The Securities and Exchange Commission (SEC), the federal agency that regulates the securities market in the United States, has taken action against GQG Partners LLC, an investment firm, for obstructing whistleblower protections. The SEC found that GQG's non-disclosure agreements (NDAs) with 12 candidates for employment and a settlement agreement with a former employee hindered individuals from reporting potential securities law violations to the SEC.
The SEC's order requires GQG to cease and desist from future violations, pay a USD 500,000 civil penalty, and implement measures to ensure compliance with whistleblower protections.
GQG Partners
GQG Partners, founded by Rajiv Jain, is headquartered in Florida, USA, and is an investment management company listed on the Australian Stock Exchange that focusses on active portfolio management. According to its website, GQG manages more than USD 150 billion in client assets globally.
After the Hindenburg report routed the Adani Group companies’ share prices in the first quarter of 2023, GQG started purchasing their shares. Between March and October 2023, GQG invested around Rs 38,500 crore (then USD 4.6 billion) in six Adani Group companies. As of June 30, 2024, the investment company holds 1.45% of AEL, 1.45% of APSEZ, 1.6% of APSEZ, 1.86% of AESL, 1.35% of Ambuja Cements, 1.72% of Adani Power Ltd with a market value of more than USD 12.5 billion.
SEC case on GQG
The Securities and Exchange Commission (SEC) offers crucial whistleblower protections to encourage individuals to report potential securities law violations. These protections are enshrined in the Dodd-Frank Wall Street Reform and Consumer Protection Act and further detailed in SEC Rule 21F-17. GQG Partners LLC ran afoul of these protections primarily by using restrictive clauses in its Non-Disclosure Agreements (NDAs) and Settlement Agreements.
The Dodd-Frank Act, enacted in 2010, introduced Section 21F-17 to incentivise reporting of potential securities law violations through financial rewards and confidentiality safeguards. This aimed to empower whistleblowers and bring violations to light. The same explicitly forbids any action hindering individuals from communicating directly with SEC staff about possible securities law violations. This includes enforcing or threatening to enforce confidentiality agreements that restrict such communication.
Restrictive NDAs and Settlement Agreement
From November 2020 to September 2023, GQG used NDAs that prohibited potential employees from disclosing confidential information to any party, including government agencies. While these NDAs allowed employees to respond to SEC inquiries, they required notifying GQG first and prohibited responses based on voluntary disclosures. This created confusion and contradicted the company's Employee Confidentiality Agreements (ECAs) and Whistleblower Policy, which permitted reporting to the SEC.
Additionally, a settlement agreement GQG entered with a former employee contained representations that contradicted the carve-out allowing communication with government agencies. These representations could have discouraged the former employee from reporting potential violations to the SEC.
Wilful violation of SEC rules
The SEC determined that GQG's actions were wilful violations of Exchange Act Rule 21F-17(a). This means that GQG knew what they were doing, even if they were unaware of the specific rule violation. While there's no evidence that GQG enforced the restrictive provisions, their mere presence in the agreements was sufficient to constitute a violation.
GQG has since taken steps to rectify the situation. In September 2023, the company stopped using the restrictive NDA template and revised it to include a carve-out for communication with the SEC. Additionally, GQG notified all current and former employees of the termination of the restrictive NDAs and their right to report potential securities law violations to the SEC.
Despite these efforts, the SEC imposed the following sanctions:
GQG is ordered to cease and desist from further violations of Exchange Act Rule 21F-17(a). A formal expression of disapproval for GQG’s conduct has been given, and a civil penalty of USD 500,000 has been imposed.
The SEC's action against GQG underscores its commitment to protecting whistleblowers and ensuring transparency in the financial markets. This case serves as a reminder to companies that hindering whistleblowers can lead to significant legal consequences.