SEC Whistleblower

The SEC Increases Protection for Whistleblowers

In a new decision, the SEC (Securities and Exchange Commission) takes action to protect whistleblowers. The SEC signaled that it will intensify its scrutiny of employment agreements for language that forbids reporting an employer’s wrongdoing. This shift not only safeguards future disclosures but also fortifies the rights of employees who have previously reported employer misconduct.

At Gardner Employment Law, we are always staying up to date with SEC transitions and new whistleblower protections. If you need assistance, contact us today.

How the SEC Acted to Protect Whistleblowers

The SEC filed charges against Monolith Resources, LLC, a privately held energy and technology company, for its use of employee separation agreements that violated the SEC’s whistleblower protection regulations. From February 2020 until early March 2023, Monolith engaged in a practice in which it required departing employees to waive their rights to monetary awards if they filed claims against Monolith with government agencies after their termination.  Monolith inserted the following language in its separation agreements:

Nothing in this agreement is intended to limit in any way your right or ability to file a charge or claim with any federal, state, or local agency. However, these agencies have the authority to carry out their own statutory duties by investigating charges or claims, issuing determinations, filing lawsuits in their own name, or taking other actions authorized by statute. You retain the right to participate in any such action, but not the right to recover monetary damages or other individual legal or equitable relief awarded by any such governmental agency.

According to the SEC, this wording created barriers to participation in its whistleblower program. As Jason J. Burt, Regional Director of the SEC’s Denver Office, emphasized, “Both private and public companies must understand that they cannot take actions or use separation agreements that in any way disincentivize employees from communicating with SEC staff about potential violations of the federal securities laws.”

Monolith agreed to cease and desist in the future from violating the SEC’s whistleblower protection rules and paid a civil penalty of $225,000, reflecting the gravity of the situation. The SEC also required Monolith to notify former employees who had signed these contentious agreements that their ability to obtain financial awards for providing information to government agencies was in not limited in any way by the agreements that they had signed.

The SEC’s thorough investigation underlined the agency’s commitment to upholding the integrity of its whistleblower program. In its press release the SEC stated, “Any attempt to stifle or discourage this type of communication undermines our regulatory oversight and will be dealt with appropriately.”  The Monolith case serves as a clear reminder of the SEC’s dedication to protecting the rights of whistleblowers and maintaining transparent corporate practices.

What Rule is the SEC Cracking Down On?

Rule 21F-17(a) of the Exchange Act, central to these enforcement actions, provides, “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.” In simpler terms, the rule aims to prevent any action by employers that might impede an individual from communicating directly with the SEC about a possible securities law violation. Rule 21F-17(a) has become a pivotal tool in the SEC’s arsenal to ensure that potential whistleblowers feel safe and supported in coming forward with crucial information, without the fear of retaliation or legal repercussions.

The recent enforcement actions highlight the SEC’s commitment to aggressively policing the compliance of corporate policies with this rule. By targeting language in employment agreements that might dissuade employees from reporting past or future misconduct, the SEC is sending a clear message to the corporate world about the seriousness with which it views the protection of whistleblowers.

An Example of Retaliation Against an Executive Who Reported Fraud

As reported by The New Yorker, Dr. Darren Sewell discovered Medicare fraud by his employer, Freedom Health.  Dr. Sewell served as vice president and the third-highest-ranking official in the company. During his tenure, Dr. Sewell observed multiple instances of fraud. He gathered evidence showing that the company manipulated its enrollment records to exclude elderly people needing extensive care. Dr. Sewell saw Freedom Health retaining younger, less care-intensive patients on its rolls and also paying sales agents bonuses for removing sicker individuals from their enrollment lists.

Upon realizing the potential Medicare fraud by his employer, Dr. Sewell sought legal counsel.  With his lawyer involved, Dr. Sewell reported the fraud and filed a whistleblower lawsuit based on the False Claims Act.  At that point, the Government took over the investigation.  Dr. Sewell, while still employed, participated by discreetly gathering evidence under FBI guidance. He performed wiretapping and other covert operations, as he was instructed to do.  Dr. Sewell’s challenge was to keep his actions secret by maintaining complete anonymity and collecting effective evidence without notice of others.

When the court unsealed the documents after the Government’s investigation was concluded, the case became public knowledge.  Dr. Sewell faced extreme workplace harassment. Despite the False Claims Act’s prohibition against employer retaliation for fraud reporting, Freedom Health found ways to disrupt Dr. Sewell’s work. The company barred him from using his computer, seized his laptop, and eventually placed him on administrative leave, leading to his resignation. Despite these challenges, Dr. Sewell chose not to file a claim of retaliation against Freedom Health.

Dr. Sewell’s legal battle spanned seven years. Tragically, Dr. Sewell passed away in an unrelated accident before the lawsuit ended, and his brother took over the case. Freedom Health opted to settle the claims, although it denied the allegations. Dr. Sewell’s family received $3.2 million. Darren Sewell’s experience conveys the difficulties in filing a whistleblower suit, and yet highlights the potential for significant rewards.

How to Take Advantage of the New SEC Approach

Here are the essentials you need to know in this evolving landscape regarding SEC violations.

  1. Familiarize yourself with Rule 21F-17(a) of the Exchange Act. This regulation stands as the cornerstone of your protection as a potential SEC whistleblower. It explicitly prohibits employers from implementing any policy or agreement that could deter employees from communicating with the SEC regarding possible securities law violations. Awareness of your rights under this rule represents the first step toward safeguarding them.
  2. Recognize problematic wording in any type of employment agreement. Stay vigilant for language that might require you to declare that you have filed no previous complaints with any governmental agency or that you promise to file no such future complaints. 
  3. Read all documents carefully before signing.  Watch for wording in documents that you are required to sign that could limit your capacity to communicate with governmental agencies either before or after your employment concludes. Such stipulations could potentially infringe on your rights and merit close scrutiny.

If your employer fails to comply with SEC regulations, the responsibility falls on the employer, not you, to correct the problem.  However, you have the right to report intentional wrongdoing, such as fraud, that you observe being committed at work.  You have the right to voice concerns against potential fraud being committed by company officials without fear of reprisal or legal repercussions.

Contact an Expert Whistleblower Attorney

The SEC’s latest enforcement actions mark a pivotal moment in the protection of whistleblowers, demanding heightened vigilance from employers and offering reassurance to employees. If you would like guidance in this area of the law, do not hesitate to reach out.

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