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SEC Fines Company for Financial Disincentive Provision For Whistleblowers
August 18, 2016
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted and among its provisions were those providing for "Whistleblower Incentives and Protection." The age of whistleblowing had dawned and Congress saw fit to ensure that those men and women who stepped forward were not harassed or retaliated against by their employers or former employers. In furtherance of implementing Dodd Frank, the Securities and Exchange Commission ("SEC") adopted Rule 21F-17, effective August 12, 2011, which states:
§ 240.21F-17 Staff communications with individuals reporting possible securities law violations.(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement (other than agreements dealing with information covered by § 240.21F-4(b)(4)(i) and § 240.21F-4(b)(4)(ii) of this chapter related to the legal representation of a client) with respect to such communications.(b) If you are a director, officer, member, agent, or employee of an entity that has counsel, and you have initiated communication with the Commission relating to a possible securities law violation, the staff is authorized to communicate directly with you regarding the possible securities law violation without seeking the consent of the entity's counsel.
Health Net
Health Net, Inc., formerly a New York Stock Exchange traded company until March 24, 2016, had entered into voluntary severance agreements with departing employees. Following the SEC's implementation of Rule 21F-17 and in furtherance of the company's periodic housekeeping of its various agreements, Health Net amended the "Waiver and Release of Claims" provision ("Waiver/Release") in its severance agreements. In pertinent part:
- Paragraph 4 of the Waiver/Release expressly required an employee to waive the right to file an application for a whistleblower award; and
- Paragraph 8 of the Waiver/Release stated that nothing precluded an employee from participating in any investigation before any federal agency, but that an employee would be required to waive their rights to any monetary recovery related to any such investigation.
As such, the Waiver/Release did not prevent whistleblowing but imposed a financial disincentive in the form of an employee's waiver of the right to collect a whistleblower award attendant to any investigation in which the employee participated. About 600 Health Net employee executed severance agreements with the Waiver/Release from about August 2011 to June 2013.
June 2013 Revision
Pursuant to the company's ongoing housekeeping, in June 2013 the severance agreements were again amended and the Waiver/Release provision no longer contained language expressly prohibiting employees from applying for whistleblower awards under 21F; however, the financial disincentive provision stood..
SEC OIP
In anticipation of the institution of proceedings by the SEC (the "OIP"), without admitting or denying the findings, Health Net submitted an Offer of Settlement, which the SEC accepted. In the Matter of Health Net, Inc.,Respondent (OIP, '34 Act Rel. No. 78590; Admin. Proc. File No 3-17396 ; August 16, 2016). The OIP asserts that:
13. Though the Commission is unaware of any instances in which (i) a former employee of Respondent who executed the above noted agreements did not communicate directly with Commission staff about potential securities law violations or (ii) Respondent took action to enforce those provisions or otherwise prevent such communications, Respondent - by use of both the 2011 and 2013 agreements - directly targeted the SEC's whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations. Such restrictions on accepting financial awards for providing information regarding possible securities law violations to the Commission undermine the purpose of Section 21F and Rule 21F-17(a), which is to "encourag[e] individuals to report to the Commission," [Adopting Release at p. 201], and violate Rule 21F-17(a) by impeding individuals from communicating directly with the Commission staff about possible securities law violations.
The Undertaking
In determining whether to accept Respondent's Offer of Settlement, the SEC considered, among other issues, the Respondent's undertaking to make reasonable efforts to contact its former employees who signed the Waiver/Release provision during August 12, 2011, to October 22, 2014, and
[p]rovide them with an Internet link to the order2 and a statement that Health Net does not prohibit former employees from seeking and obtaining a whistleblower award from the Securities and Exchange Commission pursuant to Section 21F of the Exchange Act. . .=====Footnote 2: Health Net further agrees to provide a paper copy of the Order to any former employee who requests it
Sanctions
In accordance with the terms of the OIP, the SEC ordered Health Net to cease and desist from further violations of Rule 21F-17, and ordered the company to pay a $240,000 civil money penalty.