On June 12, 2013, the SEC announced its second-ever “whistleblower” award under Section 21F of the Exchange Act in connection with SEC v. Andrey C. Hicks and Locust Offshore Management, LLC, No. 11-cv-11888 (D. Mass. 2011) (the “Locust Action”), a 2011 enforcement action in which the SEC charged that Hicks, the purported CEO of an investment advisory firm, lied to prospective investors regarding his education and employment history, created fake offering documents for the adviser’s supposed quantitative hedge fund, and lied about the fund’s service providers while diverting more than $2.7 million of investor funds to his personal bank accounts.
According to the SEC’s Order Determining Whistleblower Claim, three of four anonymous whistleblowers were awarded 15% of the more than $7.5 million in monetary sanctions to which the SEC is entitled pursuant to the judgment in the Locust Action. According to the Order, the SEC Claims Review Staff (the “CRS”) recommended that the first three claimants each receive a whistleblower award of 5% because two of them voluntarily provided original information to the SEC that helped stop the scheme and led to the successful enforcement of the Locust Action, while another confirmed much of the information and identified key witnesses. According to the Order, a claim for an award by a fourth claimant was denied because the SEC found that the initial tip provided by the claimant regarding securities fraud involving naked shorting was “vague or insubstantial” (and because the information was provided to the SEC prior to July 21, 2010 and was thus not covered by the Section 21F whistleblower provisions). The SEC also did not act on two additional tips that the fourth claimant later submitted because, according to the Order, the tips did not contain information about the ultimate enforcement matter or mention the defendants in the Locust Action, and because the SEC did not make allegations concerning naked short selling. In recommending the claim for an award by the fourth claimant be denied, the CRS explained that the claimant did not lead to the successful enforcement of the Locust Action because the claimant's tips “neither caused the [SEC] to open its investigation nor significantly contributed to the success of the enforcement action.”
According to the SEC’s announcement of the award, it has not collected any money in connection with the Locust Action (but the Department of Justice has collected approximately $800,000 from Hicks in its related action). According to the SEC’s announcement, the whistleblowers entitled to an award under the Locust Action may apply to the SEC to receive their award from the money collected by the Department of Justice.
Dodd-Frank Act Whistleblower Provisions
Section 922 of the Dodd-Frank Act directs the SEC to “pay an award . . . to whistleblowers who voluntarily provide original information to the [SEC] that [leads] to” successful enforcement actions and results in monetary sanctions of more than $1 million. Under the Dodd-Frank Act, the size of an award can range from ten to thirty percent of the monetary sanctions that the SEC collects. The Dodd-Frank Act also protects whistleblowers, prohibiting employers from retaliating against them and prohibiting the SEC from disclosing information provided by a whistleblower “which could reasonably be expected to reveal” the whistleblower’s identity. For a discussion of the final rules implementing the Dodd-Frank Act’s whistleblower provision, please see the May 25, 2011 Davis Polk Client Newsflash, SEC Adopts Final Whistleblower Rules. For a discussion of the SEC’s first whistleblower award, please see the August 23, 2012 Davis Polk Client Newsflash, SEC Announces First Whistleblower Program Award.