2nd Circuit to define ‘original information’ for SEC whistleblowers

September 26, 2014

It’s been a good week for whistleblowers at the Securities and Exchange Commission. On Monday, the SEC announced a $30 million award, its biggest ever since it enacted rules in 2010 to reward whistleblowers who report securities violations. What’s more, in the order explaining the award, the SEC said that it intends to keep paying bounties to foreign whistleblowers whose information leads to an enforcement action, even though the 2nd U.S. Circuit Court of Appeals held last month that overseas whistleblowers aren’t entitled to protection under the anti-retaliation provisions of the Dodd-Frank Financial Reform Act. According to the SEC, Congress had a different focus in the provisions of Dodd-Frank that shield whistleblowers from being fired than it did in the parts of the law that established rewards for whistleblowers.

But Larry Stryker, a would-be SEC whistleblower whose case will be argued Monday at the 2nd Circuit, isn’t so sure that the commission always knows what Congress intended in Dodd-Frank provisions on whistleblower awards. Stryker’s lawyers at Kohn, Kohn & Colapinto and the Law Office of Karim H. Kamal are challenging the SEC’s interpretation of what constitutes “original information” provided to the commission. They claim that Congress laid out a test for original information in the statutory language of Dodd-Frank, but that when the SEC wrote rules governing whistleblower awards, it added a time limitation that doesn’t appear in the law.

According to Stryker, he’s entitled to a reward for providing the SEC with the information that led to its $24 million penalty against Advanced Technologies Group and related defendants in 2011 – even though most of Stryker’s reports to the SEC came before Dodd-Frank was signed into law on July 21, 2010. The SEC, whose argument on Monday will be presented by senior counsel Stephen Yoder, says in its 2nd Circuit brief that Congress meant awards only to go to whistleblowers who reported original information after Dodd-Frank was enacted, and that its interpretation of the statute is entitled to broad deference under the U.S. Supreme Court’s 1984 standard in Chevron v. Natural Resources Defense Council, which says courts should give executive-branch agencies broad latitude to define the laws they enforce.

If Stryker is right, whistleblowers in long-running SEC investigations that began before Dodd-Frank but culminated in big recoveries after the law was enacted could be up for awards. (Neither his brief nor the SEC’s estimate how many cases might fall into that category; an SEC spokesman declined to comment beyond the brief and Stryker counsel Stephen Kohn didn’t respond to my email.)

Stryker first began talking to the SEC in 2004 about supposedly shady business practices by his former colleagues at Oxford Holdings NY, who went on to control Advanced Technologies Group. During the years that he supplied information to the SEC, Stryker was also involved in his own litigation with the former partners, claiming that they’d cheated him out of an ownership interest in Oxford successors. (His claims in both state and federal court ended up being dismissed because he waited too long to bring them.)

The SEC launched an investigation of ATG in March 2009, according to its 2013 memo denying Stryker an award, and investigators met in person with Stryker the following month. In June 2010, the SEC filed a civil complaint against ATG and two of Stryker’s former colleagues, claiming that they had raised nearly $15 million in illegal offerings of unregistered securities. (They supposedly cold-called investors, claiming to work for a venture capital fund, and touted pre-IPO opportunities in purportedly hot companies they controlled.) In January 2011, a Manhattan federal judge entered two final judgments against the defendants, totaling about $24 million.

Stryker immediately submitted a claim for a whistleblower award under Dodd-Frank, citing not only the information he had provided from 2004 to 2009 but also an email he’d sent to an SEC enforcement lawyer in September 2010 that contradicted deposition testimony from one of the ATG defendants. He said in a followup submission that his persistence brought ATG’s wrongdoing to light and that he’d substantially helped the SEC win its enforcement action.

Nevertheless, the SEC made a preliminary determination in 2012 that Stryker wasn’t entitled to an award. Under the whistleblower rules it adopted in August 2011, the agency said, Stryker hadn’t provided original information because his only communication with the SEC after the enactment of Dodd-Frank was the email he sent in September 2010. That email, the SEC said, didn’t cause the agency to open the ATG investigation – which was already well underway, thanks to Stryker’s previous reports – and didn’t significantly contribute to the success of the case. In October 2013, the full commission approved the denial of an award to Stryker.

His appeal of the denial to the 2nd Circuit will turn on whether Congress meant to restrict awards to whistleblowers who provided original information to the SEC before Dodd-Frank was enacted. Stryker’s lawyers say there’s no such restriction in the language of the statute. Congress included a three-part test for what constitutes original information, they argue, and none of the prongs of the test disqualify whistleblowers who came to the SEC before Dodd-Frank was signed into law. The SEC’s interpretation deserves no deference under Chevron, Stryker says, because Dodd-Frank’s text is clear on what constitutes original information.

The SEC also contends that the law’s language is clear, though its explanation for why the law includes a restriction on information supplied before Dodd-Frank became law is not a model of clarity. The agency asserts that because Congress said awards would only be paid to whistleblowers who submitted information in the form required by the SEC, information submitted before Dodd-Frank directed the SEC to establish rules for whistleblower awards is excluded “necessarily.” The argument boils down to: The law says you can’t claim an award if you didn’t follow our rules, we didn’t have rules before the law existed, so you can’t claim an award for information that predates the law because you didn’t follow rules that didn’t exist.

That might seem contrary to the spirit of Dodd-Frank’s whistleblower reward intentions, but the SEC said the Dodd-Frank conference committee specifically rejected statutory language that would have created a safe harbor for whistleblowers who provided information before Dodd-Frank was enacted. At the very least, the SEC said, its interpretation of the statute is reasonable enough to merit Chevron deference.

Monday’s argument should be interesting. It’s scheduled to be heard by 2nd Circuit Judges Ralph Winter and Denny Chin and U.S. District Judge Paul Oetken of Manhattan, sitting by designation. Oddly enough, when Chin was a trial judge in federal court in Manhattan, he dismissed Stryker’s suit against the former Oxford partners.

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