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Financial Services Law Insights and Observations

2nd Circuit denies three petitioners seeking whistleblower awards for SEC settlement

Courts SEC Whistleblower Second Circuit Appellate

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On November 8, the U.S. Court of Appeals for the Second Circuit denied petitions from three whistleblowers seeking awards following a $55 million settlement between the SEC and a global financial institution, which the SEC previously denied. According to the opinion, multiple individuals disclosed information to the SEC during an investigation into the financial institution’s financial statements. In 2015, the SEC reached a settlement with the institution, and nine whistleblower claimants filed applications to receive awards based on the information they provided. The SEC granted the applications for two claimants and denied the rest. The three individuals involved in this action were denied the awards because the SEC concluded that the individuals “did not provide ‘original information that led to a successful enforcement action,’” as required by the Securities and Exchange Act’s whistleblower provisions. Specifically, for the two named individuals, the SEC determined that it had already received the information they provided through an individual known as “Claimant 2,” who had previously submitted an expert report prepared by the two individuals to the SEC. The appellate court agreed with the determination made by the SEC, concluding that “their [] submission did not significantly contribute to the success of the [] action; Claimant 2ʹs submissions did.” The appellate court noted that the individual’s expert report did not qualify for Rule 21F‐4’s “original source exception,” which was designed to treat information submitted to another federal agency as though it had been submitted to the SEC directly.

As for the third, unnamed individual, the appellate court also denied the petition, concluding that the unnamed individual’s interpretation of the whistleblower program would “disincentivise whistleblowers from curating their submissions.” Specifically, the SEC asserted that the unnamed individual “‘appeared to be very disjointed and had difficulty articulating credible and coherent information concerning any potential violation of the federal securities laws’” and “‘brought with him to the meeting a wet brown paper bag containing what he claimed to be evidence.’” The SEC further noted that the documents were “jumbled and disorganized” and ultimately used similar information brought by a subsequent whistleblower. The appellate court noted that “[a] whistleblower might still be rewarded for being the first to bring incriminating information to the SECʹs attention, but only if that information is contained in a credible, and ultimately useful submission.”

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