Today is the anniversary of the birth of Pablo Picasso; if not the, certainly one of the most influential artists of the 20thcentury. Picasso was born on this date in 1881. According to This Day in History, his works can be roughly divided into several overlapping periods. It began with the Blue Period, then the Rose Period, next was Cubism, to the next phase where “Picasso explored classical and Mediterranean themes, and images of violence and anguish increasingly appeared in his work.” After World War II, Picasso experimented in fantastical works, worked with ceramics and painted variations on the works of other masters in the history of art. To this day he is a giant of the art world.
I thought about those overlapping periods when I read an article by Emily Flitter in the New York Times (NYT), entitled “Regulator Seeks Information About Goldman Sachs Ethics Complaint”. In this piece Flitter discussed the departure of Goldman Sachs partner James C. Katzman, who had become so frustrated with his firm that he “called Goldman’s whistle-blower hotline in 2014 to complain about a number of practices inside the Wall Street investment bank.”
Most interestingly, the firm did not follow its standard hotline reporting protocol by having its regular outside counsel research the complaint. In a prior article by Flitter together with Kate Kelly and David Enrich, they reported, “Goldman had long relied on Fried Frank to screen information provided over a phone line that Goldman employees could call to report allegations of misconduct without fear of retribution. The assignment was part of a large portfolio of Goldman business that Fried Frank, whose chairman was a Goldman alumnus, handled.” The Fried Frank lawyer, “Sheldon Raab, would refer complaints to Goldman’s independent board members or to bank employees for further investigation.” However Raab referred the matter to the firm’s General Counsel (GC) and not to independent Board members for an investigation.
The internal investigation did not find anything askance and Katzman resigned from the firm. As a part of his severance package, he signed a confidentiality agreement which Katzman believed prevented him from communicating with regulators or the Securities and Exchange Commission (SEC). If such a prohibition was in place, it would clearly violate federal securities law where confidentiality agreements attempt to prevent a whistleblower from bringing forward instances of federal securities law violations.
Flitter reported, “Any current or former Goldman employees with restricted stock must regularly sign a confidentiality agreement or forfeit the payments. Payments can be clawed back for “cause,” including if the former employee engages “in any act or making any statement which impairs, impugns, denigrates, disparages or negatively reflects upon the name, reputation or business interests” of Goldman, according to the bank’s regulatory filings.” Moreover, “Katzman took that language to mean that he was prohibited from discussing his concerns with the bank’s board or with regulators.”
In a statement, Goldman Sachs said, ““The legal department conducted an exhaustive investigation of the matters Mr. Katzman raised in accordance with our whistle-blower policy””. Goldman Sachs also said that it had never attempted to prevent employees from raising issues with regulators, once again saying in a statement, ““We have never limited the ability of our current or former employees to raise any concern that they may have with regulators or the Goldman Sachs board””. However, Flitter reported “Goldman’s compensation agreements contain no such exemption for talking to government officials.” A securities law violation may well turn on this last point, as the SEC has made it clear that without such exemption, it will look at any confidentiality agreement or clause with a very jaundiced eye.
What is rather amazing about all this is that the SEC has made it clear that companies must have an affirmative statement on their confidentiality agreements that they do not prevent employees from going to regulators or reporting wrongful conduct. As far back as 2015, in the pre-taliation fine and Cease and Desist Order involving KBR, Inc. In this matter, KBR was fined for having language in its internal employee confidentiality agreement that required employees to go to the company’s legal department before releasing certain confidential information to outside parties such as the SEC.
The SEC held that such restrictions violated the “whistleblower protection Rule 21F-17 enacted under the Dodd-Frank Act. KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department. Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated Rule 21F-17, which prohibits companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.” This was in the face of zero findings that KBR had actually used such language or restrictions to prevent any employees from whistleblowing to the SEC.
Even more amazingly for Goldman Sachs, the KBR Cease and Desist Order stated the approved language going forward. It read, “Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity,including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, 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 and I am not required to notify the company that I have made such reports or disclosures.”
Perhaps because the whistleblower was a Goldman Sachs partner, he was afforded treatment which was an exception to company policies, procedures and internal controls. However if there was an exception, there should have been a business or legal justification created contemporaneously with the exception.
Just as Picasso had several phases of his career, the lifecycle of the Goldman Sachs internal whistleblower program may be getting ready to have more phases.
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