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SEC Brings First Action Against Company for Potentially Stifling Whisteleblowers

The Securities and Exchange Commission recently charged KBR, Inc., a Delaware corporation specializing in technology and engineering, with a Rule 21F-17(a) violation for using language in employee confidentiality statements that had the potential to stifle whistleblower activity. This was the first action of its kind taken by the SEC.

As part of its compliance program, KBR commonly conducts internal investigations responding to complaints of potential illegal activity at the company. KBR used a form confidentiality statement as part of the internal investigations in which witnesses agreeto the following statement:

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 prior authorization of the Law Department.

The form statement further provided unauthorized disclosure was grounds for disciplinary action up to and including termination. The form, as excerpted in the SEC’s cease and desist order, did not expressly reference whistleblowing and/or reporting to a government agency.

The SEC alleged that KBR’s form language violated Rule 21F-17(a), which provides that “[n]o 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.” The SEC found a violation of Rule 21F-17(a) notwithstanding that it was unaware of any instance in which a KBR employee was in fact prevented from communicating with the staff or any instance in which KBR took action to enforce the form confidentiality statement.

KBR agreed to pay a $130,000 penalty to the SEC and modify its form to include the following statement:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity … 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.

In the Matter of KBR, Inc., No. 3-16466 (SEC Apr. 1, 2015)

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume V, Number 93

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About this Author

Zachary D Denver, Litigation Attorney, Katten Muchin Rosenman
Associate

Zachary Denver concentrates his practice in litigation and dispute resolution matters.

While attending law school, Zachary was an editor of the NYU Journal of Law and Liberty, and was a board member for the Suspension Representation Project.

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