Kilgour v. U.S. Sec. & Exch. Comm'n
| Decision Date | 08 November 2019 |
| Docket Number | Docket Nos. 18-1124,August Term, 2018,18-1127 |
| Parties | Colin KILGOUR, Daniel Williams, John Doe, Petitioners, v. United States SECURITIES AND EXCHANGE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — Second Circuit |
Colin Kilgour, Toronto, Ontario, Canada, Pro se Petitioner.
Daniel Williams, Toronto, Ontario, Canada, Pro se Petitioner.
David E. Kovel, Kirby McInerney LLP, New York, NY, for John Doe, Petitioner.
William K Shirey (Robert B. Stebbins, Stephen Yoder, Michael A. Conley, on the brief), for the United States Securities and Exchange Commission, Washington, D.C., Respondent.
Before: Kearse, Sack, Livingston, Circuit Judges.
In 2015, the United States Securities and Exchange Commission (the "SEC") reached a settlement agreement with Deutsche Bank AG ("DB") after the SEC discovered misstatements in DB’s financial statements. Previously, between 2010 and 2014, while the SEC was investigating DB, petitioners "John Doe,"1 Colin Kilgour, and Daniel Williams disclosed information to the SEC that they thought would be helpful to that investigation. After the settlement, the petitioners filed applications with the SEC for "whistleblower" awards. Their applications were denied.
The petitioners ask that we set aside the SEC’s denial of their award applications and instruct the SEC to issue whistleblower awards to them based on the value of the information provided to the SEC. For the reasons that follow, we deny the petitions.
During 2005 and 2006, DB purchased $98 billion of leveraged super senior tranches in more than thirty collateralized debt obligations (the "LSS") as credit protection. The LSS were leveraged eleven times, i.e., the sellers of the protection posted only 9% of the total value of the LSS as collateral. In late 2008 and early 2009, DB began overvaluing the LSS by misstating in their financial records the associated "gap risk"—the risk that the market value of its credit protection could exceed the available collateral posted by the sellers. This overvaluation was reflected in misstatements in DB’s financial statements. On May 26, 2015, the SEC both instituted agency cease-and-desist proceedings against DB with respect to these statements and accepted a settlement offer from DB in which DB agreed to pay a penalty of $55 million.
Between 2010 and 2014, i.e., before the SEC cease-and-desist proceedings were instituted, the SEC obtained information from several persons (the "Claimants") regarding the potential wrongdoing by DB. Three of the Claimants—John Doe, Colin Kilgour, and Daniel Williams – are the petitioners in this case.2
On or about June 7, 2010, the Enforcement Division of the SEC received information from DB’s counsel, after Claimant 1, a DB employee, filed an internal complaint, to the effect that DB was overstating the value of certain assets "to improve the appearance of [DB’s] financial performance" to its shareholders, the market and the investing public. Declaration of Amy Friedman, Assistant Director of the SEC Enforcement Division, July 27, 2016 ("Friedman Declaration"), at 3-4; Joint Appendix ("JA") 3086-87. Following this disclosure, the SEC opened an investigation of DB, and arranged for an in-person interview with Claimant 1. According to the SEC, it was Claimant 1’s "early identification of the Gap Risk issue that led the enforcement staff to focus on [that] issue in its investigation, and it was [that] issue that formed the cornerstone of the charges ultimately brought by the [SEC] against [DB] in the enforcement action." Id. at 3; JA 3087.
On September 30, 2010, petitioner John Doe met with enforcement staff from the SEC’s Complex Financial Instruments Unit ("CFIU"), a group that was part of the SEC’s Enforcement Division but whose membership did not overlap with the team working on the DB matter ("DB team"). The SEC and Doe offer different characterizations of this meeting. According to a declaration provided by the Deputy Chief of the CFIU, Reed Muoio: Declaration of Reid Muoio, Deputy Chief of CFIU, July 11, 2017 ("Muoio Declaration"), at 1; JA 4059.
Doe, for his part, contends that he provided credible, helpful information. For example, he asserts that during his meeting with the CFIU he gave a presentation that explained how certain restructuring efforts by DB would reshape the gap risk of the LSS. Doe sent several follow-up emails to the CFIU staff in October 2010, but Deputy Chief Muoio and his staff had concluded that Doe was "not a credible source of information." Id. Having so concluded, Muoio and his staff declined to forward emails they received from Doe to other staff in the Division of Enforcement. Id . Meanwhile, the SEC assigned two TCR3 numbers (numbers used to track whistleblower tips in its database) to Doe.
In March 2011, Claimant 2 began providing the DB team with information concerning DB’s gap risk calculations and made multiple submissions to the team in June and July 2011. The DB team found Claimant 2 to be a highly credible source of information, and the information that Claimant 2 provided proved, according to SEC enforcement officials, to be invaluable to their investigation of DB.
On July 29, 2011, Doe sent another email to the CFIU staff, which they forwarded to the DB team on August 3, 2011. This was the first time the DB team had seen any information provided by Doe. However, Doe’s email contained "no new information and did not help advance the [DB] [i]nvestigation." Friedman Declaration, at 8; JA 3092.
In November 2011 and December 2012, Claimant 2 made two additional submissions which were both considered by SEC enforcement personnel to be helpful to the DB team. The submissions provided information about how the gap risk calculation affected DB’s results on their late 2008 and early 2009 financial statements, and how something called the "Montreal Accord" affected the gap risk calculation. At that point, the DB team had received no such information from Doe.
On March 11, 2013, Doe made additional submissions to the DB team, including the email message that he had sent to the CFIU staff back in October 2010. But the DB team considered those submissions, like Doe’s prior submissions, to be unhelpful. At that point, "the investigation had already been ongoing for over two and a half years," and the information contained in Doe’s submission was "largely duplicative of other information that [the DB team] had already received or had learned." Friedman Declaration at 8; JA 3092. Doe’s re-sent October 2010 email, while referencing the Montreal Accord, "provided very little detail" and attached only "publicly-available documents." Additional Declaration of Amy Friedman, July 11, 2017 ("Add’l Friedman Declaration"), at 7; JA 3827.
On April 26, 2013, Doe’s counsel contacted the DB team to inform them that Doe "had [additional] information that might aid" the investigation. Add’l Friedman Declaration, at 13; JA 3833. The DB team met with Doe but found the information to be redundant. The DB team, like the CFIU in September 2010, thought Doe’s presentation was "very difficult to follow, as [he] jumped from topic to topic." Id . at 7.
On June 7, 2013, Doe made his final submission, attaching various internal DB documents. Again, these documents were considered by the DB team to be largely duplicative of documents the DB team had received from Claimant 2 or from DB itself when it responded to SEC document requests, and therefore unhelpful.
On June 21, 2013, Claimant 2 submitted an expert report to the DB team, which had been prepared by the Kilgour Williams Group ("KWG"), a consulting firm owned by petitioners Colin Kilgour and Daniel Williams. According to the DB team, this expert report was "detailed and comprehensive," "absolutely critical to [the] investigation," and used "in connection with [the] proffer session with [DB] and ensuing settlement negotiations with the company." Id. at 9-10. After submitting the report, and until July 2014, KWG continued to provide information to the SEC and to respond to questions from the DB team that "allowed the [team] to strengthen the SEC’s position vis-à-vis [DB]." Id.
In May 2014, Claimant 2 and his wife divorced. The state court overseeing the divorce proceedings awarded half the proceeds of any whistleblower payout Claimant 2 might receive to his wife. The court also ordered that Claimant 2 pay "all costs and expenses he had incurred or will incur with ... [KWG]." State Court Divorce Judgment August 10, 2015, at 10; JA 411.
On August 11, 2014, Claimant 2 authorized Kilgour and Williams to make an independent whistleblower submission so that they too could claim an award from the SEC. The next day, they jointly submitted an SEC Form TCR in an attempt to attain whistleblower status. This Form TCR did not provide any new information; it reiterated the information that KWG had been commissioned to provide on behalf of Claimant 2 between June 2013 and July 2014 and which had previously been supplied to the SEC.
After DB agreed to pay the $55 million civil fine to the SEC, nine whistleblower claimants (including the three petitioners in the case at bar) came forward to claim awards. On July 27, 2016, the SEC’s Claims Review Staff ("CRS") issued a Preliminary Determination ("PD"), as is required by Rule 21F-10(d), recommending awards for Claimants 1 and 2 and rejecting all other claimants’ applications.
Pursuant to SEC regulations, any claimant may submit "a written response to the Office of the...
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