New Reports Suggest the SEC is Cracking Down on Confidentiality Agreements

In our practice as counsel for SEC whistleblowers, one of the troubling practices we frequently see on the part of companies is the use of confidentiality agreements that purport to prevent employees or former employees from sharing any information – including information about potential violations of law – with any outside parties, including the SEC and other law enforcement agencies.

In an important development for current and potential whistleblowers, recent reports suggest the SEC and courts are getting tough on companies who seek to use such agreements to dissuade employees from reporting securities violations or other illegal conduct to the government. According to the Washington Post, the SEC has opened an investigation into Kellogg Brown & Root (“KBR”), a former subsidiary of Halliburton, to determine whether KBR broke SEC rules by requiring employees involved in an internal investigation into an alleged military-contract fraud to sign “confidentiality statements.” These confidentiality statements gave KBR the right to fire employees who revealed information about the alleged fraud, including to government authorities.

While the SEC has neither confirmed nor denied the existence of a KBR investigation (pursuant to law, all pending SEC investigations are confidential and non-public), this report is a strong sign that the SEC is deeply concerned about confidentiality agreements that seek to limit whistleblowing rights. The SEC Whistleblower Program Rules – in particular, Rule 21F-17(a) – already make it clear that “no person may take any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…” (1) In other words, while it may be acceptable for a company to require its employees to sign some form of confidentiality agreement to protect trade secrets or other sensitive information from disclosure, such agreements cannot be used to prevent – or to try to prevent – employees from participating in the SEC Whistleblower Program. The KBR matter reflects that the SEC takes this rule seriously and is willing to take a stand against companies who seek to thwart potential whistleblowers.

Likewise, a court presiding over a separate False Claims Act case related to the same alleged fraud by KBR issued a decision finding that the confidentiality statements, as well as other materials related to KBR’s internal investigation, were not protected by the attorney-client privilege or work-product doctrine because the purpose of the investigation was not to obtain legal advice or to prepare for litigation – sending yet another message to companies that confidentiality agreements do not provide an easy cover for corporate fraud.

Hopefully, these developments will cause companies to think twice before trying to use confidentiality agreements to limit employees’ ability to report misconduct. As Congress has already recognized through its implementation of Dodd-Frank, a company’s interest in confidentiality does not trump the public’s interest in detecting, preventing and punishing fraud.
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1 The narrow exceptions to this rule involve instances in which the information in the whistleblower complaint was obtained through or as a result of communications covered by the attorney-client privilege. For more information on the circumstances in which legally privileged information can form the basis of a whistleblower complaint, please see our Corporate Attorneys as Whistleblowers webinar.