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Enforcement News: Video Game Company Agrees to Pay $35 Million To Settle Charges Concerning Whistleblower Protection Rule and Maintenance of Adequate Disclosure Controls

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  • Posted on: Feb 6 2023

By: Jeffrey M. Haber

We have often written about the SEC’s whistleblower program and, in particular, the success of the program with respect to detecting and preventing violations of the federal securities laws. The success of the program depends, in large part, on the ability of would-be whistleblowers to have the freedom to report wrongdoing without fear of reprisal. Taking steps to impede a departing employee from sharing information with the SEC impairs this free flow of information to the Commission. To ensure the freedom to communicate, the SEC has cracked down on companies that use severance agreements and other types of employment contracts to silence and discourage employees from reporting wrongdoing to the Commission. See here, herehere, and here.

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) to combat illegal and fraudulent conduct on Wall Street and promote compliance with the federal securities and commodities laws.  The Dodd-Frank Act contains whistleblower provisions that authorize the Commission to pay substantial cash rewards to whistleblowers that voluntarily provide the SEC with information about securities fraud and other violations of the securities laws, including the Foreign Corrupt Practices Act. 

To fulfill the purpose of the Dodd-Frank Act, the Commission adopted Rule 21F-17,1 which provides in relevant part:

(a) 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.

Despite being effective for more than 11 years, many companies have ignored the mandate of Rule 21F-17. In this regard, they have used severance agreements and other types of employment contracts to silence and discourage employees from reporting violations of the securities laws to the Commission. That was the case in In the Matter of Activision Blizzard, Inc., Securities Exchange Act of 1934 Release No. 96796 (Feb. 3, 2023) (here).

As a regular part of its business, Activision Blizzard, Inc. (“Respondent”), a video game development and publishing company, enters into separation agreements with employees when they end their employment with the company.2 

As of 2016, Respondent’s separation agreement included a clause requiring departing employees to notify the company of any requests from an administrative agency in connection with a report or complaint. Specifically, the separation agreement stated, in part:

Nothing in this Separation Agreement shall prohibit . . . disclosures that are truthful representations in connection with a report or complaint to an administrative agency (but only if I notify the Company of a disclosure obligation or request within one business day after I learn of it and permit the Company to take all steps it deems to be appropriate to prevent or limit the required disclosure).

Between 2016 and 2021, in the ordinary course of Respondent’s business, a significant number of departing employees signed separation agreements that contained the foregoing notification clause.

Most, but not all, of the separation agreements executed between 2016 and 2021 also contained an additional clause stating, “Nothing in this Release prevents me from … giving truthful testimony, or truthfully responding to a valid subpoena, or communicating or filing a charge with government or regulatory entities (such as the Equal Employment Opportunity Commission, National Labor Relations Board, Department of Labor, or Securities and Exchange Commission.)”

The SEC maintained that, notwithstanding the additional clause, the language found in the separation agreements, requiring Respondent to be notified about the disclosure obligation or request, undermined the purpose of Section 21F and Rule 21F-17(a).3 

The SEC noted that it was unaware of any specific instances in which a former employee was prevented from communicating with the SEC’s staff about potential violations of securities laws or in which Respondent took action to enforce the notification clause or otherwise prevented such communications.

In early 2022, Respondent revised its separation agreement templates and removed the notification clause.

In addition, the SEC charged Respondent with failing to maintain adequate disclosure controls related to complaints of workplace misconduct.

Rule 13a-15(a) requires issuers that have a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (“Exchange Act’) to maintain disclosure controls and procedures. Rule 13a-15(e) defines disclosure controls and procedures to be “controls and other procedures … that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the [Exchange] Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in

the Commission’s rules and forms.” The rule explains that disclosure controls and procedures include those “designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the [Exchange] Act is accumulated and communicated to the issuer’s management … to allow timely decisions regarding required disclosure.” Disclosure controls and procedures “are intended to cover a broader range of information than is covered by an issuer’s internal controls related to financial reporting” and “should capture information that is relevant to an assessment of the need to disclose developments and risks that pertain to the issuer’s businesses.”4 

If an Exchange Act registrant fails to implement and maintain disclosure controls and procedures as required, its management may not have adequate information to assess whether the disclosures it makes to investors are fulsome, accurate, and not misleading by omission.

Respondent made risk factor disclosures pertaining to its workforce in its annual reports on Form 10-K for the fiscal years ended December 31, 2017 through December 31, 2020. Those risk factor disclosures each included a heading stating, “If we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our business.” Following the heading, the company stated:

Our success depends to a significant extent on our ability to identify, attract, hire, retain, motivate, and utilize the abilities of qualified personnel, particularly personnel with the specialized skills needed to create and sell the high-quality, well-received content upon which our business is substantially dependent. Our industry is generally characterized by a high level of employee mobility, competitive compensation programs, and aggressive recruiting among competitors for employees with technical, marketing, sales, engineering, product development, creative, and/or management skills. We may have difficulties in attracting and retaining skilled personnel or may incur significant costs to do so. If we are unable to attract additional qualified employees or retain and utilize the services of key personnel, it could have a negative impact on our business.

Additionally, each of the company’s quarterly reports on Form 10-Q filed between May 2018 and August 2021 included the following disclosure:

The company cautions that a number of important factors could cause Activision Blizzard, Inc.’s actual future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include, but are not limited to . . . maintenance of relationships with key personnel… including the ability to attract, retain, and develop key personnel and developers that can create high-quality titles, products, and services.

Though Respondent disclosed the risk factors described above related to its workforce and how its ability to attract, retain, and motivate skilled personnel might materially impact its business, according to the SEC, Respondent lacked controls and procedures designed to ensure that it captured and assessed – from a disclosure perspective – certain information related to these risk factors. This included lacking controls and procedures among its separate business units designed to collect or analyze employee complaints of workplace misconduct. As a result, said the SEC, complaints related to workplace misconduct were not collected and analyzed for disclosure purposes.

Additionally, noted the SEC, Respondent required that individual business unit leaders report certain categories of potentially material information to the company’s Disclosure Committee. However, those categories did not include information relevant to Respondent’s ability to retain employees, such as employee complaints or incidents of workplace misconduct.

As a result, concluded the SEC, such information often was not accessible to the company’s management and disclosure personnel, and was not assessed from a disclosure perspective. By lacking sufficient information to understand the volume and substance of employee complaints of workplace misconduct, explained the SEC, Respondent’s management was unable to assess related risks to the company’s business, whether material issues existed that warranted disclosure to investors, or whether the disclosures it made to investors in connection with these risks were fulsome and accurate.

Between May 2020 and May 2022, Respondent implemented several company-wide structural changes and policies that enhanced the manner in which employee complaints were required to be documented, maintained, and communicated to the company’s senior management and disclosure personnel.

The SEC instituted cease and-desist proceedings against Respondent. Without admitting or denying the SEC’s findings, Respondent agreed to a cease-and-desist order (here) and a penalty of $35 million. 

Commenting on the order and settlement, Jason Burt, Director of the SEC’s Denver Regional Office, stated: “The SEC’s order finds that Activision Blizzard failed to implement necessary controls to collect and review employee complaints about workplace misconduct, which left it without the means to determine whether larger issues existed that needed to be disclosed to investors.” With regard to the severance agreements, he stated: “Moreover, taking action to impede former employees from communicating directly with the Commission staff about a possible securities law violation is not only bad corporate governance, it is illegal.”A copy of the press release announcing the proceeding and settlement can be found here.


  1. Rule 21F-17 became effective on August 12, 2011.
  2. A separation agreement is a contract between a former employer and employee documenting the rights and responsibilities of both parties incidental to the employee’s departure.
  3. Securities Whistleblower Incentives and Protections Adopting Release, Release No. 34-63434 (June 13, 2011).
  4. Certification of Disclosure in Companies’ Quarterly & Annual Reports Final Rule Adopting Release, Release No. 33-8124 (Aug. 29, 2002).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

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