SEC Settles Fraud Case Regarding Restrictive Language With KBR, Inc.

Whistleblowers with knowledge of possible securities fraud are able to report this fraud confidentially under the relatively new whistleblower provisions of the 2010 Dodd Frank Act. If an employee opts to report the information directly to the government, he or she is thereafter protected from retaliatory maneuvers by the employer and can even seek additional damages if any adverse employment action is taken.

In today’s case, we discuss a recent small, but powerful, settlement between the SEC and KBR, Inc. involving overly-restrictive language in confidentiality agreements. According to the SEC, KBR was forcing employees to sign these agreements in order to constructively prevent any whistleblower reports to the SEC. The issue is one of emerging significance to the SEC, and the SEC is now steadily monitoring attempts by public companies to curtail employees’ rights to report fraud.

The SEC issued a statement shortly after the first settlement on the issue, which said:

“SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”

Details of the settlement with KBR, Inc.

The settlement with KBR, Inc. came amidst allegations by several employees forced to sign unnecessarily binding agreements with the company, including the following language:

“I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”

The confidentiality agreements were issued any time an employee internally reported misconduct or possible securities fraud. In essence, the employee was prohibited by the language of the agreement from subsequently reporting the fraud to the government, which is considered by the SEC to be a clear violation of the whistleblower reporting rules codified by the Dodd Frank Act.

SEC settles matter & urges other companies to avoid misuse of agreements

The SEC has expressly revealed that it did not uncover any actual instances of misuse of the agreements and did not discover any instances where KBR sought to enforce the agreement. Nonetheless, it maintains a commitment to deterring this type of overreach and required KBR to pay a settlement amount of $130,000. In addition, the SEC required KBR to amend its confidentiality language to read as follows:

“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

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