December 5, 2022
After a decade of existence, it is time for the United States Securities and Exchange Commission's Office of the Whistleblower to provide timely updates to whistleblowers and their legal counsel after a Form WB-APP is submitted in response to a published Notice of Covered Action.
The federal regulator's lack of timely communication with whistleblowers often devolves into counter-productive hostility that is inappropriately directed at individuals attempting to further investor protection.
From NoCA to Award
When a Securities and Exchange Commission ("SEC" or the "Commission") investigation results in a settlement, the federal regulator posts a Notice of Covered Action ("NoCA"), which invites whistleblowers to submit a Form WB-APP as a means of filing a claim for an award. Once filed, WB-APPs are purportedly reviewed by the SEC's Office of the Whistleblower ("OWB") and then submitted to the Claims Review Staff ("CRS"). From there, the CRS drafts a Preliminary Determination recommending an award or a denial of same, and that recommendation is subsequently presented to the Commission for approval or modification.
Following their filing of WB-APPs, whistleblowers and their legal counsel often ask OWB:
When will the WB-APP be submitted to the CRS?
How long will the CRS take to review the WB-APP?
When will I be advised of the anticipated date of the issuance of the CRS' Preliminary Determination?
How long after the publication of the Order Determining Whistleblower Claims will I be paid?
Note that not a single question above asks "how much" would be awarded. Similarly, the queries do not seek a date-certain but merely reasonable guidance.
Lack of Meaningful Guidance
As set forth on OWB's "Frequently Asked Questions" page at
https://www.sec.gov/whistleblower/frequently-asked-questions#faq-12, not one of the 19 enumerated questions references any timeframes or deadlines imposed upon OWB, the CRS, or the SEC for the processing of a whistleblower's filed WB-APP. In contrast, embedded among the answers to those 19 questions are disclosures about the deadlines that the SEC has imposed upon whistleblowers; for example [Ed: emphasis added]:
14. How do I apply for an award?
Once the case you believe your information led to is posted, you must complete and return Form WB-APP within 90 calendar days to the Office of the Whistleblower via mail to 100 F Street, NE, Mail Stop 5631, Washington DC 20549, or by fax (703) 813-9322. See Rule 21F-10. . . .
. . .
17. Can I appeal the SEC's award decision?
You have two opportunities to appeal the award determination. First, OWB will notify you of the preliminary determination of the SEC's claims review staff to recommend that the SEC either grant or deny your award application, and if granted, the percentage amount of your award. You may request reconsideration of this preliminary determination by submitting your response to OWB within 60 days of the later of (i) the issuance of the preliminary determination or (ii) your receipt of the record that was relied upon in making the preliminary determination, if you requested the record within 30 days of the issuance of the preliminary determination. See Rule 21F-10. Please note there are shorter time periods if your claim was subject to the Preliminary Summary Disposition Process established by new Rule 21F-18. See Rule Amendment FAQ 14.
The claims review staff will consider your response and forward its proposed final determination to the Commission. If the Commission denies your application for an award, you may file an appeal in an appropriate United States Court of Appeals within 30 days of the Commission's final decision being issued. See Rule 21F-13. However, if you are granted an award and the Commission follows the factors described above and the total amount awarded is between 10% and 30% of the monetary sanctions collected in the action, then the Commission's decision is not appealable.
Inexplicably, OWB does not maintain a statistics page on sec.gov addressing the durations of the various filing periods involved after a NoCA is published and a WB-APP is submitted. Similarly, OWB does not affirmatively contact whistleblowers and their counsel with any substantive processing updates, and, worse, if asked to provide updates by whistleblowers and their counsel, OWB refuses to offer meaningful guidance. Accordingly, many whistleblowers feel as if they are viewed by OWB as criminal defendants or administrative-proceeding respondents.
OWB Refuses to Provide Reasonable Guidance
Among the most troubling aspects of OWB's refusal to provide meaningful guidance is that Staff appears coached or counseled to misstate the law pertaining to the confidentiality provisions of Dodd Frank: namely:
15 U.S. Code § 78u-6 - Securities whistleblower incentives and protection
(h) Protection of whistleblowers
. . .
(A ) In general
Except as provided in subparagraphs (B) and (C), the Commission and any officer or employee of the Commission shall not disclose any information, including information provided by a whistleblower to the Commission, which could reasonably be expected to reveal the identity of a whistleblower, except in accordance with the provisions of section 552a of title 5, unless and until required to be disclosed to a defendant or respondent in connection with a public proceeding instituted by the Commission or any entity described in subparagraph (C). For purposes of section 552 of title 5, this paragraph shall be considered a statute described in subsection (b)(3)(B) of such section.
To the extent that OWB Staff interprets (h)(2)(A) as requiring that the SEC shall not provide "guidance" as to where in the SEC's pipeline a Form WB-APP has come to rest, that interpretation is not set forth or implied by the "Protection of whistleblowers" provision. When the request for guidance is coming from the whistleblower (or legal counsel), it is absurd to pretend that a response to such sources by OWB "could reasonably be expected to reveal the identity of a whistleblower," as that very party is making the request.
OWB Processing Delays
As widely reported in the media and easily found online, numerous complaints have been made by whistleblowers and their counsel about the SEC's WB-APP processing delays after a NoCA has been filed. That is the timeframe at issue. Not the triaging of initial tips. Not the time required for a diligent investigation. Not the period necessary to negotiate a settlement. The complaints at issue in this letter are solely focused on what transpires after the filing of the NoCA, at which time appeals are waived and fines either paid or in the process of payment.
As the SEC Whistleblower Program racks up more complaints about delays in rendering awards, a disincentive is placed in the path of many would-be whistleblowers. If the post-NoCA process is too onerous, the SEC will inevitably deter many from coming forward. See, for example:
"Whistleblower Challenges SEC Over Delay on Award Decision / Tipsters have grown frustrated with the length of time it has taken the regulator to determine whether a tip warrants a reward" (Wall Street Journal by Kristin Broughton / April 30, 2019)
"SEC Whistleblower Payouts Slow Amid Deluge of Reward Seekers / Agency proposes ways to speed up decisions that now take more than two years to make" (Wall Street Journal by Dave Michaels / August 5, 2018)
"SEC Backlog Delays Whistleblower Awards / Claimants are often kept waiting for a decision, data show" (Wall Street Journal by Rachel Louise Ensign and Jean Eaglesham / May 4, 2015)
The March 2022 $14 Million Whistleblower Award
Despite the SEC's public-relations efforts to burnish the tarnished image of its Whistleblower Program, things are not progressing as smoothly as we are asked to believe, see, for example:
As reported in the March 14, 2022, BrokeAndBroker.com Blog cited above, without admitting or denying the findings in an SEC Complaint, a Company and its Chief Executive Officer consented to the entry of findings in an SEC Order, which, inter alia, imposed financial penalties on the two respondents. In response to Notices of Covered Action filed for the settled matter, Claimant 1 and Claimant 2 filed timely WB-APPs. The CRS issued a Preliminary Determination recommending a denial of claims to Claimant 1 and Claimant 2 (and further denying the claims of two other Claimants, who had filed a joint claim). Order Determining Whistleblower Award Claims ('34 Act Release No. 34-94398; Whistleblower Award Proc. File No. 2022-38) (the "SEC WB Order")
"SEC Claims Review Staff Tortures Whistleblower With Denial Of Eventual $14 Million Award" (BrokeAndBroker.com Blog / March 14, 2022)
Although, the CRS seemed on sound footing as to Claimant 2's failure to file a requisite TCR, the recommended denial of Claimant 1's WB-APP was shocking. As enunciated in part in the Commission's rationale for granting an Award to Claimant 1 despite CRS's recommended denial:
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.
at Pages 5 - 6 of the SEC WB Order
Reduced to basics, the CRS proposed to deny an Award to Claimant 1 despite building a multi-million settlement on his original information. The CRS' justification for its proposed denial was that Claimant 1 had filed a TCR after publishing an extensive, online report. Notably, the CRS did not minimize the importance of Claimant 1's published report; however, the CRS alleged that Claimant failed to comply with a non-extant rule (albeit one which was subsequently codified). Twice, CRS recommended that Claimant 1 be paid $0, but, thankfully, the Commission did the right thing and declined to follow the CRS' denial recommendation -- and authorized a $14 million award. The final result, however, does not rectify the Commission's flawed process but only calls attention to the absurdity of the situation.
My Whistleblower Client / 2015 Award
As to my personal familiarity with the issues noted above, I am the lawyer who represented the first in-house compliance officer to be granted a Dodd-Frank Whistleblower Award (approximately $1.6 million)/ My client was only the 16th whistleblower to receive an award since the program's 2011 inception:
In the Matter of the Claim for Award (SEC Order Determining Whistleblower Claim; '34 Act Rel. No. 74781; Whistleblower Award Proc. File-No. 2015-2 / April 22, 2015). https://www.sec.gov/rules/other/2015/34-74781.pdf
"SEC Announces Million-Dollar Whistleblower Award to Compliance Officer" (SEC Press Release 2015-73 / April 22, 2015) at https://www.sec.gov/news/pressrelease/2015-73.html.
OIG's 2022 Investigation of TCRs
On August 29, 2022, the SEC's Office of Inspector General ("OIG") published a summary of an in-house investigation, which resulted in troubling findings and allegations about misconduct involving how the federal regulator handled its Tips, Complaints, and Referral ("TCR") program. Notwithstanding the dramatic nature of OIG's investigation and findings, the SEC failed to post anything about it on it Press Releases page; buried elsewhere on the SEC's website without much fanfare is "SEC Investigative Summary" (August 29, 2022)
OIG Found Former SEC Ombudsman Lied
The August 29th summary discloses that OIG found that the SEC's former Ombudsman/Office of the Ombudsman lied when responding to OIG about Form TCR practices. Further, the former Ombudsman was found to have approved the submission to OIG of an "inaccurate and misleading" spreadsheet, which falsely claimed that 10 of 14 TCRs originated from the Office of the Ombudsman, when, in fact, those matters did not originate from that office. Worse, OIG found that various matters referred to the Office of Ombudsman, which should prompted the generation of a Form TCR did not -- and investors with tips were essentially told to "enter their own TCRs." In jaw-dropping-fashion, OIG found that in 2017, 2018, 2019, and 2020 Annual Reports to Congress, the Ombudsman falsely depicted hypotheticals or composite descriptions as actual "vignettes." It was only in response to a notice from OIG that the Ombudsman remediated the characterization of the vignettes in the 2021 Annual Report.
The folks at OIG did their best to blunt the impact of their findings and allegations. What a clever bit of drafting to continue to blame everything on the "former Ombudsman." Amazingly, the online summary never names the name of the "former Ombudsman." That's somewhat odd considering the SEC had posted yet another Press Release several years ago: "Tracey L. McNeil Named as SEC's First Ombudsman" (SEC Press Release 2014-186 / September 5, 2014)"
https://www.sec.gov/news/press-release/2014-186 Inexplicably, in keeping its focus on the former SEC Ombudsman, OIG never blames the Office of the Ombudsman, or, for the matter, the apparent missing-in-action system of oversight and management at the highest levels of the Commission itself.
What's set out in the OIG report is just another sordid example of piss-poor management whereby large government bureaucracies are run by folks who lack the ability to effectively manage their agencies. For much of 2017 to 2020, the SEC was chaired by Trump appointee Jay Clayton. Since April 17, 2021, the SEC has been chaired by Biden appointee Gary Gensler. So, if we're divvying up who gets blamed for what, Clayton is on the hook for the cited misconduct at the SEC from 2017 through 2020; and Gensler is on the hook since April 17, 2021. The allegations of misconduct at the SEC's Office of the Ombudsman from 2017 through 2020 are disconcerting enough, however, in 2022, we now wrestle with SEC Chair Gary Gensler's absolute lack of disclosure to Congress about OIG's investigative findings during his:
Amazin' ain't it?
The SEC managed to post on its website two separate releases about Chair Gensler testimony -- the key distinction in the two release being between his mere "Testimony" and his "Oral Testimony." To be clear, there is not a single word in Chair Gensler's published September 15th testimonies before the Senate Committee about the troubling assertions in OIG's August 29th "Investigative Summary." Gensler's omission is all the more discomforting in light of the very pointed and specific finding by OIG that the former SEC Ombudsman had presented misleading vignettes in four Annual Reports to the Congress.
As Bloomberg's John Holland so succinctly encapsulated the issue:
The SEC official charged with helping the public navigate the agency's complex system lied to investigators, added misleading information in reports to Congress, and didn't log hundreds of entries into the agency's tip program, according to the summary of an inspector general's report.
Suspension (Not Firing) of SEC Inspector General
The government investigation into Hoecker was led from 2017 to 2019 by the Integrity Committee, a federal panel that examines allegations of wrongdoing against inspectors general, after two whistleblowers alleged that he conducted a substandard investigation. Inspectors general are government watchdogs who guard against the misuse of taxpayer dollars.
The previously unreported documents show that the SEC, which received the Integrity Committee's report on Hoecker in 2019, also concluded wrongdoing by Hoecker. He failed "to avoid the appearance of" bias and exercised "poor judgment when contacting a witness during an active investigation."
The SEC concluded that Hoecker failed "to report allegations of improper conduct pursuant to the SEC's policy of preventing harassment," according to the documents, which include Hoecker's time-sheets.
While the Integrity Committee recommended the SEC consider firing Hoecker, its Commissioners voted instead on May 8 to suspend him without pay from May 24-June 2, 2020, the records show. At the time, Hoecker earned nearly $277,000 a year.
So . . . let's see if we all got this.
On August 29, 2022, the SEC's Office of Inspector General issued an "Investigative Summary," in which it found that the SEC's former Ombudsman lied to OIG's auditors and lied about her handling of tips from potential whistleblowers and lied in four years of annual reports submitted to Congress. Should we take the OIG investigation's findings with several large bags of salt because OIG itself was found to have been led by a now-former Inspector General, who the Integrity Committed recommend be fired (but, instead, the Commission merely suspended him without pay)? In its findings, the Integrity Committee found that OIG's Hoecker had failed to avoid the appearance of bias and exercised poor judgment when contacting a witness during an active investigation, and had failed to report allegations of improper conduct. Talk about the OIG pot calling the Ombudsman's kettle black! Irony piled on irony steeped in irony!
The recent revelations of SEC's incompetency, ineptitude, and misconduct are vindication for years of unanswered complaints that I filed with the SEC about the SEC's Whistleblower Program. Way back in 2014, I alerted the SEC to a number of troubling aspects of its Whistleblower Program: "Comment filed with SEC/ From: Bill Singer" (September 12, 2018)
As I stated, in part, in my public comment:
As to the source of the underlying facts raised in my 2018 SEC Comment above, they were set out in "SEC Whistleblower Program Is A Black Hole Of Despair" (BrokeAndBroker.com Blog, April 9, 2015)
[I]n November 2014, I filed a complaint with the SEC's Officer of Inspector General ("OIG") and requested an investigation of what I deemed OWB's dilatory conduct. In submitting my complaint, I was required to participate in a substantial telephone interview by the third-party service provider that the SEC retains for such purposes. During that interview, I provided the sum and substance of my complaint. I then awaited some meaningful follow-up. And I waited. And I still wait.
In my futile attempts to communicate with OIG, I have referenced the April 9th BrokeAndBroker.com Blog article, which details my exasperation with both OWB and OIG. In response, OIG referred me back to OWB! Additionally, OIG persists in asking me to provide information that I had previously submitted -- but OIG will not acknowledge that it has either misplaced or lost that information and I will not cooperate further without such an admission or explanation to the contrary. Ten months have passed since the filing of my complaint with OIG and there has be no effort to contact me to discuss my concerns.
Keep in mind that my client was finally awarded about $1.6 million after the publication of the April 9th BrokeAndBroker.com Blog. It's one thing to write me off as disgruntled because my client's claim was denied but it's quite another thing when you're trying to marginalize the grievances of someone who provided substantial assistance to the SEC and eventually gained a sizable award. The system is broken and needs to be fixed.
http://www.brokeandbroker.com/2735/sec-oig-owb/ In my opening remarks in the April 2015 Blog, I noted that:
As part of my law practice, I represent whistleblowers, and for several years, I have been representing one such client before the Securities and Exchange Commission ("SEC") and dealing with the federal regulator's Office of the Whistleblower ("OWB"). Frankly, the experience has been incredibly frustrating. I simply cannot persuade the OWB that it needs to adjust its mind-set and understand that my client is not an adversary or a defendant/respondent in a criminal/regulatory case. If OWB's attitude doesn't change, it will undermine the SEC's Whistleblower Program and dissuade informants from coming forward and deter lawyers from representing those individuals on a contingency basis.
As a former regulator with two Wall Street self-regulatory organizations, I fully understand and respect the need for prosecutors and regulators to scrupulously maintain whatever confidentiality is mandated for investigations and trials/hearings. Since I represent individuals and entities that are often industry defendants/respondents and I also represent defrauded public customers, I am particularly vested in ensuring that the regulatory and criminal justice processes remain legal and ethical. I understand the rules of the game and I honor the rulebook. It is in that spirit that I urge the SEC to implement more deadlines within its Rule 21F. Also, I urge the SEC to investigate its Office of the Inspector General ("OIG") and determine whether the use of third-party service providers is appropriate for the intake of complaints directed to that office.
In 2014, I had filed a Complaint with OIG about the dilatory practices of the Office of the Whistleblower. What ensued was a despicable lack of professionalism from the SEC's various staff in handling the intake of the complaint and taking steps to investigate the allegations, as noted in the 2015 BrokeAndBroker.com Blog:
The OIG uses a curious process for the intake of complaints about the SEC and its divisions and staff. You can utilize an online filings system or a toll-free hotline telephone number. Apparently both are serviced by third-party service provider. I opted to file my grievance via telephone. The telephone call in November 2014 was protracted, during which time I was asked a series of questions (likely from a script) and, in response, I provided names, dates, rules, and events in support of my complaint. I know that OIG got the complaint because they provided me with a Report number and sent to me this email on November 20, 2014: . . .
. . .
Despite having cooperated fully with the intake procedures that OIG has implemented, it seems that OIG either lost, destroyed, or misplaced the notes of my November 2014 complaint. Inexplicably, in response to complaints about OWB's policies and practices, OIG waited four months before referring me back to OWB. . . .
By way of update, it's now December 2022 and I am still waiting for any meaningful follow-up from OIG to my 2014 complaint.
For more background on the SEC's mismanagement of claims for Whistleblower Awards:
Despite the ongoing failures of the SEC's Whistleblower Program, the unsettling findings about the SEC's former Ombudsman, and the troubling history of the SEC's former Inspector General, SEC Chair Gensler just didn't see the need to offer even a word about any of the aforementioned in his published Senate testimony. Moreover, the word "whistleblower" never even made it into the two published versions of Gensler's Senate testimony. What Chair Gensler did manage to work into his testimony was this:
While the Division is doing more with less, we do need more resources. For example, more cases are being litigated and going to trial. The SEC has tried the same number of cases to verdict in federal courts in FY22 (14) as we did in the prior three fiscal years combined.
Further, in FY21, we received 46,000 tips, complaints, and referrals from members of the public, up from about 16,000 five years earlier.
Doing more with less? As in what the rest of us do every single day? Y'all understand the meaning of "inflation?"
Gensler touts the SEC's 2022 trial-to-verdict docket of 14 cases as equaling the total for three prior years combined. Of course, a fairer disclosure might have allowed that those former three years of 2020, 2021, and 2022 spanned the Covid pandemic. You remember that, right? Folks didn't go to work. Courts were closed. Continuances and adjournments became the default. Life as we know it came to a standstill.
Statement of Acting Chair Allison Herren Lee on Contingent Settlement Offers (SEC Release)
As BrokeAndBroker.com and Securities Industry Commentator readers know, I detest the SEC's unprincipled history of sanctioning corporate fraudsters in one breath, and then, in the next breath, granting them exemptions from "Bad Boy" provisions. In recent months, when asked about who I would like to see installed as the next SEC Chair, my list of candidates tended to include Preet Bharara, Gary Gensler, and Kara Stein. As such, I welcomed Gensler's selection. That being said, former SEC Commissioner Kara Stein would have been a wonderful choice because of her staunch opposition to the SEC's policy of granting knee-jerk-like exemptions to a slew of corporate miscreants . . .
Finally, as to Gensler noting in his Senate testimony that the SEC received "46,000 tips, complaints, and referrals," one has to wonder about the impact of the former Ombudsman's mishandling of tips, complaints, and referrals on that number. Oh, and let's not forget the Office of the Whistleblower's own management issues negatively impacted those numbers. And perhaps we might speculate as to whether a wave of appeals will soon flood the federal courts when folks who were denied SEC Whistleblower Awards digest the OIG report.
At a minimum, the SEC must implement an OWB Statistics Page disclosing the amount of time that has lapsed between the filing of a WB-APP and:
- the submission of the WB-APP to the CRS;
- the issuance of a Preliminary Determination by the CRS; and
- the awarding or denial by SEC
The above three statistics should be presented for trailing 12 months and trailing 36 months, which will guide whistleblowers as to the likely processing times of their claims and will provide the SEC with a management tool by which to gauge if whistleblower claims are being timely processed. Additionally, the OWB Statistics Page should provide 12 months and 36 months trailing data for the numbers of WB-APP claims denied and for claims resulting in awards.
The SEC must re-educate its Staff to appreciate that whistleblowers, by and large, complement the federal regulator's antifraud and investor protection mandates -- the men and women providing the SEC with tips should not be treated as defendants or respondents but as valued sources of information. Finally, it's time for Congress to revisit the Dodd Frank enabling legislation and force the SEC to implement more aggressive WB-APP processing timeframes.