SEC Frowns on Impeding Potential Whistleblowers: $10 Million Fine

Last Friday, the SEC announced that the agency had settled charges against D.E. Shaw & Co. LP, a New-York based investment advisor. Since 2011, and through at least 2019, D.E. Shaw had been in habit of requiring employees to sign agreements prohibiting the disclosure of confidential corporate information to third parties.  These agreements did not have an exception for potential whistleblowers.  The company also required departing employees to sign releases before receiving post-termination payments; those releases required the employees to affirm that they have not filed any complaints with any government agency.  The settlement included a $10 million dollar civil money penalty.

As the SEC’s order goes on to explain, the employment agreements, which were in place between 2011 and 2019, defined confidential information very broadly.  It included any information about:

limited partners, clients, investors, joint venturers, or customers . . . any information that would typically be included in the D. E. Shaw Group’s income statements, including, but not limited to the amount of the D. E. Shaw Group’s revenues, expenses, or net income; [and] information gained in the course of the Employee’s employment with the Company that could reasonably be expected to [be] deleterious to D. E. Shaw Group if disclosed to third parties.

SEC Order at 3. The employment agreements also stated that the prohibition on information sharing would survive both the termination of the agreement and the individual’s employment with the company.  This was reinforced by the company’s exit letters and termination agreements (both voluntary and involuntary), most of which referenced back to this non-disclosure language.

The release agreements for departing employees was in place through 2023.  While these were signed by a smaller group than those signing the employment agreements, approximately 400 employees were still subject to their terms.   These releases required employees to represent that:

The Employee represents and warrants to the Company that the Employee has not made, filed or lodged any complaints, charges, or lawsuits or otherwise directly or indirectly commenced any proceeding against any member of the D. E. Shaw Group and/or any Covered Persons and Entities with any governmental agency, department, or official; any regulatory authority; or any court, other tribunal, or other dispute resolution body.

Most of the employees’ employment agreements did not reference the release, though some were required to sign amendments to their employment agreements requiring them to sign a release in order to receive their post-termination payments. 

Putting up barriers to employee whistleblower reports is a violation of Exchange Act Rule 21F-17, which prohibits any person from 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[.]”  This rule was introduced in 2011—incidentally, the same year that D.E. Shaw began to use these agreements—and the SEC’s first enforcement action on the topic was brought in 2015.  It wasn’t until 2017 that D.E. Shaw sent out a firm-wide email to employees, stating that “nothing in any D.E. Shaw group employment agreement, confidentiality agreement, or any other firm policy or agreement shall prohibit an employee from communicating directly with….any regulator[.]”  The email also affirmed that the company would not retaliate against employees for reporting possible violations. 

Despite this 2017 acknowledgement of the rule, D.E. Shaw failed to add any sort of whistleblower protection language to its employment agreement for another two years.  In 2019, they required most employees to sign revised employment agreements containing specific whistleblower carve-outs from the confidentiality requirement.  The language in the release, however, remained unchanged until June 2023—at which point, the SEC’s investigation into the matter was already underway.

It is impossible to know how many of D.E. Shaw’s current and former employees would have blown the whistle on the company, had they not been concerned about the consequences of breaching their employment agreements.  The use of confidentiality language in employment agreements is very common, and there are likely many other companies in a similar position.  Indeed, “[e]ntities employing confidentiality, separation, employment and other related agreements should take careful notice of today’s enforcement action,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, who went on to note that “[t]he Commission takes seriously the enforcement of whistleblower protections and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don’t impede whistleblowers from contacting the Commission.”

If you have any concerns about confidentiality agreements, releases, or other employment agreements that you have signed or that your employer uses, contact Lundin PLLC Senior Attorney Alexandra Douglas at [email protected].

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