Whistleblower Retaliation and Illegal Severance Agreements in the Oil and Gas Industry

In 2016, SandRidge Energy Inc. became the first company to be charged by the SEC for retaliating against an internal whistleblower and one of the first companies to be charged for using illegal severance agreements to block whistleblowers from reporting to the SEC.

Whistleblower laws like the Dodd-Frank Act can be a powerful tool for uncovering corporate fraud, but the success of these laws ultimately depends on how well they protect whistleblowers. The Dodd-Frank Act allows individuals around the world to confidentially or even anonymously report companies for violating U.S. federal securities laws to the Securities and Exchange Commission (SEC). Whistleblowers who provide original information that leads to a successful prosecution can receive between 10% and 30% of monetary sanctions.

Crucially, the Dodd-Frank Act also prohibits companies from retaliating against whistleblowers. Under Rule 21F-17, companies also cannot use employment or separation agreements to discourage employees from reporting to the SEC.

In 2016, the SEC announced the agency’s first charge against a company for retaliating against an internal whistleblower and for the use of illegal severance agreements. While recent changes to the SEC whistleblower program now require whistleblowers to report directly to the SEC to be covered by anti-retaliation provisions, this case still sends an important message about the consequences for companies who try to block whistleblowers from reporting to the SEC.

Whistleblower Retaliation at SandRidge Energy 

On December 20, 2016, the SEC announced a settlement with SandRidge Energy Inc. over allegations that the company had retaliated against an internal whistleblower, an employee who oversaw reservoir engineers responsible for a portion of the company’s drilling program. According to the SEC, over the course of two and a half years, the whistleblower had repeatedly raised concerns with senior management concerning the company’s process for calculating oil and gas reserves.

Based on the employee’s concerns, the company started an internal audit process. However, according to the whistleblower, the audit “missed the primary risks and problems associated with the entire reserves process.” The audit was also never completed nor disseminated to the company’s Board of Directors or Audit Committee.

Just months after the employee had been offered a promotion, the employee was labeled “disruptive” by senior management. As part of a large-scale reduction in force, the whistleblower was fired so that management could replace them with someone “who could do the work without creating all the internal strife.” After deciding to fire the whistleblower, the company attempted to negotiate a separation agreement that included language in confidential information and non-disparagement clauses that could have impeded the whistleblower from reporting to the SEC.

According to the SEC order, the company also attempted to use restrictive agreements with hundreds of other employees. Between August 2011 and April 2015, the company used an agreement containing restrictive language with almost 900 former employees, including during the period when SandRidge was under investigation by the SEC. This took place after Rule 21F-17 went into effect, after multiple internal reviews of the agreement, and after multiple employees requested a change. The SEC found that at least one former employee had refused to speak with the Commission based on the agreements.

Without admitting or denying the SEC’s findings, SandRidge agreed to pay a penalty of USD1.4 million to the SEC, subject to the company’s bankruptcy plan. Due to the Dodd-Frank Act’s reward provisions, if the whistleblower had provided the SEC with original information that led to this settlement, the whistleblower could have been eligible for between USD140,000 and USD420,000.

Key Takeaways

The SEC’s first action against a company for whistleblower retaliation sent a strong signal to companies about the SEC’s commitment to whistleblower protection. In addition to SandRidge Energy, the SEC has issued similar sanctions against BlackRock, KBR, and Merrill Lynch, among others, for blocking whistleblower communications.

Whistleblowers should remember that the best way to avoid retaliation is by protecting their identity. By reporting confidentially or anonymously to the SEC, whistleblowers can protect their identity and ensure that their concerns are meaningfully investigated.

The SandRidge Energy case is also a reminder for employees to read legal agreements drafted by company lawyers carefully. While impeding whistleblowers from communicating with the SEC violates federal law, desperate companies may be tempted to engage in what they perceive to be low-risk violations to cover up larger financial scandals.

Even if an employee has already signed such an agreement, however, employees should remember that restrictive agreements cannot prevent them from reporting securities violations to the SEC. If employees are asked to sign an agreement that purports to do so, they can report the agreement to the SEC.

Donate Today