DE Shaw, a prominent financial services firm, recently settled a retaliation case with the Securities and Exchange Commission (SEC) for a staggering $10 million. It was settled via an Administrative Order. This settlement marks the largest of its kind, highlighting the severity of the violations committed by the company. The case revolved around employment agreements that prohibited employees from speaking to governmental agencies without prior authorization from the company. Such agreements have been illegal since 2011 under the Dodd Frank Act. Despite updating internal policies to encourage employees to speak to regulators, DE Shaw failed to amend these agreements until 2019.
According to the Order, this enforcement concerned violations of the whistleblower protection rule by the adviser. From at least August 12, 20111 through April 2019, the Company required new employees to sign employment agreements (“Employment Agreements”) that prohibited them from disclosing “Confidential Information” to anyone outside of the Company unless authorized by the Company or required by law or an order of a court or other regulatory or governmental body, without any exception for voluntary communications with the Commission concerning possible securities laws violations.
Additionally, from at least August 2011 through June 2023, the Company required approximately 400 of its departing employees to sign General Releases and Agreements (“Releases”) “affirming, among other things, that they had not filed any complaints with any governmental agency, department, or official, in order to receive deferred compensation and other benefits that were sometimes worth millions of dollars.”
Finally in 2017, the Company notified employees that nothing in any policy or agreement which prohibited employees from communicating directly with or providing information to regulators, agencies, and commissions regarding possible violations of law or regulations without notice to the Company. The Company simultaneously updated its internal policies with similar language and required employees to acknowledge their receipt and review of those policies annually thereafter. However, the Company did not revise its Employment Agreements until April 2019 and did not revise the form of its Release until July 2023—after this investigation commenced—to include similar whistleblower protection language.
The case raises important questions about the need for companies to ensure that policy changes are reflected in all relevant documents and agreements. It serves as a reminder that even well-intentioned internal policies are ineffective if not properly implemented and enforced. In the case of DE Shaw, the failure to update employment agreements and separation agreements until years after the Dodd Frank act was enacted demonstrates a lack of attention to detail and a breakdown in the company’s compliance processes.
One of the key issues highlighted by this case is the broad definition of confidential information in employment agreements. These overbroad confidentiality clauses can potentially discourage whistleblowers from coming forward, as they may fear violating their agreements and facing retaliation. Companies must strike a balance between protecting their confidential information and ensuring that employees feel empowered to report any wrongdoing to regulatory bodies. By defining the instances under which confidential information should not be shared and explicitly including carve-outs for reporting concerns to law enforcement, companies can avoid creating an environment that stifles whistleblowing.
The significant penalty imposed by the SEC in this case, amounting to $10 million, portends a trend towards larger fines for retaliation settlements. This sends a clear message that the SEC is willing to impose substantial penalties on companies that violate whistleblower protection laws. It is crucial for organizations to take this into account when making decisions about their retaliation policies and practices.
The DE Shaw settlement also raises concerns about the potential impact on future pre-taliation settlements. The size of the penalty in this case suggests that the SEC is becoming increasingly vigilant in enforcing whistleblower protection laws. Companies should be aware of this trend and take proactive measures to ensure compliance with these laws to avoid costly settlements and reputational damage.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement said in the SEC Press Release “Entities employing confidentiality, separation, employment and other related agreements should take careful notice of today’s enforcement action. The Commission takes seriously the enforcement of whistleblower protections and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don’t impede whistleblowers from contacting the Commission.”
In conclusion, the DE Shaw $10 million settlement over a retaliation case and whistleblower policies serves as a stark reminder of the importance of companies ensuring that policy changes are reflected in all relevant documents and agreements. It highlights the need for organizations to strike a balance between protecting confidential information and creating an environment that encourages whistleblowing.
Both the $10 million settlement and the words of Gubir Grewal underscore the growing SEC trend towards larger fines for retaliation settlements, emphasizing the importance of compliance with whistleblower protection laws. Companies must carefully consider the impact of their decisions on retaliation policies and practices to avoid legal and financial consequences.
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