U.S. Securities and Exchange Commission building in Washington, D.C. (Photo: Mike Scarcella/ALM)
They are called “zombie” whistleblowers—tipsters who came forward to federal regulators before the Wall Street reform laws of 2010 and then return to try to reap the benefits of a bounty program created by the postcrisis reforms.
Those award applications have been dead on arrival, the tips deemed to have come too early to be eligible for an award under rules set by the U.S. Securities and Exchange Commission in the Dodd-Frank Act.
But that hasn’t stopped those whistleblowers from pressing their claims—beyond the SEC—for an award.
The U.S. Court of Appeals for the D.C. Circuit this month was presented a case from a zombie whistleblower who was denied an award for his tip. The case will mark at least the second time a federal appeals court has taken up the dispute. Last year, the circuit court in New York shut down a tipster’s push to get paid.
The whistleblower in Washington—identified as “John Doe,” per the secrecy of whistleblower’s names—filed a petition for review on Dec. 5 that does not give many details about the appeal other than to say the award claim was “timely filed.”
His lawyer, Olimpio Lee Squitieri of the New York firm Squitieri & Fearon, did not respond to requests for comment.
The whistleblower included a copy of the SEC’s denial, which says the tipster based his claim, in part, on information provided before July 21, 2010—the day Dodd-Frank was enacted.
In the denial order, the SEC also said that “none of the original” information provided after Dodd-Frank’s enactment led to the successful enforcement action at issue.
The SEC’s whistleblower office has been widely hailed for encouraging insiders and others with knowledge of misconduct to contact federal regulators. To date, the office has awarded 37 whistleblowers, doling out more than $136 million in bounties.
But the office has drawn scrutiny over the time it takes to process award applications and over its decision to only reward tips filed after the enactment of Dodd-Frank.
In a previous court challenge of a denied whistleblower award, the applicant argued in 2013 that tips predating Dodd-Frank should be eligible. The whistleblower, Larry Stryker, had provided information to the SEC’s Enforcement Division between 2004 and 2009 that helped the agency reach a $19 million settlement with Advanced Technologies Group Ltd. in late 2010.
The U.S. Court of Appeals for the Second Circuit last year upheld the SEC’s denial of an award application.
Stryker argued the SEC had exceeded its authority by disqualifying tips received before Dodd-Frank. That disqualification, he said, was “not included in the explicit Congressional definition of ‘original information.’ ”
Congress provided a safe harbor that allowed tips to be eligible for an award if they came between the enactment of Dodd-Frank and the finalization of the SEC’s rules for the whistleblower program. But it did not specify how the SEC should treat tips that predated Dodd-Frank. The agency, believing the program was designed to incentive new tips rather than reward old ones, disqualified information received before Dodd-Frank.
“The purpose of the program is to encourage whistleblowers to come forward because they can earn awards if they meet certain criteria,” said David Marshall of the whistleblower firm Katz, Marshall & Banks, who was not involved in the Stryker case. “That purpose is not served by awarding people who came forward before there ever was a program.”
David Colapinto, whose firm represented Stryker, said in an interview that the SEC should reward tips that predate Dodd-Frank but helped enforcement actions—like the Advanced Technologies Group settlement—that were resolved after the reform law was adopted.
“If the enforcement action took place before Dodd-Frank was enacted, that’s off the board. But if you’re in a situation where you gave information and they took action after Dodd-Frank, that should be allowed,” said Colapinto, a partner at the whistleblower firm Kohn, Kohn & Colapinto. “They just took a very bright line, requiring the information to be provided to the commission after the enactment of Dodd-Frank.”