SEC Acts In the Public Interest And Renders $3 Million Whistleblower Award

June 4, 2019

Notwithstanding the self-congratulatory press releases from the Securities and Exchange Commission about the purported success of its Whistleblower program, not every whistleblower shares that perspective. Nothing seems to get accomplished according to a reasonable timeline. There are delays without explanation. There are delays with explanations that lack credibility. There are delays because the federal regulator seems to relish being a bully and thinks that it's always doing everyone a favor and you should simply take a number, wait your turn, and keep your mouth shut. In the end, far too much of the SEC's Whistleblower program treats the whistleblower as an adversary and the whistleblower's tips as an annoyance. Lost in that misguided approach is that the benefit of a whistleblower program is its role as an early warning system to protect the investing public and better police Wall Street. Despite a lot of crap that continues to bedevil the effectiveness of the SEC's Whistleblower program, a recent SEC Order making a $3 million award is a very, very pleasant surprise and an encouraging step in the right direction!

Case in Point

Claimant 1 and Claimant 2 had filed with the SEC a joint Form TCR; and, thereafter, in response to a Notice of Covered Action ("NoCA"), they timely submitted Forms WB-APP. The SEC's Claims Review Staff ("CRS") issued a Preliminary Determination recommending payment of $3 million to be divided equally among the two Respondents (CRS calculated that sum via an undisclosed percentage of the monetary sanctions collected (or to be collected)). Separately, CRS recommended that Claimants' claims for an award in connection with an action brought by what is referenced as an "Other Authority" be denied. In the Matter of the Claim for Award in Connection With Notice of Covered Action [REDACTED] [REDACTED] [REDACTED] [REDACTED](Order Determining Whistleblower Award Claim; '34 Act Rel. No. 86010; Whistleblower Award Proc. File NO. 2019-7 / June 3, 2019) 

SIDE BAR: As set forth in pertinent part under Section 240.21F-4: Other definitions:

(a) Voluntary submission of information. (1) Your submission of information is
made voluntarily within the meaning of §§ 240.21F-1 through 240.21F-17 of this chapter if you provide your submission before a request, inquiry, or demand that relates to the subject matter of your submission is directed to you or anyone representing you (such as an attorney):
(i) By the Commission;
(ii) In connection with an investigation, inspection, or examination by the Public
Company Accounting Oversight Board, or any self-regulatory organization; or
(iii) In connection with an investigation by the Congress, any other authority of
the federal government, or a state Attorney General or securities regulatory authority. . . .
. . .

(c) Information that leads to successful enforcement. The Commission will consider that you provided original information that led to the successful enforcement of a judicial or administrative action in any of the following circumstances: 
(1) You gave the Commission original information that was sufficiently specific, credible, and timely to cause the staff to commence an examination, open an investigation, reopen an investigation that the Commission had closed, or to inquire concerning different conduct as part of a current examination or investigation, and the Commission brought a successful judicial or administrative action based in whole or in part on conduct that was the subject of your original information; or 
(2) You gave the Commission original information about conduct that was already under examination or investigation by the Commission, the Congress, any other authority of the federal government, a state Attorney General or securities regulatory authority, any self-regulatory organization, or the PCAOB (except in cases where you were an original source of this information as defined in paragraph (b)(4) of this section), and your submission significantly contributed to the success of the action. . . .

Already Under Investigation

The SEC Order found that Claimants provided original information to the SEC that led to the successful enforcement of the covered action. In making that determination, the SEC explained in part that:

FOOTNOTE 3: In making this determination, we apply Exchange Act Rule 21F-4(c)(2) because, at the time Claimants reported their information to the Commission, there was an ongoing investigation by the Other Authority. Although we generally apply the standards set forth under Rule 21F-4(c)(1) where (as was the case in this matter) a whistleblower's information causes us to initiate the investigation that results in the Covered Action, the more demanding standard of Rule 21F-4(c)(2) governs here because, at the time that the Claimants submitted their tip to the Commission, the conduct that was the subject of the Claimants' information was already under investigation by the Other Authority

Temporal Test for Voluntariness

Notwithstanding the finding that Claimants had reported original information, the SEC determined that Claimants did not act voluntarily as set forth under Section 21F-4(a) [Footnotes 6, 7, and 8 not provided]:

because their submission of original information to the Commission was preceded by a related information request from the Other Authority to their employer asking for a response from Claimants.5 In relevant part, Rule 21F-4(a)(1) provides that "[y]our submission of information is made voluntarily . . . if you provide your submission before a request, inquiry, or demand that relates to the subject matter of your submission is directed to you or anyone representing you (such as an attorney)" by the Commission or another designated government or regulatory authority. Rule 21F-4(a) thus establishes a straightforward, temporal test for voluntariness; the whistleblower must come forward before the Commission or other designated authorities seek information from the whistleblower. While we do not treat an information request to an employer as necessarily "directed to" all employees who may possess responsive information, we treat a request to an employer specifically seeking an interview of, or other information from, a particular employee as "directed to" that employee or the employee's representative for purposes of Rule 21F4(a)(1).
= = = = =
Footnote 5: The information request from the Other Authority did not reference Claimants by name but did request a response from the relevant employees -- which Claimants still were as of the date of that information request.

Public-Interest Discretion

The SEC Order found that Claimants had reported original information but not a "voluntary" submission because there had been an extant information request from the Other Authority to Claimants' employer asking for a response from Claimants (not by their names but in their roles as "relevant employees"). That might have been the death knell of the Claimants' request for an award but for the SEC determining that it was in the "public interest" and in furtherance of the protection of investors for the federal regulator to:

exercise our discretionary authority under Section 36(a) of the Exchange Act to waive the "voluntary" requirement of Rule 21F-4(a) in light of the unique facts and circumstances of this case. In particular, we note that: (1) neither Claimant was informed of the request from the Other Authority; (2) Claimants did not learn of the existence of the Other Authority's investigation until several months after they reported their information to the Commission; (3) Claimants' candid discussions [REDACTED] in turn prompted the Other Authority to open its investigation -- thus, Claimants' own remedial efforts, in part, were an indirect cause of the investigation that resulted in the request for information from Claimants; and (4) absent a waiver, Claimants would be subject to undue hardship and unfairness as a result of their efforts in the circumstances described here.
= = = = =
Footnote 9: In assessing the appropriate award amount, Rule 21F-6 provides that the Commission consider: (1) the significance of information provided to the Commission; (2) the assistance provided in the Commission action; (3) 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.

In rendering an Award to the Claimants, the SEC acknowledged the following facts:

[C]laimants undertook significant and timely steps to have the firm remediate the harm caused by the violations, including advocating for full disclosure of the violation and for compensation of harmed investors. We also positively assessed the following facts: Claimants promptly participated in the firm's internal compliance system after learning of the misconduct; Claimants experienced hardships by raising concerns about the violation; Claimants assisted the Commission staff by meeting with them in-person and identifying potential witnesses; and the significant law enforcement interest in deterring violations involving retail investors.

Bill Singer's Comment

As the lawyer who represented the first in-house compliance officer to be awarded an SEC Whistleblower Award (about $1.6 million), I am all too familiar with the frustration of representing a Claimant who goes the extra mile to see that Wall Street is held accountable when it engages in misconduct to the detriment of the investing public and the industry itself.  The SEC's Whistleblower program remains the subject of many complaints about its horrific communication with tipsters and its inexcusable delays in processing WB-APPs and timely paying approved Awards. As such, I remain a vocal critic of the SEC's Whistleblower program -- particularly the inexcusable delays in processing WB-APPs and the untimely payment of ordered Awards. See, for example::

SEC Whistleblower Program Is A Black Hole Of Despair (SEC Public Comment / April 9, 2015) As set forth in part in the Comment:
In light of the need to preserve a client's confidentiality, I am constrained to refer to the informant solely as "the Whistleblower client," and to avoid characterizations or references to the Respondent or the underlying investigation/matter. I will note that the Whistleblower client had no liability or exposure in the underlying matter and the client's cooperation was substantial and material during the investigative phase. 

SIDE BAR: The Whistleblower client's and my experience with the SEC Divisional Staff conducting the investigation was superb. In my three decades of Wall Street experience, I have rarely dealt with more competent and courteous regulators. The difficulties set forth in this article are not about the SEC Divisional Staff, who did the grunt work, but about my dealings with the OWB Staff and the nameless, faceless personages of the OIG. 

At various stages in my representation of the Whistleblower client, I found myself confronted by those timeless gaps in the SEC's Rule 21F noted above. After the publication of the NoCA and my client's timely submission of Form WB-APP, I sought guidance as to how long it would likely take for the issuance of a Preliminary Determination. I asked OWB if they thought it would be days, weeks, months or years. We were essentially told that it would take whatever time it would take and to be patient. 

When the determination was finally rendered, my whistleblower client did not object to the proposed award and waived the right of appeal; notwithstanding, we then went through another waiting game. When we asked OWB to provide us with the date of submission of the Proposed Final Determination to the Commissioners, that was declined -- thus making it impossible for me to calculate when the 30-day review period had expired. 

You may imagine my exasperation when trying to divine the date on which a Proposed Final Determination and an Order would be forthcoming. In response to such queries for guidance, OWB gave polite but essentially non-responsive replies. 

Understand that we are talking about an SEC regulatory matter that has been going on for several years from the date of the cited misconduct through the processing of the WB-APP. The evaluation of my client's eligibility for an award has now taken longer than the investigation by the SEC of the Respondent's misconduct! As set forth in part in the WSJ article:

The petition comes two years after the tipster applied for compensation from the SEC, according to the petition. Lawyers for the whistleblower say two years is unreasonable.

The SEC, which isn't required to act under a certain time frame, declined to comment.

Tipsters have grown frustrated with the length of time it has taken the regulator to make determinations on such awards, which can amount to several million dollars for big cases.

Between 2014 and 2017, the SEC took an average of more than two years to decide if a whistleblower deserved a reward, according to an analysis by The Wall Street Journal. That is more than twice as long as in 2012 and 2013, the early years of the whistleblower program.

Notwithstanding the issues noted above,  I compliment the SEC for its thoughtful analysis and commendable action on behalf of the two Claimants involved in the recent Order. It is comforting to see that when confronted with a Claimant's eligibility for a Whistleblower award that the SEC may over-ride certain rigid statutory definitions and exercise "discretion" to act in the public interest and do justice. I compliment SEC Chair Clayton and his fellow Commissioners for doing the right thing.

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