Woodland Hills insurer Health Net Inc. has been fined $340,000 by the Securities and Exchange Commission for developing a severance policy that prohibited employees from collecting whistleblower awards, according to an administrative proceeding filed by the federal agency.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, amended the Securities Exchange Act by adding Section 21F, “Whistleblower Incentives and Protection.” The purpose of these provisions was to encourage whistleblowers to report possible securities law violations by providing, among other things, financial incentives and various confidentiality guarantees.
Congress explicitly noted the critical importance of providing financial incentives to promote whistleblowing to the SEC as it determined that “a critical component of the Whistleblower Program is the minimum payout that any individual could look towards in determining whether to take the enormous risk of blowing the whistle in calling attention to fraud.” See “The Restoring American Financial Stability Act of 2010” report from the Committee on Banking, Housing, and Urban Affairs (April 30, 2010).
Beginning in August 2011, and continuing through October 2015, Health Net issued voluntary severance agreements that prohibited employees leaving the company from “filing an application for, or accepting, a whistleblower award” from the SEC. Although the agreements noted that employees were not precluded from participating in a federal investigation, by consenting to the severance agreements they waived their right to the monetary recovery typically provided to whistleblowers. Approximately 600 employees signed agreements that contained this language,
The Securities and Exchange Commission accused Health Net violating SEC Rule 21F-17 as a result of its use of this severance agreement. This rule provides that “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”
In anticipation of the institution of these proceedings against it by the SEC, Health Net has submitted an Offer of Settlement (the “Offer”) which the Commission has determined to accept. It agreed to pay a civil money penalty in the amount of $340,000 to the Securities and Exchange Commission.
Health Net has also agreed that it will make reasonable efforts to contact Health Net former employees who signed the Waiver and Release of Claims from August 12, 2011 to October 22, 2015, and provide them with an Internet link to the order and a statement that Health Net does not prohibit former employees from seeking and obtaining a whistleblower award from the Securities and Exchange Commission..In determining whether to accept the Offer, the Commission has considered this undertaking.
The Los Angeles Times story about this settlement raises the question “Makes you wonder what they were so eager to hide.” Health Net was acquired in March by St. Louis managed-care giant Centene for $6.3 billion.
Toni Jaramilla, a Century City lawyer specializing in whistle-blower cases, told the LA Times this case represents merely the latest attempt by businesses to limit what former employees can say about their work experience. An increasingly common provision in employment contracts is the so-called non-disparagement clause, which forbids former employees from criticizing their erstwhile employer.