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.