It’s been nine years since David Danon began helping SEC investigators build a case against Vanguard, revealing information about a scheme that paid the company to return more than $2 billion in investment funds that had been stashed in an effort to avoid taxes.
The Texas Comptroller’s Office rewarded Danone for his work, and the Securities and Exchange Commission twice filed legal briefs on his behalf, arguing that the whistleblower should be protected.
But when it came time to get paid, the Securities and Exchange Commission’s Whistleblower’s Office stopped answering his calls, according to a July federal court filing.
Danone’s allegations fit into the agency’s pattern of handling several high-dollar cases involving banks, drug companies and investment houses, according to a Bloomberg Law review of lawsuits and agency documents. The agency opened investigations and worked with whistleblowers for years, or passed their information on to other money-recovering agencies, then refused to provide details about why it dismissed their allegations.
Despite the SEC’s hype about the occasional huge prize, many of the major financial fraud cases the program is designed to prevent could slip through loopholes or be passed on to other agencies, lawyers say. The program, which was set up in the wake of Bernie Madoff’s $64.8 million Ponzi scheme, received about 12,000 tips last year.
A Bloomberg Law analysis found that less than 1% of the more than 54,000 tips in the program’s history have resulted in an award.
The Securities and Exchange Commission did not respond to Danone’s allegations in court and declined to respond to Bloomberg’s written questions about the case, citing the ongoing lawsuit. The agency also declined to answer questions about funding, resources, or why large cases were referred to other federal agencies.
Advice is always treated with respect, and information provided by whistleblowers has proven to be a powerful weapon in our law enforcement arsenal, a SEC spokesperson said in a statement released late Wednesday.
“As a result of this information, we were able to reduce harm to investors, better preserve the integrity of the US capital markets, and more quickly hold hundreds of companies accountable for illegal behavior,” the statement read.
The program has awarded more than $1.3 billion to nearly 280 whistleblowers since 2011 and has recovered about $5 billion to investors and victims.
Corporate directors, directors and their whistle-blower lawyers say they’ve been in the dark for years. The issues remain hidden behind the agency’s confidentiality rules, and it does not provide any information about how the commission reached its decisions.
Details about the crime or the companies involved only emerge when unpaid whistleblower lawsuits are filed, as has happened with investigations at Vanguard, Teva Pharmaceuticals, Royal Bank of Scotland and Bank of America.
Lawyers for a Bank of America whistleblower argued in their 2020 appeal: “The Commission … flatly refused to tell anyone exactly what it thought when making its decisions.” Their client, identified only as John Doe, won a settlement in a false $50 million lawsuit against Bank of America but was denied award by the SEC.
dark then silence
Danone, a former internal tax advisor to the Vanguard Group, made similar claims in his July petition about the SEC’s lengthy delay in his case. He filed a whistleblower complaint in May 2013, around the time he was fired by Vanguard over what he claimed were internal complaints about an “illegal fund” created to avoid taxes and harm its investors.
The lawsuit said Vanguard halted the fraudulent tax scheme in 2015 in response to work by Danone and SEC investigators, returning more than $2 billion to its financial accounts.
Danon argued in court that this was exactly what Congress had in mind when he created the program. It’s asking a federal judge to order the Securities and Exchange Commission to file an update, and issue a “Notice of Covered Action,” which begins the whistleblower award process after an investigation comes up with results. Without this notice, whistleblowers cannot file a claim.
“The Securities and Exchange Commission in nine years has not even issued the basic report that it is required by law to issue under these circumstances,” Danone’s lawyers wrote in a federal court filing on July 25. “This situation is anathema to the proper application and eventual success of the SEC Whistleblower Program. It comes at a time when the Whistleblower Program is already under full full view of Congress, the whistleblower community and commentators due to widespread delays and a lack of transparency.”
Danon’s collaboration lasted for years, according to a court filing in July, and involved the agency’s highest ranks.
In 2015 and 2016, he worked with several officials at the then-Security and Exchange Commission, including former director Sean McKissey, then-Vice Presidents Jane Norberg and Nikia Wharton, and is currently a senior counsel in the SEC’s enforcement division.
“Danone and his attorney also provided extensive information to these officials over an extended period of time, including but not limited to an account of Vanguard’s abuses,” the petition states.
After his complaint to the Securities and Exchange Commission, Vanguard disposed of her reserve fund, according to Danone’s petition.
That’s when SEC officials cut all communications.
In addition to asking the DC Court of Appeals to order the SEC to issue a Notice of Covered Business, Danone’s filing accuses the agency of being dishonest in its dealings. He maintains that the agency said at one point that it would take three years to fulfill the public records request for his file because it was so huge. A few years later, when he made the same request, Danone was told he had no response documents.
There are no checks on the system
In court documents and interviews, lawyers argue that the agency’s secrecy and inconsistency have hurt the program. Perhaps some seemingly contradictory and disapproving decisions are warranted, but since orders and decisions are all made in secret, there is no way to ensure that the awards are impartial, they argue.
When cases are appealed, SEC employees provide an affidavit stating whether the informant helped build the case, without supporting documents. The Capital Circuit Court of Appeals has consistently said these statements are sufficient evidence to support the decisions.
“I think the ambiguity, combined with the lack of a procedural mechanism for meaningful judicial review, means that many lawyers in my position are less inclined to bring these cases forward than the framers of the law had hoped,” said Roland W. Riggs of Kreindler. & Associates in New York, who participated in the Bank of America appeal.
The Bank of America case dragged on for years before the bank agreed on August 21, 2014 to pay $16.6 billion to the US government, including $245 million to the Securities and Exchange Commission, to settle fraud claims arising from its sale of residential mortgage-backed securities.
After more than five years, the SEC has dismissed the allegations of eight of the whistleblowers in the case, according to court records and final orders issued by the SEC on December 5, 2019.
One of them, referred to as John Doe Claimant 5, received an award from the Department of Justice for his contributions and sought a second award from the SEC, as permitted under the rules. In 2012, he met with SEC investigators, who told him they were part of a task force led by the Department of Justice.
The whistleblower spent years working with the task force and earned about $12 million for providing information that led to the $50 million False Claims Act settlement between the Department of Justice and Bank of America. He then applied for an award from the Securities and Exchange Commission, assuming that his years in the business and a large number of documents handed over to the business team would count.
The SEC disputed, telling his attorney that it did not use his information and that anything he submitted to the Department of Justice first could not be considered information submitted to the SEC. The whistleblower’s lawyers wrote that he refused to provide any records to support his decision.
“After the plaintiff spent years assisting the task force, the Securities and Exchange Commission failed to provide a prompt explanation for its initial decisions,” attorney Clifford Marshall wrote.
Agency lawyers also told federal appeals court judges that its rules prohibit payments to anyone who provides information exclusively to another federal agency, even if the whistleblower is already working with the SEC. The Court of Appeals eventually approved and dismissed John Doe’s complaint.
Marshall said the agency refused to provide documents or any information about his client’s case, making a meaningful appeal impossible.
“There is nothing transparent about the process; it is a black box where they keep information away from whistleblowers and keep them waiting for years,” said Marshall, the former assistant US attorney who oversaw the FCA program in North Carolina and now represents the whistleblower.
Resources and resentment
Sure enough, some huge prizes went to the whistleblower.
In September 2021, one of the clients of a senior advisor to the US Securities and Exchange Commission, Rebecca Katz, now working for Motley Rice, received $110 million, and another client received $36 million. Clients of former SEC associate litigation counsel Jordan Thomas, who helped create the whistleblower program before entering private practice, were awarded $83 million in a March 2018 case.
Clients of companies that hired three former SEC lawyers received at least $420 million — nearly a third of all awarded money — according to agency records obtained by Bloomberg Law that records payments between 2011 and 2020, four months in 2021.
But lawyers said these cases are rare and distort the reality of what most whistleblowers face.
Aegis Frumento, partner at Stern Tannenbaum & Bell in New York, points to three reasons why many large whistleblower cases go without compensation: the agency’s lack of resources to investigate and pay out big prizes, and professional enforcement officials’ resentment toward outside whistleblowers. and apparent favoritism in favor of a small group of former Securities and Exchange Commission attorneys.
“My experience is that you give them great evidence about hoaxes inside a major company…(it) falls into the hands of actual law enforcement, and they interview your client, and then at the end of the day, they say, ‘It was a great case,’ said Formento, who praised my investigators. The SEC who dealt with them, “but we don’t have the resources to follow it up. “Resources are a real problem for them.”
Formento and other attorneys said Congress needs to amend the law to allow private attorneys to file lawsuits when the agency takes no action, as permitted under the Justice Department’s False Claims Act. This ensures only attorneys and clients will proceed with the strongest cases, they said, with whistleblowers guaranteeing between 10% and 30% of any money recovered.
“The main problem with the whistleblower program is the SEC’s discretion to file cases, because most advice ends up in a black hole without any action being taken,” Fromento said.
One of the largest US bank fraud investigations followed advice to the Securities and Exchange Commission from Victor Hong, managing director of Royal Bank of Scotland, which prompted the bank to pay $10 billion to settle US government claims over its handling of mortgage-backed securities and financial instruments. other. The Securities and Exchange Commission passed his information to the Department of Justice and the Federal Housing Finance Agency, which had worked with Hong for years.
But the Securities and Exchange Commission hasn’t taken any action on its own. In court, agency lawyers argued that they could not pay when the whistleblower’s information would lead to a successful case for another agency. She said the law prohibits the SEC from paying Hong and others. In June, the Capital Circuit Court of Appeals agreed that the SEC had acted reasonably and in good faith when it dismissed his claim, while sympathizing with his situation.
Hong’s attorney, Richard Corenthal, has called on Congress to breach the secrecy surrounding the agency’s granting process.
“Congress needs to conduct an oversight hearing to correct these arbitrary actions that violate Dodd Frank’s and Congress’ intentions,” Corenthal said.
New York attorney Oliver Bode, who has his client Peter Seaver in tip-off against Barclays, said the agency’s treatment of its most prominent mentors hurt the entire program.
“It’s very frustrating when you have high profile people like Victor Hong and David (Danone) where their information is correct and it is clearly used, and they are not being paid for all of their work,” Bode said. “In these larger cases, people are putting well-paying jobs and careers on the line because they are trying to do the right thing, and they need to be protected and rewarded. If this program is going to do what it is supposed to do, we need to see more of the big issues being raised.”