An irreverent Wall Street Blog
[In]Securities Guest Blog: Wishin' I Was Stoned by Aegis Frumento Esq
November 7, 2019
Wishin' I Was
Stoned
Well,
I woke up Sunday morning with no words to tell my head it didn't ache. The wine
I had the night before was fine, but
I drank more than I could take. Or could it have been the flu-shot, or the
chasing after news that wasn't fake? Since
I didn't know whose fault it was, I simply chose
to blame the SEC.
And
the SEC Whistleblower Program in particular. I love the Whistleblower Program
when I don't despise it, unless I'm doing both at the same time, which often
happens in dysfunctional relationships.
Late
last week I had a call set up with two enforcement staff attorneys who were
investigating a situation described by a whistleblower client of mine. They had
been working on it since 2017, and we here had spent over $100,000 in legal
time fleshing out the story for them. I was expecting them to ask to speak to
my client again, as they had a couple times before, or perhaps to meet my
client in person. Then Jane Norberg, the head of the Whistleblower Office, got
on the phone. That's seldom good news.
The staff
isn't supposed to comment on pending investigations. As a result, whistleblowers
don't officially learn their tips might win them an award until the SEC posts a
Notice of Covered Action on its website. Affectionately known as a "NoCA," that
tells the world that the SEC has settled or won a case from which it expects to
receive at least $1 million in remedies. NoCAs are posted on all $1
million-plus cases, whether whistleblowers were involved or not. Any
whistleblower who thinks their tip contributed to any case can file a claim for
an award.
Without a NoCA, a whistleblower tip
gets you nothing. Whistleblowers learn of this nothing in two ways. The vast
majority of whistleblower tips (about 90% of them) end up in what Bill Singer has
called (albeit in another context) the Black Hole of Despair See http://www.brokeandbroker.com/2735/sec-oig-owb/. They never pass a preliminary review and never get assigned to an enforcement
staff. They get the silence of the tomb.
But if
enforcement staff is assigned to actively pursue the tip and the
whistleblower personally assists them in the investigation -- well, don't get
your hopes up. Close to 98% of even that elite group also go nowhere. But if
you do have one of those, then you might merit a call from the Head of the
Whistleblower Office -- just to tell you that it's over. It's a more
respectable breakup than being ghosted.
Almost
all our whistleblower clients are (or were) in that elite group -- we make sure
of it by only selecting the best and working the hell out of them. So I have
crossed paths with Jane (and her predecessor Sean McKessy) a few times. I like
her, but she is the Grim Reaper of the whistleblower universe. She is the one
who bears the bad news that despite all your effort, and despite the quality of
the tip, and despite the two years of investigation put in by the enforcement
staff, you're still a loser. She couldn't tell me why, but only referred me to
the SEC's Enforcement Manual sections describing how the SEC determines what
cases to bring. That only tells you the obvious -- that there are more bad
things happening in the industry than the SEC can go after, so choices must be
made, and you don't make them. Such calls always end with a hearty
appreciation, and a "Keep those great tips coming in, and better luck next
time!" But you still end up a loser.
Now, I
don't like losing any more than the next guy. I hung up that call with a damp,
drizzly November in my soul and a splitting headache on Sunday morning. But
what exactly did I lose? It's hard to say I lost the fees I had put into the
matter. That wasn't real money, just time that I probably would have spent
doing something less interesting. And anyway, the experience taught me a lot about
shady shenanigans on esoteric trading desks that I'm sure I can use elsewhere.
Did I lose the multi-million-dollar fees I might have earned from an award? No,
you can't lose what you never had. I lost something more ephemeral -- I lost
the right to fantasize about a win. A promising whistleblower tip became, in an
instant, a lost hope, the root of all depressions.
The
headache's gone now, the funk a fleeting thing. I've studied the whistleblower
program in depth. See https://bit.ly/34Hpyb7 and https://bit.ly/36E8HHU. As a result of that, I know, and I tell
all my whistleblower clients, that filing a tip with the SEC is like holding a
very expensive lottery ticket. If you expect to win, you are delusional. Losing
is the norm. See http://www.brokeandbroker.com/4209/frumento-sec-whistleblower/. You take the loss in stride, pick yourself up and stumble out to meet the day.
If you can't do that, don't deal in whistleblower claims.
And
that poses a conundrum for lawyers representing whistleblowers. To spend
$100,000 in legal fees to properly represent a high-quality whistleblower, so as
to avoid the Black Hole of Despair and get into the hands of the enforcement
staff, is not a big thing. It's less than a month's work spread out over a
couple of years. But if your expected hit ratio is one-in-50 (2% of high-quality
tips), then you need to be prepared to invest $5 million in legal fees to
procure that one win. That means you need one or more awards aggregating about
$20 million just to break even, and no one does this just to break even.
Let's
say you're modest and only want to recover 200% of the legal time invested.
Then you need one or more awards aggregating about $40 million to make the
enterprise worthwhile. Now things get rare. In 2018, by far the most generous
year for whistleblower awards, the SEC awarded $168 million to 13 individuals,
but only one exceeded $40 million (although two others came close at $33
million and $39 million). No single award reached that level in any prior year.
This is especially acute now that the SEC has proposed rules designed to limit the
size of larger awards. See https://www.sec.gov/rules/proposed/2018/34-83557.pdf. The big win you need to make a serious whistleblower practice worthwhile comes
around so rarely that you could spend a lifetime chasing it and never see one. The
large number of comments to the SEC from lawyers criticizing the proposed cap
on high awards reflects this. See https://www.sec.gov/comments/s7-16-18/s71618.htm.
That is why there can be no such thing as a
true "SEC Whistleblower Bar." There simply is not enough money to be made from
whistleblower awards to pay the rent, and anyone who suggests otherwise is just
blowing smoke. All of us who represent SEC whistleblowers as part of a regular
securities practice should take that to heart. Representing whistleblowers is
more a professional hobby than a "practice." We dare not do it for the money. We
do it because the cases are fascinating and the clients sympathetic. We do it
for the thrill of the hunt. We do it because hope springs eternal, because you
never know. In the end, it has to be a labor of love, because we know that no
matter how finely wrought, only a very few whistleblower submissions will ever yield
a profit. All the rest are destined to be the
disappearing dreams of yesterday.
ABOUT THE AUTHOR
Aegis J. FrumentoStern Tannenbaum & Bell
Co-Head, Financial Markets Practice
380 Lexington Avenue
New York, NY 10168
212-792-8979
Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.
Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.
He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.
NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.