No whistleblower award when SEC gives tips to other agencies: court

The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, D.C., U.S., May 12, 2021. Picture taken May 12, 2021. REUTERS/Andrew Kelly

(Reuters) – A U.S. appeals court on Thursday said a former Royal Bank of Scotland managing director is not owed a multi-million dollar whistleblower award for reporting allegedly unlawful conduct related to mortgage-backed securities, even though his tips helped federal agencies win massive settlements with the bank.

A unanimous three-judge panel of the 2nd U.S. Circuit Court of Appeals said Victor Hong is not eligible for an award under the federal Dodd-Frank Act of 2010 because the U.S. Securities and Exchange Commission (SEC) passed along information he provided in 2014 to the Department of Justice rather than bringing its own action against RBS.

Hong’s lawyer, Richard Corenthal of Archer Byington Glennon & Levine, said the decision highlights a flaw in Dodd-Frank that Congress should move to rectify.

“Otherwise, the current program discourages meritorious whistleblowers, as happened to Victor Hong in the RBS cases, thereby undermining the Congressional intent for dependable financial incentives to uncover financial fraud,” he said.

The SEC declined to comment.

RBS was not involved in the case.

The bank in 2017 and 2018 agreed to pay more than $10 billion to settle probes by DOJ and the Federal Housing Finance Agency over its sales of residential mortgage-backed securities in the years leading up to the 2008 financial crisis. The bank denied wrongdoing.

Whistleblowers can receive millions of dollars from the SEC under a program created by Dodd-Frank. The law authorizes awards worth up to 30% of the government’s recovery in “judicial or administrative actions” or “related actions” brought by the SEC.

Hong had argued that those terms were meant to apply broadly to any action by the SEC, including referring prosecution to other agencies based on information provided by whistleblowers.

But the 2nd Circuit said that despite Hong’s contribution to the DOJ and FHFA probes, Dodd-Frank clearly limited whistleblower awards to enforcement actions brought by the SEC itself.

Circuit Judge Barrington Parker wrote that it was not the court’s job to rewrite federal law to expand eligibility for whistleblower awards, even if that could help incentivize workers to report issues to the SEC.

The court upheld the SEC’s 2021 denial of Hong’s application for an award, which he had appealed directly to the 2nd Circuit.

The panel also included Circuit Judges Susan Carney and Beth Robinson.

The case is Hong v. U.S. Securities and Exchange Commission, 2nd U.S. Circuit Court of Appeals, No. 21-529.

For Hong: Paul Brown and Richard Corenthal of Archer Byington Glennon & Levine

For the SEC: Matthew Ferguson

(NOTE: This article has been updated to include a statement from Richard Corenthal.)

Read more:

Royal Bank of Scotland pays $4.9 billion for crisis-era misconduct

RBS to pay $5.5 billion to resolve major U.S. mortgage probe

Surge in SEC whistleblower awards sparks legal practice boomlet

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