino-gaming company International Game Technology (IGT) fired an employee because he reported potential illegal activity to senior management and the SEC.  IGT agreed to pay a half-million dollar penalty for doing so and to stop any further violations. As this case indicates, ensuring a safe environment for whistleblowers is a high priority of the SEC’s whistleblower program, and central to SEC’s larger enforcement efforts.