Perhaps concerned that 15% of zero is still zero, the U.S. Securities and Exchange Commission (SEC) recently announced that the second payout under its whistleblower reward program would actually come from recoveries first made by the Department of Justice in a parallel prosecution. Three whistleblowers are to receive a total of 15% of the money that the SEC collects from its enforcement action against a sham hedge fund that defrauded investors of $2.7 million, for a possible grand total of $405,000 in incentives or bounties.
But—while it has judgments against the firm and its CEO to pay approximately $7.5 million in disgorgement and penalties, and obtained an asset freeze on their assets—the SEC has not collected anything to date. Instead, the Department of Justice (DOJ) in a related action collected roughly $800,000 from the firm’s CEO. And in a move that will surprise some, the whistleblowers will be able to apply to the SEC for their whistleblower award based on the amounts collected by the Department of Justice.
Who’s Got the Money?
The SEC whistleblower payments created under Dodd-Frank, allow for monetary awards to individuals who voluntarily provide original information that leads to successful SEC enforcement actions resulting in monetary sanctions over $1,000,000–and certain successful related actions. Awards are in the range of 10% to 30% of the monetary sanctions collected.
What has not been focused on before is the potential for whistleblower to be paid for “successful related actions.”
Connecting the Dots
In its own inimitable way, Dodd-Frank defines “related actions” as:
The term “related action”, when used with respect to any judicial or administrative action brought by the Commission under the securities laws, means any judicial or administrative action brought by an entity described in subclauses (I) through (IV) of subsection (h)(2)(D)(i) that is based upon the original information provided by a whistleblower pursuant to subsection (a) that led to the successful enforcement of the Commission action.
These other relevant entities which can bring a successful action resulting in SEC whistleblower “incentives” are:
(h) (D) (i) —
(I) the Attorney General of the United States;
(II) an appropriate regulatory authority;
(III) a self-regulatory organization;
(IV) a State attorney general in connection with any criminal investigation.
Those used to navigating the thicket of securities laws, rules and regulations, will, of course, find DOJ actions included in (II), “an appropriate regulatory authority.”
Four, No, Make That Three Musketeers, Err, Whistleblowers
While the SEC’s order does not identify the whistleblowers in this case, it does state that two individuals “provided information that prompted the SEC to open an investigation and stop the scheme before more investors were harmed.” A third whistleblower confirmed much of the information the others provided and identified key witnesses.
A fourth individual sought a whistleblower award but was turned down because the SEC determined that the information provided didn’t lead to or significantly contribute to its enforcement action, as required. It is possible that this was a timing issue: that the first three simply beat number four to the punch.
“I See Money in Your Future…”
There will surely be more to come. The SEC is likely aware that, as time goes on and the pot of rewards increases, incentives paid under this provision of Dodd-Frank could help the SEC public’s image as an effective regulator.