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Carson Block Betrayed Partner to Steal SEC Award, Filing Says (1)

Sept. 27, 2022, 4:53 PMUpdated: Sept. 27, 2022, 8:11 PM

The court fight over a $14 million SEC whistleblower award to short seller Carson Block escalated Monday, with his collaborator alleging Block deceived him while also acknowledging that neither man may have deserved the money.

Kevin Barnes argued in a new federal filing that Block worked behind the scenes to convince Securities and Exchange Commission investigators to cut him out of the bounty, which stemmed from a 2011 report the men authored that eventually led to SEC enforcement action against a Chinese company. Barnes made similar arguments in a New York state court filing earlier this year, but the new filing in the Southern District of New York provides greater detail.

After the SEC announced a $55.6 million settlement with Focus Media in 2015, Barnes and Block agreed to file a whistleblower claim with the SEC, arguing that their work led the agency to investigate and to the final settlement, the lawsuit claims. This year, the SEC awarded Block $14 million under its whistleblower program while denying Barnes’ claims.

The SEC decision made “clear that that Block had plainly not been honest or faithful to Mr. Barnes, and, indeed had been working to deliberately ensure that only Mr. Block—and not Mr. Barnes—receive the opportunity at sharing in any whistleblower award,” Barnes’ attorneys wrote.

The SEC’s payment to Block is on hold while a separate lawsuit filed by Barnes against the agency plays out in court. Barnes, using the pseudonym “Jamie Doe” filed a lawsuit in April, arguing the SEC’s denial of his claim was arbitrary and not consistent with the whistleblower law. That case is pending.

Block could not be reached for comment.

In the most recent filing, Barnes also alleges that neither man may have met the legal requirements to receive an SEC whistleblower award. The SEC staff originally rejected the claims of both men, but the commission overruled them in favor of Block.

“The SEC’s investigation had been opened after an SEC attorney found the FMCN Report online, and not because of information either had been provided the SEC ... In so doing, the Claims Review Staff explicitly rejected the theory that ‘publishing an online report’ constituted a ‘voluntary submission of information’ to the SEC.”

Barnes also used the filing to express frustration with what he called the SEC’s secrecy about how it determines who who should receive whistleblower awards. He called the process a confusing system of regulations that make it difficult to contest SEC orders. The filing also makes clear that when they wrote their report on Focus Media in 2011, their only goal was to alert the public about a dishonest company, and to benefit if Focus Media stock collapsed.

The company’s stock fell $1.3 billion the day Block and Barnes released their report, according to his lawsuit. Neither man had any intention of getting a whistleblower award until they read about the program years later, Barnes’ attorneys wrote.

“Moreover, the SEC whistleblower award application process was extremely convoluted for anyone other than a former SEC staff attorney responsible for drafting the program rules. At that time, Mr. Barnes and Mr. Block had no designs on an SEC whistleblower award. It was not until years later that they became sensitized to the opportunity presented by the SEC,” they wrote.

(This story was updated in the fifth paragraph and in the final three paragraphs to include additional context and details from the Sept. 26 court filing. )

To contact the reporter on this story: John Holland at jholland1@bloombergindustry.com

To contact the editor responsible for this story: Gary Harki at gharki@bloombergindustry.com