SEC Drops Hammer in New Pre-taliation Case

Well, now we know the consequences of imposing pre-taliation agreements upon employees and then using those agreements to stifle SEC investigations or would-be whistleblowers. It’s much more painful than any pre-talation sanctions we’ve seen so far.

On Tuesday the SEC fined an Oklahoma oil services company $1.4 million for those pre-taliation abuses—a penalty far larger than anything we’ve seen so far in the SEC’s pre-taliation campaign. (This sanction, by the way, is not to be confused with the $180,000 pre-taliation fine imposed on a Virginia technology company just one day before.)

What does this case tell us? First, that pre-taliation is not some phantom risk concocted by SEC enforcement attorneys looking to keep busy; companies do have these clauses in their employment contracts, with the specific consequence of chilling whistleblowers’ appetite for reporting misconduct.

Second, for crying out loud—don’t engage in this business practice. As I mentioned earlier this week, pre-taliation is one of the unforced errors in corporate compliance. You can solve it with a global find-and-replace exercise that will take less than a day to fix. Companies still have plenty of other ways to prevent employees from sharing confidential information with legitimate threats like competitor companies.

And, frankly, if executives are so wound up over employees talking to regulators, your company probably has bigger problems on its hands. Which seems to be the case here.

Pre-Taliation Pain

The company in question is SandRidge Energy, an oil-and-gas services business in Oklahoma City. According to the SEC settlement order, SandRidge had been using restrictive language in its severance agreements at least as far back as August 2011, until the SEC finally told SandRidge in May 2015 to amend its language.

The pre-taliatory language took three forms. First, one clause specifically said former employees could not:

…voluntarily contact or participate with any governmental agency in connection with any complaint or investigation pertaining to the Company, and [may] not be employed or otherwise act as an expert witness or consultant or in any similar paid capacity in any litigation, arbitration, regulatory or agency hearing or other adversarial or investigatory proceeding involving the Company.

A second clause barred former employees from sharing confidential company information with regulators without company consent. A third took the form of a non-disparagement clause, where former employees could not make any disparaging remarks “to any governmental or regulatory agency,” among other parties.

All that is nothing we haven’t seen in pre-taliation language before. SandRidge imposed the language on at least 546 employees from 2011 to 2015, including a group of 113 who were dismissed as part of a group layoff in April 2015.

pre-taliationSigns of trouble emerged as early as 2012, when employees started to complain to SandRidge about the offending language. Any time an employee did ask for the pre-taliatory language to be removed, SandRidge obliged—but only on a case-by-case basis, rather than dropping the clause wholesale. On at least one occasion, lawyers for a departing employee warned SandRidge that “the SEC or other regulators might view this promise negatively.”

Things got worse from there. April 2015 was also the same month that the SEC unveiled its first pre-taliation sanction, against KBR—so while SandRidge was laying off scores of people with pre-taliation clauses in their separation agreements, the legal department was also getting warnings from outside counsel about this new threat of pre-taliation.

Then Came the Bad Stuff

The SEC began to witness SandRidge’s pre-taliation clauses in action earlier this year while it was investigating the company for possible misconduct in how SandRidge calculated and reported its oil and gas reserves.

At least once, SEC staff contacted a former employee to ask about the circumstances of his dismissal, and that person declined to talk, citing SandRidge’s contract language. Even after SEC staff then explained that the pre-taliation clause had been rescinded, the person still clammed up.

Separately, the employee who raised concerns about the oil & gas reserves was fired in 2015 as part of that group layoff. SandRidge had been investigating his claims of falsified numbers, but had let the investigation lapse at the time of his dismissal. When that employee asked to have the pre-taliation clause struck from his severance agreement, the company replied that it couldn’t give him an answer on that until it had finished its internal probe of his allegations.

During the above drama with the whistleblower, we should add, SandRidge filed for bankruptcy. It first was delisted from NYSE earlier this year, reorganized under Chapter 11, and returned to the markets in October.

Lessons to Learn

The facts in the SandRidge case are painful to read because clearly the company had at least some sense of possible pre-taliation risk. On those rare occasions when employees did ask it to strike the offending language, SandRidge obliged. The legal department was reading alerts from law firms that pre-taliation enforcement was the hot new thing at the SEC.

In fairness to the company, all its pre-taliation problems happened in a short period of time in spring 2015—just when the SEC began its public pre-taliation campaign, and when SandRidge also began to lay off employees in large numbers, and when it was struggling to handle an internal whistleblower alleging retaliation. At the same time, SandRidge was slouching toward bankruptcy. The company clearly was under stress and did not have its governance act together.

That said—the job of senior leaders is to have the company’s governance act together. Part of good governance is not impeding whistleblowers’ ability to speak to regulators, and whistleblower risk is not new. Nor were the warning signs SandRidge had before the end came.

Compliance officers don’t have many compliance problems that carry easy, straightforward solutions. Pre-taliation risk is one of them. Your organization might as well inoculate itself while you can.


  1. […] Energy, which did try to use pre-taliation clauses to pressure whistleblowers. Last month the SEC fined SandRidge $1.4 million for imposing those contracts only 546 employees. That’s $2,564 per offending […]

  2. […] that. But a whistleblower program that intrudes too much on traditional enforcement turf—say, by fining companies for pre-taliation clauses, or never trimming rewards for shady whistleblowers at all—that’s the sort of behavior that […]

Leave a Comment

You must be logged in to post a comment.