By Mark S. Nelson, J.D.
A whistleblower award claimant has asked the Supreme Court to review a Second Circuit decision that upheld the SEC’s denial of a whistleblower award to the petitioner. According to the certiorari petition, the petitioner provided information to the FBI about a corporate bribery scheme and that same information aided the SEC’s enforcement efforts, resulting in settlements with the DOJ and the SEC for hundreds of millions of dollars. The case, if the justices agree to take it, would turn on the meaning of key words such as “convicted” and “related” and the SEC’s interpretations of those words, an approach that in other cases has seen the justices strictly construe the SEC’s whistleblower statute and rules. An added dimension to the instant petition is that the lower court found that the petitioner had forfeited certain of his or her arguments. The Second Circuit denied a request by the whistleblower for rehearing en banc (Doe v. SEC, March 29, 2023; the appendix to the petition for certiorari contains the relevant court orders and the SEC’s order).
“Convicted.” The petitioner asserts that the SEC’s interpretation of the key terms “convicted” and “related” as applied to the SEC’s whistleblower rules sweep too broadly and thus unfairly excluded the petitioner from a whistleblower award. According to the petitioner, the court below, the Second Circuit, credited the SEC’s interpretation without considering the level of deference that interpretation should be accorded and improperly concluded that the petitioner had forfeited certain of his or her claims.
With respect to “convicted,” the petitioner argued that the SEC erred by adopting an Investment Advisers Act definition that included plea agreements in the term despite the fact that “convicted” is not defined in the Exchange Act. By way of background, Section 206(a)(6) of the Investment Advisers Act states: “’Convicted’ includes a verdict, judgment, or plea of guilty, or a finding of guilt on a plea of nolo contendere, if such verdict, judgment, plea, or finding has not been reversed, set aside, or withdrawn, whether or not sentence has been imposed.”
The term “related,” said the petitioner, was interpreted by the SEC in a similarly broad manner and, thus, did not give reasonable notice to the public of what conduct might disqualify a person from receiving a whistleblower award.
Said the petitioner: “The SEC’s position is that any connection, no matter how remote, may disqualify a whistleblower from recovering an award to which they are entitled. Obviously, some overlap is needed for two subjects to be deemed related. But the SEC does not identify which factors are dispositive or even important and how much weight to give to such factors as the degree of overlap required, which overlapping factors are essential, and which are merely persuasive. The SEC has articulated no standard for evaluating a whistleblower’s post-conviction qualification for an award.”
Lastly, the petitioner argued that the Second Circuit implicitly accorded Chevron deference to the SEC’s interpretations in its order denying the petitioner’s application. The petitioner, however, said such deference was unjustified because the SEC’s interpretation of its own whistleblower rules was flawed and that borrowing, in part, from the Investment Advisers Act undermined the choices Congress made in drafting the Investment Advisers Act (defines “convicted”) and the Exchange Act (does not define “convicted”).
Second Circuit opinion. The unnamed petitioner (whistleblower proceedings are confidential) sought to overturn a lower court decision that he or she was not entitled to an award from the SEC under the Dodd-Frank Act’s whistleblower provisions. The SEC had determined preliminarily that the petitioner was “convicted” for purposes of the whistleblower provisions of a “related” offence and, thus, denied the petitioner’s application for an award.
The Second Circuit, in a summary order, first explained that the petitioner had not raised the question of whether he or she was “convicted” before the SEC and that the SEC’s citation in its denial of the petitioner’s application about what it means to be “convicted” merely stated SEC policy in handling whistleblower claims where the claimant is convicted of an offence. The court also explained that even if the petitioner had not forfeited his or her argument about being “convicted,” the petitioner would not have prevailed because “convicted” status is not dependent upon sentence being imposed.
The Second Circuit also addressed the question of what it means for a whistleblower’s conduct to be “related” in the context of the SEC’s whistleblower rule, which refers to a person “convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award.” The court credited the SEC’s more expansive understanding of “related” and rejected the petitioner’s theory that “related” means the person must have been involved in the conduct underlying the enforcement action.
The Second Circuit noted the key facts in the case leading to its conclusion that the SEC was correct. Said the court: “Doe pleaded guilty to facilitating bribery payments that came from the same principal briber, targeted government officials in the same country, and sought benefits in the same industry as the scheme charged in the Covered and Related Actions.”
The Second Circuit, moreover, concluded that the SEC had not abused its discretion and had supported its denial of a whistleblower award with substantial evidence. Lastly, the court concluded that the SEC adequately articulated its reasoning, so the petitioner was not precluded from obtaining meaningful appellate review.
The case is No. 22-963.