A federal appeals court has denied the whistleblower claims of a former Royal Bank of Scotland (RBS) employee seeking compensation for a tip he said generated more than $10 billion worth of settlements.
The U.S. Court of Appeals for the Second Circuit ruled Thursday that Victor Hong was not entitled to receive compensation for information on wrongdoing he provided to the Securities and Exchange Commission (SEC) he said was used by other agencies. Hong was seeking a portion of more than $10 billion in separate settlements RBS entered with the Department of Justice (DOJ) and Federal Housing Finance Agency (FHFA) in 2018 and 2017, respectively.
Of the agencies, only the SEC has a program that offers whistleblowers an avenue to receive a percentage of a settlement if they provided substantive information. The court ruled since the SEC did not bring either action, Hong was not entitled to receive a share of those settlements. The SEC whistleblower program says the agency must bring a “covered judicial or administrative action” for a whistleblower to be eligible to receive compensation.
“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,’” said the unanimous three-judge ruling, written by U.S. Circuit Judge Susan Carney.
The ruling will make it less enticing for whistleblowers with substantive information about widescale wrongdoing to come forward with information, according to a statement issued through Hong’s attorney, Richard Corenthal.
“The court recognized a Dodd-Frank whistleblower program flaw, whereby the SEC can refer securities-fraud tips away to other agencies for prosecution in order to avoid paying resultant, deserved awards.” Hong said. “The court suggested for Congress to rectify this key statutory flaw.”
In May 2020, a federal appeals court ordered the SEC and DOJ to review Hong’s whistleblower claim and provide documents Hong sought to prove his claim.
Hong was seeking a portion of the $4.9 billion settlement the DOJ and RBS agreed to in 2018, which at the time was the largest-ever penalty handed down by the agency against a single entity.
No portion of that fine has ever been deemed eligible for a reward under the whistleblower program, according to a review of public records by Reuters.
In 2017, RBS and the FHFA reached a $5.5 billion settlement to resolve “violations of federal and state securities laws in connection with private-label residential mortgage-backed securities trusts purchased by Fannie Mae and Freddie Mac between 2005 and 2007,” according to the FHFA’s press release at the time.
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