SEC Shows no Patience for Muzzling Whistleblowers

August 11, 2016

Jordan A. Thomas discusses the negative impact that severance agreements have on whistleblowers

The U.S. Securities and Exchange Commission took aim at severance agreements that prevent whistleblowers from collecting cash for their tips, making clear that the agency has no patience for impeding whistleblowing in any form and suggesting it may impose even broader requirements on employers that step out of line. 

The SEC's settlement with Atlanta-based construction product distributor BlueLinx Holdings Inc. marks the third time the agency has brought charges that a company's employment or severance agreements illegally discouraged employees from becoming whistleblowers, and experts said the SEC's continuing focus on the area means employers need to pay serious attention to their own agreements.

Jordan A. Thomas, Chair of Labaton Sucharow’s Whistleblower Practice said, "This enforcement action is a warning shot to the financial services industry that these agreements must change because they deter whistleblowers from speaking up." 

Thomas, who represented a group of Bank of America executives who tipped the SEC about Merrill Lynch’s customer protection rule violations, said the agency started looking at the firm’s employment agreements in the process of investigating the tips. "I can tell you with 100 percent certainty that they [the SEC] are paying attention to this. They're looking for this in their cases. They are looking for these cases and asking for these agreements."

Thomas also noted that most companies have changed their employment agreements to remove clauses requiring employees to provide notice before going to a government agency or to make clear that employees can provide confidential company information to regulators, but that many agreements still require employees to waive their right to an award. "Corporate America has made significant changes in becoming more compliant with Dodd-Frank in all of their agreements — separation agreements, severance agreements — but they've been dragging their feet on implementing the provision regarding not discouraging people by asking them to waive any monetary award,” Thomas said.