SEC’s denial of whistleblower awards upheld

Substantial evidence supported the Securities and Exchange Commission’s (SEC) denial of three applications for whistleblower awards following a successful commission action enforcing the security laws, the 8th U.S. Circuit Court of Appeals ruled on August 22.

On Sept. 7, 2018, the commission filed a civil enforcement action against several defendants alleging that they perpetrated “highly profitable ‘pump-and-dump’ schemes by artificially inflating the stock price” of their companies.

The commission alleged that Barry Honig led the scheme, which involved other defendants, all of whom would acquire large quantities of the issuer’s stock at steep discounts and then engage in illegal promotional activity and manipulative trading to artificially boost each issuer’s stock price and to give the stock the appearance of active trading volume.

A final judgment against the defendants included over $11 million in sanctions.

In 2019, the commission’s Office of the Whistleblower (OWB) posted a notice inviting claimants to submit whistleblower award applications and five individuals submitted claims.

One claimant, Daniel Fisher, was awarded 30 percent of the monetary sanctions. Fisher was a co-founder of Biozone Pharmaceuticals, a company at the center of the SEC’s investigation.

The other applications were denied. Three of the claimants appealed: Lee Michael Pederson, John Amster and Robert Heath, but the commission entered a final order affirming the denial.

All three appealed to the 8th Circuit.

In an opinion authored by Judge Lavenski R. Smith and joined by Chief Judge Steven M. Colloton and Judge Bobby E. Shepherd, the court affirmed the denial of awards.

Pederson argued that he was a joint whistleblower with Fisher and that he provided individual tips to the commission in 2013 and 2014.

While Pederson characterized his communication with Fisher as cooperation in disclosing fraudulent activities, Fisher said the two merely “commiserated with each other” and that Pederson had virtually no helpful information.

The commission was clear that the helpful information that Fisher provided pertained to his own personal experiences at Biozone and the two provided no information jointly, the court said, and Pederson’s individual tips were publicly available information that wasn’t helpful to the commission.

“Pederson and the commission acknowledge that Pederson’s initial tips identified the existence of a pump-and-dump scheme and some of the individuals involved,” the court wrote. “But Pederson’s tips were, nonetheless, not helpful because the commission already had that information.”

Nor was the court persuaded by Pederson’s contention that his Fifth Amendment rights were violated because he had a protected property interest in the whistleblower award, as he asserted “no authority to support his argument that all whistleblowers enter into a contract with the commission,” the court said.

Turning to Amster and Heath, the court declined to consider their position that the whistleblower regulations create an objective causation standard, so the actual use of the information provided is not required for the information to lead to a successful enforcement action.

The pair failed to raise the issue below and could not demonstrate reasonable ground for their failure to do so, the court found.

“Amster and Heath assert an interpretation argument to claim that even if staff did not use their information, they could still satisfy the regulations,” the court said. “They could have made that argument below and simply did not.”

Even considering the argument, the court rejected the “objective” causation standard proposed.

“The language of the Act itself requires that the whistleblower ‘provide[] original information … that led to the successful enforcement,’” the court explained. “The Commission’s regulation asks whether the information ‘was sufficiently specific, credible, and timely to cause the staff to [act].’ We therefore agree that the regulation requires that the Commission actually use the information for the information to cause Commission action. ‘If the [Commission] didn’t consider the information, then the information could not bring about or effect a result.’”

Concluding that substantial evidence supported the commission’s determination that Pederson, Amster and Heath’s information did not lead to the successful enforcement action, the court affirmed denial of their petitions for whistleblower awards.

Bradley E. Oppenheimer of Kellogg & Hansen in Washington, D.C., who represented Amster and Heath, said the decision “is the opposite of what Congress intended.”

“Congress had a good reason to pass a law encouraging people to come forward and be whistleblowers,” he said. “It’s not easy to be a whistleblower — there are personal, professional and reputational risks involved and this decision takes away an important incentive for whistleblowers to come forward.”

New York City attorney Faezeh Vaezfakhri of Rymand Law Office, who represented Pederson, did not respond to a request for comment.

A spokesperson for the SEC declined to comment on the decision.

The case is Pederson v. U.S. Securities and Exchange Commission, No. 24-2330.