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D.C. Circuit Backs SEC’s Denial Of Whistleblower Bounties To Two Claimants In Connection With Novartis FCPA Enforcement Action


In 2016, Swiss pharmaceutical company Novartis coughed up $25 million to resolve a SEC FCPA enforcement action focused on the conduct of its indirect Chinese subsidiaries. (See here).

In the aftermath of the enforcement action, twelve individuals filed applications with the SEC for a whistleblower bounty pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the SEC determined that two claimants deserved a joint award.

Two of the ten claimants whose applications were denied, appealed the SEC’s denial to the D.C. Circuit Court of Appeals and in this recent decision the Court sided with the SEC in its denial.

As to relevant background, the decision notes:

“The petition here involves the award claims of Claimant 11 and Claimant 12. Each worked for a competitor of Novartis in China; each had informed the SEC of illegal behavior by her employer; and each had subsequently informed American media about that behavior. Media outlets then ran stories about these allegations. Each claimant argued she was entitled to a whistleblower award because, in each claimant’s view, the media reports had caused Novartis to review its practices and ultimately settle with the SEC.

The [SEC’s Claims Review Staff] CRS issued a preliminary denial of their claims because the information they provided did not “[lead] to” the successful enforcement action against Novartis as defined in Exchange Act Rule 21F-4(c). See 17 C.F.R. § 240.21F4(c)(1)–(3). The petitioners provided information related to alleged misconduct by two of Novartis’s competitors, not Novartis. Accordingly, the CRS concluded that their information did not cause the opening or reopening of the investigation as required by Rule 21F-4(c)(1). See id. § 240.21F-4(c)(1). They failed to meet the requirements of Rule 21F-4(c)(2) because the information they provided did not relate to conduct already under investigation or examination and did not significantly contribute to the success of the action. See id. § 240.21F-4(c)(2). The CRS reached this conclusion because the reported information involved conduct by different companies and was not used in the Commission’s investigation. Further, the CRS reasoned that the connection between Claimant 11’s and Claimant 12’s submissions of this information to the news media—and its subsequent appearance in various news articles—and the charges in the Novartis action was “tenuous at best,” far from demonstrating a significant contribution to the success of the action. Erasing any lingering doubt, the CRS emphasized that “the submissions made by Claimants 11 and 12 to the Commission had no impact whatsoever on the Covered Action.” Finally, the petitioners did not merit an award under Rule 21F-4(c)(3) because, although their submitted information purportedly sparked an internal investigation at Novartis, the findings of which became part of the Covered Action, the petitioners gave the information about Novartis’s competitors to the news media, not to Novartis as required by the Rule. See id. § 240.21F-4(c)(3).

The petitioners then challenged the CRS’s preliminary determination. They argued that the CRS incorrectly concluded that the three fact patterns described in Rule 21F-4(c) were the exclusive routes to satisfy the Rule and that it should have considered “alternative circumstances not specified in” the Rule in analyzing their claims. Notably, they did not contest the CRS’s determination that their circumstances failed to meet the requirements of any of the three fact patterns set forth in Rule 21F-4(c).

Taking up the petitioners’ challenge, the SEC first noted that they “appear to concede that they have not satisfied the three fact patterns set forth in Rule 21F-4(c).” J.A. 293. It then rejected the argument that there are “alternative circumstances not specified in Rule 21F-4(c) in which a claimant can satisfy” the Rule’s “led to” requirement. The Commission reiterated that it had rejected this argument in a previous order and that it had interpreted the Rule’s three fact patterns as exclusive since the Rule’s adoption. See In the Matter of the Claim for Award in Connection with Redacted, Rel. No. 89551, 2020 WL 4720539, at *4 (Aug. 13, 2020) (citing 76 Fed. Reg. 34300, 34357 (June 13, 2011)). It added that expanding the Rule beyond the three prescribed fact patterns would introduce unnecessary speculation and complexity into the analysis and make the Rule too difficult and impracticable to administer. Accordingly, the petitioners’ award applications were denied.”

As to the relevant law and regulations governing the SEC’s determination of whistleblower awards, the Court stated:

“Following Dodd-Frank’s enactment and a notice-andcomment period, the SEC accordingly adopted final rules to implement the whistleblower program. Securities Whistleblower Incentives and Protections, 76 Fed. Reg. 34,300 (June 13, 2011) (Adopting Release). The promulgated rules— in particular, Rule 21F-4(c)—set forth the circumstances under which information provided by whistleblowers will be considered to have “led to” the successful enforcement of a covered action, as the statute requires for award eligibility. See 15 U.S.C. § 78u-6(b)(1) (“In any covered judicial or administrative action, or related action, the Commission under regulations prescribed by the Commission . . . shall 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 the covered judicial or administrative action, or related action.”); 17 C.F.R. § 240.21F-4(c) (defining “[i]nformation that leads to successful enforcement”).

Rule 21F-4(c) identifies “any of the following circumstances” as scenarios in which whistleblower information will be deemed to have “led to” a successful enforcement action: (1) the whistleblower’s “original information” caused the SEC “to commence an examination, open an investigation, [or] reopen an investigation” and the successful action was “based in whole or in part” on that information; (2) the “original information” involves “conduct that was already under examination or investigation by” the SEC or other federal or state agencies and the information “significantly contributed to the success of the action”; and (3) the “original information” was reported “through an entity’s internal whistleblower . . . procedures,” the entity either gave the information to the SEC or “provided results of an audit or investigation initiated in whole or in part in response” to this information and the information the entity submitted to the SEC satisfies either of the other two scenarios. 17 C.F.R. 240.21F-4(c)(1)–(3). In the preamble to Rule 21F 4(c), the SEC noted that “a whistleblower is only entitled to an award if one of [the] three general standards is satisfied.” Adopting Release, 76 Fed. Reg. at 34,357 n.438 (emphasis added).”

The Court then framed the issue as follows: “whether Rule 21F-4(c)’s three fact patterns under which a whistleblower’s information “led to” a successful enforcement action are exhaustive, as the Commission interpreted the regulation in its denial of the petitioners’ award applications.”

The Court found the regulation ambiguous and deferred to the SEC’s interpretation. In determining whether the SEC’s interpretation warranted deference, the Court stated:

“First, the SEC’s interpretation reflects its “authoritative” and “official position.” The petitioners do not dispute this, nor can they because the Commission’s reading “emanate[s] from those actors . . . understood to make authoritative policy,” was pronounced in the SEC’s Adopting Release and has been reaffirmed in public adjudicative orders.

Second, the interpretation “implicate[s] [the Commission’s] substantive expertise” in implementing the whistleblower program. […] [T]he subject matter in dispute here—the Commission’s process for determining whistleblower award eligibility—is part and parcel of the SEC’s statutorily assigned duties. Indeed, “Congress has explicitly entrusted the Commission with implementation and oversight of the program.” And no other agency is involved in whistleblower award determinations. Furthermore, the whistleblower program “is laden with carefully considered implicit and explicit policy judgments on the part of the Commission,” including balancing the burden of administering the whistleblower regime while providing an adequate incentive for potential whistleblowers to come forward.

Third and finally, the SEC’s reading “reflect[s] [its] ‘fair and considered judgment.’


In sum, given that the text of Rule 21F-4(c) is genuinely ambiguous, the SEC’s interpretation is entitled to deference pursuant to the interpretive guideposts announced by the Supreme Court in Kisor. Accordingly, the petitioners’ claim that the Commission’s reading does not fall within the bounds of reasonable interpretation fails.”

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