D.E. Shaw Pays $10 Million for Anti-Whistleblowing Language in Employee Agreements

Under the rules of the Securities and Exchange Commission (SEC), financial institutions cannot prevent their employees from contacting the SEC regarding improper activity they recognize as part of their work. Protection for whistleblowers must be clear and unambiguous. As D.E. Shaw learned,  sending mixed messages regarding whistleblower rights can be very costly. 

In their standard employment agreement used for approximately eight years, the investment adviser prevented employees from disclosing confidential information to anyone outside the company unless authorized the firm or required pursuant to a court order. Within the agreement, no exception was listed for whistleblower reports to the SEC. Likewise, hundreds of departing employees over a 12-year period were required to sign releases declaring that they had not made any reports or complaints to government agencies regarding what they experienced at D.E. Shaw. Refusing to sign these releases would result in the withholding of deferred compensation and severance pay. 

The SEC held that these boilerplate documents violated 21F-17(a) of the Securities Exchange Act of 1934, which prohibits actions to impede individuals from communicating directly with the SEC staff about possible securities law violations. As a result, D.E. Shaw paid the SEC a $10 million civil penalty to resolve the situation. 

Prior the settlement, D.E. Shaw defended its actions by pointing out a firmwide email sent in 2017 stating that workers were allowed to contact SEC regulators regarding potential violations, and that approval from the company was not required. However, this message was not deemed sufficient to excuse the contrary language found in the employment and termination agreements. 

Commenting on the settlement, SEC Enforcement Division Director Gurbir S. Grewal said, “Entities employing confidentiality, separation, employment and other related agreements should take careful notice of today’s enforcement action.” 

Many companies in various industries use language in employee agreements and manuals to discourage workers from reporting misconduct to the property authorities. If you have seen or heard of unlawful activity from your employer, remember that you have legal protection as a whistleblower regardless of what you might have signed when you took or left your job. Kardell Law Group provides comprehensive legal support to clients in whistleblower cases and can help you take action if your rights have been violated.