Prominent whistleblower attorney Jordan Thomas filed a lawsuit Wednesday against the Securities and Exchange Commission to vacate what he says are “illegal” changes to the agency’s whistleblower rules, which “undermine the integrity and effectiveness” of the program.
The changes to the SEC whistleblower rules, approved by a 3-2 vote in September, “add uncertainty to the cost benefit analysis” of SEC whistleblowers, Thomas, a partner and chair of the Whistleblower Representation Practice at the law firm Labaton Sucharow, told ThinkAdvisor on Wednesday in an interview. “The new rules turn the commission into a casino that courts high rollers with the promise of large jackpots but reserves the right to lower their winnings if they are too large.”
Thomas was a principal architect of the SEC Whistleblower Program.
The 48-page lawsuit, filed in the U.S. District Court for the District of Columbia, states that despite its incredible success, “the Commission recently amended its whistleblower rules for the express purpose of decreasing the size and number of whistleblower awards it issues.”
Under the Dodd-Frank Act, the Commission was ordered to “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 a covered action or ‘related action’ in an amount equal to ‘not less than 10 percent . . . [and] not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.’”
Under the Dodd-Frank rules, the agency calculated whistleblower awards by assigning an “award percentage” based on certain positive factors (e.g., the significance of the information provided) and negative factors (e.g., the culpability of the whistleblower), the lawsuit explains.
The commission then issued an award by multiplying the “award percentage” by the total monetary sanctions collected by the SEC.
The commission, the lawsuit states, “did not take the size of the monetary sanctions into account when deciding the proper amount of the whistleblower award.”
The rules encouraged whistleblowers to come forward “by guaranteeing that those individuals who acted properly would be awarded accordingly and would not have their awards unfairly and arbitrarily diminished,” the suit states.