Stavroula Lambrakopoulos on SEC Whistleblower Practice

Last month, the Securities and Exchange Commission (SEC) brought an enforcement action against JP Morgan Securities (JP Morgan) for impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC.

Stavroula Lambrakopoulos
K&L Gates Washington, D.C.

JP Morgan will pay $18 million to settle the action.

The SEC said that JP Morgan regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. 

The agreements required the clients to keep confidential the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. 

Even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC.

“Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “But that’s exactly what we allege JP Morgan did here. For several years, it forced certain clients into the untenable position of choosing between receiving settlements or credits from the firm and reporting potential securities law violations to the SEC. This either-or proposition not only undermined critical investor protections and placed investors at risk, but was also illegal.”

The SEC’s order found that JP Morgan violated Rule 21F-17(a) under the Securities Exchange Act of 1934, a whistleblower protection rule that prohibits taking any action to impede an individual from communicating directly with the SEC staff about possible securities law violations. 

Without admitting or denying the SEC’s findings, JP Morgan agreed to be censured, to cease and desist from violating the whistleblower protection rule, and to pay the $18 million civil penalty.

Stavroula Lambrakopoulos, a partner at K&L Gates in Washington, D.C., says the enforcement action against JP Morgan “is the first action involving the terms of agreements between a financial institution and its retail clients, which are prevalent throughout the financial services industry.” 

“Previously, enforcement had focused squarely on restrictive confidentiality provisions involving employees, such as those found in employment or severance agreements or in connection with internal investigation interviews,” Lambrakopoulos said.

“The unprecedented magnitude of the penalty in a standalone Rule 21F-17(a) case underscores the SEC’s emphasis on preventing practices that it views as obstructions of whistleblower rights.”

“Since 2015, the SEC has brought a number of enforcement actions targeting practices by companies that discourage or prohibit an individual from going forward and filing a whistleblower complaint,”  Lambrakopoulos told Corporate Crime Reporter in an interview last month.

“There have been about 25 to 30 such cases since 2015, where the SEC targeted confidentiality agreements, primarily in employment or severance agreements. There may be language in those agreements that prohibit the signer from disclosing the agreement or any of the underlying facts of the agreement to anybody, including the authorities.”

“Over the last eight or nine years, companies have amended these confidentiality agreements to make clear that the person is not prohibited from responding to a subpoena or a court order or an inquiry from any government authority.” 

“But the SEC has a rule – Rule 21 F 17(a) – that prohibits anyone from acting in any way to discourage or prohibit or prevent a party from going to the SEC with a complaint about potential securities law violations. Those almost 30 cases I mentioned brought by the SEC since 2015 have been brought under that rule.” 

“In the JP Morgan case, for the very first time, the SEC targeted release agreements between the financial firm and the customer. JP Morgan included language in these customers agreements that allowed the signers to respond to government regulators. But the SEC made findings that this language did not clearly express that the customer would be able to initiate contact with the SEC.” 

“Even though there was not language in the agreement prohibiting the customer from going to the SEC, because the confidentiality provision barred any kind of disclosure, it was not clear that they could voluntarily go to the SEC.”

The confidentiality agreements barred any kind of disclosure?

“But that’s typical language. There will be a confidentiality agreement with a customer that limits the disclosure of the settlement and the facts underlying the settlement agreement. And there will be typical language that says – this doesn’t bar any kind of disclosure in response to a subpoena, formal process or court order.”

JP Morgan paid $18 million to settle the charges of “impeding hundreds of advisory clients and brokerage customers from reporting potential securities law violations to the SEC.”

According to the SEC’s order, from March 2020 through July 2023, JP Morgan regularly asked retail clients to sign confidential release agreements if they had been issued a credit or settlement from the firm of more than $1,000. 

The agreements required the clients to keep confidential the settlement, all underlying facts relating to the settlement, and all information relating to the account at issue. 

In addition, even though the agreements permitted clients to respond to SEC inquiries, they did not permit clients to voluntarily contact the SEC.

“Under these agreements, overall the customer was prohibited from disclosure,”  Lambrakopoulos said. “I can see the argument that that doesn’t allow you to initiate a whistleblower complaint to the SEC. I don’t know whether that was the intent.” 

“The $18 million penalty is the highest penalty in an 21F 17(a) enforcement action. The SEC is saying – you have to be express. The signer needs to understand that they have the right to go and initiate a complaint with the SEC.”

This settlement was announced last month. Are financial firms changing the language in these settlement agreements as a result?

“They should be looking at their templates for these agreements. The SEC is now looking at agreements with customers and clients. Being a whistleblower is not just limited to being an insider or an employee or officer. It could be anyone. It could be a client. It could be a third party vendor.”

“Firms should take note and review their agreements.” 

Are these firms now going to have to inform people signing these agreements that there is an SEC whistleblower provision and they have these rights under the law?

“I don’t think that’s the takeaway, that firms are going to have to inform everyone that they have these rights under the SEC’s whistleblower law. That’s not something I would advise.” 

“But for any kind of confidentiality agreement, you need to take a look and make sure that the language that is used that normally provides an out from the disclosure bar for responding to a regulator, that it’s not just reactive but that disclosure is permitted to the SEC voluntarily.”

[For the complete q/a transcript Interview with Stavroula Lambrakopoulos, see 38 Corporate Crime Reporter 9(12), February 26, 2024, print edition only.]

Copyright © Corporate Crime Reporter
In Print 48 Weeks A Year

Built on Notes Blog Core
Powered by WordPress