Oil and gas employees should be vigilant for severance agreements that silence whistleblowers

by Carly Fabian, Research Associate

Published on February 08, 2021

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Oil and gas employees should be vigilant for severance agreements that silence whistleblowers

As employees in the oil and gas industry face a devastating series of layoffs, questions about the process of negotiating and signing severance agreements will likely remain a major concern for current and former employees. As financial pressure in the industry leads to both layoffs and an increased risk of financial fraud, some employees may find themselves wondering how severance agreements affect their ability to blow the whistle.

Current and former employees in the oil and gas industry need to know that severance agreements cannot prevent them from filing a tip or complaint with the Securities and Exchange Commission (SEC). The Dodd-Frank SEC Whistleblower program allows individuals around the world to confidentially or even anonymously report companies for violating U.S. federal securities laws. Whistleblowers who provide original information that leads to a successful prosecution can receive between 10% and 30% of monetary sanctions.

Severance agreements that impede or even risk impeding whistleblowers may violate Rule 21F-17 under the Dodd-Frank Act. Rule 21F-17 states that: “No person may take any action to impede an individual from communicating directly with Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement.” In addition to language that would prevent whistleblowers from communicating with the SEC, agreements cannot include language that asks whistleblowers to waive their right to receive incentives for reporting to the SEC.

Moreover, the Dodd-Frank Act allows current or former employees to confidentially or anonymously report the restrictive agreements themselves as securities violations. On April 1, 2015, the SEC ruled that any publicly traded company that requires employees to sign nondisclosure agreements in violation of Rule 21F-17 is in violation of the Securities and Exchange Act.

The SEC has aggressively enforced Rule 21F-17 in the past several years, but employees should still be vigilant about restrictive language. While impeding whistleblowers from communicating with the SEC is a legal violation, this has not always stopped companies from trying in the past.

In December 2016, SandRidge Energy agreed to settle allegations that the company attempted to use an illegal severance agreement to prevent individuals from voluntarily cooperating with a government agency in complaints or investigations concerning the company. According to the SEC order, between August 2011 and April 2015, the company used an agreement containing restrictive language with almost 900 former employees, including during a period when SandRidge was under investigation by the SEC. The SEC found that at least one former employee had refused to speak with SEC staff based on the agreements.

The SEC separately alleged that SandRidge retaliated against an internal whistleblower who had reported concerns about the company’s process for calculating oil and gas reserves in 2014 and 2015. After deciding to fire the whistleblower, the company attempted to negotiate a separation agreement that included the restrictive language. To settle the allegations, SandRidge agreed to pay a penalty of USD1.4 million to the SEC.

SandRidge is not the only company to attempt to block whistleblowers from communicating with the SEC. In 2016, the SEC filed an emergency civil action against Sedona Oil and Gas and its president, Kenneth Crumbley Jr, to stop the offer and sale of allegedly fraudulent oil and gas investments. In addition to the fraudulent conduct, the complaint alleged that Crumbley had threatened to retaliate against employees who communicated with the SEC. The SEC has issued similar sanctions against BlackRock, KBR, and Merrill Lynch, among others, for violations of Rule 21F-17 and other attempts to block whistleblower communications.

These SEC enforcement actions have set a powerful precedent and reinforce that whistleblowers have the unique ability to reveal otherwise difficult-to-detect fraud. However, desperate companies may be eager to intimidate potential whistleblowers. Oil and gas whistleblowers have proven to be the Achilles heel for fraudulent oil and gas reserve reporting strategies, and companies could be especially concerned with silencing employees who have the potential to reveal fraudulent claims about reserves.

If companies assume that current or former employees will be too intimidated to second guess or report illegal agreements, they may be tempted to engage in what they perceive to be a low-risk violation of the law in order to prevent investigations into much larger financial scandals. Employees should read severance agreements carefully and remember that, even if they have already signed one, severance agreements cannot prevent them from reporting violations of securities law to the SEC.

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