SEC Brings Enforcement Proceeding Relating to Confidentiality Agreements That May Stifle Whistleblowers

02 April 2015 Legal News: Securities Enforcement & Litigation Publication
Author(s): Bryan B. House Lisa M. Noller

Legal News: Securities Enforcement & Litigation

After repeated public statements warning companies that might seek to stifle whistleblowers, the U.S. Securities and Exchange Commission (SEC) has brought its first enforcement action relating to language in confidentiality agreements that the SEC believes could impede whistleblowers from reporting potential violations of the securities laws. As discussed in more detail below, this action suggests that companies should re-examine their employment policies, severance agreements, codes of conduct, and any other practices utilizing language regarding confidentiality. Notably, the SEC views overly restrictive agreements as problematic, even without evidence that any whistleblower actually has been deterred from whistleblowing activity.

On April 1, 2015, the SEC instituted a settled administrative proceeding against KBR, Inc., the global technology and engineering firm based in Houston. In its action, the SEC found that, as part of its regular compliance program, KBR conducts internal investigations regarding allegations of potential violations of the federal securities laws. During these investigations, KBR investigators typically interviewed KBR employees and, in connection with those interviews, provided witnesses with a form confidentiality statement. That statement required witnesses to agree to the following provision:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

While the SEC order states that the SEC is unaware of any instances in which a KBR employee actually was prevented from communicating directly with SEC staff, or in which KBR took action to enforce the form confidentiality agreement, the SEC determined that the language 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.” Thus, the SEC determined that the confidentiality agreement violated SEC Rule 21F-17(a), which prohibits taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation …”

The SEC’s order noted that KBR has amended the confidentiality statement 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 whistleblower 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.

In addition, as part of the settled action, KBR undertook to make reasonable efforts to contact KBR employees in the United States who had signed the confidentiality statement since August 21, 2011, and to provide those employees with a copy of the order and a statement that KBR would not require the employee to comply with the prior version of the confidentiality statement. Finally, KBR agreed to cease and desist from committing or causing any violations and any future violations of Rule 21F-17 under the Exchange Act, and agreed to pay a civil penalty in the amount of $130,000.

The SEC’s investigation regarding KBR’s use of the confidentiality statement had been reported in the press since early 2014, after virtually identical language was quoted in an opinion in a False Claims Act case regarding the applicability of the attorney-client privilege to KBR’s internal investigations. In United States ex rel. Barko v. Halliburton Co., 37 F. Supp. 3d 1 (D.D.C. 2014), the district court concluded that the KBR’s internal investigations were not privileged and cited the confidentiality statement in support of this conclusion, because it had not informed the interviewees that the purpose of the investigation was to obtain legal advice. 37 F. Supp. 3d at 6 n.33. While the Court of Appeals for the District of Columbia disagreed with the district court’s privilege analysis and vacated the district court’s order in In re Kellogg Brown & Root, Inc., 756 F.3d 754 (D.C. Cir. 2014), the SEC obviously was interested in KBR’s use of the confidentiality statement for other reasons.

As discussed previously, the Wall Street Journal, in addition to noting the SEC’s KBR investigation, has reported that the SEC has sent letters to “a number of companies” asking for nondisclosure agreements, employment contracts, and other documents that might seek to silence potential whistleblowers. As we have suggested, companies should promptly review employment policies, severance agreements, codes of conduct, and any other documents or practices utilizing confidentiality provisions or other similar language to ensure that they do not contain statements that could be interpreted as preventing whistleblowers from reporting suspected wrongdoing.

Importantly, the issue is not limited solely to public companies. On March 30, 2015, the Office of the Inspector General (OIG) for the U.S. Department of State issued a review of the use of confidentiality agreements and policies by some of the largest Department of State contractors. The report concluded that some of the contractors had policies or agreements that might have a chilling effect on employees who are considering whether to report fraud, waste, or abuse to the government.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Bryan B. House
Milwaukee, Wisconsin

Lisa Noller
Chicago, Il

Courtney Worcester
Boston, MA

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