August 9, 2022

2nd Cir. Limits Reach of Dodd-Frank Whistleblower Incentives

A recent 2nd Circuit decision pared back the scope of the claims for which compensation may be received under Dodd Frank’s whistleblower provisions. Here’s the intro from this Sheppard Mullin blog on the decision:

In Hong v. SEC, No. 21-529 (2d Cir. July 21, 2022), the Court held that a person who provides the Securities and Exchange Commission (“SEC”) with information about potential securities laws violations is entitled to receive a whistleblower award under Section 21F of the Securities Exchange Act (15 U.S.C. § 78u-6) if the SEC itself brings a qualifying action, but not when the SEC shares the whistleblower’s information to other agencies who then bring an action in partial reliance upon it.

In this case, the whistleblower tipped the SEC off to some alleged shenanigans involving his employer bank’s portfolio of residential mortgage-backed securities.  The SEC didn’t take action but shared his information with the DOJ & the Federal Housing Finance Agency.  Ultimately, the bank settled with the agencies for $10 billion, so you can understand why this guy was hoping for a big payday.

However, the SEC contended that it wasn’t on the hook for whistleblower claims resulting from actions by other agencies.  It said that in order for actions by other agencies to qualify as “related actions” under Section 21F, there must also be an underlying SEC action.  The 2nd Circuit applied Chevron deference to the SEC’s interpretation of the scope of Dodd-Frank’s whistleblower provisions & ultimately ruled in the agency’s favor.

The blog says that the decision sets definitive limits on the reach of the Dodd-Frank Act’s whistleblower incentives and may also affect an individual’s assessment of whether to risk their career to come forward with information on potential wrongdoing.

John Jenkins