On The Case

Mortgage banker’s failed appeal sheds light on opaque SEC bounty process

(Reuters) - The president of the mortgage company MNI failed Tuesday to persuade the District of Columbia U.S. Court of Appeals that the Securities and Exchange Commission wrongfully denied him a bounty for information he provided about Bank of America mortgage-backed securities.

The MNI president, who litigated anonymously at the D.C. Circuit, claimed that he gave the SEC and the Justice Department information that helped the government reach a nearly $17 billion global settlement with BofA in 2014, including a $245 million SEC deal. The SEC commissioners rejected his application for a reward from its whistleblower program, based on declarations from three SEC staff lawyers who said the information Doe provided – more than a year after the commission had begun investigating BofA’s MBS practices – did not contribute to the case or lead to the settlement. D.C. Circuit Judges Karen Henderson and Douglas Ginsburg sided with the SEC in an unpublished order Tuesday, holding that Doe offered no good reason to second-guess the SEC’s determination.

It’s quite rare, according to whistleblower lawyers Jordan Thomas of Labaton Sucharow and Rebecca Katz of Motley Rice, for rebuffed tipsters to go to court to challenge SEC orders denying them a bounty. It’s rarer still for those challenges to succeed. Katz said she’s aware of only three cases, in addition to the Doe case, in which SEC whistleblowers sought review of final commission orders in the appellate courts – and the challengers lost all three. Thomas said he’s not aware of a single successful appeal by an SEC whistleblower.

Doe’s longtime counsel, Clifford Marshall of Marshall, Roth & Gregory, declined to comment on the D.C. Circuit ruling. But Marshall said he believes the SEC’s whistleblower bounty process is flawed. “Many times, the basis for the SEC’s final whistleblower decision is less than transparent,” Marshall said. “I cannot believe that was the intent of Congress in enacting Dodd-Frank.”

Given the rarity of SEC whistleblower appeals and Doe’s focus on process at the D.C. Circuit, it’s worth delving into the Doe appeal for what it reveals about a program that, as the SEC pointed out in its brief to the D.C. Circuit, has awarded more than $500 million to tipsters – but has left other purported whistleblowers, like Doe, dissatisfied with their awards and the SEC’s justification for them.

Doe said he went to the SEC in December 2011 to accuse BofA of putting a squeeze on companies that generated mortgage loans when it received buyback demands from Fannie Mae and Freddie Mac, then booking some of the billions it allegedly received from those loan originators as income. He met with SEC agents for four hours in April 2012. Doe alleged that SEC investigators told him they were part of a larger task force investigating mortgage-backed securities and that he should reach out an assistant U.S. Attorney in Charlotte, North Carolina, where BofA is headquartered.

MNI soon thereafter filed a False Claims Act case against the bank in federal court in Charlotte. Doe said he met again with SEC investigators in June 2012, along with other members of the federal government’s MBS Task Force. Over the next few years, Doe said, he was in regular contact with DOJ prosecutors about his qui tam allegations. At his direction, Doe said, at least one MNI employee also met with DOJ investigators.

In Doe’s view, the SEC claims that BofA ultimately agreed to settle “mirrored” the allegations he brought to the commission in 2011. He was one of more than a dozen people who asked for a bounty for supplying the SEC with a tip about Bank of America.

In 2017, the SEC staff issued a preliminary determination rejecting Doe’s bounty claim, along with those of the other purported BofA whistleblowers, because, according to the staff, none of the claimants provided information that led the SEC to begin or significantly expand its investigation. (Remember, the SEC had begun a broad examination of the entire MBS industry in 2010.) Nor, according to the SEC, did any of the bounty claimants, including Doe, significantly contribute to the successful outcome of the case against BofA.

Doe’s lawyers asked to see the record underlying the SEC’s preliminary determination, asking in particular if the SEC had consulted with DOJ about Doe’s contributions. The SEC, citing Dodd-Frank’s statutory requirements, supplied Doe’s counsel with declarations from three SEC lawyers who’d worked on the BofA case and said Doe did not qualify for an award.

That’s a typical response, said whistleblower lawyer Katz. “Unfortunately, this does not leave much to use for a successful appeal,” Katz said.

In 2019, the SEC issued a final order denying Doe an award. Doe appealed to the D.C. Circuit, arguing that the SEC had been arbitrary and capricious in denying him an award – and in failing to provide “even a cursory explanation” of its decision-making. At the very least, Doe argued, the SEC erred by giving short shrift to the materials he had provided to the Justice Department, not least because Doe was following the instructions of SEC investigators when he reached out to DOJ prosecutors.

The SEC, which didn’t respond to my email requesting comment, responded that the commission adhered to Dodd-Frank. Its lawyers said in sworn declaration that the information Doe provided to the SEC did not contribute to the BofA investigation or settlement. And because Doe didn’t provide the SEC with the materials he submitted to DOJ, the SEC was not required to consider that information. “Doe asserts that the commission has an obligation to … figure out whether any information it receives from another government entity originally came from a potential whistleblower,” the SEC said. “But no statute or regulation imposes those affirmative obligations on the commission in these informal adjudications. And such unwarranted and impracticable requirements would dramatically impede the effectiveness of a whistleblower program that received over 5,000 tips in the last year alone.”

The D.C. Circuit sided with the SEC. The SEC lawyers’ declarations, the appeals court said, showed Doe’s information came after the commission’s investigation began and was outside the focus of the SEC’s case. And Doe failed to establish that the SEC told him to provide followup information to the Justice Department, or, that any materials he gave to DOJ were relevant to the SEC’s case.

In any event, the D.C. Circuit said, SEC whistleblower awards, as a matter of statute and SEC rulemaking, are to be based on information provided to the SEC. “Doe had an obligation to provide the Commission with all of the information he provided to DOJ,” the appeals court said. “Because he failed to meet that obligation, Doe is ineligible for an award based on the DOJ materials.”

The opinion is unpublished, but should put whistleblower lawyers on notice that they must loop the SEC into any dealings with the DOJ or other government agencies. The decision is also more proof that in the SEC whistleblower process, there’s not a lot of room to second-guess the SEC.

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