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Blackrock And Homestreet: The Latest Companies To Settle Charges That They Impeded Whistleblowers From Reporting Violations Of The Law

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  • Posted on: Jan 25 2017

Last year, this Blog wrote a number of articles about the Securities and Exchange Commission’s (“SEC” or the “Commission”) efforts to stop companies from impeding whistleblowers from reporting violations of the securities laws to the Commission. (See here, here, and here.) It looks like 2017 is picking up where 2016 left off.

Last week, the SEC announced the settlement of two enforcement actions (here and here) against companies that impeded protected whistleblower activity. Both actions involved the use of separation agreements that required departing employees to waive their right to recover whistleblower awards for reporting violations of the law to the Commission; the SEC also alleged that one of the companies took other actions to impede its employees from communicating with the Commission. The SEC has repeatedly sanctioned companies that use such agreements as violating Section 21F of the Dodd-Frank Act and Rule 21F-17 promulgated thereunder by, among other things, “removing the critically important financial incentives” intended to encourage current and former employees to report violations of the securities laws to the SEC.

Blackrock, Inc.:

On January 17, 2017, BlackRock Inc. (“Blackrock”), the New York-based asset manager, agreed to pay the SEC a $340,000 penalty to settle charges that it forced more than 1,000 exiting employees to waive their right to obtain whistleblower awards for reporting violations of the law in order to receive their severance payments.

According to the SEC’s order, more than 1,000 departing BlackRock employees signed separation agreements containing language stating that they “waive any right to recovery of incentives for reporting of misconduct” in order to receive their monetary separation payments from the firm. Notably, BlackRock added the waiver provision in October 2011 after the SEC adopted its whistleblower program rules.  The asset manager continued using this language in its separation agreements through March 2016.

Commenting on the settlement, Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, stated: “BlackRock took direct aim at our whistleblower program by using separation agreements that removed the financial incentives for reporting problems to the SEC. Asset managers simply cannot place restrictions on the ability of whistleblowers to accept financial awards for providing valuable information to the SEC.”

BlackRock consented to the SEC’s order without admitting or denying the findings that it violated Rule 21F-17.  The order notes that BlackRock voluntarily revised its separation agreement and took a number of remedial actions, including the implementation of mandatory yearly training to summarize employee rights under the SEC’s whistleblower program.

HomeStreet Inc.:

Two days later, on January 19, 2017, Seattle-based HomeStreet, Inc., a commercial and financial lender that serves customers in the Western United States and Hawaii, agreed to settle allegations that it conducted improper hedge accounting and later took illegal steps to impede employees from talking to the SEC about it. The bank agreed to pay a $500,000 penalty, and Darrell van Amen, the company’s chief investment officer and treasurer, agreed to pay a $20,000 penalty, to settle the charges.  Both agreed to the settlement without admitting or denying any wrongdoing.

According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure – the swaps were designed to guard against a change in interest rates that would make those loans more costly for HomeStreet. The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment.  Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ratio falls outside a certain range.

The SEC found that in certain instances from 2011 to 2014, van Amen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment.  The test results with altered inputs to influence the effectiveness ratio were provided to HomeStreet’s accounting department, which resulted in inaccurate accounting entries.

The SEC also found that after HomeStreet employees reported concerns about the accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect.  When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the whistleblower.  It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation.  HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments and other post-employment benefits.

“Companies that focus on finding a whistleblower rather than determining whether illegal conduct occurred are severely missing the point,” said Jina Choi, Director of the SEC’s San Francisco Regional Office.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, added, “This is the second case this week against a company that took steps to impede former employees from sharing information with the SEC.  Companies simply cannot disrupt the lines of communications between the SEC and potential whistleblowers.”

Takeaway:

Last week’s enforcement actions underscore, as Norberg said, the SEC’s continued “commitment to ensure the lines of communication between whistleblowers and the SEC remain unimpeded.” This commitment should influence how companies deal with potential whistleblowers in their severance agreements, internal policies and confidentiality agreements. Therefore, the key takeaway from these enforcement actions is, as Norberg stated, for companies to “review and revise their agreements [to ensure] that [they do not] stifle whistleblowers from reporting to the SEC.”

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