Court confirms SEC denial of whistleblower award to two parties based on the SEC’s interpretation of providing “original” information that contributed to the successful prosecution of an action, as required under Dodd-Frank and SEC rules.
Kilgour vs. SEC, Nos. 18-1124 and 18-1127 (2nd Cir., 11/8/19).
This case stems from the request of several whistleblowers to receive money from the SEC for information they provided that ultimately led to a more than $55 million settlement with Deutsche Bank AG (“DB”). The issue concerns how DB accounted for certain collateralized debt obligations during the financial crisis. According to the SEC, in late 2008 and early 2009, “DB began overvaluing” certain collateralized debt obligations that were supposed to provide credit protection. This resulted in DB “misstating in their financial records” the “gap risk” – which is “the risk that the market value of its credit protection could exceed the available collateral posted by the sellers.” According to the SEC, this “overvaluation was reflected in misstatements in DB’s financial statements.”
In June 2010, a DB employee (“Claimant 1”) met with the SEC’s Enforcement Division and provided information about DB’s overstating assets to “improve the appearance of DB’s financial performance….” As a result of this meeting, the SEC’s Enforcement Division opened an investigation into DB. Then, in September 2010, one of the Petitioners, listed as John Doe (“Doe”) in the complaint, met with the SEC’s Complex Financial Instruments Unit (“CFIU”) concerning DB. The CFIU said Doe’s efforts were not credible and, as a result, they did not forward his information to the Enforcement team investigating DB. Over the next year, according to the SEC, another whistleblower appeared (“Claimant 2”) and “began providing the DB team with information ... invaluable to their investigation of DB.”
Then, in July 2011, “Doe sent another email to the CFIU staff, which they forwarded to the DB team” the following month. This was the first time the SEC’s team investigating DB had seen Doe’s information and, by that time, Doe’s information contained no new information for the SEC that had not been provided by other whistleblowers. While the SEC continued its investigation, Claimant 2 hired an expert firm to produce a report that detailed the issue; that, according to the SEC, was “absolutely critical to the investigation.” With the permission of Claimant 2, the two experts (“Kilgour” and “Williams”) who authored the report filed their own whistleblower forms, seeking an award from any settlement.
The SEC ultimately settled with DB for $55 million. In total, nine whistleblowers came forward seeking an award from the settlement under Dodd-Frank. Pursuant to SEC rules, the SEC’s Claims Review Staff reviewed all nine whistleblower claims and made a “preliminary determination” recommending awards be issued to Claimants 1 and 2, but no one else. Doe, Kilgour and Williams challenged that determination, arguing that each provided “original information” that was helpful to the SEC and should, therefore, receive an award. More specifically, Doe argued that he provided original and useful information to the SEC’s CFIU and they failed to forward that to the enforcement group investigating DB in a timely manner. SEC, he maintained, should be “equitably estopped” from claiming it did not rely on Doe’s information.
The Court first reasons that equitable estoppel is not available to Doe, as the Supreme Court has ruled a claimant “may not assert a monetary claim of estoppel against the government” in this situation. Second, the Court finds that, even if Doe’s claim were allowable, it would be denied as, under the SEC’s interpretations of its rules for paying whistleblowers, a claimant cannot be paid unless the whistleblower’s submission contributes to the successful action. Since Doe’s submission did not contribute to the successful recovery against DB, the Court affirms the SEC’s denial of a whistleblower award for him.
In relation to Kilgour and Williams, there was no question the information provided in the expert report they authored did provide information helpful to the action. However, Kilgour and Williams did not file a whistleblower claim until after Claimant 2 had submitted that information to the SEC and it had formed part of the basis of Claimant 2’s whistleblower award. Thus, when Kilgour’s and Williams’ claim was filed, the information was already available to the SEC and the claims forms filed with the SEC at that later date therefore did not “significantly contribute to the success of the DB action; Claimant 2’s submission did.” As a result, the Court also confirms the SEC’s denial of a whistleblower award for Kilgour and Williams.
(SOLA Ref. No. 2020-01-07)
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