SEC Whistleblowers Blow Their Own Whistles Too Late For Awards

March 12, 2019

After you file a Form TCR with the Securities and Exchange Commission, you may strike gold. You may strike fool's gold. Either way, before you're even going to come across a nugget of whatever, you're gonna have to wait and see whether the SEC posts a "Notice of Covered Action" ("NoCA") for your matter. If your tip ends up with a NoCA, you may (or may not) be deemed eligible for a Whistleblower Award. None of which means that you or any other whistleblower will pass muster when the SEC decides who is (and isn't) eligible for an Award.  As we learn in a recent SEC Order, it is critical for whistleblowers to monitor posted NoCAs in order to ensure their place in line. Think of it as listening for the starter's gun in order to begin the race. If you don't hear the gun go off and never leave the starting line, well, you know, you're dead in your tracks. If you do hear the gun and begin the race, just because you're running around the track doesn't mean you're going to emerge the winner.

NoCA -- No Guarantee

After you file a tip with the SEC as a whistleblower, you need to check to see if your matter gets posted on the SEC's Office of the Whistleblower ("OWB") website under the listed "Notice of Covered Actions" ("NoCAs"), which are posted under the heading: "Claim an Award." web-page. In pertinent part, the OWB's page explains that:

The inclusion of a Notice means only that an order was entered with monetary sanctions exceeding $1 million. By posting a Notice for a particular case, we are not making any determinations either that (i) a whistleblower tip, complaint or referral led to the SEC opening an investigation or filing an action with respect to the case or (ii) an award to a whistleblower will be paid in connection with the case.

Subject to the Final Rules, individuals who voluntarily provided the SEC with original information after July 21, 2010 that led to the successful enforcement of a covered action listed below are eligible to apply for a whistleblower award.

Once a Notice of Covered Action is posted, individuals have 90 calendar days to apply for an award by submitting a completed Form WB-APP to the Office of the Whistleblower by midnight on the claim due date listed for that action. Please send completed forms to the Office of the Whistleblower by mail at 100 F Street NE, Mail Stop 5631, Washington, DC 20549 or by fax at (703) 813-9322.

The SEC Rulebook

§ 240.21F-10 Procedures for making a claim for a whistleblower award in SEC actions that result in monetary sanctions in excess of $1,000,000.

(a) Whenever a Commission action results in monetary sanctions totaling more than $1,000,000, the Office of the Whistleblower will cause to be published on the Commission's website a "Notice of Covered Action." Such Notice will be published subsequent to the entry of a final judgment or order that alone, or collectively with other judgments or orders previously entered in the Commission action, exceeds $1,000,000; or, in the absence of such judgment or order subsequent to the deposit of monetary sanctions exceeding $1,000,000 into a disgorgement or other fund pursuant to Section 308(b) of the Sarbanes-Oxley Act of 2002. A claimant will have ninety (90) days from the date of the Notice of Covered Action to file a claim for an award based on that action, or the claim will be barred. 

(b) To file a claim for a whistleblower award, you must file Form WB-APP, Application for Award for Original Information Provided Pursuant to Section 21F of the Securities Exchange Act of 1934 (referenced in § 249.1801 of this chapter). You must sign this form as the claimant and submit it to the Office of the Whistleblower by mail or fax. All claim forms, including any attachments, must be received by the Office of the Whistleblower within ninety (90) calendar days of the date of the Notice of Covered Action in order to be considered for an award. . .

§ 240.21F-8 Eligibility. 

(a) To be eligible for a whistleblower award, you must give the Commission information in the form and manner that the Commission requires. The procedures for submitting information and making a claim for an award are described in § 240.21F-9 through § 240.21F-11 of this chapter. You should read these procedures carefully because you need to follow them in order to be eligible for an award, except that the Commission may, in its sole discretion, waive any of these procedures based upon a showing of extraordinary circumstances. . .

Better Late? Better Never!

Following the posting of a NoCA, two applicants for a whistleblower award  (referenced as "Claimant 1" and "Claimant 2") filed claims with the SEC. In the Matter of the Claim for Award in connection with Redacted and Redacted (Order Determining Whistleblower Award Claim Whistleblower Award Proc. File No. 2019-3; '34 Act Rel. No. 85273 / March 8, 2019) Unfortunately for Claimant 1 and Claimant 2, their claims were filed, respectively, 11 months and 2 years after the 90-day NoCA deadline set forth in Rule 21F-10(b). But hope springs eternal. Rule 21F-8(a) grants the SEC discretion to waive its whistleblower procedures "upon a showing of extraordinary circumstances." What clever arguments did each Claimant make to prompt the SEC's discretionary invocation of a waiver of the lapsed filing deadlines? As set forth in the SEC Order:

[C]laimant 1 was under the impression that the Commission would contact Claimant 1 regarding the need to file an award claim, that Claimant 1 was never advised to watch for a posting of a NoCA on the Commission's website, and that Claimant 1 was unaware of the ninety-day period for filing an award claim.
. . .

[C]laimant 2 did not provide an explanation or justification for the late filing in Claimant 2's application, nor did Claimant 2 acknowledge in the application that Claimant 2 filed it late.

Confronted with such less-than-compelling excuses, the SEC's Claim Review Staff ("CRS") recommended denial of both awards as having been filed untimely. Both Claimants filed request for reconsideration.

Did You Hear the Ones About the Hacked Website and the Premature NoCa?

With the appeals now before the SEC itself, Claimants attempted to buttress their arguments for deadline waivers. As set forth in part in the SEC Order:

[F]irst, Claimant 1 represents that Claimant 1 never knew of, nor agreed to, the requirement that claimants file an application for a whistleblower award within ninety days of a posting of a NoCA. Second, Claimant 1 represents that hackers intentionally kept Claimant 1 from learning of the posting of the relevant NoCA by repeatedly taking Claimant 1's website offline, requiring Claimant 1 to spend all of Claimant 1's online time working to get Claimant 1's website up and running again.
. . .

[C]laimant 2 appears to argue that the Commission has not collected (or finished collecting) funds in the Covered Action, that the NoCA therefore was premature, and that Claimant 2's application therefore is timely. Claimant 2 also argues that the application was timely because the Commission was put on notice when Claimant 2 submitted a tip to the Commission that Claimant 2 wished to be considered for an award.

Not So Extraordinary

Upon entertaining the Claimants requests for reconsideration of the denial of their applications, the SEC noted that its exercise of a waiver of its WB-APP filing deadline required a showing of extraordinary circumstances, which is narrowly construed and applied only in limited circumstances. Further, the definition of an "extraordinary circumstance" required a showing the the "failure timely to file was beyond the control of the applicant." Even if such an extraordinary circumstance was demonstrated, the SEC still admonished that an applicant must prove that the belated filing was "promptly arranged" as soon as reasonably practical. 

You Can Hear The Whistleblowers Blow It A Hundred Miles

In denying Claimant 1's reconsideration, the SEC asserts that "the lack of awareness of the submission deadline does not constitute an extraordinary circumstance justifying a waiver of the requirement that applicants file their claims within ninety days." Moreover, the SEC insists that a "potential claimant's responsibility includes the obligation to regularly monitor the Commission's web page for NoCA postings and to properly calculate the deadline for filing an award claim." Showing its cynical view of Claimant 1's hacking story, the SEC explains that: at best (or worst) "[C]laimant 1 chose to use Claimant 1's online time restoring Claimant 1's website rather than checking the Commission's website to learn of the NoCA and the deadline for filing an award claim." Ouch!

In denying Claimant 2's reconsideration, the SEC was clearly unmoved by the argument that once a Form TCR was filed relating Claimant 2's tip, that the SEC was "on notice" of the tipsters "interest in an award." The SEC stuck to its guns: The rules are the rules and they say what they say. There's a 90-day filing deadline. There is nothing about tolling that deadline once the NoCA is filed regardless of any ongoing collections efforts by the SEC. 

Bill Singer's Comment

Can't really argue with the SEC Order, which makes its points in a workmanlike fashion. That being said, there is a very pregnant and intriguing comment set out in a footnote:

Although the Claimants have not requested that we invoke our separate exemptive authority under Section 36(a) of the Exchange Act, we would decline to do so if they had. Section 36(a) grants the Commission the authority in certain circumstances to "exempt any person . . . from any provision or provisions of this title or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors." We believe that Claimants have not met their burdens of demonstrating any considerations that would satisfy the requirements for us to exercise our Section 36(a) exemptive 

One day, perhaps, an enterprising advocate for a worthy whistleblower may argue that notwithstanding a Claimant's belated filing, it is necessary or appropriate in the public interest, and is consistent with the protection of investors for the SEC to exempt the tipster from the penalty of being denied an Award based upon an untimely filing. It would likely require a very, very high-profile case and a palpable injustice that would deprive a given Claimant of an award. Further, the facts would have to raise the very real threat that a denial would undermine the public's confidence in the integrity of the SEC's whistleblower process and would deter future tipsters from coming forward. 

Obviously, rules are rules and, more critically, a deadline is a deadline. On the other hand, the SEC has often played loosey-goosey with its own procedural deadlines. I am reminded of the allegations of a former SEC Associate General Counsel, Rory Flynn, who was in charge of the regulator's Office of the General Counsel's Adjudication Section. Flynn was alarmed by the SEC's Adjudication Section's backlog of appellate cases, which he deemed violated the SEC's Rule of Practice. Pointedly, Flynn believed that Adjudication was violating Rule 900(a) by failing to timely resolve appeals; and, further, although the Rule 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. In response to Flynn's concerns, the SEC fired him in 2013, which prompted his filing of a grievance with the Office of Special Counsel, which denied his claims, which then prompted his appeal to the United States Merit Systems Protection Board, which also denied his claims. See, "The Damnatio Memoriae of Former SEC Counsel Rory Flynn" ( Blog, December 11, 2017).