Identities of SEC Whistleblower and Respondent Bank Outed

November 12, 2020

Psst . . . do ya wanna know a secret? Okay but you gotta promise not to tell. There's this guy who says that he blew the whistle on a bank and he says that he's entitled to a share of something like $50 million. We're not supposed to know the Claimant's or the bank's name. It's the law. On the other hand, somehow, I happen to know his name and that of the bank. How? Well, that's one helluva a story. Read on.

Required Non-Disclosure

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a whistleblower is entitled to confidentiality and non-disclosure of his/her identity to the public. As set forth in Section 240.21F-7: Confidentiality of submission:

(a) Section 21F(h)(2) of the Exchange Act (15 U.S.C. 78u-6(h)(2)) requires that the Commission not disclose information that could reasonably be expected to reveal the identity of a whistleblower, except that the Commission may disclose such information in the following circumstances: 

(1) When disclosure is required to a defendant or respondent in connection with a federal court or administrative action that the Commission files or in another public action or proceeding that is filed by an authority to which we provide the information, as described below; 

(2) When the Commission determines that it is necessary to accomplish the purposes of the Exchange Act (15 U.S.C. 78a) and to protect investors, it may provide your information to the Department of Justice, an appropriate regulatory authority, a self regulatory organization, a state attorney general in connection with a criminal investigation, any appropriate state regulatory authority, the Public Company Accounting Oversight Board, or foreign securities and law enforcement authorities. Each of these entities other than foreign securities and law enforcement authorities is subject to the confidentiality requirements set forth in Section 21F(h) of the Exchange Act (15 U.S.C. 78u-6(h)). The Commission will determine what assurances of confidentiality it deems appropriate in providing such information to foreign securities and law enforcement authorities. 

(3) The Commission may make disclosures in accordance with the Privacy Act of 1974 (5 U.S.C. 552a). 

(b) You may submit information to the Commission anonymously. If you do so, however, you must also do the following:

(1) You must have an attorney represent you in connection with both your submission of information and your claim for an award, and your attorney's name and contact information must be provided to the Commission at the time you submit your information; 

(2) You and your attorney must follow the procedures set forth in § 240.21F-9 of this chapter for submitting original information anonymously; and 

(3) Before the Commission will pay any award to you, you must disclose your identity to the Commission and your identity must be verified by the Commission as set forth in § 240.21F-10 of this chapter. 

So . . . the gist of Dodd Frank is that the SEC is required to "not disclose information that could reasonably be expected to reveal the identity of a whistleblower." Sure, we can all see how a core aspect of any whistleblower program would be to protect the identity of the whistleblower. 

SEC Awards $50 Million to Whistleblower
In the Matter of the Claim for Award in Connection with Notice of Covered Action [REDACTED] (Order Determining Whistleblower Award Claim, '34 Act Rel. No. 89002, Whistleblower Award Proc. File No. 2020-20), the SEC awarded about $50 million to an individual whistleblower, which is the largest amount awarded to an individual under the Dodd-Frank program. The Claims Review Staff ("CRS") issued a Preliminary Determination recommending the payout to Claimant 1 but recommending the denial of an award to Claimant 2, who alleged that Claimant 1 filed a WB-APP (the application for an Award) "for both of them, as there was no space for them to both sign." Moreover, Claimant 2 argued that the joint filing was purportedly necessitated in part because Claimant" Claimant 2 does not have the resources, such as a computer or internet access, to monitor the SEC's website for the postings of Notices of Covered Action. . ." Unfortunately for Claimant 2, the SEC found that "there is no evidence in the record to support a finding that Claimant 2 was a participant in any manner in Claimant 1's tip . . ."

So . . . Claimant 1 had a lovely $50 million payday but, sadly, Claimant 2 was denied so much as a penny. Interesting argument Claimant 2 had made: He said that Claimant 1 supposed filed the WB-APP for both of them. Okay . . . wow, talk about misplaced trust! In any event, the SEC did its job under Dodd-Frank and protected the identities of both Claimant 1 and Claimant 2. If you read the published Order Determining Whistleblower Award Claim, you will note that it is filled with deletions of identifying names and information, all of which are replaced with "Redacted." The names of the two Claimants are disclosed only as "Redacted." The number of the Covered Action is "Redacted." We don't know the name of the Respondent targeted by the whistleblowers or subject to the Covered Action or any filed WB-APP. Like I said, it looks like the SEC did its job under Dodd-Frank when it came to keeping secrets.

SEC Order Denying Stay

In the Matter of Richard J. Herber (Order Denying Stay, '34 Act Rel. No. 90388, Whistleblower Award Proc. File No. 2020-20 / November 10, 2020), the SEC's Order of Denial clearly references "Claimant 2" by name -- not only in the caption but throughout the published document. Pointedly, the Order informs us in part that:

Claimant Richard J. Herber moves for a stay of the Commission's Order Determining Whistleblower Award Claim (the "Order")pending resolution of his appeal to the U.S. Court of Appeals for the Seventh Circuit. 2 That Order denied Herber's whistleblower award claim and granted the award claim of another claimant. 3  

= = = = =
Footnote 1: Order Determining Whistleblower Award Claim, Exchange Act Release No. 89002, 2020 WL 3030497 (June 4, 2020). 

Footnote 2: Petition for Review, Richard J. Herber v. SEC, No. 20-2174 (7th Cir. July 2, 2020) (Doc. No. 1-1). 

Footnote 3: 2020 WL 3030497, at *1. The Order denied the award claim submitted by Herber as "Claimant 2" and granted the claim of another individual as "Claimant 1" to protect the confidentiality of both claimants. Herber has since appealed in his own name and thus has waived confidentiality. 

In denying Herber's Motion to Stay, the SEC notes that Herber was subject to a [Ed: footnotes omitted]:

traditional, four-factor standard-namely, "(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies." Because the first two factors are the most critical, an applicant's failure to demonstrate the requisite likelihood of success or irreparable harm ordinarily will be dispositive of the stay inquiry. 

Herber makes no attempt to establish that a stay is justified under any of these factors but simply requests "that no money or award be paid to [the other, successful claimant] in this matter until my Petition for Review is completely heard and final judgment determined by the Court of Appeals." We therefore conclude that Herber has not carried his burden on the stay factors. 

Moreover, our whistleblower rules already prevent the payment of any whistleblower award in this matter until "[t]he completion of the appeals process for all whistleblower awards claims arising from" the covered action. As a result, a stay is unwarranted because there is no possibility that Herber will suffer irreparable injury absent a stay.

Who's Richard Herber, you may ask. 

What does Richard Herber have to do with "SEC Awards Record Payout of Nearly $50 Million to Whistleblower / Whistleblower Program Reaches $500 Million in Total Awards" or In the Matter of the Claim for Award in Connection with Notice of Covered Action [REDACTED] (Order Determining Whistleblower Award Claim)? 

For starters, note that  the Whistleblower Award referenced in these two SEC documents involves '34 Act Release No. 89002:

In the Matter of the Claim for Award in Connection with Notice of Covered Action [REDACTED] (Order Determining Whistleblower Award Claim, '34 Act Rel. No. 89002, Whistleblower Award Proc. File No. 2020-20)

Next, note that same '34 Act Release is referenced in Footnote 1 of  In the Matter of Richard J. Herber (Order Denying Stay, '34 Act Re. No. 90388, Whistleblower Award Proc. File No. 2020-20 / November 10, 2020) :

Footnote 1: Order Determining Whistleblower Award Claim, Exchange Act Release No. 89002, 2020 WL 3030497 (June 4, 2020). 

Oh my, it seems that the SEC's Cone of Silence isn't working all that well. 

Apparently, Herber was Claimant 2, and he was aggrieved by the SEC denial of his claim in the above-cited $50 million whistleblower award. As a result, Herber filed an appeal with the United States Court of Appeals for the Seventh Circuit ("7Cir"), and, in so doing, outed himself. Let's all be on the same page about that fact: Herber blew his cover in his court filings. I am NOT blaming the SEC for that. On the other hand, let's also note that Herber filed "pro se," so, you know, I'm sort of wondering whether anyone advised him to request that the case be sealed or that some form of protective order be issued to ensure his continued confidentiality -- which, admittedly, he may not care about protecting at this point. Keeping in mind the dictates of Dodd-Frank's confidentiality provisions, however, shouldn't the SEC have stepped in and done some damage control? After all, the SEC had gone to great pains to redact Herber's name from its own docket. Further, in having outed his identity, Herber may have narrowed the circle of possibilities as to the identity of Claimant 1. Given the issues noted, doesn't the SEC have some obligation to ask 7Cir to redact the record so that references to "Herber" are printed only as "Claimant 2" or "REDACTED"? For all I know, that may well have happened, and this could be a case of me not knowing what I don't know. 

Claimant 1 Also Victimized by Delay

Notwithstanding the need to ensure that Herber has full Due Process when it comes to arguing for his alleged portion of a multi-million-dollar Whistleblower Award, there is the offsetting need to ensure that Clamant 1 is timely paid. The delays caused by Herber's seeking to appeal the SEC's denial of his Award are not inconsequential. Surely, Claimant 1 is eager to collect the $50 million bounty; however, SEC Rule § 240.21F-14(c)(2) prohibits the payment of any whistleblower award until the appeals process for all whistleblower awards claims is completed. Unfortunately for Claimant 1, on October 29, 2020, 7Cir granted Herber's Motion for Enlargement of Time to File Briefs and set a due date for his brief by December 14, 2020; for the SEC's brief by January 13, 2021, and for Herber's reply brief by February 3, 2021.

7Cir Petition for Review

As was referenced in the SEC Order Denying Stay, Herber "outed" himself by placing his name on his Petition for Review of the SEC's Order. On the other hand, we also have the SEC itself engaging in questionable conduct, as evidenced by its disclosures in Richard J. Herber, Petitioner, v. Securities and Exchange Commission, Respondent (Motion of the Securities and Exchange Commission for Summary Affirmance, United States Court of Appeals for the Seventh Circuit, No. 20-2174 / August 20, 2020)  

In the SEC's Motion, the federal regulator identifies "Richard J. Herber" by name -- which raises the question as to whether the SEC should have moved to seal portions of the file referencing Herber by name. Pointedly, consider that the SEC is clearly aware of the minefield into which it has been summoned, as evident from Footnote 1:

"A___" refers to the relevant record documents in the appendix to this motion. The record documents have been redacted to the extent that they contain information that could reasonably be expected to reveal the identity of the other individual whose whistleblower award claim was decided in the same order of the Commission. See 15 U.S.C. § 78u-6(h)(2)(A). The redactions do not remove information essential to the Court's consideration of Herber's petition. 

The SEC Outs the Bank of New York Mellon

I am NOT downplaying the difficulty presented to the SEC by Herber's actions. It's quite the damned-if-you-do-damned-if-you-don't challenge. Frankly, what the hell do we want from the SEC when Herber outed himself as Claimant 2 through his Petition? On the other hand, Herber is proceeding in a pro se capacity, which should have prompted some officer of the court to raise the issue of confidentiality with him -- which, for all I know, someone did. I am not criticizing anyone's conduct here because I'm not quite sure myself what should or should not have been done. Taking things further into the legal minefield, the SEC's Motion discloses the name of the Respondent against which it approved the award to Claimant 1 but denied to Claimant 2: "The Bank of New York Mellon":

II. The Commission's proceeding against The Bank of New York Mellon

On June 13, 2016, the Commission issued an order instituting a settled administrative proceeding against The Bank of New York Mellon. Bank of New York Mellon, Investment Company Act of 1940 Release No. 32151, 2016 WL 3345651 (June 13, 2016). In its order, the Commission alleged that from at least 2000 through at least August 2011, The Bank of New York Mellon and its predecessors (the "Bank") misled certain of its custodial clients, including certain registered investment company customers, by representing that foreign exchange execution would be provided according to "best execution standards" and at "best rates," when in fact the Bank priced these transactions near the end of the trading day or session at or near the worst interbank rates reported during that day or session. Id. at *1. This resulted in substantial revenues to the Bank based on the difference between the rates that the Bank assigned to its clients and the rates that it obtained on its own behalf. Id. Moreover, the Bank failed to disclose either the time of the transactions or the manner of pricing in the trade confirmations and transaction reports it provided to these clients. Id. at *2. To settle the Commission's proceeding, the Bank agreed, among other things, to pay roughly $133 million in disgorgement plus prejudgment interest, to be deemed satisfied by the Bank's payment of an equivalent amount in settlement of related actions brought by the U.S. Department of Justice and the New Case: 20-2174 Document: 7 Filed: 08/20/2020 Pages: 114 6 York Attorney General. Id. at *6. The Bank also agreed to pay the Commission a civil penalty of $30 million. Id.6 

III. Herber's whistleblower award claim

On July 29, 2016, the Commission's Office of the Whistleblower published Notice of Covered Action 2016-86 concerning the Bank of New York Mellon proceeding on the Commission's public website and invited claimants to submit whistleblower award applications based on that proceeding within 90 days, by October 27, 2016. A1-3. The Office of the Whistleblower received Herber's award claim for Notice of Covered Action 2016-86 nearly ten months after that deadline, on August 23, 2017. A35 ¶7. Herber later submitted an amended application that also claimed an award in connection with the related actions brought by the U.S. Department of Justice and the New York Attorney General. A5-22. In his application, Herber admitted that he did "not remember if [he] filed a whistleblower complaint with the SEC," but he asserted that he had provided information concerning the Bank to the U.S. Attorney's Office for the Southern District of New York. A16. . . .

at Page 6 of the SEC Motion

Bill Singer's Comment

I am perplexed. Simply stated, I'm dazed and confused. Dodd-Frank provides for confidentiality. The SEC tends to follow that proscription with zeal. Virtually all public, published SEC whistleblower documents are peppered with "Redacted." We don't know who did what. We don't know who the Respondents are. We don't know who the Claimants are. Most of the time, we don't know the percentage of the Award as related to the fines collected. All of that subterfuge has a purpose and point. It's to protect the integrity of the SEC's whistleblower program. As such, how the hell am I supposed to comprehend coming upon public, published documents that disclose the name of a previously unidentified "Claimant 2," and the number of the Covered Action, and the name of the very Respondent in the SEC's regulatory action (the Bank of New York Mellon)?  Frankly, either someone dropped the ball and the SEC needs to investigate the issues noted and plug up its leaky protocol; or, in the alternative, if everything that transpired fully comports with Dodd-Frank and the SEC's policies, then something needs to be amended in terms of the law and/or the SEC's rules.