The Activision Blizzard Case, Part II: Whistleblower Protections

Earlier this week, we told you about the potential ramifications for disclosure controls stemming from the Securities and Exchange Commission’s $35 million settlement with video game maker Activision Blizzard. Prospective whistleblowers – and legal departments worried about possible malfeasance behind the scenes at their companies – may also want to bone up on the particulars of the enforcement case.

In addition to the issue of disclosure controls, the SEC also took exception to the separation agreements signed by Activision Blizzard’s departing employees between 2016 and 2021. The terms of those deals required ex-employees to notify Activision Blizzard in the event they received requests from government agencies related to a report or complaint about the company. Those would include inquiries from the SEC about possible securities law violations, of course, although the agreements typically contained language expressly stating the agreement did not prevent former employees from communicating with the commission.

As lawyers from Sidley Austin LLP noted in a memo on the settlement, the SEC “made no finding of any instance in which a departing employee was prevented from communicating with” the agency. In the SEC’s view, the clause still violated Rule 21F-17(a), which states, “No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement… with respect to such communications.” As such, the stipulation in Activision Blizzard’s standard separation agreement is “not only bad corporate governance, it is illegal,” according to Jason Burt, director of the SEC’s Denver regional office.

On its face, the idea that it is out of bounds for a company to require notice from former employees regarding inquiries from the SEC seems like an aggressive interpretation of the whistleblower protections. That might fuel the conclusion that the commission’s charge in this instance has more to do with the egregiousness of the allegations against Activision Blizzard than enforcing securities law.

On the other hand, while the high-profile nature of the Activision Blizzard case might contribute to the perception that it is an outlier, the SEC’s track record on the whistleblower issue suggests otherwise. An analysis of recent administrative proceedings compiled using the Intelligize platform shows the charge fits with a slew of decisions by the agency in recent years. Additionally, the commission continues to tout the uptick in tips it receives from whistleblowers, a sign of its vested interest in the program. The agency amended its rules last year to offer stronger incentives for whistleblowers to come forward.

And come forward they have – at least according to the SEC’s report, which notes that, “Fiscal Year 2022 continued to build on the record-breaking success of FY 2021 for the U.S. Securities and Exchange Commission’s Whistleblower Program. In FY 2022, the Commission awarded approximately $229 million in 103 awards, making FY 2022 the Commission’s second highest year in terms of dollar amounts and number of awards.” So, whether a company believes the whistleblower allegations against Activision Blizzard were warranted or not, it would be well-served to pay attention to the numbers, which indicate these types of SEC actions aren’t going away any time soon.