Whistleblower Awards Slow to Trickle as SEC Raises Bar on Claims

The SEC is denying a record percentage of whistleblower claims, including two in orders that sharply rebuked a previous award to activist investor Carson Block—signs the agency is enforcing rules and scrutinizing claims more strictly than in past years.

The commission, now with a Republican majority, denied awards in 31 consecutive orders issued between April 21 and July 15 – covering at least 55 different tipsters, Bloomberg Law found in a review of all 65 final orders issued this year. It’s the longest drought in the history of the program, which was created by the Dodd-Frank law of 2010 to encourage tips about financial wrongdoing.

Approximately $20 million has been awarded so far this year, including three awards totaling about $9 million that the agency made on July 16, two days after Bloomberg Law asked it about the lack of approvals.

Last year at this time, more than $60 million had been awarded, on the way to $255 million for the year. So far this year, the agency has approved about 13% of all claims, compared to about 37% last year through the end of July.

Attorneys who have dealt directly with the agency and its staff for years are divided on whether it is a blip, or a sign the new administration is trying not to pay whistleblowers. They agree, however, that the commission is scrutinizing cases more closely.

“They are looking for hyper-technical reasons to disqualify someone who was qualified, which is the exact opposite of what Congress intended,” said Stephen Kohn, founding partner of the whistleblower advocacy firm Kohn, Kohn & Colapinto in Washington. “The law was written to encourage people to come forward and report corruption, and to compensate them for taking such big risks.”

“What is happening now is a trend, and that’s very clear,” Kohn said. “There has been a policy shift to where resources are now being used to figure out ways to avoid paying qualified claims.”

The Securities and Exchange Commission declined to comment.

Sen. Charles Grassley (R-Iowa) helped write the whistleblower statute after the SEC failed to heed multiple warnings about Bernie Madoff’s $63 billion fraud. He’s championed the program ever since and has noticed the steep dropoff in awards.

“Senator Grassley is aware of this matter, and the Senator’s office is looking into it. Whistleblowers are always encouraged to reach out to Senator Grassley,” David Bader, his press secretary, said in a statement.

Block Award Rebuke

The final orders from this year show a clear shift from previous commissions’ practice of waiving or stretching program rules to reward people who published their tips online or shared them with news media before coming to the SEC.

In the past, the commission was more likely to waive those requirements if the whistleblower met all other criteria, according to lawyers and a review of hundreds of orders over the past 15 years.

In a May 5 order, the new commission pointed to what it called flawed reasoning behind a $14 million award its predecessors gave Block, chief executive of investment firm Muddy Waters Capital, in 2022. While whistleblowers’ names are confidential by law, Block’s identity was revealed in lawsuits from a former associate who claimed he deserved half the award.

Block published a 2010 report alleging wrongdoing by a Chinese company, FocusMedia, then emailed a copy of his report to SEC staff, without filing a formal tip as required by the whistleblower law. Twelve years later, over the objections of its staff, the commission waived its reporting requirements to give him a whistleblower bounty.

That vote, first reported in a Bloomberg Law investigation, has since become entangled in lawsuits and allegations that the agency applies its rules inconsistently. The US Court of Appeals for the Third Circuit in 2023 said the agency’s logic in awarding Block a bounty “leaves something to be desired,” a statement referenced in at least two agency denials this year.

The commission now agrees. In its May 5 order, the commission said allowing tipsters to self-publish, as Block did, or bring their information to the media before filing with the SEC “would reward behavior inconsistent with the statute’s design.”

“Accordingly, we disavow the information-focused approach followed in our 2022 Order,” the commission wrote.

Block’s attorneys didn’t respond to emails seeking comment.

Jason Zuckerman, a Washington attorney who has helped many clients with SEC whistleblower tips, said the run of denials doesn’t necessarily mean that the program is in trouble. Instead, he said, steep staff and budget cuts mean the agency’s staff is not much larger than it was in 2010.

Last year, the agency fielded more than 80,000 tips, compared to less than 2,000 in the early years of the program.

Zuckerman said that a large share of the denials seem to be on meritless cases, and that the staff is working hard to clear a backlog. He said he is hopeful that the pace and size of awards will pick up in the second half of the year.

“I do think the current commissioners are less inclined to look for a way to issue an award, but I don’t think there is any reason to think they aren’t going to approve valid claims. That just isn’t the case,” Zuckerman said. “The staff works very hard and has the upmost integrity, so I don’t believe there will be an effort to deny valid claims.”

“That said, there is no doubt that now the rules are going to be applied more strictly than we’ve seen in the past, and that just means lawyers and whistleblowers are going to make sure they do everything right when they submit their claims,” Zuckerman said.