SEC LogoOn May 31, 2016, the U.S. Securities and Exchange Commission (“SEC”) issued an order upholding the SEC Claims Review Staff’s (“CRS”) Preliminary Determination denying a claim for a whistleblower award in connection with the enforcement action SEC v. CVS Caremark Corp.  Notice of Covered Action 2014-48 (“Covered Action”).  This order provides insight into a whistleblower tip that essentially goes nowhere, which is what happens to the overwhelmingly vast majority of them.  And this insight is valuable because most attention has been focused on those very few instances where the SEC has in fact awarded a bounty.  During the Fiscal Year 2015, the SEC received 3,923 tips, issued orders and determinations on roughly150 whistleblower claims, but only paid out awards to 8 Claimants during that time (or in just over .2 percent of the tips filed).  See SEC 2015 Annual Report to Congress on the Dodd-Frank Whistleblower Program. (See our posts on the 2015, 2014, 2013 and 2012 Annual Reports).

Here, the SEC found that the Claimant’s tip was designated for “no further action” when received by the Division of Enforcement and thus was not used in connection with the Covered Action against CVS Caremark. Since the Claimant’s tip was marked no further action, “Claimant’s tip was not forwarded to investigative staff either to begin a new investigation, to inquire into different conduct, or to use in connection with any ongoing investigation” and Enforcement staff did not communicate or receive information from Claimant. Therefore, Claimant could not satisfy the requirement that the tip caused the SEC to “(i) commence an examination, (ii) open or reopen an investigation, or (iii) inquire into different conduct as part of a current Commission examination or investigation.” See Section 21F(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”); Exchange Act Rules 21F-3(a)(3)& 21F-4(c).

Notably, the SEC rejected Claimant’s argument that the “no further action” designation of Claimant’s tip erroneously and wrongfully denied the Claimant eligibility for an award. The SEC found that the designation had no bearing on Claimant’s ability to obtain an award because even if the Claimant’s contentions were true, “it would still remain the case that Claimant’s information did not lead to the Covered Action.” Significantly, the SEC found Claimant’s tip warranted a “no further action” designation because it did not credibly and specifically allege a violation of federal securities law.

This order highlights the requirement that a claimant’s tip must both: (i) credibly and specifically allege a violation of federal securities laws and (ii) actually cause the SEC to begin, reopen, or further an investigation into different conduct to be eligible for a whistleblower award.  Merely identifying a target company and providing vague information unconnected to any securities law violation will not suffice.

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Photo of Lloyd B. Chinn Lloyd B. Chinn

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative…

Lloyd B. Chinn is a partner in the Labor & Employment Law Department and co-head of the Whistleblowing & Retaliation Group. He litigates employment disputes of all types before federal and state courts, arbitration tribunals (e.g., FINRA, JAMS and AAA), and before administrative agencies in New York and across the country. Lloyd’s practice ranges from litigating compensation disputes to defending whistleblower, discrimination and sexual harassment claims. Although he represents employers in a wide range of industries, including law, insurance, health care, consulting, media, education and technology, he focuses a substantial portion of his practice on the financial services sector. He has tried to final verdict or arbitration award substantial disputes in this area.

Due to Lloyd’s litigation experience, clients regularly turn to him for advice regarding the full range of employment matters, including terminations, whistleblower policy and procedure, reductions in force, employment agreements, and employment policies. For example, in the wake of the financial crisis, he has counseled a number of firms through reductions in force and related bonus and deferred compensation disputes. Lloyd has also been retained to conduct internal investigations of allegations of workplace misconduct, including claims leveled against senior executives.

Lloyd has represented global businesses in matters involving Sarbanes-Oxley and Dodd-Frank whistleblower claims. He has taken an active role in the American Bar Association on these issues, currently serving as Co-Chair of the Whistleblower subcommittee of the ABA Employee Rights and Responsibilities Committee. Lloyd has spoken on whistleblowing topics before a numerous organizations, including the American Bar Association, ALI-ABA, Association of the Bar of the City of New York, and New York University School of Law. He has testified twice before Congressional subcommittees regarding whistleblower legislation and has also published blog postings, articles and client alerts on a variety of topics in this area, including the Dodd-Frank Act’s whistleblower provisions. Lloyd is a co-editor of Proskauer’s Whistleblower Defense Blog, and he has been widely quoted by on whistleblower topics by a number of publications, including the New York Times, the Wall Street Journal, the National Law Journal and Law 360.

Lloyd has also become active in the International Bar Association, presenting on a variety of subjects, including: the #MeToo movement, the COVID-19 pandemic and employment law, and cross-border harmonization of employment provisions in transactions. Lloyd also hosts a quarterly roundtable discussion among financial services industry in-house employment lawyers. He has also published articles and given speeches on a variety of other employment-law topics, including non-solicitation provisions, FINRA arbitration rules, cross-border discovery, e-discovery, and the use of experts.