JPMorgan’s ‘Eye-Opening’ Penalty Signals SEC Whistleblower Focus

A JPMorgan Chase & Co. unit’s $18 million settlement with the Securities and Exchange Commission underscores the agency’s aggressive approach to protecting whistleblowers.

The SEC has emphasized enforcing a whistleblower protection rule in recent months, bringing a series of actions against companies for language in employee agreements that the agency viewed as discouraging people from reporting wrongdoing.

The settlement Tuesday with J.P. Morgan Securities LLC is among the first to target agreements with customers, adding a new layer to the SEC’s recent efforts. And the penalty—the largest of its kind—serves as a warning to other companies.

“I’m sure there are firms across the country now that are going to see this and look back at all the contracts that they have, with any party, and try to make sure they don’t trip up this regulation,” John Berry, a Munger, Tolles & Olson LLP partner and former SEC attorney, said.

The size of the fine could also encourage more people to bring questionable contracts to the SEC’s attention.

See also: SEC Payouts to Whistleblowers Plummet Amid Record Surge in Tips

Compliance Focus

Written into the 2010 Dodd-Frank Act, the whistleblower program offers tipsters potential awards of 10% to 30% of fines over $1 million collected by the SEC. The SEC’s Rule 21F-17 prohibits companies from impeding individuals from communicating with the agency about potential securities law violations.

The agency brought a wave of enforcement actions in 2016 alleging violations of the rule, according to a Bloomberg Law review of cases posted on the SEC’s website. Action trailed off in later years, including 2020 when no actions were filed.

But activity picked up in 2023 with several announcements, including one in late September against D.E. Shaw & Co. The hedge fund agreed to pay $10 million, which was at the time the largest penalty for a standalone violation of the rule.

Activision Blizzard Inc. had paid $35 million months earlier to settle claims it violated the whistleblower protection rule and also failed to put in place controls to handle workplace complaints.

“Our message through these actions and orders could not be more clear: we take compliance with Rule 21F-17 very seriously,” the SEC’s director of enforcement, Gurbir Grewal, said at a New York City Bar Association event in October.

The actions, many of which involved employment or separation agreements, drove a number of companies to revisit their contracts with employees, attorneys say.

Beyond Employees

JPMorgan’s broker subsidiary requested certain customers sign a release promising not to sue, or “solicit others to institute” any action against the firm, when the customer accepted a credit or settlement over $1,000, according to the SEC. Over 360 customers signed such agreements, the SEC said.

While customers could respond to inquiries from the SEC or other government agencies, the SEC said the release prohibited them from proactively reaching out to regulators to report wrongdoing.

The JPMorgan unit, which has revised the language, didn’t admit or deny the SEC’s findings. The largest US bank said in a statement it takes its regulatory obligations seriously and promptly took action to resolve the issue.

Rule 21F-17 is important to the SEC’s whistleblower program and the rule is written broadly enough to cover various types of agreements, not just those with employees, attorneys said.

The rule has “historically been used to protect employees’ rights to go to the SEC,” Berry said. “Now the SEC is signaling it’s not just employees we care about; it’s anybody who is impeded from going to us, we’re going to enforce this provision.”

‘Eye-Opening Amount’

Many other cases involving alleged violations of Rule 21F-17 have settled for significantly less than $18 million. Recent examples include commercial real estate firm CBRE Group Inc. and privately held clean energy company Monolith Resources LLC, which last year agreed to pay $375,000 and $225,000, respectively, over language in employee separation agreements.

The penalty against the JPMorgan unit is a “significant, eye-opening amount” and sends a message that the whistleblower protection rule needs to be taken seriously, said Sean McKessy, a partner at Phillips & Cohen LLP who represents whistleblowers.

“The prior 21F-17 cases, for most of the entities who agreed to settle, was a rounding error for their earnings,” said McKessy, who was the first chief of the SEC’s whistleblower office.

It’s not clear whether the penalties against JPMorgan and D.E. Shaw set a new benchmark for fines. But some attorneys said the higher settlement amounts come as the SEC appears to be losing patience with firms violating a rule that’s been on the books for years.

‘Hardline View’

Others drew parallels between the SEC’s enforcement of whistleblower protection rules and the agency’s crackdown on companies’ recordkeeping lapses, which has resulted in billions of dollars in fines under the Biden administration.

“The SEC in more than one arena is taking a very hardline view on purported violations of SEC rules,” said Ballard Spahr LLP partner Kahlil Williams, who represents clients in actions involving securities and corporate governance.

Higher penalties could encourage more people to report violations of the whistleblower protection rules to the SEC.

Companies must face sanctions over $1 million for a whistleblower to be eligible for an award. Attorneys representing whistleblowers in the past felt it may not be worth it to report a standalone violation of 21F-17 because the penalties had been well under that threshold.

JPMorgan’s settlement changes the calculation.

“We who represent whistleblowers may say we may take on cases with just standalone 21F-17 implications because now the SEC has shown that over $1 million in sanctions is in play,” McKessy said.