Some companies and their counsel have been experimenting with ways to encourage internal reporting, attempting to avoid what can be the serious consequences of an SEC whistleblower claim. But they must be careful that their legitimate efforts to maintain a balance in encouraging internal reporting do not lead to something the SEC sees as an attempt to obstruct employees from participating in the Dodd-Frank Whistleblower Program. This approach also underscores the importance of maintaining an effective whistleblowing system that deals with the threat of external whistleblowing by encouraging employees to report misconduct internally, rather than by blocking them from reporting externally.
Recently Kara Brockmeyer, Chief of the SEC's FCPA unit and Sean McKessy, Chief of the SEC's whistleblowing unit, warned companies and their in-house counsel during panel discussions against "new methods" that possibly could extend the scope of the Whistleblower Program. It seems that more regulatory attention is being paid to efforts made by companies to discourage their employees from reporting misconduct to the SEC, including via confidentiality agreements.
According to the Dodd-Frank Act: "Any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing or threatening to enforce, a confidentiality agreement is a prohibition".
The SEC recently investigated Kellogg Brown & Root (KBR). Allegedly, KBR instructed employees to keep information they possess regarding fraud "confidential" and not to disclose this information to anyone without the prior consent of KBR's General Counsel. This was established via internal reporting requirements, pursuant to a Code of Business Conduct, that "obligate" every employee to disclose information regarding fraud to be investigated as part of an internal compliance program. The employees had to sign confidentiality statements barring them from disclosing allegations to anyone, including federal prosecutors and investigators. They were warned that the unauthorised disclosure of information could be grounds for disciplinary action up to and including termination of employment. Supposedly, the company tried to shield these confidentiality statements and other internal files from disclosure, saying they were protected by attorney-client privilege.
On 7 May 2014, the US Court of Appeals held that compliance investigative documents are not covered by attorney-client privilege. "There is nothing in the record to support this assertion, there was no indication that the purpose of their investigation was to obtain legal advice". The whistleblower's attorney in this case argued that "the lower court was correct to demand production of the documents, as KBR failed to establish the investigation reports were privileged because, among other things, they were created and prepared by non-lawyers in the normal course of the company's business operations, they contain facts and not legal opinions, they were prepared to carry out a business purpose, and the employees were not interviewed by attorneys, but KBR security investigators."
The approach of the SEC and the judges' call emphasises the importance of careful drafting of employment and confidentiality agreements. General counsel need to make sure that their legitimate attempts to secure confidentiality are not perceived as a non-legitimate effort to block whistleblowing. Additionally, this approach underscores the importance of maintaining an effective whistleblowing system that deals with the threat of external whistleblowing by encouraging employees to report misconduct internally, rather than by blocking them from reporting externally.
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