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by Bill Singer
by Bill Singer
Whistleblowers Awarded Bounties In Related Criminal Action
September 5, 2013
This is an update of "SEC Awards Second Wave Of Whistleblower Bounties" (BrokeAndBroker.com, June 17, 2013).
On October 26, 2011, the Securities and Exchange Commission ("SEC") filed a Complaint in SEC v. Andrey C. Hicks and Locust Offshore Management, LLC (D. Mass. 2011) alleging that the defendants had committed fraud in connection with the offer and sale of shares in the Locust Offshore Fund, Ltd., a pooled investment fund purportedly incorporated in the British Virgin Islands, which turned out to be wholly fictitious.
On March 20, 2012, the U.S. District Court for the District of Massachusetts entered final default judgments in favor of the SEC finding both defendants jointly and severally liable for of $2,512,058.39 in disgorgement and prejudgment interest. The Court also imposed a civil penalty on Locust Offshore Management, LLC in the amount of $2,512,058.39, and a civil penalty on Andrey C. Hicks in the amount of $2,512,058.39.
Whistleblower Claims Filed
On April 3, 2012, the SEC's Office of the Whistleblower posted a Notice of Covered Action 2012-27 for the Locust Matter and four claimants filed timely whistleblower award claims.
On December 19, 2012, The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the approval of the claims of Claimants #1, 2, and 3 in the amount of five percent (5%) each of the monetary sanctions collected; however, the CRS also recommended the denial of the claim of Claimant #4.
The CRS found that Claimants # 1, 2, and 3 had voluntarily provided original information to the SEC that led to the successful enforcement of the Locust matter; and, accordingly, the CRS recommended that each such award be set in the amount of 5% of monetary sanctions collected. Those recommendations were approved by the SEC.
An Unhappy Camper
On February 19, 2013, Claimant #4 submitted a response contesting the Preliminary Determination.
In December 2011, Claimant #4 had submitted a tip to the SEC about "securities fraud committed by many brokers/dealers/traders involved with naked shorting" of the securities of a firm whose name is redacted in the SEC's public release. Claimant #4's tip alleged that the fraud had occurred as early as 2003 through 2005.
Apparently Claimant #4 had submitted several similar tips about this matter, but the SEC deemed his information to be vague and determined to take no further action. In confirming the recommendation of denial by its CRS, the SEC deemed that "none of Claimant #4 tips contained information on the Locust Matter, nor did they even mention the Locust Matter defendants…"
Further, the SEC Complaint against the defendants alleged that they had "made misrepresentations when soliciting individuals to invest in a purported hedge fund controlled by defendants, and did not make any allegations concerning naked short selling, which was the subject of Claimant #4 tips."
In conclusion, the SEC found that Claimant #4's tips "did not lead to the successful enforcement of the Locust Matter because it neither caused the Commission to open its investigation nor significantly contributed to the success of the enforcement action."
Bill Singer's Comment
As these awards mark only the second such event since the inception of the SEC's whistlblower program, whistleblowers and their legal counsel would do well to learn the lessons as to what likely will and will not earn a recommendation for an award. In sustaining the denial of a Whistleblower Award to Claimant #4, the SEC admonishes that:
To be considered for an award under Section 21F, a whistleblower must voluntarily provide the Commission with "original information" that leads to the successful enforcement of a covered judicial or administrative action or related action. 15 U.S.C. § 78u-6(b)(1). Under Rule 21F-4(b)(1)(iv), information will be considered "original information" only if it was provided to the Commission for the first time after July 21, 2010. 17 C.F.R. § 240.21F-4(b)(1)(iv). Further, as relevant here, original information "leads to" a successful enforcement action if either: (i) the original information caused the staff to open an investigation, and the Commission brought a successful action based in whole or in part on conduct that was the subject of the original information; or (ii) the conduct was already under investigation, and the original information significantly contributed to the success of the action. Rule 21F-4(c)(1)-(2), 17 C.F.R. § 240.21F-4(c)(1)-(2).
The information Claimant #4 provided prior to July 21, 2010, including the information re- submitted after July 21, 2010, is not "original information" and therefore does not provide a basis for a whistleblower award. With regard to the information Claimant #4 submitted after July 21, 2010, Claimant #4 fails to articulate any connection or nexus between this information and either the opening of the investigation or the success of the enforcement action in the Locust Matter.Further, we find no evidence whatsoever after our review of the record that Claimant #4 information was used in either the investigation or litigation of the Locust Matter; indeed, the record indicates that Claimant #4 information was not used in any Commission investigation or enforcement action. Accordingly, the information Claimant #4 provided after July 21, 2010 did not lead to a successful Commission enforcement action and therefore does not provide the basis for a whistleblower award.
In a nutshell:
- A whistleblower must voluntarily provide the SEC
- with "original information"
- that leads to the successful enforcement of a covered judicial or administrative action or related action.
In the Matter of the Claim for Award in connection with SEC v. Andrey C. Hicks and Locust Offshore Management, LLC, 1:11-cv-11888-RGS (D. Mass. 2011) Notice of Covered Action 2012-27 (ORDER DETERMINING WHISTLEBLOWER AWARD CLAIM, Securities Exchange Act Of 1934 Release No. 69749; Whistleblower Award Proceeding File No. 2013-1 / June 12, 2013).
UPDATE
Hicks pled guilty on Dec. 12, 2012, to five counts of wire fraud and consented to the forfeiture of his interest in property previously seized by the Justice Department United States v. Hicks (D. Mass. 1:11-CR-10407-PBS, 2011). Hicks was sentenced to 40 months in prison and about $170,000 has been administratively forfeited in the criminal proceeding. The aggregate value of assets seized from Hicks is estimated to be approximately $845,000, and the three whistleblower claimants are expected to ultimately receive 15 percent of this amount for a combined total of approximately $125,000.
On June 28, 2013, CRS issued a Preliminary Determination recommending that Claimant#1, Claimant#2, and Claimant#3 each also be allowed an award in the amount of five percent (5%) of the monetary sanctions collected in United States v. Hicks, which was deemed a "Related Action" within the meaning of Rule 21F-3(b) under the Securities Exchange Act of 1934, 17 C.F.R. § 240.21F-3(b).
SIDE BAR: In cases where there are related criminal proceedings in which money is collected by another regulator, a provision in the whistleblower rules allows whistleblowers to apply for an award based off the other regulator's collections in such "related actions."
The CRS recommendation pertaining to the related criminal action bounties was approved (Order, Securities Exchange Act of 1934 Rel 70293/ Whistleblower Award Proceeding 2013-3 / August 30, 2013). To date, the three whistleblowers have received $8,505 each for tips and information they provided to help the SEC and Justice Department.
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