SEC Order Denying Whistleblower Claim Confirms Prospective Coverage and Limited Discovery in Dodd-Frank Bounty Proceedings

In a recent order denying a whistleblower’s award claim,1 the U.S. Securities and Exchange Commission upheld the prospective application and discovery limitations of two of its rules implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act’s bounty provisions for whistleblowers who report violations of the federal securities laws. The partially redacted order arose in connection with an enforcement action styled SEC v. Advanced Technologies Group, LTD, 10-cv-4868 (S.D.N.Y. judgment entered Jan. 13, 2011), in which the SEC was awarded over $19 million in sanctions related to allegedly unlawful offerings of non-exempt securities.

The claimant seeking a bounty award had submitted information about the alleged wrongdoing on a number of occasions before Dodd-Frank’s enactment on July 21, 2010. After that date, the anonymous claimant corrected some alleged misstatements of one of the defendants in the enforcement action and submitted a claim for a whistleblower award under Section 21F of the Securities Exchange Act of 1934, which was created by Dodd-Frank and provides in part:

In any covered judicial or administrative action, or related action, the Commission [SEC], under regulations prescribed by the Commission and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action. . . .2

The SEC’s Claims Review Staff issued a Preliminary Determination recommending the claim’s denial on the ground that the claimant’s information was not “original information” under SEC Rule 21F-4(b)(1)(iv) — which restricts the definition of “original information” to information submitted after Dodd-Frank’s enactment.3 In response, the claimant sought extensive discovery, including the deposition of an SEC staff attorney and the production of intra-agency communications and all documents pertaining to the SEC’s underlying investigation and enforcement action.

When the SEC’s Office of the Whistleblower denied these requests, the claimant submitted a formal response contesting the Preliminary Determination. In particular, the claimant first argued that SEC Rule 21F-4(b)(1)(iv) constitutes an impermissibly retroactive restriction on Dodd-Frank’s statutory definition of “original information” — which defines the term without reference to Dodd-Frank’s effective date.4 The claimant also argued (among other things) that the denial of the discovery requests deprived him or her of due process and a fair opportunity to contest the Preliminary Determination.

Dodd-Frank’s Prospective Application to SEC Whistleblowers

In response to the claimant’s argument that SEC Rule 21F-4(b)(1)(iv) is inconsistent with the statutory definition of “original information,” the SEC readily concluded that the rule is not “impermissibly retroactive.”5 Quite the contrary; the SEC concluded that the claimant’s position relied on a retroactive application of Dodd-Frank to information that was submitted before the statute’s effective date.6 On this point, the SEC explained,

Neither the statutory language, the legislative history, nor sound policy considerations suggest that Congress’s adoption of a new whistleblower reward program in July 2010 was intended to pay awards to people like Claimant who gave the Commission original information years before the statute was enacted.7

After considering other whistleblower provisions that specifically address timing issues and examining Dodd-Frank’s legislative history, the SEC concluded,

Congress did not intend for Section 21F to reward individuals who came forward before Dodd-Frank’s enactment; rather, Congress intended for the award program to create powerful new incentives for the public to assist the Commission in its fight against securities law violations. Leveraging the limited assets of the Investor Protection Fund established by Section 21F(g) of the Exchange Act to pay those individuals who respond to the new incentive by coming forward after Dodd-Frank’s enactment is consistent with that Congressional purpose.8

Limits on Discovery Under SEC Rules 21F-10 and 12

Before addressing the claimant’s due-process challenge to the discovery limitations imposed by the Office of the Whistleblower, the SEC turned to the regulatory scheme that it had adopted to implement Dodd-Frank’s bounty provisions. Under SEC Rule 21F-10(e)(1), claimants seeking a whistleblower bounty may review selected “materials. . . that formed the basis of the Claims Review Staff’s Preliminary Determination.”9 Rule 21F-12, in turn, restricts the materials available to a claimant to public documents, the claimant’s own submissions, and certain sworn declarations — expressly excluding any “pre-decisional or internal deliberative process materials that are prepared exclusively to assist the Commission in deciding the claim.”10

Given the fact that “Rules 21F-10(e) and 12 give claimants the right to review all the materials that formed the basis of the [Claims Review Staff’s] Preliminary Determination, other than pre-decisional or internal deliberative process materials,” the SEC concluded that the claimant’s due-process argument had no merit:

To go further and permit claimants free-wheeling discovery on issues such as the staff’s internal deliberations in evaluating and utilizing a whistleblower’s information or in considering the merits of a claimant’s application, would constitute an unwarranted and a potentially damaging intrusion into our investigative processes, including the frank discussion of legal and policy decisions concerning whether an enforcement action should be brought, the specific causes of action that should be charged, and the parties that should be named as defendants. The disclosure of this sort of information would, as we explained when it adopted the whistleblower rules, “have a chilling effect on our decision-making process.”11

The SEC thus rejected the claimant’s due-process challenge. Even after assuming that Dodd-Frank had created a protected property interest, the SEC concluded that under a balancing test,12 its “whistleblower rules provide all the discovery and other procedural opportunities that due process could possibly require in a proceeding of this kind.”13

Implications of the SEC’s Order

Although the Advanced Technologies Group bounty proceedings ostensibly involved a straightforward application of the SEC’s definition of “original information” and limitations on permissible discovery, the SEC’s order brings additional clarity to the claims process for SEC whistleblowers. Under the applicable rules as interpreted by the SEC, whistleblowers who provided information before Dodd-Frank’s effective date are not eligible for bounty awards, regardless of the date on which the underlying enforcement action concludes. Furthermore, the discovery available to claimants who wish to challenge the Claims Review Staff’s recommendation is limited in accordance with the enforcement interests of the SEC.


1 In re Claim for Award in connection with SEC v. Adv. Techs. Grp. LTD, Exchange Act Release No. 70772 (Oct. 30, 2013), available at http://www.sec.gov/rules/other/2013/34-70772.pdf.

2 15 U.S.C. § 78u-6(b)(1) (emphasis added).

3 17 C.F.R. § 240.21F-4(b)(1) (“In order for your whistleblower submission to be considered original information, it must be: . . . (iv) Provided to the Commission for the first time after July 21, 2010 . . . .”).

4 See 15 U.S.C. § 78u-6(a)(3).

5 In re Claim for Award in connection with SEC v. Adv. Techs. Grp. LTD, Exchange Act Release No. 70772, at 13.

6 Id. at 8.

7 Id. at 9.

8 Id. at 11.

9 17 C.F.R. § 240.21F-10(e)(1)(i).

10 Id. § 240.21F-12(a), (b).

11 In re Claim for Award in connection with SEC v. Adv. Techs. Grp. LTD, Exchange Act Release No. 70772, at 15–16 (footnotes and citations omitted).

12 See generally Matthews v. Eldridge, 424 U.S. 319 (1976).

13 In re Claim for Award in connection with SEC v. Adv. Techs. Grp. LTD, Exchange Act Release No. 70772, at 16–17.