The SEC has hit Activision Blizzard Inc with a $35m fine for failing to “maintain disclosure controls and procedures to ensure that the company could assess whether its disclosures pertaining to its workforce were adequate”. The alleged failings at the video game development and publishing company also violated the SEC’s whistleblower protection rule.
According to the SEC order, Activision Blizzard was aware that its ability to attract, retain, and motivate employees was critical to its business performance and that personnel matters were a factor that might have a material impact on the company’s prospects and its forward-looking statements to investors.
Despite identifying it as a risk factor in its Form 10-K and Form 10-Q disclosures, the company did not implement adequate controls and procedures among its separate business units that would permit it to effectively “collect or analyze employee complaints of workplace misconduct”.
Because this key information connected to its employees was not captured and was unavailable it was not possible for management to understand the volume and the substance of the complaints or misconduct. Not having access to the information meant that management was “unable to assess related risks to the company’s business, whether material issues existed that warranted disclosure to investors, or whether the disclosures it made to investors in connection with these risks were fulsome and accurate.”
In other words, not having the information meant that management did not have a full grasp of problems that could potentially affect the business bottom line and could not therefore determine whether public disclosures needed to be made.
“Taking action to impede former employees from communicating directly with the Commission staff about a possible securities law violation is not only bad corporate governance, it is illegal.”Jason Burt, Director of the SEC’s Denver Regional Office
“The SEC’s order finds that Activision Blizzard failed to implement necessary controls to collect and review employee complaints about workplace misconduct, which left it without the means to determine whether larger issues existed that needed to be disclosed to investors,” said Jason Burt, Director of the SEC’s Denver Regional Office.
Violated whistleblower rule
The SEC also found that Activision Blizzard executed separation agreements between 2016 and 2021, where the company required former employees to provide notice if they had received a request for information from the Commission.
Although the order makes clear that there is no evidence that any employees were impeded from communicating with the SEC as a result of these separation agreements, the notice requirements were in breach of confidentiality protections accorded to whistleblowers. As Jason Burt emphasized in the SEC press release, impeding “former employees from communicating directly with the Commission staff about a possible securities law violation is not only bad corporate governance, it is illegal.”
Activision Blizzard has, without admitting or denying the SEC’s findings, settled the charges and agreed to a cease-and-desist order and a $35m penalty.