In what is being called a landmark ruling for whistleblowers, the Securities and Exchange Commission announced Wednesday that one of the nation’s largest government contractors used confidentiality agreements that had the potential to intimidate and “muzzle” workers from reporting allegations of fraud.
The ruling involving Kellogg Brown & Root, also known as KBR, sends a powerful signal to corporations that the improper use of confidentiality agreements will result in civil fines and possible criminal penalties, according to legal experts.
The announcement is being hailed as a major victory for whistleblowers, shielding them from signing overly restrictive confidentiality agreements that threaten them with lawsuits and termination for reporting allegations of fraud.
The SEC said in its announcement that the ruling represented its first-ever enforcement action against a corporation for using confidentiality agreements to could “stifle” the whistleblower process.
“By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.
“SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
KBR did not admit wrongdoing and was not found to have specifically prevented an employee from reporting fraud. Mark E. Lowes, the company’s vice president of litigation, said the confidentially agreements were designed to protect the integrity of the internal investigative process, not to conceal information. He also noted that the agreements went into effect before new whistleblower protections under the so-called Dodd-Frank Act went into law.
“We take our reporting and compliance obligations very seriously,” Lowes said. “We want to be and try to be a good corporate citizen. The only reason we used the agreement was during our confidential investigative process, and the SEC is trying to make clear that these agreements should not be used. It never dawned on us that an attempt to protect attorney-client privilege would be seen this way. I suspect that we are not alone in this in the corporate world.”
Lowes said KBR has agreed to pay $130,000 fine to settle the SEC investigation and has also agreed to amend its confidentiality agreements, a step SEC officials have applauded.
“KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us.” said Sean McKessy, Chief of the SEC’s Office of the Whistleblower. “Other employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”
Whistleblower lawyers called the SEC ruling unprecedented.
“This is a historic step forward for all whistleblowers,” said Stephen M. Kohn, an attorney for a whistleblower who is suing KBR and its former parent company, Halliburton Co. “Corporations have used restrictive settlements to intimate employees from reporting fraud and violations of law. This action by the SEC is a game changer and will result in significant corporate reforms.”
Jason Zuckerman, a whistleblower lawyer who served as senior legal advisor to the U.S. Office of Special Counsel, the federal agency responsible for protecting whistleblowers, said the SEC ruling will have a wide-ranging impact.
“This is a huge win for corporate accountability and transparency,” Zuckerman said. “Many of my whistleblower clients have feared coming forward to the SEC and other regulators because of agreements and policies that muzzle whistleblowers. Now every company will have to review and revise their policies.”
KBR was the largest U.S. contractor operating in Iraq and Afghanistan between 2002 and 2011, winning nearly $40 billion worth of federal work. The Houston-based company has been the subject of numerous lawsuits and fraud allegations relating to some of those contracts.
The existence of the confidentiality agreements surfaced in one of those lawsuits, during a deposition of KBR’s vice president of legal affairs. A former employee, Harry Barko, alleged that KBR and Halliburton had inflated the cost of a military supply contract for U.S. bases in Iraq.
KBR’s agreements prohibited employees who reported fraud from discussing the “subject matter” of their allegations with anyone, including government auditors and investigators, without “specific authorization” from the company. Employees were warned that if they violated the terms of the agreements, they could face “disciplinary action up to and including termination of employment.”
The statements had been in use “for years,” KBR attorney Christopher Heinrich said during his Feb. 5, 2014 deposition.
The Washington Post first publicly disclosed the agreements last year after discovering that another federal contractor, International Relief & Development, had deployed overly restrictive confidentiality agreements for its workers. IRD, which later amended its agreements, has since been suspended from receiving federal contracts following allegations of “serious misconduct.”
Kohn, Barko’s lawyer, filed a complaint with the SEC and the Justice Department last year, alleging that the agreements had a chilling effect on workers. Kohn also said the agreements were in violation of the Securities and Exchange Act, which makes it illegal for publicly traded corporations such as KBR to bar employees from notifying the SEC about potential violations of securities law.
Jordan A. Thomas, a former SEC official who now represents whistleblowers, called the SEC ruling a “warning shot” to corporate America.
“The use of employment agreements to silence potential whistleblowers has been widespread and growing,” Thomas said. “This landmark enforcement action is the first step in attacking this significant law enforcement-investor protection problem. This is just the beginning. I predict that the SEC will bring more cases like this in the coming years.”