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Financial Services Law Insights and Observations

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  • DOJ reportedly investigating professional baseball organization for potential FCPA violations

    Financial Crimes

    Based on media reports, DOJ’s Fraud Section is reportedly investigating some part of a professional baseball organization for possible FCPA violations related to recruitment of international players, particularly related to immigration issues for players from Latin America. Reports indicate that the investigation was initiated when a whistleblower provided the FBI with information and documents last year during spring training. Since then, several witnesses have reportedly already been subpoenaed and testified before a federal grand jury in connection with the investigation.

    A spokesperson for the organization stated that they had not been contacted by federal authorities regarding an investigation, and the two franchises that appear to be most at issue declined to comment to the media on the matter.

    Financial Crimes FCPA Whistleblower DOJ

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  • SEC awards nearly $4 million to whistleblower living overseas

    Securities

    On September 24, the SEC announced a whistleblower award of almost $4 million to an individual residing in a foreign country. The SEC determined the individual voluntarily provided critical information and continued assistance, which helped the agency bring a successful enforcement action. The SEC now has awarded over $326 million to 59 individuals since 2012.

    Securities SEC Whistleblower

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  • SEC announces second-largest whistleblower award; waives “voluntary” requirement for one claimant

    Securities

    On September 6, the SEC announced a whistleblower award totaling more than $54 million— $39 million to one (the second-largest award given under the SEC’s whistleblower program) and $15 million to another—for critical information and continued assistance, which helped the agency bring an enforcement action. The redacted order highlights the denial of related-action claims by both claimants and notes an exception made to the “voluntary submission” requirement for claimant two.

    According to the order, the SEC denied claimant one’s request for an additional award based on another agency’s related action, because the claimant failed to demonstrate the causal relationship required to establish that the “submission significantly contributed to the success of the [related action].” Specifically, the SEC noted that the claimant’s information was never directly transmitted to the other agency, which relied on the SEC’s order to pursue its action. The SEC rejected the claimant’s argument that providing information directly to another agency would be “at war with Congress’ clear instruction that the identity of a whistleblower must be protected” due to the fact that the other agency may not offer the same anonymity as possible under the SEC’s whistleblower program. The SEC notes that while a whistleblower may choose not to provide the information to another agency themselves, the rules allow for the SEC to transmit the information directly, while requiring the other agency to maintain confidentiality, which was not done in this case.

    The SEC also denied claimant two’s related action request, concluding that the claimant should seek an award through the alternative program available from the other agency. The SEC noted that if the claimant were to receive a related-action award there would be the potential that the cumulative award would exceed the 30-percent ceiling established by Congress and would produce an “irrational result” encouraging “multiple ‘bites at the apple’” as it would allow whistleblowers to have multiple opportunities to adjudicate and obtain separate rewards on the same enforcement actions.

    Notably, for claimant two, the redacted order demonstrates that the SEC made an exception to the “voluntary” submission requirements under the rules. Specifically, Rule 21F-4(a)—in order to create an incentive for whistleblowers to proactively provide information about possible violations—requires that a whistleblower “must come forward before the government or regulatory authorities designated in the rule seek information from the whistleblower.” In this instance, it was undisputed that claimant two provided the SEC information after an investigative review by another agency; however, the SEC exercised discretionary authority to grant a limited waiver of Rule 21F-4(a) and permit an award to claimant two. The SEC determined that a limited waiver was appropriate because, although claimant 2 previously “appeared before [the other agency] for an investigative interview” regarding the same violations, at the time of that appearance the claimant  was unaware of the information that would ultimately be deemed by the SEC to be the “critical basis” for the whistleblower claim. The SEC concluded that once claimant two became aware of the critical information, they promptly reported it to both agencies, despite no legal obligation to do so and having no other “self-interested motive to come forward,” achieving a primary policy goal of the program to encourage prompt reporting of information about possible securities law violations.

    Securities Whistleblower Dodd-Frank

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  • SEC awards whistleblower $1.5 million after reducing amount for reporting delay

    Securities

    On September 14, the Securities and Exchange Commission (Commission) announced a whistleblower award likely to yield the whistleblower more than $1.5 million for volunteering information that led to a successful enforcement action. In its order, the Commission notes that it “severely reduced the award here after considering the award criteria identified in Rule 21F-6 of the Exchange Act.” Specifically, the Commission alleges the whistleblower was culpable and “unreasonably delayed” reporting the information for over a year after the occurrence of the underlying facts, only doing so after learning a Commission investigation was ongoing and receiving a “significant and direct financial benefit.”

    The SEC’s whistleblower program has awarded approximately $322 million to 58 individuals since issuing its first award in 2012.

    Securities SEC Whistleblower Enforcement

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  • CFTC announces multiple whistleblower awards totaling $45 million

    Securities

    On August 2, the Commodity Futures Trading Commission (CFTC) announced multiple whistleblower awards, totaling $45 million, to individuals who volunteered information that led to successful enforcement actions. Earlier in July, the CFTC also announced its largest award, of approximately $30 million, to one whistleblower (previously covered by InfoBytes here), and the first award made to a whistleblower living in a foreign country. Under the CFTC’s whistleblower program, eligible whistleblowers can receive between 10 and 30 percent of the monetary sanctions collected from the resulting enforcement action. The CFTC’s Enforcement Director anticipates that this trend of substantial awards will “continue as the Commission continues to receive increasing numbers of high-quality whistleblower tips.”

    The announcement also included three related orders (see here, here, and here).

    Securities CFTC Whistleblower Dodd-Frank

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  • CFTC announces $30 million whistleblower award

    Securities

    On July 12, the Commodity Futures Trading Commission (CFTC) announced an approximately $30 million award to a whistleblower who volunteered information that led to an enforcement action. This is the fifth and largest award—previously the highest was around $10 million— given by the CFTC’s whistleblower program, created by the Dodd-Frank Act. Director of the CFTC’s Whistleblower Office, Christopher Ehrman, stated, “The award today is a demonstration of the program’s commitment to reward those who provide quality information to the CFTC.” Under the CFTC’s program, whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected from the resulting enforcement action.

    The announcement does not provide details of the information provided or the related enforcement action.

    Securities Whistleblower Dodd-Frank CFTC

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  • SEC requests comments on proposed amendments to whistleblower program

    Agency Rule-Making & Guidance

    On June 28, the SEC voted to propose for public comment several rule amendments that seek to clarify certain existing rules and make technical amendments to its whistleblower program under Section 21F of the Securities Exchange Act. Among other things, the proposed changes would (i) allow awards based on money collected under deferred prosecution agreements and non-prosecution agreements entered into by the DOJ or a state attorney general in a criminal case, or settlement agreements entered into by the SEC outside of a judicial or administrative proceeding that address securities law violations; (ii) eliminate the potential double recovery under the definition of “related action”; (iii) authorize the SEC to adjust an award’s percentage as appropriate to advance the goals of rewarding and incentivizing whistleblowers; (iv) establish a uniform definition of “whistleblower” in response to the Supreme Court's decision in Digital Realty Trust, Inc. v. Somers (as previously covered in a Buckley Sandler Special Alert); and (v) clarify anti-retaliation protection requirements. The SEC also has included interpretative guidance on the terms “unreasonable delay” and “independent analysis.” Comments will be accepted for 60 days following publication in the Federal Register.

    Agency Rule-Making & Guidance SEC Securities Whistleblower

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  • Non-profit advocacy organization accuses UK bank of deceptive report on US whistleblower tip rewards programs

    Financial Crimes

    On June 20, an American non-profit advocacy organization for whistleblowers and a European advocacy organization for whistleblowers formally requested that a UK bank retract a report that they alleges mischaracterizes US whistleblower tip rewards programs, including regarding FCPA tips. The report, originally released in 2014 by the bank in conjunction with the UK’s Financial Conduct Authority, had criticized the use of financial incentives for whistleblowers in the US, arguing that they were ineffective, “don’t generate quality tips,” and “impose expensive and unnecessary governance structures.” The report concluded that the UK should adopt regulatory changes to improve protections for all whistleblowers rather than provide rewards, which allegedly allot large financial payouts to a tiny minority of whistleblowers. 

    The American organization disputed these assertions in a rebuttal report, released this year. According to the whistleblower advocacy organizations, many of the assertions in the bank’s report “are simply false” and the continued use of the report “inhibit[s] the implementation of effective anti-fraud laws in the UK.” The organizations further complained that the 2014 report has been used as justification for stakeholders in UK to not create financial incentives for whistleblowers and that it has stifled momentum in the UK for an effective whistleblower program. 

    Financial Crimes FCPA Whistleblower

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  • District Court rules that Federal Reserve Banks are not federal agencies under False Claims Act

    Courts

    On May 9, the U.S. District Court for the Eastern District of New York dismissed a qui tam action brought under the False Claims Act (FCA) against a national bank and its predecessors-in-interest (defendants), which alleged that the defendants presented false information to Federal Reserve Banks (FRBanks) in connection with their applications for loans. The court held that allegations of false or fraudulent claims being presented to the FRBanks cannot form the basis of an FCA action because the FRBanks cannot be characterized as the federal government for purposes of the FCA.

    The relators in the action originally brought a whistleblower lawsuit against the bank, alleging that the defendants inaccurately represented their financial condition in order to be eligible to borrow from the FRBanks’ discount window at lower interest rates. By way of background, in order for liability to incur under the FCA, a false or fraudulent claim must be made to the federal government or its agents. Therefore, the court needed to resolve two legal issues: (i) whether FRBanks should be characterized as the government or its agents for purposes of the FCA, and (ii) whether the federal government paid any portion of the loans the defendants received or reimbursed the FRBanks for issuing the loans.

    In supporting its conclusion that FRBanks are not government actors, the court reasoned that the Federal Reserve Act (FRA), which created the Federal Reserve districts and FRBanks, did not designate the FRBanks as part of an executive department or agency. The court also noted that although the Federal Reserve Board of Governors (Board) is a federal agency, each FRBank operates as a private corporation owned by private stockholders, receives no government appropriations, and generates its own income from interest earned on government securities. Furthermore, the court reasoned that the Board provides only general policy supervision, FRBank employees are not government employees, and FRBanks lack the ability to promulgate regulations and operate independently of the Board and the government.

    In resolving the second issue, the court agreed with the defendants’ argument that the bank’s loan requests did not create FCA liability for claims, because the relators did not, and could not, “allege that the [g]overnment either provided any portion of the money loaned to the defendants, or reimbursed [FRBanks] for making the loans.”

    Courts Federal Reserve False Claims Act / FIRREA Whistleblower

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  • District court applies Supreme Court standard to dismiss Dodd-Frank whistleblower claims

    Courts

    On April 19, the U.S. District Court for the District of New Jersey dismissed a fired executive’s suit against a global financial services firm alleging whistleblowing retaliation claims under Dodd-Frank under the standard set by the U.S. Supreme Court ruling in Digital Realty Trust Inc. v. Somers. (See Buckley Sandler Special Alert on Supreme Court Decision here.) Specifically, the U.S. District court lifted a stay, which the court had imposed pending a decision in Digital Realty Trust, and granted the defendant’s motion to dismiss with prejudice. Noting that the purpose of Dodd-Frank’s anti-retaliation provisions is “to incentivize individuals … to come forward and provide information of securities law violations to the SEC,” the court determined that the plaintiff “had ample time between when he first learned of the violations and his termination to report the misconduct to the SEC,” but he chose not to lodge claims “until well after the fact of the alleged securities violations, his testimony to FINRA and his own termination.” The court also rejected the argument that testimony given to FINRA is sufficient to invoke Dodd-Frank’s whistleblower protections, noting that the plaintiff’s testimony to FINRA “plainly” did not meet statutory requirements.

    Courts Whistleblower U.S. Supreme Court Dodd-Frank Anti-Retaliation SEC

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