By John Filar Atwood
The Third Circuit Court of Appeals denied a petition to overturn an SEC decision not to issue a whistleblower award, finding that the Commission appropriately reasoned that the petitioner did not follow the requisite whistleblower procedures, particularly the requirement that a whistleblower directly submit information to the SEC. The court also found that the SEC thoroughly explained its refusal to exercise its discretion to grant a procedural waiver, so did not act arbitrarily or capriciously in denying the award application (Doe v. SEC, March 23, 2023, Chagares, M.).
The SEC reached a settlement in 2015 with Focus Media and its CEO after an investigation uncovered improper conduct related to certain company transactions. The company and CEO agreed to pay more than $55 million in penalties, disgorgement, and interest as part of the settlement.
Following the settlement, the petitioner filed an application with the SEC for a whistleblower award based on his alleged contributions to the SEC’s investigation. He claimed to be a principal author of a November 2011 report that examined the company and CEO, stating that information in the report was the cornerstone of the Commission’s case against Focus Media and its CEO.
The report was published by Muddy Waters Research, and in his whistleblower award application, in the section regarding the method of his tip submission, the petitioner checked the “Other” box, writing in “News Media” as the manner via which his tip was submitted to the Commission.
Petitioner was ineligible. The SEC’s claims review staff recommended denying the award claim, noting that the enforcement staff obtained the report through its own initiative from a public website, and not from the petitioner, making him ineligible for the award. The petitioner contested the decision, arguing that the report was provided directly to the SEC via email push notifications, social media postings, and news coverage.
The Commission’s final order adopted the staff recommendation to deny the award claim, stating that the petitioner not only failed to submit the report in accordance with the relevant whistleblower procedures but in fact failed to provide information directly to the SEC at all. Accordingly, the SEC concluded that he was not a whistleblower under the relevant regulations. Regarding the emails, social media postings, and news coverage, the SEC noted that the petitioner did not assert that he was the author or sender of the emails and postings and therefore failed to show that he provided the information directly to the agency.
Other claimant received $14 million. Complicating the issue was the fact that the SEC did grant whistleblower status to a different claimant who also helped create the report despite the claims review staff’s preliminary recommendation that it be denied. The Commission awarded the other claimant $14 million based on a percentage of the settlement achieved with the company and its CEO. The claimant’s whistleblower application faced many of the same procedural roadblocks as the petitioner’s, with the primary difference being that the claimant emailed the report directly to an SEC enforcement attorney a few days after the report was published online.
The Third Circuit panel noted that to be eligible for an award, a whistleblower must submit information to the SEC in a Form TCR mailed or faxed to the SEC or submitted via its online portal. The court acknowledged that the SEC has interpreted its rules to generally require that information be provided directly to the Commission without any allowance for the online publication of information that happens to indirectly make its way into the hands of Commission staff.
SEC’s decision not arbitrary. The court ruled that the petitioner failed to show that the SEC acted arbitrarily or capriciously in concluding that his award application failed to meet this whistleblower criteria. The court stated that it is undisputed that the petitioner did not submit the report to the SEC via a Form TCR, and that the petitioner indicated only that the SEC learned of the report through news media.
Noting petitioner’s claim that he provided the report to SEC officials through other means such as the email blast and social media posts containing the report that purportedly made their way to SEC investigators, the court held that the SEC appropriately concluded that the petitioner did not claim to have authored those emails and posts. The court stated that while the petitioner’s claims that the necessary implication of his presentation was that he authored the relevant emails and tweets, his conclusory assertions do not undermine the SEC’s inference to the contrary given the lack of evidence of authorship in the record.
The court then stated that the petitioner was left to argue that the SEC should have waived its procedural requirements for him but concluded that he made such argument only obliquely. The SEC concluded that extraordinary circumstances warranting waiver did not exist because the petitioner did not explain why he could not have submitted the report directly to the SEC, and that the public interest would not be served by waiver since the petitioner did not submit information to the agency directly and therefore had not engaged in the sort of activity that whistleblower awards were designed to encourage.
Waiver rationale not addressed. The court considered that the petitioner did not respond to or address the SEC’s rationale regarding the waiver, but instead focused on the alleged incoherence of the SEC’s simultaneous decision to grant a waiver for the other claimant. The court ruled that the other claimant’s award has no substantive bearing on the SEC’s decision as to the petitioner. None of the petitioner’s complaints about the disparate outcome resolve or eliminate the clear procedural deficiencies in his application, the court concluded, nor do they explain why the SEC should have exercised its discretion to waive the procedural requirements in his case.
The court stated that in staking his claim so heavily on the notion that he is entitled to an award because the other claimant received one, the petitioner failed to explain why he is entitled to it on the merits of his own case. The court said that even if it were to credit the petitioner’s assertion that he was similarly situated to the other claimant in all material respects, that would only suggest that the SEC arguably should have denied the other claimant’s award on the same grounds as it denied the petitioner’s award. Accordingly, the court determined that the petitioner’s focus on the other claimant was unavailing because it does not undermine the SEC’s denial of his application on procedural grounds or its attendant decision not to grant a waiver of those procedures.
The case is No. 22-1652.