SEC Charges Privately Held Company for Restrictive Separation Agreements

Published On: September 8th, 2023Categories: Securities, Whistleblower News and Qui Tam Blog

On September 8, the U.S. Securities and Exchange Commission (SEC) announced settled charges filed against Monolith Resources LLC, a privately held energy and technology company headquartered in Lincoln, Nebraska. The SEC charged Monolith with using overly restrictive seperation agreements which violated Rule 21F-17 of the SEC Whistleblower Program.

Rule 21F-17 bans restrictive confidentiality and nondisclosure agreements. It states that “no person may take any action to impede an individual from communicating directly with Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”

According to the SEC, 22 former employees of Monolith signed separations agreements which required them “to waive their rights to monetary whistleblower awards in connection with filing claims with or participating in investigations by government agencies.” While the agreements claimed to not limit the ability of a signee to file claims with the SEC, the agency determined that restricting the ability of an individual to receive an award does impede that individual from reporting potential securities violations.

“Both private and public companies must understand that they cannot take actions or use separation agreements that in any way disincentivize employees from communicating with SEC staff about potential violations of the federal securities laws,” said Jason J. Burt, Regional Director of the SEC’s Denver Office. “Any attempt to stifle or discourage this type of communication undermines our regulatory oversight and will be dealt with appropriately.”

Monolith agreed to pay $225,000 and take remedial actions to settle the charges. 

Kohn, Kohn & Colapinto has played a pivotal role in the development and enforcement of Rule 21F-17. In the 1980s, KKC represented whistleblower Joseph Macktal whose case established the Macktal Precedent: NDAs that restrict a whistleblower’s right to report regulatory violations to the government or restrict his or her right to testify in court or administrative proceedings are wholly void.

Following the passage of the Dodd-Frank Act, attorneys at KKC met with the Chief of Staff for the Chairman of the SEC and explained that restrictive NDAs could undermine the Dodd-Frank Act whistleblower program and urged the SEC to issue a rule which followed the Macktal precedent.

Then, on behalf of whistleblower Harry Barko, KKC filed a complaint with the SEC alleging that Kellogg Brown & Root (KBR) was forcing employees to sign restrictive NDAs as part of the company’s alleged “compliance” program. KKCrequested that the SEC take action in the matter.

On April 1, 2015 the SEC announced an enforcement action against KBR, the first action taken against a company for language in NDAs that restricted whistleblowing. KBR was forced to pay a $130,000 penalty and agreed to cease this practice.

The SEC’s charges against Monolith are historic because they mark the first time the agency has charged a privately held company with violating Rule 21F-17.

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