Benjamin Calitri. Photo courtesy of Kohn, Kohn & Colapinto, LLP.
On September 8th, the SEC announced its first enforcement action against a private company for violation of Rule 21F-17(a). Rule 21F-17(a) prohibits any person from “tak[ing] 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.” In other words, this rule prevents companies from silencing whistleblowers.
The Commission already has a strong record of enforcing this rule among public companies, but its recent $225,000 sanction against Monolith Resources marks the first time the Commission has charged a privately held company, that is not a broker or investment advisor, for violating this rule.
The SEC Order against Monolith explains that from February 2020 until early March 2023, twenty-two former employees of Monolith signed separation agreements containing language which violated Rule 21F-17(a). Despite stating 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,” the separation agreements required former employees to waive their right to claim monetary awards from government whistleblower programs. The SEC determined that by requiring former employees to forego whistleblower awards, the separation agreements “raised impediments to participation in the Commission’s whistleblower program.”
The SEC has found companies to be in violation of Rule 21F-17(a) for contract clauses that require the employee to waive their right to a monetary award from government whistleblower programs,[1] require prior consent of the company in some way before disclosure of information to a regulator,[2] prevent the employee from initiating contact with regulators,[3] or require the employee to notify the company of any disclosures soon after.[4] Beyond employee contracts, [5] the SEC has found language in violation of Rule 21F-17(a) in employee/compliance manuals,[6] severance and separation agreements,[7] and settlement agreements.[8]
The Commission’s enforcement of Rule 21F-17(a) against a private company demonstrates that they understand the strategic importance of the whistleblower program in fulfilling the mission of the SEC: to protect investors and maintain fair, orderly, and efficient markets. They are prepared to sanction any company – regardless of whether they are public or private – that tries to suppress the rights of whistleblowers in violation of securities laws. In the Monolith enforcement order itself, the SEC described the “financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations” as “critically important.” The Commission also cited specifically to Congress’s intent that “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.”
The Monolith enforcement action should serve as a warning to private companies who think they can get away with fraud by suppressing the whistleblower rights of their employees and former employees. The securities of private companies are within SEC jurisdiction, and therefore private companies are not exempt from SEC regulation. This order proves that the SEC can and will take up cases for Rule 21F-17(a) violations by private companies, and it serves as a testament to the endurance of the Dodd-Frank whistleblower program, despite attempts by corporations to deter employees from blowing the whistle.
Footnotes
[1] See SEC Enforcement actions against: BlueLinx; Health Net; BlackRock; Homestreet; Gaia.
[2] See SEC Enforcement actions against: KBR; BlueLinx, Guggenheim, Brinks.
[3] See SEC Enforcement action against: Guggenheim.
[4] See SEC Enforcement action against: Activision Blizzard.
[5] See SEC Enforcement action against: Brinks.
[6] See SEC Enforcement action against: Guggenheim.
[7] See SEC Enforcement actions against: Merrill Lynch; BlueLinx; Health Net; Anheuser-Busch InBev; NeuStar; BlackRock; Homestreet; Activision Blizzard; Gaia.
[8] See SEC Enforcement action against: BlueLinx.
Benjamin Calitri is an Associate at Kohn, Kohn & Colapinto, LLP.
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