Whistle-blowing: Insurer gets smacked for bullying employees

By David Lazarus

Aug. 19, 2016 3 AM PT

Seems like every time conservatives make the case for less regulation of business, some well-known company gets caught breaking rules intended to protect consumers, workers or the general public.

This time, it’s Woodland Hills insurer Health Net Inc., which was busted for strong-arming employees into keeping quiet about questionable company practices.

Health Net agreed to pay a $340,000 penalty this week after the Securities and Exchange Commission determined that the company illegally linked severance payments for hundreds of employees to their agreeing not to seek whistle-blower awards.

“They were basically saying to employees that they couldn’t tell anyone about what the company was doing wrong if they wanted their severance,” said Toni Jaramilla, a Century City lawyer specializing in whistle-blower cases. “They were trying to muffle employees’ ability to report problems in the workplace.”

They were trying to muffle employees’ ability to report problems in the workplace.

— Toni Jaramilla, Century City lawyer

Health Net’s severance agreement, according to the SEC, required that outgoing workers waive “any right to bring a lawsuit against the company” or to receive funds from “any proceeding brought based on any communication by employee to any federal, state or local government agency or department.”

Think about that. If you wanted to keep your severance, you’d have to pledge not to sue for any reason and not to be rewarded for reporting any wrongdoing on Health Net’s part to officials.

Makes you wonder what they were so eager to hide.

No one at Health Net responded to my requests for comment. Federal authorities said the company “consented to the SEC’s cease-and-desist order without admitting or denying the findings.”

Health Net was acquired in March by St. Louis managed-care giant Centene for $6.3 billion. In response to the SEC settlement, Centene said only that “these alleged issues” occurred prior to the merger.

Jaramilla and other whistle-blower experts told me this case represents merely the latest attempt by businesses to limit what former employees can say about their work experience.

An increasingly common provision in employment contracts is the so-called non-disparagement clause, which forbids former employees from criticizing their erstwhile employer.

Roger Ailes reportedly had such a provision in his contract at Fox News, which he recently departed with a $40-million severance payout amid allegations of sexual harassment.

The SEC is authorized by the Dodd–Frank Wall Street Reform and Consumer Protection Act to pay whistle-blowers up to 30% of any funds collected from companies found to be committing fraud or violating securities laws intended to protect investors.

Since the program began five years ago, more than $85 million has been handed to 32 whistle-blowers, the commission says. A payout of more than $17 million was announced in June, the second-largest payout to date after a $30-million award in 2014.

It’s hard to say how substantial an impact these cases have had because the SEC is prevented by law from disclosing any information that might reveal a whistle-blower’s identity.

“Financial incentives in the form of whistle-blower awards, as Congress recognized, are integral to promoting whistle-blowing to the commission,” Antonia Chion, associate director of the SEC Enforcement Division, said in a statement. “Health Net used its severance agreements with departing employees to strip away those financial incentives, directly targeting the commission’s whistle-blower program.”

The SEC said Health Net inserted the hinky language in its severance agreements after passage of Dodd-Frank in 2010. Section 922 of the law places a bounty on any securities-related misbehavior that results in at least $1 million in penalties.

Republican presidential nominee Donald Trump has called for “a dismantling of Dodd-Frank.” He went a step further last week, saying in a speech to the Detroit Economic Club that, if elected, he would oversee a sweeping rollback of all financial regulations and a moratorium on new rule making.

“This will give our American companies the certainty they need to reinvest in our community, get cash off of the sidelines, start hiring for new jobs and expanding businesses,” Trump said.

I’d be more sympathetic to such proposals if businesses weren’t repeatedly being caught crossing legal and ethical lines, usually for no better reason than to boost profit at the expense of customers or competitors, or to keep some wrongdoing under wraps.

Last week, a federal court jury convicted San Francisco’s PG&E of violating pipeline safety laws six years after a defective gas line exploded in Northern California, killing eight people and destroying 38 homes. The utility also was convicted of obstructing the federal probe into the blast and misleading investigators.

This isn’t to say all companies behave badly. The vast majority go about their business without violating state or federal rules — even if they find these rules burdensome.

Such companies shouldn’t blame overzealous lawmakers or regulators for all the scrutiny. They should blame the Health Nets and PG&Es.

“Rules are there for a reason,” said Don Warren, a Newport Beach whistle-blower attorney. “They’re meant to protect the public.”

By forcing Health Net to clean up its act, the SEC has accomplished that goal. But it’s questionable how meaningful a deterrent that $340,000 penalty will be for other businesses.

See the most-read stories in Business this hour »

Warren deemed the amount “a really skimpy punishment” for violating an important law. He said some companies might view such a relatively light fine “as just the cost of doing business.”

Health Net reported $186 million in profit last year. Writing a check for $340,000 won’t exactly break the bank.

I look at Health Net’s actions and I see the classic profile of a schoolyard bully, pushing around those with less power to get its way.

That’s why adult supervision is necessary.

Until businesses prove themselves worthy of more lenient treatment.

David Lazarus’ column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5 and followed on Twitter @Davidlaz. Send your tips or feedback to [email protected].

MORE FROM DAVID LAZARUS

California Inc.: Seeking cleaner air for SoCal, battling Pokémon

Deciphering your hospital bill — good luck with that

This secret society says it can help you attain wealth and power — but they’ll cost you