Pacts That Gag Employee Tipsters May Be Prevalent in Financial Sector, Survey Finds

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By Yin Wilczek

May 19 — U.S. and U.K. financial institutions may be gagging whistle-blower employees through the widespread use of confidentiality agreements, a new study suggests.

In a survey of 1,223 individuals employed by financial firms in both countries, 10 percent of the respondents said they signed or were asked to sign confidentiality agreements that would bar the reporting of illegal or unethical activity to authorities.

The figure jumps to 25 percent for respondents who make $500,000 or more per year, according to the survey issued May 19 by Labaton Sucharow LLP and Notre Dame University's Mendoza College of Business.

The survey also found that 16 percent of the respondents believe their company's confidentiality policies and procedures would prohibit them from reporting potential wrongdoing directly to law enforcement or regulatory authorities.

For those earning $500,000 or more, that statistic jumps to 28 percent, according to the survey.

Finance Executives 

Between December 2014 and January 2015, the survey polled individuals who were employed in the financial services or banking industries as account executives, financial advisers, financial analysts, portfolio managers or investment bankers.

In a release, Jordan Thomas, chair of Labaton's whistle-blower representation practice and co-author of the report, said the “widespread, systematic and previously unknown scope of gag orders in Corporate America” serves as a wake-up call for the Securities and Exchange Commission and other regulators.

“These tactics are particularly insidious because they keep local, state and federal law enforcement organizations in the dark about all types of wrongdoing—everything from large-scale corporate frauds, environmental accidents and public safety concerns,” Thomas said.

In early April, the SEC fined KBR Inc. $130,000 over a confidentiality agreement that allegedly infringed on federal whistle-blower protections.

SEC whistle-blower chief Sean McKessy has warned that the agency continues to scrutinize other employer pacts that may stifle employee whistle-blowing. At the same time, whistle-blower counsel have been bringing what they consider problematic agreements to the commission's attention.

More and More Seen

Whistle-blower attorneys say that confidentiality pacts that cross the line are prevalent.

“More and more we see firms attempt to conceal fraud by using ‘confidentiality agreements' to intimidate witnesses from reporting wrongdoing to authorities,” said Michael Sullivan, a partner at Finch McCranie LLP, Atlanta, who represents SEC whistle-blowers.

“This witness intimidation should be regarded as a separate crime,” Sullivan, a former federal prosecutor, told Bloomberg BNA. “The public’s interest is in protecting investors by exposing fraud, and wise judges refuse to enforce these agreements.”

However, Daniel Davis, special labor & employment law counsel at Proskauer Rose LLP's Washington office who represents corporations, said he was “surprised” by the survey results given that employers usually are pretty careful about what they include in these agreements. He questioned whether the issue is one of interpretation.

“I think that there may be some ambiguities in some of these agreements that employees are reading in a way that the employer never meant for them to be interpreted,” Davis told BBNA. He added that although confidentiality provisions in employer agreements are common, employers generally are not trying to prevent their workers from going to the authorities to report wrongdoing.

Nonetheless, in light of the KBR case and the SEC's pronouncements, employers should take this opportunity to “look over their agreements again and see if there is anything that needs to be clarified,” Davis said.

Other federal agencies, including the Equal Employment Opportunity Commission and the National Labor Relations Board, also have been active in this space.

Other Findings 

In other highlights, the Labaton/Notre Dame survey found that although 89 percent of the respondents said they would report misconduct, a surprising 37 percent of the respondents still are not aware of the SEC's bounty program.

The survey also indicated that Wall Street may not have learned its lesson from the 2008 financial crisis and the subsequent clampdown by law enforcers.

A full 47 percent of the respondents believe their competitors have engaged in illegal or unethical behavior to gain an edge, the survey found. One quarter of the respondents also said they likely would engage in insider trading to make $10 million if they had no chance of being caught.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The survey and related release are available at http://www.labaton.com/en/about/press/Historic-Survey-of-Financial-Services-Professionals-Reveals-Widespread-Disregard-for-Ethics-Alarming-Use-of-Secrecy-Policies-to-Silence-Employees.cfm.