SandRidge Energy agreed to pay $1.4 million to settle charges that it fired an engineer for blowing the whistle on how the company calculated its oil and gas reserves. The company also settled claims that it improperly forbid workers from cooperating with the SEC.
Since the SEC’s investigation began, the company has since filed for bankruptcy protection. Despite the bankruptcy, the company likely still have to pay a fine for its wrongdoing.
SandRidge’s Illegal Separation Agreement
When workers voluntarily leave their employment, most companies use a separation agreement. In exchange for some token compensation, workers often are asked not to steal trade secrets or disparage the company. Beginning in August 2011, SandRidge changed their separation agreement to prevent workers from cooperating with the government. The new agreement said that a departing employee may not “at any time in the future 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.”
Another provision of the agreement said that the former employees could not “disclose to any other person or organization, including any governmental agency, any of the Company’s confidential, proprietary information.”
Read together, the two provisions prevented workers from cooperating with the government or even reporting any wrongdoing. Not coincidentally, the new separation agreements were rolled out at the same time the company was under investigation.
In May of 2015, the SEC learned of the language and asked SandRidge to remove the anti-cooperation language. The Commission also asked the company to contact its present and former employees and let them know the non-cooperation policy was illegal and had been repealed.
SandRidge and Illegal Whistleblower Retaliation
In the fall of 2012, SandRidge hired an engineer to oversee part of its drilling program. Almost immediately after being hired, the engineer reported internally his concerns that the company’s oil and gas reserves were improperly reported. Investors want to know that there is a sound basis for the numbers companies report in public filings. For example, the value of an energy company like SandRidge is often highly dependent on the company’s energy reserves. Are they worth billions or are their wells running dry?
The Commission says that for two and one half years, the engineer complained about the valuations. Finally, in December of 2014, the company did its own internal audit. That month the engineer was told if he wanted an immediate promotion to vice president, he had to a “support management.”
The engineer continued to complain about the company’s internal accounting and declined the promotion. In March of 2015, the engineer was terminated. The Commission claims his termination was illegal whistleblower retaliation.
At the time he was let go,the company still had not completed the investigation of his claims. Senior management instead decided to replace the engineer with someone “who could do the work without creating all of the internal strife.”
Dodd Frank’s Whistleblower Retaliation Protections
In 2010, Congress passed the Dodd Frank Wall Street Reform and Consumer Protection Act. The new law included a whistleblower retaliation prohibition which was designed “to encourage whistleblowers to report possible violations of the securities laws by providing financial incentives, prohibiting employment-related retaliation, and providing various confidentiality guarantees.”
After the bill’s passage, the SEC adopted a rule which said, “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.”
After reviewing the company’s separation agreement and the details of the engineer’s termination, the Commission elected to charge SandRidge. This month, the company agreed to the fines and penalties. The company was not required to admit to any wrongdoing.
In announcing the $1.4 million settlement, the chief of the SEC Whistleblower Office said, “Whistleblowers who step forward and raise concerns internally to their companies about potential securities law violations should be protected from retaliation regardless of whether they have filed a complaint with the SEC. This is the first time a company is being charged for retaliating against an internal whistleblower, and the second enforcement action this week against a company for impeding employees from communicating with the SEC.”
First Enforcement Action Involving an Internal Whistleblower
The Dodd Frank whistleblower retaliation measures clearly cover whistleblowers who report misconduct to the government. This case, however, is different. The engineer had not yet reported his concerns to the SEC. Like most whistleblowers, the engineer attempted to correct the problem internally. He was terminated before he could even become a formal whistleblower.
Is the engineer covered? We say yes although some courts say only external whistleblowers are covered. Unfortunately, a couple appeals courts have sided in favor companies and said internal whistleblowing doesn’t qualify for protection.
Fortunately for all parties involved, SandRidge decided to settle instead of fighting the government.
SEC Whistleblower Program
The SEC is authorized to pay whistleblower awards of between 10% and 30% of whatever it collects from wrongdoers. To qualify, the whistleblower must have inside information concerning possible violations of the federal securities laws that has occurred, is ongoing, or is about to occur. The information provided must lead to a successful SEC action resulting in an order of monetary sanctions exceeding $1 million. One or more people can act as a whistleblower, but companies or organizations cannot qualify as whistleblowers.
Included in the award program are whistleblowers with inside information about violations of the Foreign Corrupt Practices Act (FCPA).
Like the False Claims Act, both laws often have powerful whistleblower retaliation protections.
Need more information? Please visit our SEC whistleblower program information page or contact us directly. All inquiries are protected by the attorney – client privilege and kept confidential. The author of this post, attorney Brian Mahany, can be reached at *protected email* or at (414) 704-6731.
MahanyLaw –America’s SEC Whistleblower Lawyers
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