The U.S. Securities and Exchange Commission (SEC) issued an order in August denying a whistleblower award to an individual who provided the agency with evidence that a defendant in a previously filed SEC enforcement matter misrepresented their finances in order to evade sanctions. The putative whistleblower was denied an award even though their information helped the SEC recover funds that could be used to compensate harmed investors. The denial was based on a narrow interpretation of the SEC’s whistleblower rules that poses significant risks to the SEC’s ability to collect sanctions from wrongdoers for the benefit of harmed investors.
In the underlying enforcement matter, the defendant was found liable for securities laws violations and ordered to pay monetary sanctions including disgorgement of ill-gotten gains. After the defendant asserted their inability to pay based on their financial condition, however, the court waived the requirement to pay disgorgement and declined to impose a civil penalty. It appears that five years later, a whistleblower, who had not provided information in connection with the underlying enforcement matter, provided evidence to the SEC that the defendant’s assertions about their financial condition had been false. The SEC included the whistleblower’s information in its post-judgment supplemental briefing, and the court subsequently issued an Amended Judgment in which it reinstated the disgorgement and imposed a civil penalty on the defendant.
The whistleblower applied for an award pursuant to the rules of the SEC’s whistleblower program, which provide that a whistleblower who voluntarily provides the SEC with original information that leads to the successful enforcement of an action is eligible for an award of 10-30% of the amounts recovered. The SEC’s Claims Review Staff (CRS) issued a preliminary decision denying the whistleblower’s application on the basis of an exceptionally narrow reading of those eligibility requirements. Specifically, the CRS’ preliminary decision noted that the Amended Judgment “did not resolve any new charges or award any new relief for the charges already asserted,” but instead only reinstated sanctions that had been waived or not imposed based on the defendant’s purported financial condition. Therefore, the CRS found, the whistleblower’s information “concerned only the collectability of relief” and “had no bearing on whether that relief was warranted in its own right,” and the whistleblower therefore did not qualify for an award. The whistleblower did not contest the decision, which, pursuant to the whistleblower program rules, therefore became a final order of the SEC itself.
The SEC’s decision to deny an award in this matter appears at odds with both the facts and the law. As an initial matter, according to the SEC’s order, no civil penalty was imposed in the original judgment, and was only added in the Amended Judgment after the SEC’s post-judgment briefing brought the whistleblower’s information to the court’s attention. Whatever the reason for not imposing a civil penalty initially, the inclusion of the civil penalty in the Amended Judgment appears to be new relief to which the SEC was entitled on the basis of the whistleblower’s information. More broadly, the SEC’s order offers no explanation for why information that enables the SEC to actually collect money for the benefit of harmed investors does not “lead[] to the successful enforcement” of the underlying matter. In other contexts, the SEC undoubtedly considers the actual recovery of funds on behalf of victims to be a measure of success for its Enforcement program.
The SEC’s decision to deny an award in this matter bears consequences for future efforts to recover assets on behalf of harmed investors. If whistleblowers who provide information about defendants’ efforts to hide assets and evade sanctions are deemed ineligible for an award, those whistleblowers will be disincentivized from taking the risks of reporting that information to the SEC. As a result, the SEC will be denied the information it needs to pursue and obtain monetary sanctions from those who have already been found to have violated the securities laws and victimized investors.
The recent decision appears at odds with the very underpinnings of the SEC Whistleblower Program’s mission. The Whistleblower Program aims to “motivate those with inside knowledge to come forward and assist the Government.” The whistleblower in this case came forward and helped the government uncover an apparent effort to mislead the court and evade accountability, but was denied an award on the basis of an arguably narrow and technical reading of the relevant rules. The result appears inconsistent with the SEC commitment to issue an award “whenever a whistleblower… tip leads the SEC to collect sanctions and penalties.”
While the whistleblower in this matter chose not to contest the denial to the full SEC, another whistleblower denied for similar reasons may choose to do so. If they do, for the reasons discussed above, they would have powerful legal and policy-based arguments for the SEC to take a different approach.