Monday, September 26, 2022

Citigroup whistleblower must share $27M award

By Anne Sherry, J.D.

A whistleblower who alerted the SEC to misconduct at Citigroup must share a $27 million award with a colleague. While the petitioner argued he was the only one who brought “original information” to the SEC, the two whistleblowers presented the information as a team, and the Commission was entitled to treat them as a joint whistleblower even though they filed separate award applications. Furthermore, the D.C. Circuit Court of Appeals lacked jurisdiction to review the amount of the award or its allocation between the recipients (Johnston v. SEC, September 23, 2022, Ginsburg, D.).

The petitioner, Michael Johnston, led the “Johnston Team” at a Citigroup subsidiary beginning in the 1990s. His co-whistleblower, Michael Mittman, was also part of the Johnston Team. In 2008, while preparing for a FINRA arbitration proceeding against Citigroup, Johnston allegedly singlehandedly discovered that Citigroup had misrepresented “back-tests” conducted to verify certain risk assessments in funds that collapsed in the 2008 financial crisis. The Johnston Team then sent the SEC a 25-page report on the issue, and Johnston and Mittman met with SEC staff to present the findings of the Johnston Team’s independent back-tests.

The SEC brought an enforcement action that resulted in a $180 million settlement. Johnston and Mittman each submitted a timely whistleblower claim, with Johnston’s claim stating he was submitting it on behalf of the Johnston Team as a whole. Viewing the two men as having provided the original information jointly, the SEC granted them 15 percent of the sanctions, or $27 million, to be divided equally. Johnston petitioned the D.C. Circuit for review, and the court granted Mittman’s motion to intervene.

Jurisdiction. On Mittman’s motion to dismiss, the court agreed that it lacked jurisdiction to consider Johnston’s challenges to the amount and allocation of the whistleblower award. The whistleblower statute allows the court to review “any determination, except the determination of the amount of an award.” However, this did not preclude review of the entire challenge. The court agreed with the SEC that it could consider Johnston’s argument that Mittman was ineligible for an award because he provided no original information.

Legal arguments. The court first observed that under the statute, a whistleblower is expressly defined as “any individual who provides, or 2 or more individuals acting jointly who provide, information.”While the term “whistleblower” would ordinarily imply a single individual, the statute’s definition supersedes ordinary usage. When making the award, the SEC considered who provided original information at the time it received the information—at that time, Johnston and Mittman were working jointly.

Furthermore, an award applicant need not have developed the information to have “provided” it. Such an interpretation would require reading additional words into the statute, whereas the SEC’s view does not. The statute also plainly contradicted Johnston’s argument that because the definition of whistleblower does not include the word “original,” the term does not apply to the award provision. Finally, nothing in the statute or its regulations requires the SEC to consider how a whistleblower styles his award application in determining whether he is a joint or solo applicant. The court called Johnston’s counterargument “so obtuse as to be insulting”; Johnston selectively quoted a portion of the SEC rule, but the immediately preceding portion contradicted his position.

Factual arguments. Finally, the court reviewed the factual dispute to determine only whether the SEC’s findings of fact were supported by substantial evidence. The record was clear that Johnston and Mittman presented themselves as joint whistleblowers when they provided their information to the Commission. They were represented by a single attorney, and Johnston’s own award application attributed both the discovery of the back-test problem and the analysis contradicting it to the “Johnston Group.” The SEC accordingly had substantial evidence that the pair acted jointly when they provided the original information.

The case is No. 21-1132.