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SEC Takes a Stand Against Companies Trying to Silence Whistleblowers - AGAIN!

Posted  September 19, 2023

Last Friday (September 8), Monolith Resources agreed to pay $225,000 to settle Securities and Exchange Commission (SEC) charges of using employee separation agreements that violated the SEC’s whistleblower protection rules.  It is just the latest in a continuous stream of SEC enforcement actions against companies trying to silence whistleblowers.  Monolith is a clean technology company headquartered in Lincoln, Nebraska that produces hydrogen and carbon related products.

The Dodd-Frank Wall Street Reform and Consumer Protection Act created the SEC Whistleblower Program which provides various incentives and protections to whistleblowers who voluntarily provide information to the SEC that leads to a successful enforcement action.  One of the key incentives under the Program is the right of successful whistleblowers to receive up to 30% of any government recovery.  As Congress explicitly recognized, “a critical component of the Whistleblower Program is the minimum payout that any individual could look towards in determining whether to take the enormous risk of blowing the whistle in calling attention to fraud.”  See The Restoring American Financial Stability Act of 2010, Committee on Banking, Housing, and Urban Affairs (Apr. 30, 2010).

One of the key protections under the Program is the unfettered right to report potential wrongdoing to the SEC.  Specifically, Rule 21F-17 proscribes taking “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 . . . with respect to such communications.”  This is the provision the SEC charged Monolith with violating with a provision in its employee separation agreements that forced departing employees to waive their right to potential whistleblower awards under the SEC Program.

According to the SEC’s Order, for the last three years Monolith’s separation agreements provided that “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.”  Nothing wrong with that.  That is exactly the type of language the SEC wants to see.  At the same time, however, the agreements also had language that took away the right to any whistleblower reward from working with the government:

These [governmental] 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 action authorized by statute.  You retain the right to participate in any such action, but not the right to recover money damages or other individual legal or equitable relief awarded by any such governmental agency.

This is exactly the type of language the SEC does not want to see because, as the SEC explained, it raises “impediments to participation in the Commission’s whistleblower program by having the employees forego the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.”

As part of the settlement, Monolith agreed to revise its separation agreements to make clear that “nothing in this Agreement shall bar or impede in any way your ability to seek or receive any monetary award or bounty from any governmental agency or regulatory or law enforcement authority in connection with protected ‘whistleblower’ activity.”  The company also agreed to notify former employees that the agreements they signed do not in any way limit their ability to obtain whistleblower awards.

The SEC has trumpeted the settlement as another example of its zero-tolerance for companies trying to get in the way of whistleblowers:

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.  Any attempt to stifle or discourage this type of communication undermines our regulatory oversight and will be dealt with appropriately.

Just the latest example of the SEC showing the love for its whistleblowers.  It also comes only months after the SEC made two blockbuster whistleblower awards.  On August 4, the SEC awarded $104 million to seven whistleblowers.  And on May 5, it awarded $279 million to a single whistleblower, the SEC’s largest to date, and the largest award under any of the government’s ever-expanding list of whistleblower rewards programs.  When it comes to standing up for whistleblowers, the SEC has definitely put its money where its mouth is.

If you have information relating to potential securities law violations and would like to speak with an experienced member of the Constantine Cannon whistleblower team, please don’t hesitate to contact us for a free and confidential consultation.

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