This year the SEC has already awarded $114 million to whistleblowers, nearly twice the amount than for all of 2019. Three awards in 2020 are among the ten biggest SEC payouts ever, including last week’s $50 million award to a former BNY Mellon currency trader. Would-be SEC whistleblowers and their lawyers should be tingling with excitement, right?
Not really. The whistleblower program could be collateral damage in a case now pending in the U.S. Supreme Court. Here’s why.
SEC whistleblowers can receive up to 30 percent when recoveries (penalties plus disgorgement) are more than $1 million. Nearly three-quarters of all the money the SEC recovers is disgorgement. Now, two petitioners are asking the Supreme Court to strike down or limit the SEC’s use of disgorgement. If the court does that, there would likely be fewer enforcement actions with recoveries of more than $1 million, and smaller recoveries overall.
The case is Liu v. Securities and Exchange Commission. Charles C. Liu and Xin Wang a/k/a Lisa Wang are fighting an SEC disgorgement order against them for $26 million, the same amount they raised from investors through an alleged fraud. They’re relying on another case the Supreme Court decided three years ago called Kokesh v. Sec. & Exch. Comm’n, 137 S. Ct. 1635 (2017).
The court ruled in Kokesh that SEC disgorgement is subject to the federal five-year statute of limitations for penalties because the SEC uses disgorgement “as a penalty.” Liu and Wang say Congress never gave the SEC authority to use disgorgement that way. The Supreme Court heard oral arguments in March and is likely to decide their case soon.
How important is disgorgement? Of the $12 billion the SEC recovered through enforcement actions during the last three fiscal years, $8.7 billion was disgorgement. In the two years after Kokesh, the SEC said it had to “forgo” $1.1 billion in disgorgement from pending enforcement actions.
Even before disgorgement came under fire, SEC whistleblowers faced long odds. Since 2012, the agency has received more than 37,000 tips. Over the same period, it made awards to just 83 individuals, amounting to $500 million. Another obstacle SEC whistleblowers and their lawyers face is time. Investigations typically take two to four years to complete, according to a D.C.-based law firm that represents SEC whistleblowers. Sometimes the wait is a lot longer. The BNY Mellon whistleblower waited about a decade for his award.
FCPA cases have included some of the biggest SEC disgorgement orders. Will Liu impact FCPA enforcement? Maybe not. Because all FCPA enforcement actions against public companies are settled by negotiation, disgorgement (in some form) might continue to be a big part of those cases, notwithstanding a decision in Liu against the SEC.
Are there clues about how the Supreme Court might decide Liu v. Securities and Exchange Commission? Ronald Mann, a law professor at Columbia and former Supreme Court clerk, covered the oral argument for SCOTUSblog. He said predicting outcomes from oral arguments is always tricky. But it appeared to him that “a surprisingly unified bench” coalesced around two ideas: First, that the SEC’s “catch-all” concept of disgorgement is too broad. Second, that disgorgement might nevertheless be legitimate “equitable relief” if the SEC appropriately tailors it to a specific case. (The SEC has the statutory authority to seek “any equitable relief that may be appropriate or necessary for the benefit of investors.”)
It isn’t clear today how that sort of compromise decision from the Supreme Court would impact the SEC’s use of disgorgement. But it’s very likely the total pot of money available to SEC whistleblowers would shrink, and probably by a lot. Does that mean the SEC whistleblower award program would shrink too, or maybe even disappear? Or would the SEC (and Congress) find a way to plug the gap? We’ll know the answer soon.
Here’s the brief from Liu and Wang:Petitioners brief in Liu
And here’s the SEC’s reply brief:SEC reply brief in Liu