SEC Severely Reduces Whistleblower Award for Unreasonable Filing Delay
September 17, 2018
The SEC isn't ready to make nice with a whistleblower who was tardy. Turns out, the SEC is a very punctual place. They keep time. Meticulously. A cynical fellow might call out the SEC as a hypocrite. A sarcastic fellow might compliment the SEC on never missing an opportunity to miss an opportunity when it comes to aggressive, timely regulation of the too-big-to-fail. A fellow with a sense of humor would hoist the SEC with its own petard -- which is what today's BrokeAndBroker.com Blog attempts to do.
SEC Press Release
In the recent SEC Press Release "Whistleblower Receives
Award of Approximately $1.5 Million" (SEC Release 2018-194)
https://www.sec.gov/news/press-release/2018-194 , we're told that a
whistleblower was awarded the princely sum of $1.5 million. Of course, the SEC
Release also manages to remind us (yet again) about how amazing the SEC's
Whistleblower program is. Although the release does acknowledge that someone
stepped forward, submitted a tip, and that tip produced a whopping fine, the
whole give-credit-where-credit-is-due thing gets watered down by this fairly
jarring bit of thrown shade:
[T]he whistleblower provided the SEC with vital information and ongoing assistance that proved important to the overall success of an enforcement action. However, the SEC's order notes that the award was reduced because the whistleblower did not promptly report the misconduct and benefited financially during the delay.
Did not promptly report the misconduct.
Benefited financially during the delay.
What the hell is that all about?
10% to 30% Bounty
The Dodd-Frank Wall Street Reform and Consumer Protection Act prescribes that when a whistleblower voluntarily provides original information that leads to a successful SEC enforcement action in which monetary sanctions are over $1 million, a bounty be paid to that tipster of no less than 10% and no more than 30% of the fines actually collected.
If the whistleblower referenced in the SEC Release only qualified at the low-end of the Dodd-Frank range of percentages, the $1.5 million award would have been calculated as 10% of $15 million in fines collected by the SEC. If the whistleblower qualified at the 30% maximum level, then the collected fine was $5 million. As such the whistleblower at issue was responsible for the SEC collecting something in the neighborhood of $5 million to $15 million. That's a nice neighborhood to be living in, no?
Why do the good folks at the SEC have their undies in a bunch? After all, the SEC Release concedes that the whistleblower provided the SEC with vital information and ongoing assistance. That's nice, right? Apparently "nice" is not enough for the federal regulator because as grandiose as its $1.5 million award was, it represented a reduction from an even higher award that the whistleblower could have earned. Why the discount? Apparently because the whistleblower did not promptly report the misconduct and allegedly benefited financially from the delayed reporting.
Ummm . . . not to be too picky here but just what the hell constitutes the "prompt" reporting of misconduct by a third-party to any federal regulator or prosecutor? There's no law that requires anyone to become a whistleblower. Blowing the whistle could have devastating consequences if the whistleblower's identity should become revealed. As such, it doesn't strike me as unreasonable if someone takes her time before reaching out to the SEC and filing a tip that could blow up in her face? Just think about how many folks are toiling away trying to figure out who penned the anonymous Op/Ed in the New York Times about President Trump.
SEC Order
As is often the case with most government press releases, the SEC's is short on substantive facts but long on tooting its own horn when it comes to the breathtaking success of its whistleblower program. Wholly missing from the SEC Release is any statement as to just how late (days, weeks, months, or years) was the whistleblower's filing. Similarly absent is any explanation as to what constituted the alleged financial benefit engendered by the purported delay. In order to get more facts, we next turn to the underlying regulatory document behind the SEC Release: In the Matter of the Claim for Award in connection with Notice of Covered Action (Redacted SEC Order Determining Whistleblower Award Claim; '34 Act Rel. No. 84125; Whistleblower Award Proc. File No. 2018-12) [Ed: references to "redacted" are in the original SEC Order] https://www.sec.gov/rules/other/2018/34-84125.pdf According to the SEC Order, the SEC Claims Review Staff ("CRS") issued a Preliminary Determination recommending that the unnamed Claimant:
receive a whistleblower award in the amount of Redacted of the monetary sanctions collected, or to be collected, in the above-identified Covered Action. This proposed award would yield a likely payout to Claimant of more than $1,500,000. Claimant subsequently provided written notice of Claimant's decision not to contest the Preliminary Determination.
As a side note, the SEC Order informs us that the unnamed Claimant was a wannabe double-dipper who had filed a claim for a second Covered Action for which CRS recommended denial of an award. For whatever reasons, the unnamed Claimant opted not to contest either the CRS's recommended award or its separate denial. After its deliberations, the SEC adopted CRS' recommendations, subject to "severely" reducing the Award in the approved claim. In justifying its decision, the SEC explains that:
Turning to the award amount, we (consistent with the CRS's recommendation) have severely reduced the award here after considering the award criteria identified in Rule 21F-6 of the Exchange Act.2 Although Claimant provided important information in relation to the overall success of the enforcement action as well as ongoing assistance, Claimant unreasonably delayed in reporting the information to the Commission and was culpable. With respect to our finding that the Claimant unreasonably delayed, we have considered the following: Claimant waited for more than a year after learning of the facts underlying the violation before Claimant reported to the Commission; Claimant reported to us only after learning of the ongoing Commission investigation; during the period of Claimant's delay, investors were being harmed; as a result of the delay, the monetary sanctions upon which Claimant's award is based increased; and Claimant waited to report to the Commission until Redacted. With respect to our culpability determination, we have considered the fact that Claimant -- while being fully aware of the wrongdoing -- nonetheless Redacted Redacted received a significant and direct financial benefit. Whistleblowers with similar conduct should expect to receive a severely reduced award -- indeed, even one as low as the minimum statutory threshold -- in future cases.
Accordingly, it is hereby ORDERED that Claimant shall receive an award of Redacted Redacted of the monetary sanctions collected in the Covered Action, including any monetary sanctions collected after the date of this Order.
====
Footnote 2: In assessing the appropriate award amount, Exchange Act Rule 21F-6 provides that the Commission consider: (1) the significance of information provided to the Commission; (2) the assistance provided in the Covered Action; (3) the law enforcement interest in deterring violations by granting awards; (4) participation in internal compliance systems; (5) culpability; (6) unreasonable reporting delay; and (7) interference with internal compliance and reporting systems.
According to the SEC Order, the inexcusable delay consisted of "more than a year," which in bureaucratic doublespeak likely means less than two years and likely not all that in excess of 12 months or thereabout. The price -- the kick-'em-in-the-nuts payback -- for the Claimant's roughly one-year delay was a severe reduction in the award ordered by the SEC. Oddly, the SEC's pangs of moral and ethical outrage about Claimant's delay and financial benefit did not prompt the federal regulator to return the collected fine. Yeah, I know, the SEC wasn't that outraged.
Rule 21F-6
If we consult the Rule 21F-6 cited in the SEC Order, we come across the following [Ed: highlighting supplied]:
§ 240.21F-6 Criteria for determining amount of award.
In exercising its discretion to determine the appropriate award percentage, the Commission may consider the following factors in relation to the unique facts and circumstances of each case, and may increase or decrease the award percentage based on its analysis of these factors. In the event that awards are determined for multiple whistleblowers in connection an action, these factors will be used to determine the relative allocation of awards among the whistleblowers.
. . .
b) Factors that may decrease the amount of a whistleblower's award. In determining whether to decrease the amount of an award, the Commission will consider the following factors, which are not listed in order of importance.
(1) Culpability. The Commission will assess the culpability or involvement of the whistleblower in matters associated with the Commission's action or related actions. In considering this factor, the Commission may take into account, among other things:
(i) The whistleblower's role in the securities violations;
(ii) The whistleblower's education, training, experience, and position of responsibility at the time the violations occurred;
(iii) Whether the whistleblower acted with scienter, both generally and in relation to others who participated in the violations;
(iv) Whether the whistleblower financially benefitted from the violations;
(v) Whether the whistleblower is a recidivist;
(vi) The egregiousness of the underlying fraud committed by the whistleblower; and
(vii) Whether the whistleblower knowingly interfered with the Commission's investigation of the violations or related enforcement actions.
(2) Unreasonable reporting delay. The Commission will assess whether the whistleblower unreasonably delayed reporting the securities violations. In considering this factor, the Commission may take into account, among other things:
(i) Whether the whistleblower was aware of the relevant facts but failed to take reasonable steps to report or prevent the violations from occurring or continuing;
(ii) Whether the whistleblower was aware of the relevant facts but only reported them after learning about a related inquiry, investigation, or enforcement action; and
(iii) Whether there was a legitimate reason for the whistleblower to delay reporting the violations. . .
Culpability
As to a reduction in an award based upon a whistleblower's perceived delay in reporting, that "delay" must be found to have been "unreasonable."The SEC Order pronounces that "Claimant unreasonably delayed in reporting the information to the Commission and was culpable."
Given the manner in which the Rule was drafted, it is important to note that the factor of financial benefit is nestled in a section about a whistleblower's "culpability" in the matters provided in the tips. As such, the SEC is entitled to use its discretion to reduce -- but not to wholly eliminate -- an award if the whistleblower was "involved" in the misconduct at issue and financially benefited from the underlying violations. As to the issue of the whistleblower's "financial benefit," both the SEC Release and the SEC Order present virtually no substantive facts that justify the Chair and Commissioners "severe" decrease of the final Award. We never are informed as to what the non-decreased award could have been. We don't know how the whistleblower financially benefited, to what amount, and how the benefit was related to his alleged culpable misconduct. All that the Order reveals is that the whistleblower was "fully aware of the wrongdoing" and, nonetheless, "received a significant and direct financial benefit." Respectfully, being "aware" of wrongdoing and being involved in that wrongdoing are two different things. I may be aware that you were driving too fast for a mile before you killed a pedestrian but that doesn't mean that I had a role in your speeding.
Unreasonable Delay
With respect to the SEC's finding of unreasonable delay, the rationale for that conclusion is stated in the SEC Order as based upon the whistleblower having "waited for more than a year after learning of the facts underlying the violation before Claimant reported to the Commission." The SEC justifies the decrease in the whistleblower's award, in part, by noting that the whistleblower "reported to us only after learning of the ongoing Commission investigation; during the period of Claimant's delay, investors were being harmed . . . "
Funny thing about delay. One man's unreasonable delay could well be another's caution. Supposing that I become aware of a fact on January 15th, and then of two more facts on February 23rd, and then, sometime in March, I put the three facts together and figure out that there just might be some misconduct going on at a broker-dealer where I work. In April, after I've done some online research, I find that I can file something called a Form TCR with the SEC and become a whistleblower eligible for a 10% to 30% bounty. Then I pause. I know that Trump is in office and they're talking about deregulation. I hear that the SEC is talking about capping whistleblower awards. I heard that it can take years before the SEC pays a whistleblower. I heard that not only will I have to pay a lawyer a 1/3 contingency fee if I use counsel but I also have to pay state and federal tax on the full amount of the award (with no credit for the attorneys' fees). Then I start to wonder if it's worth getting involved with the SEC because even if I file anonymously, maybe the lawyer working for the regulator takes a job at my employer or with some big ass law firm representing the industry. If word ever got out that I spilled the beans, my name will be mud in the biz, and even if the SEC doesn't blow my cover, someone might begin putting things together and figure out I was the source. On the other hand, I could hit the jackpot and walk away with a few million bucks.
Better Late Than Never?
So, you tell me, if there is no law requiring anyone to become a whistleblower and file a Form TCR with the SEC, just exactly when is it too late for that wannabe whistleblower to blow the whistle? Since no other whistleblower came forward, it's also fair to assume that but for this whistleblower's belated tip, the SEC would never have started an investigation of the misconduct and might not have had the information or tools to successfully prosecute its case. Frankly, it's hard to think of a more apt motto for this dilemma than: Better late than never. In light of that perspective, the SEC's warning takes on a fairly ominous tone to the extent that it says better never than late: Whistleblowers with similar conduct should expect to receive a severely reduced award -- indeed, even one as low as the minimum statutory threshold -- in future cases.
SEC Dithering: Zelaya
Finally, howsabout the SEC cuts out all the sanctimonious crap? Nice to see all the SEC's hand-wringing about the whistleblower
Claimant's dilatory filing of his tip. Too bad that the SEC isn't equally as passionate when it comes to keeping itself running on time. In Carlos Zelaya,
individually, and George Glantz, individually and as trustee of the George
Glantz Revocable Trust, for themselves and on behalf of all those persons
similarly situated,
Plaintiffs-Appellants, v. United States of America, Defendant-Appellee
(Opinion, 11th Circuit, 13-14780, 11-CV-62644, March 30, 2015),
http://brokeandbroker.com/PDF/Zelaya11Cir.pd fthe 11th Circuit offered this
introductory synopsis:
The plaintiffs in this case, Carlos Zelaya and George Glantz, are victims of one of the largest Ponzi schemes in American history: the much-publicized Ponzi scheme orchestrated by R. Allen Stanford. All Ponzi operations eventually unravel, and when the scheme that had victimized Plaintiffs was publicly revealed to have been a fraud, Plaintiffs were taken by surprise. Yet, according to Plaintiffs, the federal agency entrusted with the duty of trying to prevent, or at least reveal, Ponzi schemes was not all that surprised. To the contrary, this agency, the United States Securities and Exchange Commission ("SEC"), had been alerted over a decade before that Stanford was likely running a Ponzi operation. According to Plaintiffs, notwithstanding its knowledge of Stanford's likely nefarious dealings, the SEC dithered for twelve years, content not to call out Stanford and protect future investors from his fraud. And even though the SEC eventually roused itself to take action in 2009, by then, of course, the money was long gone, and many people lost most of their investments.
Pursuant to the Federal Tort Claims Act, Plaintiffs sued the United States in federal court, alleging that the SEC had acted negligently. The federal government moved to dismiss, arguing that it enjoyed sovereign immunity from the lawsuit. The district court agreed, and dismissed Plaintiffs' case. Plaintiffs now appeal that dismissal to this Court. In reviewing the district court's dismissal, we reach no conclusions as to the SEC's conduct, or whether the latter's actions deserve Plaintiffs' condemnation. We do, however, conclude that the United States is shielded from liability for the SEC's alleged negligence in this case. We therefore affirm the district court's dismissal of the Plaintiffs' complaint.
Pages 2 -3 of the 11th Circuit Opinion
In considering an appeal by victims of what the 11th Circuit described as "one of the largest Ponzi schemes in American history," we are stunned when we read the characterization of the SEC's response to Stanford's "nefarious dealings" as one in which the federal regulator had "dithered for twelve years, content not to call out Stanford and protect future investors from fraud." After shaking our heads in disbelief at the allegations against the SEC, we learned that the 11th Circuit found that its hands were tied and affirmed the district court's prior dismissal of the claims. In effect, a negligent SEC was deemed shielded from liability. Dithering. Negligent. I don't recall seeing those words emblazoned on the SEC's emblem.
SEC Failure to Detect: Molchatsky
And there is more. Much more. In Molchatsky, et al. v. United States (2nd Circuit, 11-2510 April 10, 2013). http://brokeandbroker.com/Madoff2Cir.pdf As set forth in the 2nd Circuit's initial synopsis of the appeal:
Plaintiffs-Appellants Phyllis Molchatsky, et al. ("Plaintiffs") appeal from an April 19, 2011 Opinion and Order by the United States District Court for the Southern District of New York (Swain, J.) granting Defendant-Appellee the United States' motion to dismiss Plaintiffs' complaints against the United States Securities and Exchange Commission (the "SEC") for lack of subject matter jurisdiction pursuant to Federal Rule of Civil Procedure 12(b)(1). Plaintiffs also appeal from the district court's January 24, 2011 Memorandum Order denying Plaintiffs' motion for relief from a judgment under Federal Rule of Civil Procedure 60(b). Plaintiffs seek to hold the United States liable for SEC employees' failure to detect Bernard Madoff's Ponzi scheme and for the financial losses that Plaintiffs claim they suffered as a result. Because we find that the SEC's actions, along with its regrettable inaction, are shielded by the Discretionary Function Exception, we affirm the district court's dismissal of Plaintiffs' claims for lack of subject matter jurisdiction.
Pages 2 - 3 of the 2nd Circuit Opinion
The SEC's failure to detect Madoff's Ponzi. The SEC's "regrettable inaction." Talk about unreasonable delay! Barely containing its disappointment with the SEC's conduct, the 2nd Circuit offered this stinging commentary in Molchatsky:
Plaintiffs' harm ultimately stems from the SEC's failure to investigate Madoff and uncover his Ponzi scheme. As a result, the conduct Plaintiffs seek to challenge is "too intertwined with purely discretionary decisions" made by SEC personnel. Gray v. Bell, 712 F.2d 490, 515 (D.C. Cir. 1983); see generally id. at 515-16. Despite our sympathy for Plaintiffs' predicament (and our antipathy for the SEC's conduct), Congress's intent to shield regulatory agencies' discretionary use of specific investigative powers via the DFE is fatal to Plaintiffs' claims. . .
Page 7 of the 2nd Circuit Opinion
SEC Whistleblower Rory Flynn
After some 13 years at NASD/FINRA, in August 2012, regulatory lawyer Rory Flynn began work as an Associate General Counsel at SEC, where he had previously been employed for 12 years. During his second stint at the SEC, Flynn was apparently in charge of the federal regulator's Office of General Counsel's Adjudication section, which assisted the SEC in deciding appeals. Apparently, Flynn was alarmed by Adjudication's backlog of unresolved appellate cases, which he found to have involved nearly half of his section's docket. Flynn deemed the degree of stale caseload to be contrary to SEC Rules of Practice Rule 900(a) and (b).
Flynn believed that Adjudication was violating Rule 900(a) by failing to timely resolve appeals; and, further, although the Rules provided for further delay upon the SEC's determination that "extraordinary facts and circumstances" existed, Flynn believed that the requisite determination or approval for extensions were not being obtained. In essence, Flynn believed that not only were appeals failing to be completed within the 30-day window proscribed in Rule 900(b) but the SEC was not being properly notified via the required detailed report as to the procedural posture of an overdue case, an estimated date of completion, and other specified information.
By May 2013, after hiring additional Adjudication staff and implementing a triage system prioritizing simpler cases, Flynn arranged to meet with new SEC Chair Mary Jo White to further discuss his ongoing concerns. Four days before the scheduled meeting with White, her office cancelled. A few days after that cancellation, Flynn was fired by his supervisor, Michael Conley. Among the reasons given for his termination were "poor work performance,""fail[ure] to produce high quality work product on a timely basis," "failure to prioritize assignments," and "inability to work cooperatively with senior level managers." Following his termination, Flynn initiated a grievance process with the Office of Special Counsel, where he sought corrective action in response to his claim that the SEC had engaged in a prohibited personnel action by firing him for raising his concerns about non-compliance with Rule 900. In a sense, Flynn blew the whistle on the SEC. Unfortunately, The Office declined to pursue his claims, which prompted Flynn to file an action before the United States Merit Systems Protection Board ("MSPB"), where an Administrative Judge denied Flynn relief after finding that he had not made any protected disclosures.
Flynn appealed the Administrative Judge's Initial Decision to the MSPB, which was then operating with only two of its three members: Susan Tsui Grundmann, Chairman and Mark A. Robbins, Member. The two-member Board could not concur on Flynn's appeal and, accordingly, the Initial Decision became the MSPB's Final Decision. Rory C. Flynn, Appellant, v. United States Securities and Exchange Commission, Agency [On Petition for Review of Initial of Merit Systems Protection Board. (DC-1221-14-1124-W-1)] (Order, United States of America Merit Systems Protection Board / September 1, 2016) http://brokeandbroker.com/PDF/FlynnMSPB.pdf
Flynn appealed the MSPB's denial of his claim to the United States Court of Appeals for the Fourth Circuit ("4Cir"). Rory C. Flynn, Petitioner, v. United States Securities and Exchange Commission, Respondent (Opinion, United States Court of Appeals for the Fourth Circuit, No. 16-2122 / December 7, 2017) http://brokeandbroker.com/PDF/Flynn4Cir.pdf In light of its finding of a failure of adjudication on the Rule 900(b) claims, 4Cir remanded that portion of Flynn's appeal back to the MSPB Administrative Judge. In conclusion, 4Cir, denied in part, granted in part, and remanded for further proceedings Flynn's appeal.
Funny, isn't it, how the SEC severely reduces an award to a whistleblower for his alleged dilatory filing and personal benefit by the purported delay, yet the federal courts find themselves powerless to sanction the SEC when that regulator dithers, engages in negligent regulation, fails to investigate, and pursues a course of regrettable inaction -- and, in more recent times, a former SEC Associate General Counsel acting as a whistleblower tried to get the regulator to act within prescribed timeframes, only to be fired.
Black Hole of Despair
To close the circle and return to where we started today's BrokeAndBroker.com Blog, the SEC has warned every future whistleblower that if you engage in what may be deemed unreasonable delay in filing your whistleblower claim, any ensuing Award may be severely reduced. Frankly, that strikes me as a bone-head thing to say in 2018 but I also suspect that it is a somewhat calculated attempt to hamstring the Dodd-Frank whistleblowing program. It may well be that the SEC intentionally failed to disclose further facts in the Order out of a bona fide and reasonable concern to protect the confidential identity of the whistleblower. If that's the motivation, then I would argue that the SEC should not have used today's featured case to launch a tougher agenda of punitive reductions of whistleblower awards. Wait until you can offer a meaningful explanation of the distinction between reasonable and unreasonable delay, and the parameters of inappropriate benefiting from involvement in culpable conduct. Bad facts always make bad laws.
Worse, the SEC seems unaware of the body of criticism about the delays inherent in learning if a whistleblower will ven be deemed eligible for an award. The SEC seems oblivious to complaints about its own delays in rendering and paying whistleblower awards. For those at the SEC still unaware of the horrific delays within its whistelblower program, please read: SEC Whistleblower Program Is A Black Hole Of Despair (BrokeAndBroker.com Blog).