October 2, 2014
Wayward Whistleblowers
Call me naive, but I was surprised and disappointed to read in this blog that, not only had a dispute arisen among three “joint” whistleblowers about splitting the proceeds of an SEC whistleblower award, but that the dispute among two of the three has now manifested itself in the form of litigation.
As noted, the complaint alleges that three people jointly developed information about a fraud committed in conjunction with an investment scheme. As the story goes, they initially planned to apply for a whistleblower award with the SEC on behalf of an entity in which they all had an interest. However, upon learning that the SEC rules require whistleblower award applications be submitted by individuals (not companies or other entities), they allegedly agreed that one of them (the defendant) would submit the application in his name, with the understanding that – upon receipt of any whistleblower award – all three would share in the proceeds.
To make a long story short, the SEC granted a $14.7 million award, which the defendant then refused to share with the other joint whistleblowers. The defendant allegedly settled with one of the two other whistleblowers, and the other then filed this suit. In response, the defendant filed this motion for a more definite statement or dismissal, which indicates:
“Plaintiff’s Complaint is an unintelligible assortment of confusing statements. While ostensibly bringing a claim for breach of contract, Plaintiff dedicates his complaint to unrelated allegations. The claims sounds like the claims of co-workers who are trying to claim a portion of a co-workers lottery winnings because they work together.”
What next? Particularly given this litigation; the recent, very arguably excessive $30 million award to a foreign whistleblower; and my own in-house experience (wherein whistleblowers played a memorable role), I am inclined to believe that the UK’s assessment and rejection of the US whistleblower bounty scheme, which I blogged about previously, has some merit.
See also this recent Speechly Bircham memo about the SEC’s $30 million award, and the UK’s contrasting approach.
What Does It Take to Incentivize a Whistleblower?
As noted in this Venable alert, now outgoing Attorney General Eric Holder is seeking an increase to the $1.6 million cap on whistleblower awards available for financial fraud under FIRREA (Financial Institutions Reform, Recovery and Enforcement Act) – akin to those available under the False Claims Act (i.e., 25-30% of the amount the government recovers). FIRREA was rarely used until the aftermath of the 2008 financial crisis, when it was used for recent, significant actions against, e.g., JP Morgan, Citigroup and Bank of America.
Holder apparently believes that the $1.6 million cap isn’t sufficient to incentivize would-be whistleblowers to come forward – thereby tempering the DOJ’s ability to learn about, investigate and stop misconduct before it evolves into a crisis. It’s difficult to know whether that’s the case given FIRREA’s historically low profile (and, accordingly, perhaps, low level of awareness), and the fact that, according to this WSJ article, there have been no known whisteblower awards to date made under FIRREA.
The article notes this reaction by former DOJ lawyer Andrew Schilling to the suggested increase:
Mr. Schilling said the attorney general’s proposal “raises the question whether the Firrea bounties are too low or whether those others [e.g., False Claims Act, Dodd-Frank Act] are too high. A lot of people would say you don’t need a $500 million reward to incentivize someone to come forward. You’d have to worry about the credibility of a whistleblower who would come forward only if they’re offered $50 million.”
As the WSJ article indicates, senior DOJ officials Marshall Miller and Leslie Caldwell also made notable speeches the same day as Attorney General Holder’s (but to different lawyer audiences) encouraging whistleblowing on white-collar crime. See also this DealBook post, which addresses the DOJ’s focus in these speeches on pursuing individual – not just corporate – culpability.
Transcript: “Cybersecurity Role-Play: What to Do & Who Does What, When”
We have posted the transcript for the recent webcast: “Cybersecurity Role-Play: What to Do & Who Does What, When.”
– by Randi Val Morrison