On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Securities Exchange Act of 1934. Dodd-Frank added section 21F to the Exchange Act, titled “Whistleblower Incentives and Protection.” Section 21F is intended to encourage whistleblowers to report security law violations and provides whistleblowers with financial incentives and confidentiality protections. Congress included financial incentives for whistleblowers so that whistleblowers will “take the enormous risk of blowing the whistle in calling attention to fraud.” See “The Restoring American Financial Stability Act of 2010” report, dated April 30, 2010, from the Committee on Banking, Housing and Urban Affairs.

It was under Section 21C of the Securities Exchange Act that the Securities and Exchange Commission commenced cease and desist proceedings against Health Net, Inc.. Health Net is a California-based health insurer that employs approximately 8,500 employees. According to the SEC’s Order Instituting Cease and Desist Proceedings against Health Net (the “Order”), from 2011 to 2015, Health Net entered into voluntary severance agreements with employees.

Health Net’s severance agreements included waivers and release of claims that the departing employee agreed to in exchange for severance payments. In 2011, Health Net amended its severance agreement to provide that although a departing employee was not barred from participating in a government investigation, the employee waived his or her right to file an application for, or accept, a whistleblower award from the SEC. Order, ¶ 7. Specifically, Health Net’s severance agreement required the employee to waive:

the right to file an application for award for original information submitted

pursuant to Section 21F of the Securities Exchange Act of 1934.

Id. at ¶ 8.

From August of 2011 to June 2013, 600 Health Net employees signed severance agreements containing the following waiver:

Employee … waives any right to any individual monetary recovery in any

such proceeding or lawsuit or in any proceeding brought based on any

communication by employee to any federal, state or local government or

department.

In investigating Health Net, the SEC found that the company’s severance agreements “directly targeted the SEC’s whistleblower program by removing the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations.” According to the SEC, Health Net’s waivers of monetary recovery for whistleblower claims by departing employees undermine the purpose of Section21F encouraging whistleblowers to come forward.

As part of the Order, Health Net was required to pay $340,000 in penalties to the Securities and Exchange Commission in accordance with Exchange Act Section 21F(g)(3). The Order reflects the federal governments interest in challenging waivers or other employment provisions that provide disincentives to whistleblowers.

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Jason Cornell is an attorney who represents whistleblowers with the law firm Clark Fountain LaVista Prather Keen & Littky-Rubin. Clark Fountain represents plaintiffs in various matters throughout the United States. If you have questions regarding the issues addressed in this or other posts, you can reach Jason at 561 899-2111, or jcornell@clarkfountain.com.