No Reward for Whistleblower Who Acted Before Dodd-Frank: 2nd Cir.

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By Casey C. Sullivan, Esq. on March 18, 2015 1:56 PM

A tipster who reported his firm's securities violations before the passage of the Dodd-Frank Act cannot collect a whistleblower's reward under that Act, the Second Circuit has ruled.

Over a period of five years, Larry Stryker repeatedly informed the SEC about questionable practices at his firm, Advanced Technologies Group, leading to an enforcement action in 2009 and an eventual $20 million settlement.

Under Dodd-Frank, whistleblowers can collect 10 to 30 percent of the money recouped from a successful SEC enforcement action based on their information. In 2011, Stryker filed for just such an award. The SEC refused, arguing that since he offered information before the passage of Dodd-Frank, he was not entitled to to the $2 to $6 million that would otherwise be his share under the Act.

A Contentious History, a Large Settlement, and No Reward

Stryker had long had difficulties with Advanced Technologies Group. He first reported them to the SEC in 2004, during a dispute with the firm's leadership. While he repeatedly sought to have the SEC bring an enforcement action, according to Reuters' Alison Frankel, he also engaged in his own litigation against the firm. In 2010, the SEC brought an action against the firm for illegal offering unregistered securities in violation of the Securities and Exchange Act.

After that action resulted in a settlement, the SEC refused to provide Stryker with a whistleblower's reward. Under their interpretation, he was not eligible since he submitted his "original information" prior to the enactment of Dodd-Frank in 2010.

2nd Cir. Applies Simple Chevron Test

The Second Circuit applied a straightforward Chevron test to determine that the SEC's interpretation of Dodd-Frank was permissible. Under Chevron v. NRDC, if Congress has not directly and unambiguously addressed the precise question at issue -- a rarity at best -- the court must defer to an agency's reasonable interpretation of the statute it administers.

Recognizing some "loose ends" in the Act's definition of "original information" (it defines original information in some circumstances as information already known to the Commission, for example), it deferred to the SEC's interpretation. The goal of enticing whistleblowing would not be served, for example, by awards for information already provided.

Ruling Continues Narrowing of Whistleblowing Provisions

The Second Circuit's ruling narrows the availability of potential awards for long-running investigations which began before the passage of Dodd-Frank. It comes on the heels of the court's decision last month that overseas whistleblowers aren't entitled to Dodd-Frank protections.

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