In two separate actions this week, the SEC objected to language in severance agreements that encourage outgoing employees to keep quiet

By Joseph McCafferty

December 21, 2016

The Securities and Exchange Commission hit two separate companies this week with penalties for violating rules that prevent companies from asking outgoing employees in severance agreements to not bring concerns or other information to regulators as a condition of the agreement. The SEC has warned in the past that such language in separation agreement is a violation of whistleblower protections.

On Monday, the SEC announced that a technology company had agreed to pay a penalty of $180,000 to settle charges involving its severance agreements that impeded at least one former employee from communicating information to the SEC.

The SEC's order found that Virginia-based NeuStar violated federal securities laws by routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators "in any communication that disparages, denigrates, maligns, or impugns" the company. Former employees could be compelled to forfeit all but $100 of their severance pay for breaching the clause. These severance agreements were used with at least 246 departing employees from Aug. 12, 2011 to May 21, 2015.whistle

Then on Tuesday, the SEC announced that Oklahoma City-based SandRidge Energy continued to regularly use restrictive language that prohibited outgoing employees from participating in any government investigation or disclosing information potentially harmful or embarrassing to the company, even after a new whistleblower protection rule became effective in August 2011.

The SEC's order further finds that SandRidge fired an internal whistleblower who kept raising concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves. The employee had been offered a promotion, which was turned down. Just months later, senior management concluded the employee was disruptive and could be replaced with someone "who could do the work without creating all the internal strife." The company had conducted no substantial investigation of the whistleblower's concerns and only initiated an internal audit that was never completed. The employee's separation agreement also contained the company's prohibitive language that violated the whistleblower protection rule.

Strong Words from the SEC
SEC officials were adamant in their statements on the charges that the regulator will continue to pursue cases where it thinks public companies are influencing former employees to keep mum on concerns about potential rules and legal violations "Public companies cannot use severance agreements to impede whistleblowers from communicating with the SEC about a possible securities law violation," said Antonia Chion, Associate Director of the SEC's Enforcement Division. "NeuStar's severance agreements broadly prohibited former employees from communicating any disparaging information about the company to the SEC, and unsurprisingly at least one former NeuStar employee was chilled by such language."

"Ignoring a rule that protects communications between outgoing employees and the SEC, SandRidge flatly prohibited such contact in their separation agreements and at the same time retaliated against an employee who raised concerns about the company to its management," said Shamoil T. Shipchandler, Director of the SEC's Fort Worth Regional Office.

Clearly the issue has become an area of focus for the SEC. Whistleblower protections, including the creation of the Whistleblower office at the SEC, were part of the Dodd-Frank Act, signed into law in 2010. Internal audit and compliance departments will likely want to review the language the company is using in severance and separation agreements with employees to ensure that they do not include provisions that either restrict former employees from providing information to enforcement agencies or other authorities, or incentivize them to refrain from contacting authorities.


Joseph McCafferty is head of audit content for MIS Training Institute. He can be reached at jmccafferty@misti.com.