Lessons from the Recent Enforcement Action Highlighting the SEC’s Broad Interpretation of Whistleblower-Related Rules
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Key takeaways:
- On April 12, 2022, the Securities and Exchange Commission (the “SEC” or the “Commission”) announced settled charges against David Hansen, the co-founder and former Chief Information Officer of NS8, a Las Vegas technology company, for violations of Rule 21F-17(a). The SEC’s Order found that an employee went to Hansen about the company’s inflated customer and monthly revenue numbers, which were used in external communications sent to potential and existing investors. The employee allegedly explained that if the company did not take action to address the incorrect data, he would “reveal his allegations to NS8’s customers, investors, and any other interested parties.” Hansen, along with NS8’s CEO, cut off the employee’s administrative privileges and took a number of other actions which culminated with the employee’s termination.
- Absent from the Order is any explicit suggestion that Hansen, the CEO, or anyone at NS8 was made aware of a tip the employee had previously made to the SEC. The settlement therefore represents a broad interpretation of Rule 21F-17(a), which prohibits “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation.” Commissioner Peirce penned a spirited dissent in response.
- In light of this broad interpretation, companies that find themselves faced with a possible whistleblower complaint should ensure that they document the business reasons for any actions taken after concerns are brought to their attention. Further, they should have clear, direct channels for escalating internal complaints while providing would-be whistleblowers with the knowledge that complaints will be seriously considered. Companies should further operate under the presumption that employees have or will report perceived violations to the Commission or other relevant regulators.