Hong v. U.S. Sec. & Exch. Comm'n
| Citation | 41 F.4th 83 |
| Decision Date | 21 July 2022 |
| Docket Number | Docket No. 21-529,August Term 2021 |
| Parties | Victor HONG, Petitioner, v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, United States of America, Respondents. |
| Court | United States Courts of Appeals. United States Court of Appeals (2nd Circuit) |
Paul K. Brown (Richard S. Corenthal, John H. Byington III, on the brief), Archer, Byington, Glennon & Levine LLP, Melville, NY, for Petitioner.
Matthew S. Ferguson (Michael A. Conley, Thomas J. Karr, on the brief), Office of the General Counsel, Securities and Exchange Commission, Washington, DC, for Respondent Securities and Exchange Commission.
Casen B. Ross, United States Department of Justice, Washington, DC, for Respondent United States of America.
Before: Parker, Carney, and Robinson, Circuit Judges.
On this petition for review, we consider whether an individual who submits information about potentially unlawful conduct to the Securities and Exchange Commission is entitled to an award under the Commission's whistleblower program when the Commission does not itself bring an enforcement action but other federal agencies secure financial settlements in partial reliance on that information. See 15 U.S.C. § 78u-6.
Victor Hong worked at a subsidiary of the Royal Bank of Scotland Group PLC ("RBS" or "the Bank") for six weeks in the fall of 2007 before resigning, prompted by what he believed to be unlawful practices engaged in by the Bank in connection with its portfolio of residential mortgage-backed securities ("RMBS"). Seven years later, in 2014, he formally submitted information to the SEC about the Bank's misconduct. The SEC itself took no action against the Bank, but gave the information to the Department of Justice ("DOJ") and the Federal Housing Finance Agency ("FHFA"), each of which had already begun RMBS-related investigations into the Bank. FHFA and DOJ obtained additional related information and documents from Hong by subpoena, and, in 2017 and 2018, respectively, those agencies entered into settlements with the Bank related to its underwriting, marketing, and sale of RMBS. Combined, the settlements required the Bank to make payments to those agencies totaling over $10 billion.
Hong then applied to the SEC for an award under its whistleblower program (the "Program"), established in 2010 by Section 21F of the Securities Exchange Act. See 15 U.S.C. § 78u-6.1 He asserted that the DOJ and FHFA settlements constituted "covered judicial or administrative action[s]" or "related action[s]" resulting in sanctions of over $1 million and that he was therefore entitled under the Program to receive between 10% and 30% of the total amounts collected. See id. § 78u-6(a)(1), (b)(1). The SEC denied his claim. It concluded that Hong had identified no action "brought by the Commission under the securities laws" based on his information, as required to qualify as a "covered judicial or administrative action" on which an award might be due; it further found that there was in fact no such action "brought by the Commission." Sp. App'x at 5–6 (quoting 15 U.S.C. § 7u-6(b)(1)). It also rejected his alternative theory of recovery that the DOJ and FHFA settlements qualified as "related actions" under the Program and made him eligible for an award. The Commission reasoned that an "action" that was "brought by the SEC" was still a necessary predicate for an action brought by another agency to qualify as a "related action." Id. at 7. Hong then petitioned for judicial review. See 15 U.S.C. § 78u-6(f).
On review, we locate no error in the SEC's construction of Section 21F to require an action "brought by the Commission" to support a whistleblower award. We further decide that, contrary to Hong's arguments, investigative and information-sharing activities engaged in by the SEC are not "covered judicial or administrative action[s] brought by the Commission under the securities laws" or "actions" as to which the DOJ and FHFA settlements can be considered "related." Hong's argument that this reading is impermissibly inconsistent with the congressional intent in establishing the whistleblower program cannot overcome the plain language of Section 21F and does not give us license to disregard the agency's reasonable application of the statutory provisions.
Finally, having so concluded, we adopt the Commission's determination that Hong was not entitled to an award under the Program because the Commission did not bring a covered action. We also reject Hong's contention that the SEC was obligated to provide him with additional records regarding its investigation in connection with its denial of the claimed award. He has identified no regulatory or statutory basis for his request and, in any event, in light of our construction of the statute, any such records would not entitle Hong to an award.
We therefore DENY the petition for review. We further DENY as moot the motion to dismiss filed by the United States as respondent.
Through the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act"), Pub. L. No. 111-203, 124 Stat. 1376 (2010), Congress adopted a range of new whistleblower incentives and protections as well as many other measures aimed at stemming abuses in the financial arena. The whistleblower provisions in particular were designed to motivate those with inside knowledge of securities law violations to share information with the government despite the risks that speaking out could pose to the whistleblower's professional reputation and career. See S. Rep. No. 111-176, at 110–11 (2010). As relevant here, the Dodd-Frank Act amended the Securities Exchange Act of 1934 (the "Exchange Act") to establish a new statutory whistleblower program within the Commission. See Pub. L. No. 111-203, § 922, 124 Stat. 1376, 1841–49 (2010); see generally Kilgour v. U.S. Sec. & Exch. Comm'n , 942 F.3d 113, 120–21 (2d Cir. 2019).
The Program provides that the SEC "shall pay" monetary awards to individuals who provide the SEC with "original information" pertaining to securities laws violations and resulting in sanctions payments if certain conditions are met. 15 U.S.C. § 78u-6(b)(1). Thus, the statute directs in relevant part:
In any covered judicial or administrative action, or related action , the Commission, under regulations prescribed by the Commission ..., shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action , in an aggregate amount equal to ... not less than 10 percent ... [and] not more than 30 percent, in total, of what has been collected of the monetary sanction imposed in the action or related actions.
Id. (emphasis added).2 A whistleblower's eligibility for an award under the program accordingly depends in part on whether the information provided led to the successful enforcement of a "covered judicial or administrative action" or "related action."
Section 21F(a)(1) defines "covered judicial or administrative action" as "any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000." Id. § 78u-6(a)(1). It defines a "related action," as, "when used with respect to any judicial or administrative action brought by the Commission under the securities laws, ... any judicial or administrative action brought by [certain other entities]" that "is based upon the original information provided by a whistleblower ... that led to the successful enforcement of the Commission action."3 Id. § 78u-6(a)(5). The Department of Justice is among the entities whose judicial or administrative actions may qualify as "related" for purposes of the Program. Id. § 78u-6(a)(5), (h)(2)(D)(i)(I). The Program also confers substantial discretion on the Commission in administering the Program, instructing that "[a]ny determination made under [Section 21F], including whether, to whom, or in what amount to make awards, shall be in the discretion of the Commission." Id. § 78u-6(f).
In September 2007, Hong began work as a managing director and head of fixed-income independent price verification and risk management at RBS Greenwich Capital Markets, Inc., a subsidiary of RBS. In this position, he was responsible for conducting independent price verifications for all of the Bank's securitized credit products, including prime RMBS.5 Shortly after beginning work, Hong asserts, he became aware of "persistent discrepancies between trader marks or otherwise over-marked valuations" and the "analytical fair market value" of these securitized products. Jt. App'x at 153. According to Hong, his supervisors and RBS senior management repeatedly refused to correct these discrepancies, leading him to resign from RBS Greenwich in November 2007, less than two months after he began.
In July 2014, seven years after his departure from RBS, Hong completed and filed with the Commission a Tip, Complaint or Referral ("TCR") form providing information about the possible securities law violations of which he became aware while working at the Bank. He reported, for example, that "RBS Greenwich Capital top officers asked [him] to help falsify the pricing of several billion dollars of RMBS ... and other mortgage-related trading portfolios," and stated that he had "resigned rather than cooperate." Jt. App'x at 6.6
The information provided on his July 2014 TCR form was apparently of interest to members of a working group (the "RMBS Group") drawn from the government's Financial Fraud Enforcement Task Force, an entity established by President Obama in 2009 to investigate RMBS-related misconduct and comprising representatives of the SEC, FHFA, DOJ, and other agencies.7 In 2011, FHFA had sued the Bank on the basis of...
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