Kyle Bass Wins Reversal of SEC Move to Deny Whistleblower Award

The SEC acknowledged that activist investor Kyle Bass should have been paid as a whistleblower two years ago, apparently the first time it has overturned a decision to deny an award in response to a federal court challenge.

The Securities and Exchange Commission’s new ruling, issued without any notice to the federal court hearing Bass’s appeal, awarded the Texas billionaire $400,000 for his help in exposing fraud at a Dallas land developer. Bass said he deserved $2.5 million. A second informant on the same case was given more than $2 million.

The commission initially ruled Bass wasn’t entitled to an award because he was acting on behalf of his company, Hayman Capital Management, and not as an individual tipster. In response to Bass’s appealto the US Court of Appeals for the Fifth Circuit, the SEC took the unusual step of asking that the case be returned to it, writing that it may have misinterpreted an “ambiguous” email from Bass’s attorney.

The SEC now agrees that Bass acted as an individual tipster.

Bass’s attorney, Katherine S. Addleman of Haynes & Boone, L.L.P., said this week that the reversal had been expected, given that the agency admitted its mistake when it asked the Fifth Circuit to let commissioners take a second look at the case. The SEC said in court filings that it reserved the right to again reject his application for other reasons.

Still, she said, the agency’s handling of the entire matter underscores deeper problems with the way it makes decisions.

“There’s a lot lacking in the transparency of the whistleblower program in terms of how the commission and the staff address complaints, and frankly in the arbitrary nature of the staff’s assessments of who is entitled to an award,” Addleman said. “They are very inconsistent in their decisions and how they apply the rules.”

Addleman’s complaint has been echoed in at least a dozen federal court appeals of agency whistleblower decisions in recent years. Most have failed; some are still awaiting decisions.

A Bloomberg Law investigation found that the program operates in secrecy far beyond its legislative mandate to protect the identities of whistleblowers, routinely waives its own rules without explanation, and often issues decisions at odds with previous rulings.

Although some appeals courts have criticized the agency’s decisions and its rule making process, they have always deferred to the SEC’s right to interpret its own rules.

The SEC said in a statement that it wouldn’t comment beyond what is in its written decision.

Bass’s efforts to expose a Ponzi scheme at United Development Funding led to criminal convictions of four executives and SEC sanctions. He also made a $30 million profit short-selling UDF stock.

Bass couldn’t be reached for comment. In an interview with Bloomberg Television last year, Bass said he gave the SEC everything it needed to take on UDF. But when it came time to pay for his efforts, he said the agency ignored him.

“They denied our award when we gave them an 80-page PowerPoint that was connecting all the dots for them,” Bass said in the interview. “The SEC has to do a better job with whistleblowers. It’s that simple.”

The SEC’s decision reversed itself on a second ground, beyond its determination that Bass qualified as a whistleblower. In its Dec. 2, 2022 ruling, the commission refused to waive its requirement that all tipsters file a Tips, Complaints and Referrals form through its online system, saying Bass “did not demonstrate a sufficient reason,” for not submitting the form.

In the reversal ruling, however, the commission gave Bass the waiver, saying that it would be in the “public interest and consistent with the protection of investors,” to do so.

There are signs that some whistleblowers are gaining traction in their efforts to overturn SEC denials Next month the Fifth Circuit has scheduled oral arguments in an appeal by three whistleblowers who exposed a sweeping fraud by a Texas insurance company, helping recover more than $1 billion for investors.

The agency ruled that the tipsters deserved to be paid up to the statutory maximum—30 percent of all money recovered—but said it couldn’t pay them anything because the money was recovered in a bankruptcy proceeding. In their appeal, financial analyst John McPherson and Texas investor John Barr, who was also a victim and testified at several hearings, said the SEC arbitrarily changed its rules to avoid paying such a large windfall.