United States: SEC Announces Additional Whistleblower Award Based On Assets Seized By Justice Department

After awarding the second-ever whistleblower bounty award pursuant to Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in connection with SEC v. Andrey C. Hicks and Locust Offshore Mgmt., LLC., No.  1:11-cv-11888-RGS (D. Mass. 2011), the SEC announced that the three whistleblowers were being awarded additional funds based on assets collected by the collected by the Justice Department in U.S. v. Andrew C. Hicks, No. 11-mi-1147-RBC (D. Mass. 2011) (press release can be accessed here).  The two cases constituted "related actions" because they were based on the same original information.  The SEC's determination to award an additional bounty based on the related criminal action is likely to lead to more whistleblower tips.

Background

In October 2011, the SEC filed an enforcement action against the defendants in Locust alleging fraud in connection with the offer and sale of securities.  Based on the same facts and circumstances, also in October 2011, the U.S. Attorney for the District of Massachusetts charged Andrey C. Hicks with wire fraud, attempting to commit wire fraud, and aiding and abetting wire fraud.  In March 2012, the U.S. District Court for the District of Massachusetts entered judgment in favor of the SEC after a default judgment was entered against the defendants.  The sanctions totaled approximately $7.5 million.  On June 12, 2013, the SEC announced an award to three of the four tipsters who provided tips in the action of 5% each of the monetary sanctions collected.  The award to each whistleblower on the amount collected was $376,808.76, with a potential aggregate award of $1,130,426.28.  On June 28, 2013, the SEC approved an award of 5% to each whistleblower of the money collected in the related criminal action.

In December 2012, Hicks pled guilty to five counts of wire fraud and was sentenced to 40 months in prison.  In addition, Hicks consented to the forfeiture of his interest in property previously seized by the Justice Department.  Approximately $170,000 had been administratively forfeited.  These funds, according to the SEC, were deemed "collected" for purposes of issuing a whistleblower award and therefore the three whistleblowers were entitled to 5% each of the amount collected, or $8,500 each.  Additionally, the value of the assets seized from Hicks totals approximately $845,000, and thus the whistleblowers are expected to receive 5% each ($42,250)—a total of 15% of the amount seized ($126,750).

The additional whistleblower award based on the assets seized in the criminal action are provided pursuant to Rule 21F-3(b) under the Securities Exchange Act of 1934, 17 C.F.R. § 240.21F-3(b).  Agencies that fall under the "related action" include an Attorney General of the United States, an appropriate regulatory authority, self-regulatory organization, or state attorney general in connection with a criminal case.  17 C.F.R. § 240.21F-3(b). 

Implications

This additional whistleblower award based on the related action is significant, particularly given that it illustrates the close interaction between the SEC and the Justice Department in pursuing civil and criminal actions and the likelihood that a willingness to pursue actions across agencies is likely to lead to higher awards, and in turn, encourage more tips.

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