Video Game Developer Fined $35 Million for Mishandling Internal Complaints
Commentary by Steven Lofchie
A video game development company settled SEC charges for (i) failing to implement controls to ensure that materially significant workplace complaints were reviewed and disclosed to investors and (ii) violating SEC whistleblower protection requirements.
In the Order, the SEC found that the company's workplace complaint review controls were not equipped to handle a large volume of complaints, and thus may have failed to identify certain complaints that would need to be disclosed to investors. The SEC said that as a result, the company was unable to ensure that risk disclosures in its filings were "fulsome, accurate and not misleading by omission."
Separately, the SEC found that the company violated whistleblower protection rules by including a clause in separation agreements requiring former employees to disclose if they received a request for information relating to a potential securities law violation. The SEC said that the company willingly removed the clause from its separation agreements prior to SEC intervention.
The SEC determined that the company violated SEA Rule 13a-15(a) ("Controls and procedures") and Rule 21F-17(a) ("Staff communications with individuals reporting possible securities law violations"). To settle the charges, the company agreed to (i) cease and desist and (ii) a civil monetary penalty of $35,000,000.
Commentary
Although not on the same scale as the penalties imposed on broker-dealers for recordkeeping violations, this seems another instance where the penalty is arguably disproportionate to the violation. It would be one thing if there were evidence that the issuer had intentionally, or even unintentionally, failed to disclose a material problem in an employee complaint, but apparently that is not the case. Likewise, there is not a suggestion that an employee was prevented from talking to the SEC. In short, the penalty is for failures of process, not of substance.
Leaving aside whether the scale of the penalty is appropriate, the case puts issuers on notice to (i) have a procedure to review internal complaints for the purpose of determining whether such complaints, individually or in the aggregate, warrant public disclosure and (ii) review their separation agreements.