SEC Charges D. E. Shaw with Violating Whistleblower Protection Rule

The Securities and Exchange Commission (SEC) has announced that it has reached a settlement with D. E. Shaw & Co., L.P., a registered investment adviser based in New York. The charges stem from allegations that D. E. Shaw violated whistleblower protection rules by requiring employees to sign agreements that prohibited the disclosure of confidential corporate information to third parties without exceptions for potential SEC whistleblowers. The firm also required departing employees to sign releases confirming that they had not filed any complaints with government agencies to receive deferred compensation. Under the terms of the settlement, D. E. Shaw has agreed to pay $10 million to resolve the charges.

The SEC's order states that between 2011 and 2019, D. E. Shaw mandated that new employees sign agreements prohibiting them from disclosing confidential information to external parties, except when authorized by the firm or required by law or a court order. The definition of confidential information was broad, encompassing any data acquired during employment that could potentially harm D. E. Shaw if disclosed to third parties. Moreover, from 2011 to 2023, approximately 400 departing employees were required to sign releases confirming that they had not filed complaints with any governmental agency, department, or official to qualify for deferred compensation and other benefits, sometimes valued at millions of dollars.

In 2017, D. E. Shaw issued a firm-wide email notifying employees that they were not prohibited from communicating with regulators regarding potential legal violations and that they were not required to notify D. E. Shaw about such communications. However, the firm did not include similar whistleblower protection language in its employment agreements until 2019 and in its releases until 2023, following the commencement of the SEC's investigation.

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, stated, "Entities employing confidentiality, separation, employment, and other related agreements should take careful notice of today's enforcement action. The Commission takes seriously the enforcement of whistleblower protections, and those drafting or using these types of agreements should take equally serious their obligations to ensure that they don't impede whistleblowers from contacting the Commission."

Sheldon L. Pollock, Associate Director of the SEC's New York Regional Office, emphasized the importance of whistleblower protection, saying, "Protected by federal law, whistleblowers play a significant role in uncovering fraud and other illegality in the securities markets, particularly with respect to registered entities regulated by the Commission. The SEC remains committed to ensuring their unfettered ability to provide information to further our investigations."

D. E. Shaw has agreed to settle the charges without admitting or denying the SEC's findings. The settlement includes a censure, a commitment to cease and desist from violating the whistleblower protection rule, and a civil penalty of $10 million. The case underscores the SEC's dedication to safeguarding the rights and protections of whistleblowers who contribute to the enforcement of securities laws.