Second Circuit Affords SEC Broad Discretion In Whistleblower Award Decisions

After Deutsche Bank agreed to a $55 million settlement with the SEC in 2015, two whistleblowers were awarded more than $8 million each. Three individuals who were denied awards appealed to the U.S. Court of Appeals for the Second Circuit. On November 8, 2019, the Second Circuit upheld the SEC’s determination that the submissions by these three whistleblowers did not “significantly contribute” to the SEC enforcement action. Kilgour v. SEC, Nos. 18-1124 and 1127 (2nd Cir. Nov. 8, 2019). Although arising from unusual circumstances, this ruling drives home the fact that the SEC has broad discretion when making whistleblower awards, including the discretion to disregard submissions not presented clearly and persuasively.

Whistleblower award claims can sometimes follow twisting paths, as this case well illustrates. Two of those challenging the SEC denial were consultants who assisted one of the successful whistleblowers, Eric Ben-Artzi, by preparing an expert report analyzing Deutsche Bank’s securities violations. Their expert report was submitted to the SEC on behalf of Ben-Artzi and was crucial to the successful enforcement action against Deutsche Bank.

Consultants would ordinarily be paid by the client, possibly out of any monetary award. However, in this case Ben-Artzi declined to accept the SEC award, as a protest against the SEC’s decision not to pursue senior bank executives. (Another factor may have been that pursuant to a state divorce proceeding, half of the award would have gone to Ben-Artzi’s ex-wife). But while the investigation was still on-going, Ben-Artzi had authorized the consultants to separately submit the same report on their own behalf, as whistleblowers themselves, and they did so. In 2017 the SEC denied the consultants’ application for an award and they appealed.

This may have seemed like a strong case for the consultants, whose report was admittedly very helpful to the SEC. But the Second Circuit deferred to the SEC’s narrow reading of Rule 240.21F-4(c)(2), which provides that to be eligible for an award the whistleblower’s “submission” must have significantly contributed to the SEC action. In the Kilgour decision the court concluded that it was reasonable for the SEC to find that the submission made by the consultants on their own behalf did not significantly contribute to the enforcement action because the same report had already been provided as part of Ben-Artzi’s disclosure. In short, the SEC, and ultimately the Second Circuit, focused not on whether the consultants’ “information” contributed to the positive outcome, but on whether the particular “submission” by the consultants contributed to that outcome. Because the submission in the consultants’ names came after the submission in Ben Artzi’s name, the court accepted the SEC’s conclusion that the consultants’ submission did not contribute to the positive outcome.

The SEC’s interpretation may seem technical and small-minded, especially because the agency was happy to make use of the consultants’ report. But the SEC was influenced by significant programmatic concerns, i.e., the SEC is not interested in having consultants, experts, attorneys, and others who have assisted whistleblowers in making submissions subsequently attempt to qualify as whistleblowers themselves, at least when the submissions in their own names offer the SEC no new information. As stated in the SEC’s denial decision, “we do not perceive any programmatic benefit from permitting . . . hired experts to come forward separately as the original source” of a whistleblower’s disclosure. Securities Exchange Act Rel. No. 82181 (Nov. 30, 2017) at 12. From this perspective, the SEC’s decision was an effort to limit the awards program to “true” whistleblowers.

The third appellant raised a different but equally unusual issue. This anonymous whistleblower, referred to only as “John Doe,” made an early whistleblower submission regarding the Deutsche Bank violations and was interviewed by attorneys in one section of the SEC’s Enforcement Division. Those attorneys concluded that Doe’s presentations were disjointed and unfocused (noting that he carried a “wet brown paper bag” said to contain evidence) and that he was “not a credible source of information.” As a result, they did not forward his submission to the team investigating Deutsche Bank. Doe subsequently sent more information to the SEC, some of which reached the team investigating Deutsche Bank, and he met with that team. But any credible information submitted by Doe at these subsequent times had by then already become available to the SEC from other sources. Ultimately the SEC denied Doe’s award application.

Doe’s primary argument on appeal was that even if his initial written and oral submissions were disorganized and difficult to understand, they contained some of the same information that was eventually gathered elsewhere by the SEC and used against Deutsche Bank. On that basis he argued that he had provided valuable information, regardless of the form in which it was submitted. As stated by the Second Circuit, Doe argued that “[a]ll a whistleblower must do to be entitled to an award . . . is give the SEC some useful information first, in any form, no matter how impenetrable.” The court found no merit in that argument, believing that it would “disincentivize whistleblowers from curating their submissions.” Again relying on the Rule 240.21F-4(c)(2) requirement that the specific “submission” must have contributed to the successful outcome of the SEC action, the court held that to be eligible for an award, a whistleblower’s information must be packaged in “a credible, and ultimately useful submission.” Because Doe’s other arguments were likewise unpersuasive, Doe’s request to overturn the SEC decision was denied.

Kilgour offers at least three important insights. First, when considering whistleblower awards, the SEC will attribute a submission only to the party or parties making the submission. An early submission will not be attributed to a consultant or expert who worked on that submission but was not identified as the whistleblower. Second, a key question in award decisions is whether the specific submission at issue contributed to the successful SEC action. It is not enough that a submission contained the same information the SEC used in the enforcement action if the specific submission at issue was not actually relied on by the SEC. Finally, during the investigative process and again when considering whistleblower awards, the SEC may disregard submissions that are unclear, disorganized, insufficiently documented, or otherwise unconvincing. Whistleblowers hoping to qualify for an award should make every effort (including seeking professional assistance where appropriate) to ensure that their submissions are clear, well-organized, as complete as possible, and persuasive.

Whistleblower Aid

The foregoing discussion is provided by Whistleblower Aid for general information purposes and is not intended to be, and should not be, taken as legal advice. For guidance on how to contact Whistleblower Aid, see https://whistlebloweraid.org/contact#whistleblower-contact.