No payout for pre-Dodd-Frank SEC whistleblowers – 2nd Circuit

March 11, 2015

Larry Stryker first told the Securities and Exchange Commission about supposedly shady business practices at a firm called Advanced Technologies Group in 2004. At the time, there was no bounty program for tips to the SEC. But Stryker was in the midst of his own fight with ATG’s leaders, whom he accused of cheating him out of an ownership stake in a previous enterprise. Over the next six years, as Stryker pursued his own ultimately unsuccessful litigation against his former business partners, he continued to badger the SEC to bring a case against them and ATG. After a meeting with Stryker in 2009, the commission finally sued the company and its principals for illegally offering unregistered securities in 2010. The case ended in 2011 with judgments of more than $20 million against the defendants.

Stryker believed he was entitled to a reward under the whistleblower bounty program the SEC adopted after Congress passed the Dodd-Frank Act in 2010. The SEC said in 2013 that he was not because he provided the information that led to its investigation of ATG before Congress created the Dodd-Frank whistleblower program.

On Wednesday, the 2nd U.S. Circuit Court of Appeals agreed with the SEC. A three-judge appellate panel ruled that under the U.S. Supreme Court’s 1984 decision in Chevron v. Natural Resources Defense Council, it owes deference to the SEC to interpret the laws it administers. Even if Dodd-Frank’s statutory language on the whistleblower bounty program isn’t entirely clear about time restrictions for tips, the 2nd Circuit said, Congress left it to the SEC to make the final rules of the program. And the SEC, according to the appeals court, reasonably interpreted Congress’s provisions on whistleblower bounties to apply only to tipsters who provided original information after Dodd-Frank was enacted.

Stryker’s lawyers at Kohn Kohn & Colapinto and the Law Offices of Karim H. Kamal had been hoping that the 2nd Circuit would find the SEC improperly read a time restriction into Dodd-Frank’s language on the whistleblower program. Congress did specifically assure that the bounty would extend to tipsters who blew the whistle to the SEC in between the passage of the law and the effective date of the SEC rules for the program but did not address tips supplied to the SEC before Dodd-Frank was enacted. When the SEC adopted rules to administer the whistleblower program, it said that awards would only be made to tipsters who provided information “for the first time” after Dodd-Frank’s passage in July 2010.

The 2nd Circuit is the first federal appellate court to review that SEC rule, so the panel’s endorsement of it is a big blow to tipsters who first supplied the SEC with information before July 2010, even if they continued to cooperate with the agency after Dodd-Frank took effect.

The brief 2nd Circuit opinion was written by Judge Ralph Winter for a panel that also included Judge Denny Chin and U.S. District Judge J. Paul Oetken of Manhattan, sitting by designation.

Stryker counsel Stephen Kohn did not respond to a request for comment.

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