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Order Awarding $54 Million to Two SEC Whistleblowers Provides Three Lessons for Whistleblowers

SEC Announces Second-Largest Award in the History of the SEC Whistleblower Program 

On September 6, 2018, the SEC issued an order awarding a total of $54 million to two whistleblowers that enabled the SEC to bring an important enforcement action.  One whistleblower received $39 million and the other received $15 million. The $39 million award is the second-largest award approved since the inception of the SEC Whistleblower Program.  The largest SEC whistleblower awards to date are:

The recent order provides important guidance for whistleblowers on three issues that may arise in SEC whistleblower award determinations:

  1. Providing information to the SEC after investigators direct a “request, inquiry, or demand” can disqualify the whistleblower from recovering an award.

  2. To qualify for an award from a related action, the whistleblower must demonstrate that “the same information that the whistleblower provided to the Commission must have been provided to the other authority and that information must have itself directly contributed to the other authority’s investigative or litigation efforts leading to the success of that authority’s enforcement action. In other words, the whistleblower must demonstrate actual reliance [by the other agency] on the whistleblower’s original information.”

  3. Where a whistleblower’s submission leads to both an SEC enforcement action and a related action taken by another agency, such as the Department of Justice, the whistleblower is unlikely to recover more than 30% of the total monetary sanctions recovered as a result of the whistleblower’s tip.

“Original Information” Requirement Warrants Prompt Reporting

As we have discussed in our article offering tips for SEC whistleblowers, reporting promptly is critical because of the risk that someone else will submit the same information to the SEC first.   And an unreasonable delay in reporting will often cause the SEC to reduce the award percentage.

These provisions are consistent with the policy goal of creating a “strong incentive for whistleblowers to come forward early with information about possible violations of the securities laws rather than wait until Government or other official investigators ‘come knocking on the door.’”  Proposed Rules for Implementing the Whistleblower Provisions of Section 21F of the Securities Exchange Act of 1934, 75 FR 70488, 70490/3 (Nov. 17, 2010).

The September 6 Order highlights another reason to report promptly.  Claimant 2 was nearly denied any award because a federal agency interviewed the whistleblower before they filed a Form TCR.  Under Rule 21F-4(a), the whistleblower must come forward before the government direct a “request, inquiry, or demand” to the whistleblower that relates to the subject matter of the tip.  In other words, an individual who comes forward only after learning that government investigators were seeking to question them generally will not qualify for an award.

Here, the SEC granted a waiver of Rule 21F-4(a) because at the time that that the whistleblower was interviewed by another federal agency, they did not know the information that later supplied the critical basis for their tip to the SEC, and when the whistleblower learned of that information, they promptly reported it to the SEC and the other agency.  In addition, Claimant 2 was not a target or a subject of the other agency’s investigation.

To Qualify for an Award from a Related Action, the Whistleblower Must Demonstrate that They Provided the Information to the Agency

Under the SEC Whistleblower Program, the SEC is authorized to pay monetary awards in certain successful “related actions” if the action is based on the same original information that the whistleblower gave to the SEC leading to the SEC obtaining monetary sanctions totaling more than $1 million.  In other words, a related action award enables a whistleblower to obtain additional financial awards for the ancillary recoveries obtained by other governmental entities resulting from the same original information that the whistleblower provided to the SEC.

A “related action” is defined as a judicial or administrative action brought by:

  1. the Attorney General of the United States;

  2. an appropriate regulatory authority;

  3. a self-regulatory organization; or

  4. a state attorney general in a criminal case.

An “appropriate regulatory authority” means the Commission, the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and any other agencies that may be defined as appropriate regulatory agencies under Section 3(a)(34) of the Exchange Act (15 U.S.C. 78c(a)(34)).

One of the whistleblowers who received an award in the September 6 Order was denied an award from collected proceeds in a related action because the whistleblower failed to “demonstrate [that he or she] directly (or through the Commission) voluntarily provided the governmental agency, regulatory authority or self-regulatory organization the same original information that led to the Commission’s successful covered action, and that this information led to the successful enforcement of the related action.”  Rule 21F-11(c).  In particular, the whistleblower did not directly submit the original information to the agency that took a related action, and SEC staff responsible for the covered action never shared any information or materials with the other agency.  In addition, the agency that took the related action knew about the material facts proving the violation before the SEC took an enforcement action based in part on the whistleblower’s information.

A Related Action Award is Unlikely to Enable a Whistleblower to Recover More than 30 Percent of the Total Collected Proceeds from a SEC Action and Related Action

Consistent with the position that the SEC took in its recent proposed amendments to the SEC whistleblower rules, the September 6 Order clarifies that the SEC is unlikely to permit a whistleblower to recover more than 30 percent of total collected proceeds from an SEC enforcement action and a related action.  In the order, the SEC acknowledges that the definition of “related action” in the SEC Whistleblower Program’s rules does not, on its face, exclude certain judicial or administrative actions that have a less direct or relevant connection to the SEC’s whistleblower program than another whistleblower scheme.  Despite this, the order declines the whistleblower’s request for a related-action award.  The SEC offers three reasons for its position:

  • When Congress established the Commission’s whistleblower program, it set a firm ceiling on the maximum amount that should be awarded for any particular action—“not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed” in the action.

  • The related action component of the Dodd-Frank Act enables whistleblowers to obtain additional financial awards for the ancillary recoveries that may result from their submissions to the SEC, but it is not intended to enable a whistleblower to use two separate whistleblower award programs to obtain an award exceeding 30 percent of total collected proceeds from both a SEC enforcement action and related action. According to the September 6 Order, any additional financial incentive that would otherwise result from the related-action component of the Commission’s award program would be unnecessary to encourage individuals to report misconduct.

  • Permitting whistleblowers to recover under both the SEC Whistleblower Program and a separate award scheme for the same action “would produce the irrational result of encouraging multiple ‘bites at the apple’ in adjudicating claims for the same action and could potentially allow multiple recoveries.”

SEC Whistleblower Program Continues to Be an Unmitigated Success

The award of $54 millions to two whistleblowers indicates that whistleblowers are continuing to enable to the SEC to take significant enforcement actions that protect investors.  As Chair Clayton stated in a June 28, 2018 open meeting on proposed amendments to the SEC’s whistleblower rules, the “Commission’s whistleblower program has contributed significantly to our ability to detect wrongdoing and better protect investors and the marketplace, particularly where fraud is well-hidden or difficult to detect.  As we continue our pursuit of enforcement initiatives focused on misconduct that impacts the retail investor, the strength of our whistleblower program is a critical component in our investor protection toolbox.”  Indeed, according to the notice of proposed rulemaking, “[o]riginal information provided by whistleblowers has led to enforcement actions in which the Commission has obtained over $1.4 billion in financial remedies, including more than $740 million in disgorgement of ill-gotten gains and interest, the majority of which has been or is scheduled to be returned to harmed investors.”  To learn more about the SEC Whistleblower Program download the eBook SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.

© 2018 Zuckerman Law

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About this Author

Jason Zuckerman, Whistleblower Litigation Attorney, Washington DC  Law Firm
Principal

Jason Zuckerman is Principal of Zuckerman Law and litigates whistleblower retaliation, wrongful discharge, non-compete, and other employment-related claims.  Zuckerman serves as Plaintiff Co-Chair of the Whistleblower Subcommittee of the ABA Labor and Employment Section’s Employee Rights and Responsibilities Committee, and in 2012, the Secretary of Labor appointed Zuckerman to serve on the Whistleblower Protection Advisory Committee. 

Prior to founding Zuckerman Law, Zuckerman served as Senior Legal Advisor to the Special Counsel at the U.S...

(202) 262-8959
Matthew Stock, CPA, Auditor, Zuckerman Law Firm
Certified Public Accountant

Matthew Stock is an associate at Zuckerman Law, where his practice focuses on representing whistleblowers in whistleblower rewards and whistleblower retaliation cases. He is also a Certified Public Accountant, Certified Fraud Examiner, and former KPMG external auditor.

As an auditor, Mr. Stock developed an expertise in financial statement analysis, internal controls testing, and fraud recognition. At Zuckerman Law, Mr. Stock uses his auditing experience to help whistleblowers investigate and disclose to the government complex financial frauds. In addition, Mr. Stock routinely assists whistleblowers in Sarbanes-Oxley whistleblower retaliation cases analyze a wide range of accounting issues, including revenue recognition, earnings management, and financial statement fraud.

202-930-5901