Featured Expert Contributor, White Collar Crime and Corporate Compliance

Gregory A. Brower is Chief Global Compliance Officer for Wynn Resorts. He also serves on WLF’s Legal Policy Advisory Board and is a former U.S. Attorney. Emily R. Garnett is a Shareholder practicing in the Denver, CO office of Brownstein Hyatt Farber Schreck, LLP and a former enforcement attorney at the U.S. Securities and Exchange Commission. Her practice focuses on complex litigation with a specialty in the areas of securities, white collar, and antitrust.

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The Securities and Exchange Commission (“SEC”) recently announced a settlement with Activision Blizzard Inc. (“Activision”), the publicly traded company that develops and publishes popular video games such as Call of Duty and Candy Crush.  The settlement, including the company’s agreement to pay a $35 million penalty, came in anticipation of the SEC’s enforcement action for alleged violations of the Securities Exchange Act of 1934 (“the Exchange Act”).  The SEC alleged that Activision violated the Exchange Act’s disclosure-controls procedures and whistleblower protection rules.   

Relevant to the SEC’s scrutiny of Activision’s disclosure-controls procedures was the company’s recent Form 10-K and 10-Q filings in which the company acknowledged that attracting, retaining, and motivating a workforce of employees with specialized skills is important to its business.  Specifically, the disclosures acknowledged that “[i]f we do not continue to attract, retain, and motivate skilled personnel, we will be unable to effectively conduct our business.”  The SEC found that despite the company’s disclosure of such risk factors, the company lacked controls and procedures among its separate business units that were adequately designed to collect or analyze employee complaints of misconduct for disclosure purposes.  Therefore, the SEC concluded that such information was often not accessible to management and disclosure personnel and was not properly accessed from a disclosure perspective and that this gap caused the company to be in violation of Exchange Act Rule 13a-15(a) which requires issuers to maintain disclosure controls and procedures.  The SEC’s investigation followed an Equal Employment Opportunity Commission investigation of Activision for failing to adequately monitor and address complaints of sexual harassment of female employees and gender-based wage discrimination.

As for the whistleblower issue, the SEC found that the separation agreements that Activision entered with several employees included a clause requiring the employees to notify the company of any requests from an administrative agency in connection with a report or complaint.  Even though most such agreements also contained a clause providing that the separated employee was free to give truthful testimony or to truthfully respond to a valid subpoena, or to communicate or file a charge with a government or regulatory entity, the SEC found that the notice requirement undermined the purpose of its whistleblower rules.   As a result, the SEC concluded that the agreements  violated Exchange Rule 21F-17(a) which prohibits any person from taking action to impede an individual from communicating directly with the Commission staff about a possible securities law violation. 

Interestingly, the Commission’s settlement order was not unanimous, with Commissioner Hester Peirce issuing a separate statement that expressed her strong disagreement with the result.  “I dissent because the Order does not articulate any securities law violations,” she wrote.  She went on to say that the reported workplace misconduct at Activision “is deeply concerning, but it is not our concern,” pointing out that the alleged conduct was already the subject of a separate settlement between Activision and the EEOC which required Activision to establish an $18 million fund for former employees.  More specifically, with respect to the disclosure issue, Peirce observed that “the Order nowhere claims that Activision Blizzard’s risk disclosure was at any time misleading or incomplete, even though the Order also insists that management was denied access to relevant information when formulating the disclosure.”  Peirce went on to warn that “when the SEC gets this granular, the limits are not clear,” and “if workplace misconduct must be reported to the disclosure committee, so too must changes in any number of workplace amenities and workplace requirements, and so too must any multitude of factors relevant to other risk factors. The requirement cannot be that a company’s disclosure controls and procedures must capture potentially relevant, but ultimately – for purposes of disclosures – unimportant information.” 

Peirce also disagreed with the Order’s interpretation of Activision’s separation agreements as violating Rule 21F-17(a), opining that the Order does not explain how the notification requirement in the agreements impedes former employees from communicating with the Commission.  She interprets the notice provision as only requiring notification to the company, not prohibiting such communication. 

Finally, Commissioner Peirce suggests that if the Commission is to find a company in violation of a rule, “we at least ought to articulate clearly both what conduct violated the rule and how it did so.”

Commissioner Peirce’s strong dissent notwithstanding, the SEC is clearly willing to continue its scrutiny of issuers in new ways and companies should take care to ensure that adequate controls are in place before making certain public disclosures.  Moreover, this settlement also seems to confirm that regulators, including the SEC, are increasingly willing to interpret agreements with employees in a way that provides greater protection to employee rights.