Sean McKessy (“McKessy”), the Securities and Exchange Commission’s (“SEC”) whistleblower chief, cautioned in-house attorneys who draft contracts incentivizing employees to report securities fraud complaints in-house rather than to the SEC, according to an article in Law360 (subscription required). While speaking to the Georgetown University Law Center Counsel Institute, McKessy explained that the SEC is actively looking for creatively drafted contracts in which employees agree not to go to the SEC or regulators with complaints. The SEC is looking for these provisions in contracts such as confidentiality, separation and employment agreements. According to McKessy, if the SEC sees a contract containing such a provision, the Commission will not only go after the company but the attorneys who drafted it and may go so far as to revoke the attorneys’ power to appear before the SEC. McKessy has made similar public comments in the past (discussed in our post from December 12, 2012).
The SEC may be taking these steps because it has not received as many meritorious whistleblower complaints as it had hoped it would. According to the SEC staff report to Congress, the SEC received 3,238 whistleblower tips in 2013, 3,001 in 2012 and only 334 during the last four months of 2011, after the program was first implemented. Both McKessy and Christopher Ehrman, the Commodity Future Trading Commission whistleblower chief, denied any dissatisfaction with the number of tips the SEC receives, which they say on average is approximately nine or ten tips per day. They also say they are content with the quality of the tips they receive and that some are becoming enforcement actions.
Although McKessy made it plain that provisions prohibiting employees from approaching the SEC are forbidden, he did not go so far as to suggest that employers cannot encourage (or even require) internal reporting of unlawful conduct. While employers (and their counsel) have obvious interests in encouraging – if not requiring – internal reporting of misconduct, they must take care not to impede an employee’s ability to report such misconduct directly to the SEC.