In the first enforcement action of its kind, the U.S. Securities and Exchange Commission on Wednesday struck a blow for whistleblowers by charging government contractor KBR with potentially discouraging workers from reporting securities law violations.
The engineering and construction services company has agreed to pay a $130,000 penalty to settle allegations that language in a confidentiality agreement was improperly restrictive under the whistleblower protections of the Dodd-Frank Act.
The language warned witnesses interviewed as part of certain internal investigations that they could face discipline and even be fired if they discussed the interview with outside parties without the prior approval of KBR’s legal department.
“By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release.
“Corporations have used restrictive settlements to intimate employees from reporting fraud and violations of law,” he told The Washington Post. “This action by the SEC is a game changer and will result in significant corporate reforms.”
The Wall Street Journal reported in February that the SEC was cracking down on potential muzzling of whistleblowers by their employers, sending letters to several companies asking for years of nondisclosure agreements, employment contracts, and other documents.
In an order instituting proceedings against KBR, the SEC said it was unaware of any instances where KBR took any action to enforce the confidentiality agreement and prevent someone from communicating with the SEC. But it said the language undermines the purpose of Dodd-Frank, which is to “encourage individuals to report to the Commission.”
To settle the charges, KBR also agreed to amend its confidentiality agreements to make clear that employees do not need legal clearance to contact the SEC.
“It never dawned on us that an attempt to protect attorney-client privilege would be seen this way,” Mark E. Lowes, KBR’s vice president of litigation, said. “I suspect that we are not alone in this in the corporate world.”