On August 14, 2023, in a rare whistleblower award opinion, the Eleventh Circuit affirmed the Securities and Exchange Commission’s (SEC) denial of a whistleblower award in Granzoti v. Securities and Exchange Commission, 2023 WL 519503 (11th Cir.). The opinion establishes that eligibility for SEC whistleblower awards follows an actual causation standard – i.e., that the SEC must act upon the whistleblower’s tip.
Renato De Miranda Granzoti submitted a tip to the SEC’s whistleblower program concerning a pyramid scheme in 2013. The next year the SEC opened an investigation into the scheme and filed an enforcement action. The SEC subsequently secured a final judgment in its favor, and Granzoti filed his application for a whistleblower award. But the SEC denied him a bounty.
While Granzoti submitted his whistleblower tip before the SEC had even opened an inquiry into the fraud scheme, declarations from the SEC showed that his tip was never relayed to the staffers that investigated and brought the enforcement action. Instead, the SEC received a referral from the Department of Justice (DOJ) and opened its investigation based on the (apparently later) DOJ referral.
Under 17 C.F.R. § 240.21F-4(c) there are three primary ways a whistleblower becomes eligible for an award:
- The whistleblower’s information led to the SEC opening, reopening, or expanding an investigation.
- The whistleblower’s information – while related to an ongoing investigation – “significantly contributed to the success of [an enforcement] action”.
- The whistleblower reported the conduct through a company’s internal whistleblower, legal, or compliance procedures and, inter alia, that information was relayed to the SEC by the company, and the information led to the opening, reopening, or expanding of an investigation or otherwise “significantly contributed to the success of [an enforcement] action”.
In Granzoti’s case, the first standard was at issue. He argued that while his tip may not have caused the SEC to open an investigation, it was detailed enough that it could have caused the SEC to open the investigation. The Eleventh Circuit dispatched the argument by looking to the regulatory and statutory texts, both of which are framed in terms of actual – not theoretical – causation. The statute requires that a tip “led to the successful enforcement [action]” while the regulation requires that the tip is sufficiently robust “to cause the staff” to open, reopen, or expand an investigation. The Eleventh Circuit thus joined the D.C. Circuit and Second Circuit in finding that SEC whistleblower award eligibility turns on an actual causation standard.
The Eleventh Circuit’s opinion is a practical one, but one cannot help but sympathize with Granzoti. He submitted what was, by all accounts, credible information to the SEC. Yet because the information was (for reasons unclear) never sent to relevant investigatory staffers, he could not be credited with the opening of the SEC’s investigation. The opinion suggests that had the SEC acted upon Granzoti’s tip and investigated the investment scheme sooner, he would have met the actual causation standard and remained eligible for an award. And Granzoti had little insight into what happened to his tip – the record of the SEC’s internal actions here was limited to that described in declarations from the agency’s employees. A factual challenge to the inner workings of a black box is a tall order. Granzoti emphasizes that it is critical that whistleblowers not just submit credible information to the SEC but that they do so in a manner that persuades the agency to act.
