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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.”
On November 4, the SEC announced the filing of an amended complaint in an action against an online auction portal and its CEO (collectively, “defendants”), along with the CEO’s wife as a relief defendant. The original complaint, filed in May, alleged that defendants operated a $23 million fraudulent securities offering and misappropriated investor proceeds. The amended complaint adds, among other things, a new count for “Impeding: Rule 21F-17 of the Exchange Act,” alleging that the defendants took actions to impede individuals from communicating with the SEC and other agencies regarding misconduct at the company by conditioning the return of investor money on signing agreements with confidentiality clauses purportedly prohibiting the reporting of potential securities law violations to law enforcement agencies. The SEC seeks preliminary and permanent injunctions, disgorgement plus prejudgment interest, and penalties.
On October 7, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a whistleblower’s reverse-false-claims action because it was barred by the False Claims Act’s (FCA) public-disclosure provision and the alleged scheme was not plead with sufficient detail. The relator, a former fraud investigator for the Department of Veterans Affairs Office of the Inspector General, alleged that the 15 financial institution defendants “avoided their regulatory obligation to return government-benefit payments they received for beneficiaries they knew to be deceased.” According to the relator, the defendants must have known of the beneficiary deaths because the Social Security Administration sends death notification entries to all receiving depository financial institutions. However, the district court determined that defendants provided documents showing the information had already been publicly disclosed and the relator was not the original source of the information (which would have been required to maintain a claim with respect to information that has already been publicly disclosed) because he obtained the information through his employment as a fraud investigator. As such, the court permanently dismissed the complaint on the grounds that the relator relied on public disclosures, and that the complaint failed to plead the allegations with sufficient detail.
On appeal, the 5th Circuit agreed that the complaint could not survive the FCA’s public disclosure bar, explaining that the public-disclosure bar is met if the following elements apply: (i) the disclosure is public; (ii) the disclosure contains “‘substantially the same allegations’” as in the complaint; and (ii) the relator is not the “‘original source’” of the information. In addition, the appellate court agreed that the complaint lacked sufficient factual matter to satisfy federal rules of civil procedure, and concluded that further amendments would be futile because there are no claims left to amend.
On October 2, New York’s Office of the Attorney General launched an online, open-source whistleblower submission system designed to enable witnesses to report information without compromising their identity. The N.Y.A.G. Whistleblower Portal allows whistleblowers to securely and anonymously submit information, while protecting individuals’ identity, location, and information provided. Whistleblowers will also be able to engage in two-way anonymous communications with the attorney general’s office through the portal. According to the press release, the attorney general’s office “is the first governmental agency in the United States to offer whistleblowers the capability to directly transmit documents and send and receive communications electronically without their identity being traceable.”
On September 27, the Commodity Futures Trading Commission (CFTC) announced a whistleblower award of approximately $7 million to an individual who reported information that led to a successful Commodity Exchange Act (CEA) enforcement action. The associated order notes that five claimants submitted whistleblower award applications to the CFTC in response to the covered action, but the CFTC provided the award only to claimant one, as that individual voluntarily provided the original information to the Commission. The order does not provide any other significant details about the information provided or the related enforcement action. The CFTC has awarded over $90 million to whistleblowers since the enactment of the Whistleblower Program under the Dodd-Frank Act, and their information has led to more than $730 million in sanctions to date.
On September 12, the U.S. Court of Appeals for the Third Circuit held that the False Claims Act (FCA) does not guarantee relators an automatic in-person hearing before a case can be dismissed. According to the opinion, a relator filed a qui tam action against a Delaware non-profit organization, asserting claims on behalf of the United States and the State of Delaware under the FCA and the Delaware False Claims Act (DFCA), alleging the organization received funding from state and federal governments by misrepresenting material information. Delaware and the federal government declined to intervene and, three years later, both moved to dismiss the case. Both governments argued that the relator’s allegations were “factually incorrect and legally insufficient.” The district court granted the motions without conducting an in-person hearing. The relator appealed, arguing that the FCA guarantees an automatic in-person hearing before a case can be dismissed.
On appeal, the 3rd Circuit disagreed with the relator. The appellate court noted that the government “has an interest in minimizing unnecessary or burdensome litigation costs,” and, once the government moved to dismiss, the burden shifted to the relator to prove that dismissal would be “fraudulent, arbitrary and capricious, or illegal.” The appellate court concluded that the relator failed to do so, and rejected his argument that he should have been allowed to introduce evidence during a hearing to satisfy his burden. While the FCA and the DFCA state that a relator has an “‘opportunity for a hearing’ when the government moves to dismiss,” it is the relator’s responsibility to avail himself or herself of this opportunity, according to the appellate court. The court concluded that the FCA and DFCA do not guarantee an automatic in-person hearing and, because the relator failed to request a hearing and his motions failed to prove the dismissal was fraudulent, arbitrary, capricious, or illegal, the district court did not err in dismissing the action.
On August 29, the SEC announced that it had awarded more than $1.8 million to a whistleblower who provided “critically important” information and assistance to a “programmatically significant enforcement action.” The SEC’s order noted that without the whistleblower’s tip, the violations would have been difficult to identify because the misconduct happened abroad. The order does not provide any additional details regarding the whistleblower or the company involved in the enforcement action. Since the program’s inception in 2012, the SEC has awarded approximately $387 million to 66 whistleblowers.
On July 23, the SEC announced a $500,000 award to an overseas whistleblower whose “expeditious reporting” on an important witness assisted the Commission in bringing a successful enforcement action. The SEC’s order noted that the whistleblower’s tip was the first information that the Commission received on the charged misconduct, and that without the information—which was substantiated by other witnesses—the violations would have been difficult to identify and prove partly because the misconduct happened abroad. The order does not provide any additional details regarding the whistleblower or the company involved in the enforcement action. Since the program’s inception in 2012, the SEC has awarded approximately $385 million to 65 whistleblowers.
On July 11, the SEC responded to a petition asking the U.S. Court of Appeals for the District of Columbia to compel a whistleblower award determination from the agency. In April 2017, the “John Doe” petitioner had applied for an SEC whistleblower award, claiming that beginning in May 2011 and continuing for the next several years, he voluntarily provided original information to the Commission that led to the SEC and DOJ’s $519 million resolution of foreign bribery claims against a multinational pharmaceutical company (previously reported here). Under the SEC Whistleblower Program established by the Dodd-Frank Act, the petitioner could be eligible for up to 30% of that $519 million recovery. In April 2019, after the SEC still had not issued a preliminary determination in connection with his application, the petitioner sought relief in court. The petitioner argued that it was a “simple task” to evaluate his claim, and the agency’s two-year delay was “unreasonable.”
In its response, the SEC argued that the petitioner “greatly misapprehends the work, effort, and time involved in reviewing whistleblower claims,” “overlooks the substantial complexities involved in adjudicating claims regarding the matter,” and “ignores that the SEC is processing a voluminous number of other whistleblower applications that require the attention of the Commission in addition to his claim.”
For additional information about SEC whistleblower awards and procedures under the SEC Whistleblower Program, see the article published here by Buckley LLP attorneys.
On June 24, the Commodity Futures Trading Commission (CFTC) announced a whistleblower award of approximately $2.5 million to an individual who reported information that led to a successful enforcement action. The CFTC noted that the award was reduced because of the individual’s unreasonable delay in reporting the violations to the CFTC. CFTC officials emphasized that while there may be reasons to delay reporting, “[this] case illustrates the importance of reporting violations to the CFTC as soon as reasonably possible. Reporting early lessens the harm violators can inflict on the public and hastens our investigations to bring the culprits to justice.” The associated order does not provide details of the information provided or the related enforcement action. Since 2014, the CFTC has awarded over $90 million to whistleblowers, whose information has led to more than $730 million in sanctions.
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