It’s Déjà vu All Over Again, SEC Again Hits Severance Agreements Under Whistle-Blower Rules

SEC HQ4For the second time in two days, the SEC cracked down on restrictive employee severance agreements that purport to limit the ability of former employees to communicate with the Commission. In this case, the SEC hit SandRidge Energy, Inc. with a $1.4 million civil penalty for violating Exchange Act Rule 21F-17, and entered a cease and desist order prohibiting future violations. SandRidge agreed to settle the charges without admitting or denying the SEC findings.

The severance agreement used by SandRidge from at least August 2011 to April 2015 prohibited former employees from cooperating with any governmental agency in any complaint or investigation concerning the company. The provision expressly stated that former employees could not voluntarily contact any government agency concerning any complaint or investigation pertaining to the company. The form agreement also prohibited employees from using or disclosing any confidential or proprietary information to any other person or organization, including governmental agencies, without the company’s prior written consent. Finally, the agreement provided that employees could not “at any time in the future defame, disparage or make statements or disparaging remarks” that could damage the company’s reputation or that of any of its officers, directors or other specified persons or entities.

While SandRidge would on occasion modify the restrictive language in response to a specific request from an employee, the company continued to use the standard form agreement in many cases. From August 2011 through April 2015, approximately 546 former employees signed separation agreements that contained at least some of these provisions, and approximately 240 other employees received a form with all or some of these provisions attached to their employment agreements.

As part of a planned reduction in force, SandRidge entered into approximately 113 separation agreements on or after April 1, 2015, the day the SEC announced its first enforcement action against KBR charging violations of Rule 21F-17. After becoming aware of the SEC’s enforcement action, SandRidge asked its outside employment counsel to revise its standard form separation agreement, but the company did not change the language in the separation agreements used for the ongoing reduction in force. The SEC noted that many of the improper separation agreements were in place, and that employees executed a large number of agreements, during periods when the SEC was actively investigating SandRidge.

The matter culminated when the company dismissed an internal whistle-blower who regularly raised concerns about the process used by SandRidge to calculate its publicly-reported oil and gas reserves. According to the SEC order, management stated that they could replace the whistle-blower with someone “who could do the work without creating all of the internal strife.”The employee’s separation agreement also contained the prohibited restrictive language.

In the release adopting Rule 21F-17, the SEC stated that an “attempt to enforce a confidentiality agreement against an individual to prevent his or her communications with Commission staff about a possible securities law violation could inhibit those communications even when such an agreement would be legally unenforceable, and would undermine the effectiveness of the countervailing incentives that Congress established to encourage individuals to disclose possible violations to the Commission.”

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated that "whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC."

The settlement is subject to approval by the Bankruptcy Court for the Southern District of Texas.

In the Matter of SandRidge Energy, Inc., SEC Release No. 34-79607 (Dec. 20, 2016).