SEC confidentiality ruling a win for whistleblowers

WASHINGTON — In what is being called a landmark ruling for whistleblowers, the Securities and Exchange Commission announced Wednesday that one of the nation’s largest government contractors used confidentiality agreements that had the potential to intimidate and “muzzle” workers from reporting allegations of fraud.

The ruling involving Kellogg Brown & Root, also known as KBR, sends a powerful signal to corporations that the improper use of confidentiality agreements will result in civil fines and possible criminal penalties, according to legal experts.

The announcement is being hailed as a major victory for whistleblowers, shielding them from signing overly restrictive confidentiality agreements that threaten them with lawsuits and termination for reporting allegations of fraud.

The SEC said the ruling represented its first enforcement action against a corporation for using confidentiality agreements that could “stifle” the whistleblower process.

“SEC rules prohibit employers from taking measures through confidentiality, employment, severance or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC,” said Andrew J. Ceresney, director of the SEC’s Division of Enforcement. “We will vigorously enforce this provision.”

KBR did not admit wrongdoing and was not found to have specifically prevented an employee from reporting fraud. Mark E. Lowes, the company’s vice president of litigation, said the confidentially agreements were designed to protect the integrity of the internal investigative process, not to conceal information. He also noted that the agreements went into effect before new whistleblower protections under the so-called Dodd-Frank Act went into law.

“We take our reporting and compliance obligations very seriously,” Lowes said. “We want to be and try to be a good corporate citizen. The only reason we used the agreement was during our confidential investigative process, and the SEC is trying to make clear that these agreements should not be used. It never dawned on us that an attempt to protect attorneyclient privilege would be seen this way. I suspect that we are not alone in this in the corporate world .”

Lowes said KBR has agreed to pay a $130,000 fine to settle the SEC investigation and also has agreed to amend its confidentiality agreements, a step SEC officials have applauded.

Whistleblower lawyers called the SEC ruling unprecedented.

“This is a historic step forward for all whistleblowers,” said Stephen M. Kohn, an attorney for a whistleblower who is suing KBR and its former parent company, Halliburton. “Corporations have used restrictive settlements to intimate employees from reporting fraud and violations of law. This action by the SEC is a game changer and will result in significant corporate reforms.”

KBR was the largest U.S. contractor operating in Iraq and Afghanistan between 2002 and 2011, winning nearly $40 billion worth of federal work. The Houston-based company has been the subject of numerous lawsuits and fraud allegations relating to some of those contracts.

The existence of the confidentiality agreements surfaced in one of those lawsuits, during a deposition of KBR’s vice president of legal affairs. A former employee, Harry Barko, alleged that KBR and Halliburton had inflated the cost of a military supply contract for U.S. bases in Iraq.

Jordan Thomas, a former SEC official who now represents whistleblowers, called the SEC ruling a “warning shot” to corporate America.

“The use of employment agreements to silence potential whistleblowers has been widespread and growing,” Thomas said. “This landmark enforcement action is the first step in attacking this significant law enforcement-investor protection problem. This is just the beginning. I predict that the SEC will bring more cases like this in the coming years.”