The U.S. Securities Exchange Commission fired a $130,000 warning shot at corporate America, fining Houston-based KBR this amount for drafting employee confidentiality agreements to thwart employee SEC whistleblowing for malfeasance. The whistleblower bar calls it an historic step forward for whistleblowers while a prominent pro-business group calls it overreaching.
Harry Barko Whistleblower Lawsuit Brought KBR’s Faulty NDAs to Light
The SEC alleged former Halliburton subsidiary KBR, Inc. included language in their employee confidentiality agreements that effectively required workers to get KBR’s legal department to sign off in advance on any disclosures, including blowing the whistle on corporate wrongdoing – even to the SEC or the Department of Justice, under penalty of firing or other discipline.
The $130,000 the SEC fined KBR told U.S mega-corps that silencing whistleblowers in this manner will not be tolerated. KBRs allegedly overly restrictive employee confidentiality agreements came to light in a high profile whistleblower lawsuit brought by Harry Barko against KBR and its then-parent Halliburton alleging the company was overcharging the U.S. government.
SEC: Muzzle Whistleblowers at your Peril - Vigorous Enforcement Promised
According to Andrew Ceresney, SEC’s Division of Enforcement director, “By requiring employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us.”
The Wall St. Journal telegraphed such an action in February reporting the SEC was seeking documents from multiple companies, including NDAs and employment agreements going back for several years; the SEC inquiries appeared focused on whistleblower muzzling in violation of Dodd Frank’s whistleblower protections and pervasive 21F-17 SEC violations. The pertinent language therein reads, “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.”
Ceresney continued in a public SEC statement, “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
An SEC statement identified no instances where KBR, Inc. in fact used the offending language to prevent an employee from reporting to the Commission although former employee Barko’s case suggests otherwise. Under the terms of the settlement KBR agreed to change the language in their agreements to be clear that reports of wrongdoing to the SEC did not require the advance clearance by KBR’s lawyers.
KBR Lawyer “It Never Dawned on Us”
A U.S. Chamber of Commerce, a pro-business advocacy group that has been accused of being extreme in their business positions in recent years, letter to Securities Exchange Commission chair Mary Jo White from the Chamber’s Center for Capital Markets Competitiveness president read in part, “This action is the result of a highly subjective interpretation and application of the SEC’s recently adopted whistleblower rules.”
KBR litigation vice president Mark Lowes took the Chamber’s stand yet further saying, “It never dawned on us that an attempt to protect attorney client privilege would be seen this way.”
Rumor - More Enforcement Actions Pending
The SEC victory is credited to investigations by Rebecca Fike, Jim Etri, and David Peavler of the SEC’s Fort Worth Regional Office. Sources say more enforcement actions are imminent as the Commission plans to robustly protect the whistleblowing process.