$35M Settlement with Activision Emphasizes Importance of Whistleblowers in SEC Program

On February 3, the SEC announced a $35 million settlement with video game company Activision Blizzard, Inc., which created Candy Crush and Call of Duty. The SEC alleges the company violated SEC rules by:

1) including an illegal provision in employee severance agreements, which prohibited former employees from reporting information to the SEC unless they notified the company within 24 hours of the employee becoming aware of that obligation or request, and

2) failing to implement proper internal controls related to employee reports of misconduct.

These two alleged violations of SEC rules highlight important Commission requirements that employers often try to circumvent.

First, Exchange Act Rule 21(f)-17(a) prohibits any person or entity from impeding an individual from speaking directly with the Commission about a potential violation of the securities laws. Between 2016 and 2021, however, Activision included in its standard separation agreements a provision that stated: “Nothing in this Separation Agreement shall prohibit . . . disclosures that are truthful representations in connection with a report or complaint to an administrative agency (but only if I notify the Company of a disclosure obligation or request within one business day after I learn of it and permit the Company to take all steps it deems to be appropriate to prevent or limit the required disclosure)” (emphasis added). The SEC found that Activision’s requirement that employees sign such agreements illegally impeded employees from communicating directly with the Commission about potential violations of the securities laws. Although the SEC noted that they found no specific example where the illegal clause actually prevented or interfered with a disclosure to the Commission, the inclusion of the clause still violated SEC rules.

Second, Exchange Act Rule 13a-15(a) requires that companies maintain effective controls over financial reporting, and that those in a company who are responsible for financial reporting regularly assess the accuracy of such reports to the Commission. Among other things, companies are required to report to the Commission any factors that make investing in the company particularly risky. According to the Commission, between 2018 and 2021, Activision knew that one of the main risk factors for its business was its ability to motivate, retain, and attract employees. However, the company lacked adequate internal controls to track employee complaints of misconduct within its various, separate business units. Thus, Activision lacked adequate information about how many (and what kinds of) employee complaints of misconduct had been logged across the company, and it was unable to accurately assess whether any material issues requiring disclosure existed related to these complaints. Between 2020 and 2022, the company implemented several company-wide changes and policies that improved its management and tracking of employee complaints so that senior management and disclosure personnel became aware of these risks. Still, that was not enough to avoid liability

The settlement with Activision raises two important points about companies’ obligations under the securities laws:

  • The SEC whistleblower program has issued more than $1.3 billion in awards to whistleblowers since 2012. The program relies on whistleblowers to share information with the Commission relevant to violations of the securities laws.
    • A large part of the program’s success depends on whether potential whistleblowers feel empowered and enabled to speak out about fraud without fearing retaliation or otherwise being prevented from speaking with the SEC.
    • Although employers often try to require would-be whistleblowers (even those no longer employed) to disclose to the company any whistleblowing/ reporting obligations to the SEC, this is illegal.
    • Any attempt to prevent a whistleblower from speaking with the Commission is likely a violation of the securities laws.
    • Employers may not require whistleblowers to inform them when they are going to the SEC or when they believe they have an obligation to go to the SEC. This is a clear violation of the Commission’s rules because it interferes with the key role played by whistleblowers in initiating and assisting with investigations into violations of the securities laws.
  • Tracking and maintaining a record of employee complaints is always a good practice for employers to follow. Where retaining and motivating employees is an especially tenuous aspect of a company’s business, tracking and managing those complaints may relate to that company’s disclosure obligations under the securities laws.
    • Companies must assess and disclose those aspects of the business that make an investment in the business especially risky. Where a company does not main proper internal controls to adequately assess and maintain records of those risks, that entity may be in violation of the securities laws.

If you believe your employer has violated the securities laws, your employer may not prohibit or interfere with you submitting that information to the SEC. If you submit original information to the Commission that results in an enforcement action with sanctions of over $1,000,000, you may be eligible for an award of between 10 and 30 % of the monetary sanction. The Commission relies on whistleblowers to enforce the securities laws, and if your employer tries to interfere with this important practice, they are likely violating the law.


KCNF represents whistleblowers who seek protection under the statutes and programs identified above.

This article was also published in Corporate Compliance Insights on March 8, 2023.