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SDNY: Confidentiality Agreement Impeded Investors from Whistleblowing

On November 17, 2021, the U.S. District Court for the Southern District of New York held that a company and its CEO violated Rule 21F-17 of the Exchange Act by entering into confidentiality agreements with investors that prohibited communications with the SEC, and subsequently attempting to enforce those agreements.  SEC v. Collectors Coffee Inc., No. 19-cv-4355.

Background.  As we previously reported in 2019, the SEC sued Collector’s Coffee, an online auction platform for sports memorabilia, and its CEO, for allegedly defrauding investors and impeding their communications with the SEC in violation of Rule 21F-17.  Rule 21F-17, adopted after the passage of the Dodd-Frank Act, prohibits any person from acting 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.”

As discussed in our July 2021 update, the Court previously held that Rule 21F-17 applies to investors as well as employees, finding that the broad definition of “whistleblower” under Section 21F of the Exchange Act extended its protections beyond the employer-employee context.

Ruling.  The Court declined to disturb the prior rulings, holding that the only remaining issue to be resolved is whether defendants’ conduct actually violated Rule 21F-17.  Defendants had entered into agreements with investors that expressly prohibited “communications with any regulatory agencies, such as the United States Securities and Exchange Commission …” and, in at least one instance, sued an investor for breaching this confidentiality clause.  The Court held that such actions were undoubtedly “actions to impede” prohibited by Rule 21F-17, and granted summary judgment in favor of the SEC.

Implications.  The SEC’s successful enforcement of Rule 21F-17 should serve as a reminder that companies must ensure that their agreements and confidentiality provisions include clear carve-outs allowing whistleblowing to the SEC and other regulatory agencies.

© 2022 Proskauer Rose LLP. National Law Review, Volume XI, Number 351
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About this Author

Steven J Pearlman, Labor Employment Law Firm, Proskauer Law firm
Partner

Steven Pearlman is a partner in the Labor & Employment Law Department and co-head of the firm's Whistleblowing & Retaliation Group, resident in the Chicago office. Steven’s practice focuses on defending complex employment litigation involving claims of discrimination and harassment, wage-and-hour laws and breaches of restrictive covenants (e.g., non-competition agreements). He has successfully tried cases to verdict before judges and juries in Illinois, Florida and California, and defended what is reported to be the largest Illinois-only class action in the history of the U.S....

312-962-3545
Pinny Goldberg Labor and Employment Lawyer Proskauer Rose Law Firm
Associate

Pinny Goldberg is an associate in the Labor & Employment Law Department. Pinny represents employers in a broad array of matters before federal and state courts, FINRA and other arbitration panels, and administrative agencies, including the EEOC and its state equivalents, and in pre-litigation negotiations. Matters he works on include discrimination and harassment, wage and hour, wrongful discharge, whistleblowing and retaliation, covenants not to compete, breaches of fiduciary duty, unjust enrichment, and tort and contract claims. 

In...

212.969.3074
Scott S. Tan Lawyer Proskauer  Employment Litigation & Arbitration Group
Associate

Scott Tan is an associate in the Labor & Employment Law Department and a member of the Employment Litigation & Arbitration Group.

Scott earned his J.D. from the UCLA School of Law, where he served as a problem developer and member of the Moot Court Honors Board. He also worked as a research assistant for Dean Jennifer Mnookin and Professor Hiroshi Motomura.

212-969-3858
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