Impeding SEC Whistleblowers

Company Sanctioned For Impeding SEC Whistleblowers

On December 19, 2016, the U.S. Securities and Exchange Commission (the “SEC” or “Commission”) entered an Order sanctioning NeuStar, Inc. (“NeuStar”) for impeding SEC whistleblowers from reporting to the Commission.
impeding SEC whistleblowers

The SEC Order

Impeding SEC Whistleblowers Through A Non-Disparagement Clause

The SEC found that two provisions in NeuStar’s severance agreements contravened SEC whistleblower protections by impeding SEC whistleblowers from reporting to the Commission.  The first provision was a non-disparagement clause. The non-disparagement clause began with a broad list of entities and people whom departing employees could not “disparage”:

[E]xcept as specifically authorized in writing by NeuStar or as may be required by law or legal process, I agree not to engage in any communication that disparages, denigrates, maligns or impugns NeuStar or its officers, directors, shareholders, investors, potential investors, partners, predecessors, subsidiaries, employees, consultants, attorneys or any others associated with NeuStar …

The second part of the non-disparagement clause set forth an extensive non-exclusive list of people and entities to whom departing employees could not make “disparaging” remarks.  The list specifically named the SEC:

… including but not limited to communications with accountants, investment bankers, commercial bankers, insurance brokers or carriers, media, journalists, reporters, equity analysts, investors, potential investors, customers, suppliers, competitors, joint venture partners and regulators (including but not limited to the Securities and Exchange Commission … (Italics in original SEC Order.)

Impeding SEC Whistleblowers Through A Forfeiture Clause

The second provision discussed in the Order was a forfeiture clause.  That provision stated that if the employee violated the non-disparagement clause, the employee would forfeit all of his or her severance compensation except for $100.

At Least One Former Employee Was Actually Impeded From Communicating With The SEC

According to the Order, over a period of approximately three years and nine months, at least 246 NeuStar employees signed severance agreements containing the non-disparagement and forfeiture clauses. The Order acknowledged that the SEC had not uncovered any instances in which NeuStar attempted to enforce the non-disparagement clause against former employees. However, according to the Order, “at least one former NeuStar employee was impeded by the Nondisparagement Clause from communicating with the Commission”.

Impeding SEC Whistleblowers Violated Rule 21F-17

The Commission found that NeuStar’s severance agreements violated SEC Rule 21F-17.  The Order quoted subsection (a) of that Rule:

No person may take 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 … with respect to such communications.

In a press release about the Order, an Associate Director of the SEC’s Division of Enforcement explained, “Public companies cannot use severance agreements to impede whistleblowers from communicating with the SEC about a possible securities law violation”.
impede SEC whistleblower

The SEC’s press release

NeuStar Revised Its Severance Agreements

In a section titled “Remedial Steps Taken By NeuStar”, the Order noted that “Promptly after the Commission staff’s investigation began and on its own accord, NeuStar revised its severance agreement template …” As part of that revision, NeuStar removed references to “regulators” from the non-disparagement clause and inserted the following language:

In addition, nothing herein prohibits me from communicating, without notice to or approval by NeuStar, with any federal government agency about a potential violation of federal law or regulation.

Sanctions Imposed On NeuStar By The SEC

The SEC ordered NeuStar to pay a civil monetary penalty of $180,000. Additionally, the Order required NeuStar to make reasonable efforts to:

(1) contact its former employees;

(2) give them with an Internet link to the Order, or provide a paper copy of it to those employees who request it; and

(3) provide them with “a statement that NeuStar does not prohibit former employees from communicating any concerns about potential violations of law or regulation to the Securities and Exchange Commission”.

The SEC’s press release quoted the Chief of the Office of the Whistleblower:

This action demonstrates our continued strong enforcement of this critically important whistleblower protection rule and underscores our ongoing commitment to ensuring that potential whistleblowers can freely communicate with the SEC about possible securities law violations.

Additional Information

For additional information about the SEC’s enforcement of rules prohibiting companies from impeding SEC whistleblowers from communicating with the Commission, click on the links below:
  • The SEC’s Order in the NeuStar case.  (External link to the SEC’s website.)
  • The SEC’s Press Release about the NeuStar case.  (External link to the SEC’s website.)
  • Article about the NeuStar case.  (Note:  external link to The Pickholz Law Offices website.)

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