SEC Claims Review Staff Tortures Whistleblower With Denial of Eventual $14 Million Award

Claimant 1 stated in his/her award application that he/she had published an online report exposing the fraud committed by the Company and the CEO in REDACTED, and that this report, along with the subsequent assistance he/she provided to the Commission's investigative staff caused the Commission to discover the existence of the fraud and contributed to the success of the Covered Action. Claimant 1 contended that he/she satisfied the requirement of reporting this information to the Commission by "properly execut[ing] and fil[ing] [his/her] Form TCR on REDACTED," which was more than four years after Claimant 1 had released the report about the Company and two months after OWB posted the Notice of Covered Action for this matter.  

Claimant 2, in contrast to Claimant 1, did not submit a tip to the Commission. Rather,  Claimant 2 stated that he/she "was a principal author of [a] report . . . released publicly on REDACTED . . . [containing] information and analysis [that] became the cornerstone of the Commission's case" in the Covered Action. This is the same online report that Claimant 1 published, as discussed above.

Claimant 1 emphasizes that there was no requirement under the whistleblower rules at the time he/she submitted his/her Form TCR that required an individual to provide his or her original information first through a Form TCR and that this requirement was only proposed for the first time when the Commission issued its proposal to amend the whistleblower rules in 2018. Further, Claimant 1 notes that, in its release proposing the rule amendments, the Commission needed, in the Commission's words, to " 'clarify" that "the first time an individual provides information to the Commission that the individual will rely upon as a basis for claiming an award, the individual must provide that information in accordance with the procedures specified in Rules 21F-9(a) and (b)." 

[H]e/she, in fact, emailed an attorney in the Commission's Division of Enforcement (the "First Enforcement Attorney") with his/her allegations just three days after the online report was published and before the staff reached out to him/her to request the information. Claimant 1 further notes that his/her attorney followed-up with the First Enforcement Attorney just a few weeks later, and that the First Enforcement Attorney asked that Claimant 1 send him data supporting the allegations. Before Claimant 1 was able to transmit his/her supporting information to the First Enforcement Attorney, he/she was contacted by a different Enforcement attorney, who had read the online report, on REDACTED, and subsequently sent the materials to that attorney. This second Enforcement attorney was, in fact, one of the attorneys assigned to the Enforcement team that was investigating the Company and later recommended the Commission bring the enforcement action (the "Enforcement Investigative Attorney"). Claimant 1 argues that his/her information did lead to the success of the Covered Action because the online report caused the opening of the investigation and he/she provided this information to the Commission on "multiple" occasions. Finally, Claimant 1 contends that, even if he/she failed to comply with certain procedural requirements, the Commission should exercise its discretion under Rule 21F-8(a) to excuse Claimant 1 from these requirements because Claimant 1 "provided the type of extraordinary assistance that the [whistleblower] program was designed to reward."

online report was "the cornerstone" of the Commission's case in the Covered Action. Claimant 2 does not dispute that he/she did not file a Form TCR as required by Rule 21F-9; rather Claimant 2 contends that the Commission was "directly notified" of his/her online report via "1) iContact email push notification, 2) tweets from [Claimant 2's] account, [and] 3) significant media coverage of the [r]eport." Claimant 2 further argues that the Commission should exercise its discretionary authority under Rule 21F-8(a) to excuse any procedural omissions Claimant 2 may have committed in this matter. 

[C]laimant 2 did not submit any information concerning the Company to the Commission at any point prior to the settled  REDACTED proceeding or even prior to Claimant 2's award application on Form WB-APP. The definition of "whistleblower" enacted by Congress in Exchange Act Section 21F(a)(6) requires that an individual provide information "to the Commission" to qualify as a whistleblower, and the Supreme Court has described this definitional requirement as "clear and conclusive." We have never before granted an exemption from this requirement, and we decline Claimant 2's invitation to do so now.

In rejecting Claimant 2's award claim, we do not intend to diminish Claimant 2's role in investigating the Company and in publicly exposing the wrongdoing at the Company through writing and publishing the online report. Nor do we wish to discourage others from undertaking similar efforts. However, our whistleblower program is designed "to motivate those with inside or special knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud." To that end, Section 21F and our whistleblower rules unambiguously require individuals to provide their original information directly to the Commission and in the manner prescribed by the rules, if they wish to pursue a whistleblower award. 

Claimant 1 emailed a copy of his/her report to the First Enforcement Attorney, who, as noted, was not a member of the Covered Action investigative team, in REDACTED , just three days after the report was released online and a month before the Commission opened its investigation of the Company.  Claimant 1 did not, however, submit a Form TCR until four years later, in REDACTED, which was REDACTED months after the Covered Action had concluded. The requirement of submitting a tip in the prescribed manner on Form TCR or through the Commission's TCR System is not a mere formality but, rather, is critical to the trackability, management, and reliability of tips. The programmatic purposes of requiring whistleblowers to submit their information on Form TCR or through the online TCR portal include: allowing the Commission to promptly determine whether an individual who submits information is subject to heightened whistleblower confidentiality protections; helping the staff efficiently process the information and other documentation provided by the individual and assess its potential credibility; and assisting the Commission in eventually evaluating the individual's potential entitlement to an award. Also, by submitting a tip on Form TCR, the submitter declares under penalty of perjury that the information is true and correct to the best of the submitter's knowledge and belief. A tip that bypasses the TCR System may not contain the sworn declaration under penalty of perjury as to the veracity of the information. The fact that Claimant 1 ultimately submitted a Form TCR years after the online report and Claimant 1's email to the First Enforcement Attorney does not serve the programmatic goals of ensuring that information is properly tracked, reviewed and assessed. 

In 2020, the Commission adopted a limited exception to the Rule 21F-9(a) and (b) TCR filing requirement. New Rule 21F-9(e) clarifies that claimants must comply with the procedures for submitting information described in Rules 21F-9(a) and (b) within 30 days of providing the Commission with the original information to be relied upon as a basis for claiming an award. In addition, it provides for an automatic waiver of the TCR filing requirement where a claimant can show that he or she complied with the submission requirements of the rule within 30 days of "first obtaining actual or constructive notice about those requirements (or 30 days from the date you retain counsel to represent you in connection with your submission of original information, whichever occurs first);" and "[t]he Commission can readily develop an administrative record that unambiguously demonstrates that you would otherwise qualify for an award." Claimant 1 is not eligible for the automatic waiver under Rule 21F-9(e) because he/she was represented by counsel when he/she sent the email to the First Enforcement Attorney in and did not submit a Form TCR within 30 days thereafter. 

Nevertheless, we have determined that it would be in the public interest and consistent with the protection of investors for the Commission to exercise our discretionary authority under Section 36(a) of the Exchange Act to waive the TCR filing requirements of Rules 21F-9(a) and (b) in light of the unusual facts and circumstances present here. Specifically, Claimant 1: (1) emailed a copy of his/her online report to the First Enforcement Attorney just three days after posting it on the Internet and Claimant 1's attorney followed-up with the First Enforcement Attorney a few weeks later; (2) the information in Claimant 1's online report was credible and of high quality and caused Enforcement staff to open an investigation that ultimately resulted in the successful Covered Action and returned millions of dollars to harmed investors; (3) Claimant 1  submitted his/her tip just REDACTED after the whistleblower rules went into effect, when the filing requirements were still unfamiliar to many individuals; and (4) the Enforcement Investigative Attorney provided warnings to Claimant 1 that there could be criminal penalties for providing false information to the Enforcement staff.

The record demonstrates that Claimant 1 voluntarily provided original information to the Commission that led to the successful enforcement of the Covered Action. Claimant 1 voluntarily provided the First Enforcement Attorney with a copy of the report three days after posting it on the Internet and before receiving any request from the Commission. While the investigation was opened as a result of the Enforcement Investigative Attorney discovering the report through his own Internet search, and not as a result of receiving Claimant 1's submission to the First Enforcement Attorney, Claimant 1 was an original source of the report. The investigation was opened based on the information in the report, which contained analysis derived from a large number of publicly-available and non-public sources, and which alleged that REDACTED. This allegation ended up being the basis of the charges that the Commission ultimately brought against the Company and its CEO. We thus conclude that Claimant 1 provided information that led to the successful enforcement of the Covered Action by providing the Commission with original information that was sufficiently specific, credible, and timely to cause the staff to open its investigation and that the Commission brought the Covered Action based on conduct that was the subject of Claimant 1's information. 

Applying the award criteria in Rule 21F-6 of the Securities Exchange Act of 1934 to the *** specific facts and circumstances here, we have determined to grant Claimant 1 an award of of the monetary sanctions collected in the Covered Action. In reaching this determination, we positively assessed the following facts: (i) Claimant 1, an outsider of the Company, was expeditious in reporting the information to the Commission; (ii) Claimant's information was significant as it alerted the staff to the ongoing securities violations; (iii) Claimant's prompt reporting to the Commission allowed the Commission to stop an ongoing fraud and ultimately to return millions of dollars to harmed investors; and (iv) the charges brought by the Commission bear a close nexus to the information provided by Claimant.

While the investigation was opened based in large part on Claimant 1's research and analysis, as summarized in Claimant 1's online report, investigative staff independently obtained key evidence on the REDACTED and REDACTED underpinning the violations from other sources. Thus, although Claimant 1 was responsive to the staff's requests for additional information, Claimant 1 was not in a position to provide continuing helpful information and assistance during the investigation.

• Whistleblower
• Office of the Whistleblower
• Claims Review Staff
• CRS
• Whistleblower
• Form TCR
• Form WB-APP. Dodd Frank
• Original Information
• Public Interest
• BrokeAndBroker
• Bill Singer