DB Whistleblower Award Denial Highlights The Importance Of Having Good Counsel At The Start
Last week, in a full written Opinion, a U.S. Court of Appeals upheld the U.S. Securities and Exchange Commission’s 2017 decision to deny three claimants a share of an SEC whistleblower award related to Deutsche Bank (the “DB whistleblower award”).
One of the unsuccessful claimants was an individual identified in court papers as “John Doe”. The SEC lawyers who interacted with Doe described him as disjointed and incoherent, and stated that they did not use his information in initiating or investigating their case against Deutsche Bank. (Court Opinion at 5-6.)
The other two unsuccessful claimants were outside experts. Their firm was hired by a whistleblower to assist him in preparing his SEC whistleblower tip, in which he informed the SEC about securities law violations involving misstatements in Deutsche Bank’s financial statements. That whistleblower won an SEC whistleblower award. But when the two experts submitted their own claims for their own awards, the SEC denied them any share of the DB whistleblower award.
All three of the unsuccessful claimants appealed the SEC’s decision to the U.S. Court of Appeals for the Second Circuit. The case was called Kilgour, Williams, and John Doe v. U.S. Securities and Exchange Commission, Nos. 18-1124, 18-1127 (2d. Cir., filed Apr. 18, 2018). Oral arguments in the case were heard on January 22, 2019.
John Doe & The Dangers Of Not Hiring An Experienced SEC Whistleblower Attorney Before Reporting To The SEC
According to the Court’s Opinion, the SEC opened its investigation into Deutsche Bank in or around June 2010 (the “SEC’s DB Team”). Approximately three months later, John Doe met with enforcement staff in the SEC’s Complex Financial Instruments Unit (“CFIU”). This team was different from the SEC’s DB Team.
The Deputy Chief of the CFIU stated that Doe “appeared to be very disjointed and had difficulty articulating credible and coherent information concerning any potential violation of the federal securities laws”. The Deputy Chief further stated that when the SEC met with Doe, Doe brought what he claimed to be evidence in “a wet brown bag”. (Court Opinion at 5.) The CIFU team “concluded that Doe was ‘not a credible source of information’”, and did not forward e-mails that Doe provided to the SEC’s DB Team. (Court Opinion at 6.)
Two and one-half years later, Doe met with the SEC’s DB Team. According to the SEC’s DB Team, during that April 2013 meeting Doe was “very difficult to follow, as [he] jumped from topic to topic”. The SEC’s DB Team also found that most of the information that Doe provided during that meeting was duplicative of information that it had already received from other sources. (Court Opinion at 8.)
The Court Opinion
According to the SEC, it did not use Doe’s information, and Doe’s information did not contribute to the success of its enforcement action against Deutsche Bank.
Deutsche Bank settled the case with the SEC, and an SEC whistleblower award became available in the case. Doe’s application for part of that DB whistleblower award was denied.
On appeal, the Court of Appeals found that “It was reasonable for the SEC to credit its staff’s informed determination that Doe had not provided a credible submission”. (Court Opinion at 25-26.) For this reason as well as other reasons stated in its Opinion, the Court denied Doe’s petition to compel the SEC to grant him a share of the DB whistleblower award. (Court Opinion at 28.)
John Doe’s case illustrates some of the possible dangers faced by a whistleblower who decides to submit his or her information to the SEC alone, rather than hiring an experienced SEC whistleblower law firm at the very beginning before submitting anything to the SEC.
As a former SEC Director of Enforcement explained, an experienced SEC whistleblower attorney can help to curate the whistleblower’s information, and present it in a compelling way that will have a better chance of resonating with the SEC. A knowledgeable SEC whistleblower lawyer, especially one who has spent decades representing clients in SEC investigations, can prepare a whistleblower for his or her meetings with the SEC, so that the whistleblower can make a coherent presentation that the SEC will be able to follow and understand. During meetings, a seasoned lawyer can help the whistleblower stay focused, and can help to clarify any misunderstandings or miscommunications as they occur. In these and other ways, an experienced SEC whistleblower attorney can help increase the whistleblower’s chances of becoming eligible to receive an SEC whistleblower reward and hopefully avoid a fate similar to John Doe.
Retained Experts Also Denied Part Of The DB Whistleblower Award
One of the successful SEC whistleblowers, identified in the SEC’s Award Order as “Claimant #2”, hired the two outside experts to help him prepare his SEC whistleblower submission about Deutsche Bank’s financial misstatements. The two experts prepared an expert report for Claimant #2 to use. Claimant #2 submitted the expert report to the SEC.
In his award application, Claimant #2 informed the SEC that he was waiving any claim for his own award based on the expert report, so that the two experts could apply for their own share of the DB whistleblower award.
Nevertheless, the SEC denied the experts a share of the DB whistleblower award. In doing so, the SEC appears to have adapted certain agency principles to its rules governing the SEC whistleblower program.
The SEC's Order
According to the SEC, because the experts were hired by the whistleblower to help him to develop his information and to make his own presentation to the SEC, the experts were not the “original source” of the information presented to the SEC. The whistleblower who hired them and who provided the tip to the SEC was the “original source” of the information under SEC whistleblower rule 21F-4(b)(5).
In the SEC’s Order, it stated that when a whistleblower hires an expert to provide him or her with information and analysis to submit to the SEC on the whistleblower’s own behalf, and the whistleblower does so, “the retained expert should be deemed to have forfeited and waived any subsequent claim to being the original source of that information”.
Furthermore, because Claimant #2 had already submitted the expert report, which he had hired the two experts to create for him, when the experts later submitted the report to the SEC themselves, it was duplicative of what Claimant #2 had already provided and therefore was not “original information”.
On appeal, the Court stated that the two experts’ “submission did not significantly contribute to the success of the [Deutsche Bank] action; Claimant 2’s submission did”. (Court Opinion at 26.) The Court therefore denied the experts’ petition to compel the SEC to grant them a share of the DB whistleblower award. (Court Opinion at 28.)
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The Pickholz Law Offices LLC is a law firm that focuses on representing clients involved with investigations conducted by the U.S. Securities and Exchange Commission, FINRA, and other securities regulators.
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