Letter To SEC Commissioners

Katz, Marshall & Banks partners David Marshall and Debra Katz submitted a letter to the SEC on May 8, 2013, calling for the SEC to take action to put an end to efforts by employers to impose contractual limitations on the ability of whistleblowers to submit information to the SEC. Marshall and Katz detailed practices that they have observed of companies including language in routine severance and settlement agreements that violate the SEC rule preventing companies from impeding individuals from communicating directly with the SEC about possible securities law violations through its whistleblower-reward program. Below is the full text of that letter.

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Dear Commissioners:

We are partners with the law firm of Katz, Marshall & Banks, LLP, an employment law firm based in Washington, D.C. that specializes in the representation of whistleblowers. We are currently represent a number of individuals who have submitted tips to the Securities and Exchange Commission ("SEC" or the Commission") through the Office of the Whistleblower. We are writing to address an issue that deserves the Commission's prompt attention, namely the attempted inclusion by corporations and their counsel of terms in settlement agreements with departing employees that impede would-be whistleblowers from providing information to the Commission about potential securities violations. As discussed more fully below, we believe that such provisions -- which are routinely requested of employees -- seriously undermine the SEC's efforts to use the whistleblower-reward program as a critical tool in the Commission's enforcement of the nation's securities laws.

I. Introduction: Incentivizing and Protecting Whistleblowers

The clear intent of Congress in establishing the SEC whistleblower-reward program was to incentivize individuals to come forward with information about violations of securities laws and the Foreign Corrupt Practices Act ("FCPA"). Section 922 of the Dodd-Frank Act also established strong anti-retaliation protections for individuals who report such misconduct. The SEC went a step further when promulgating regulations to govern the program, explicitly making it unlawful to interfere with the efforts of such individual to provide information to the Commission. Rule 21F-17(a) 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.

17 C.F.R. § 240.21F-17(a). Unlike the separate anti-retaliation provision, this rule comes into play when a company attempts to block or deter an individual from providing information to the Commission and cooperating in its investigation of that information. The rule is often violated well before an individual experiences actionable retaliation.

II. Technical Compliance with the Rule

The majority of the individuals we represent before the Commission have obtained information about possible securities violations through their employment with the companies whose conduct is the subject of their tips, or sometimes through their employment with related companies. As we know from our own experience and as a number of SEC officials involved in the whistleblower program have noted in public statements, the overwhelming majority of these employee-whistleblowers first reported the same securities violations to their companies' management and when their responses were not properly addressed they then reported their concerns to the SEC. As a result of their internal reporting and/or of management's learning or suspecting that the employee has also gone to the SEC, many of these whistleblowers experience retaliation for raising their concerns, and they are often involuntarily separated from their employment as a result. Some are demoted, others get fired, and some just find themselves being suddenly criticized, marginalized, or ignored in ways that make it clear that the decision to speak out about wrongdoing has placed their careers in danger despite years of exemplary job performance.

Whether the company terminates the employee as an act of retaliation, the employee "voluntarily" resigns, or the employee departs later for some unrelated reason, many of these whistleblowers end up entering into separation agreements with their former employers in order to obtain severance or other benefits. Such agreements are routinely presented to employees today, and require that the employee release any legal claims against the company in exchange for whatever benefits the company provides. A very large number of employees sign such agreements in the United States every year, often without advice of counsel.

In the eleven years since the passage of the Sarbanes-Oxley Act in 2002, we have represented scores of whistleblowers who have raised concerns about securities fraud and other financial fraud, and who have faced retaliation from their employers as a result. Since the enactment of the Dodd-Frank Act in in July 2010, we have been routinely advising such whistleblowers about the SEC whistleblower program and, where appropriate, representing them in the preparation and submission of their tips to the SEC. In these cases, we are frequently involved in the negotiation of settlement agreements that resolve our clients' claims of unlawful retaliation, which usually arise under Section 806 of the Sarbanes-Oxley Act, more recently under Section 922 of the Dodd-Frank Act, and/or some state-law counterpart. During negotiations, we often have to respond to attempts by employers and their counsel to include language that interferes with the ability of whistleblowers to participate freely in the SEC program, or which otherwise might frustrate the Commission's enforcement efforts.

It is our observation that most employers, and certainly their counsel, understand that they cannot insist on the inclusion of settlement terms that would expressly prevent a current or former employee from communicating with the SEC. Our clients have regularly been presented with severance agreements requiring departing employees to represent and agree that he "ha[ve] not and will not share non-public, proprietary or otherwise confidential information of the company with any third party." Most employers will agree to modify such a prohibition with language such as, "Nothing in this agreement shall be construed...