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Eye-popping SEC whistleblower awards continue. Last week, the SEC announced two awards totaling over $98 million and then, early this week, another two awards totaling over $24 million. (One individual whose tip prompted the opening of the investigations is receiving an award of $82 million! And this is still significantly below the record!) As a reminder, whistleblower awards can range from 10% to 30% of the monetary sanctions where they exceed $1 million.

While these few whistleblowers were getting multimillion-dollar awards, the U.S. Court of Appeals for the D.C. Circuit confirmed something Liz highlighted last year — the very limited circumstances under which lawyers may claim an award. As the opinion explains:

Under the Commission’s regulations implementing its whistleblower award program, an attorney may not receive a whistleblower award for disclosing information obtained during the representation of a client unless the attorney’s disclosure was permitted by the applicable state bar rules or the Commission’s attorney conduct regulations.

But the circumstances of this case were a bit unique. Here’s the background:

Defendants had offered and sold the securities of a corporate entity. In doing so, the Defendants had misrepresented to investors in the securities offering that their money would be used to fund a particular project (the “Project”). Instead of spending investors’ funds on the Project, however, Individual 1 and Individual 2 misappropriated a large portion of investors’ funds for their personal use. …

Doe was employed as in-house counsel at a company. The Company was owned and controlled by Individual 1 and provided assistance in connection with the Defendants’ securities offering. … During the course of his employment at the Company, Doe came across information that indicated that Individual 2 was misappropriating money invested in the securities offering. Individual 2 did not own, control, or play any formal role at the Company.

Doe filed a whistleblower tip with the Commission. In his tip, Doe explained that Individual 2 was misappropriating investors’ funds for his personal use and that, as a result, the Project that the securities offering was supposed to fund would never be completed. … Doe explained that he believed his disclosure would serve his client’s interest by “preventing further misappropriation by [Individual 2], possibly recovering funds that had been misappropriated, and helping lead to the successful completion of [the Project].” …

Although Doe’s whistleblower tip did not mention the Company or Individual 1, both were investigated by the Commission as a result of Doe’s tip and ultimately subject to enforcement actions.

The SEC determined that Doe’s disclosure was not permitted by the Florida Rules of Professional Conduct. Doe sought reconsideration based on the rule that permits a lawyer to reveal confidential information to the extent necessary to serve the client’s interest. The court did not find this persuasive:

The record demonstrates that at the time he filed the tip, Doe believed that the Company was implicated in the securities fraud scheme. In reporting on the suspected wrongdoing, then, Doe was reporting on his own client. Common sense therefore dictates that Doe could not have reasonably believed that he was acting in his client’s best interest. … Doe informed the Commission, for example, that his “goal” in submitting this tip was “to prevent [his] client . . . from committing a crime.”  Doe elaborated that he intended for the Commission to investigate the entire securities offering, including his client; he explained, “I fully expected my tip to result in such a widely encompassing investigation” and “I intended for that to occur.”

But remember, whistleblower award or no, lawyers still need to report “up the ladder” under SEC rules!

– Meredith Ervine