The $10M Reason Why You Should Understand (Ex) Employee Contracts

Knock... knock... it's the SEC

Settling with a regulator for $10 million dollars is a very unpleasant outcome, even if you are one of the largest hedge funds in the world. That’s what D.E. Shaw recently paid to settle with the SEC over confidentiality provisions that conflicted with federal whistleblower regulations.

And they are by no means an outlier. Activision paid $35M in a similar whistleblower disclosure settlement earlier this year. And CBRE paid $375,000 along with an extensive commitment to taking remedial action across its workforce of 100,000 employees.

What’s the takeaway? The SEC is taking whistleblower protection very seriously and taking a dim view of any efforts to impede whistleblowers. If there are any contractual terms in your employment, non-disclosure or settlement agreements that conflict with whistleblower freedom, the SEC is coming for you.

This is not just a public company concern, either. The regulator has private companies on its radar too. Monolith Resources, LLC, a privately held energy and technology company paid a $225,000 penalty for provisions in its employee separation agreements that undermined the financial incentives available to whistleblowers.

Since the financial incentives for whistleblowers are significant, the temptation to talk to the SEC about possible violations is very high. In 2023, a record-breaking $600M was paid out in whistleblower awards, and whistleblower tips grew 50% compared to 2022. That’s 18,000 total tips for 2023. In one case, a whistleblower was awarded $279M for their information and cooperation.

What You Can Do To Avoid Facing Similar Penalties

It’s very clear that getting ahead of this is better than waiting for the SEC to come knocking at your door. Anyone under the SEC's jurisdiction should make a plan to review every contract, agreement or policy that might contain terms restricting disclosure of information, or otherwise restricting or discouraging cooperation with regulators. The problem is that many businesses have material amounts of these agreements and the task to review them seems daunting.

Luckily, there's  contract review software like Catylex.  Using AI we can help you find and fix problematic clauses in a fraction of the time, and at a fraction of the cost compared to manual human review. We are make making it much easier to mitigate and avoid the risks associated with not understanding what your contracts say.