Eugene Ross v. SEC ( 2022 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 2, 2022 Decided May 27, 2022
No. 21-1165
EUGENE C. ROSS,
APPELLANT
v.
SECURITIES AND EXCHANGE COMMISSION,
APPELLEE
On Appeal of an Order of the
Securities and Exchange Commission
Stephen M. Kohn argued the cause for appellant. With him
on the briefs were David K. Colapinto and Kayla Svihovec.
John R. Rady, Attorney, U.S. Securities and Exchange
Commission, argued the cause for appellee. With him on the
brief were Dan M. Berkovitz, General Counsel, John W. Avery,
Deputy Solicitor, and Stephen G. Yoder, Senior Litigation
Counsel.
Before: HENDERSON, ROGERS and WILKINS, Circuit
Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
2
KAREN LECRAFT HENDERSON, Circuit Judge: Eugene
Ross appeals a United States Securities and Exchange
Commission (SEC or Commission) order denying his
application for a whistleblower award resulting from a
successful SEC enforcement action. He contends that he
voluntarily provided original information to the SEC that led to
the successful enforcement action as set forth by the governing
statute, 15 U.S.C. § 78u-6(b)(1), but that the Commission
erroneously rejected his award application based on its
improper definitions of key statutory terms, see 17 C.F.R.
§ 240.21F-4(a) (defining “[v]oluntary submission of
information”), (b) (defining “[o]riginal information”).
We disagree. The SEC properly denied Ross’s award
application, which was based on information submitted to the
Commission before July 21, 2010. The Congress expressly and
unambiguously excluded from the definition of “original
information” submissions provided to the Commission before
this date, the statute’s date of enactment. 15 U.S.C. § 78u-7(b);
see id. § 78u-6(a)(3). Because Ross fails to satisfy the statutory
requirements for “original information,” we need not address
his challenge to the SEC’s definition of “voluntary.”
Accordingly, we affirm the order.
I. Background
Appellant Eugene Ross was a broker for Bear Stearns
Companies, Inc. from 2002 until 2005, when he was terminated
for his role in the events leading to this case. In September
2004, he discovered what he suspected were violations of
various anti-fraud provisions of the federal securities laws
perpetrated against his client by Amerindo Investment
Advisors, Inc. (Amerindo), which at the time was clearing its
trades through Bear Stearns, and by two of its executives. Ross
immediately provided evidence of the suspected fraud to his
3
client, who confirmed that she had not authorized the
questioned transactions. Ross and his client confronted the
Amerindo executives, who denied any wrongdoing, and Ross
also notified his supervisors at Bear Stearns. According to
Ross, his Bear Stearns supervisors neither investigated nor
reported the alleged violations to the government. He then
advised his client to hire an attorney to pursue the matter. She
did so and reported the suspicious activity and information
provided to her by Ross to the United States Department of
Justice (DOJ) and the SEC.
To this point, Ross had no direct contact with any
government agency and did not report to or discuss with the
government Amerindo’s alleged securities violations. That
changed in June 2005 when an Assistant United States
Attorney requested to meet with Ross through his employer to
discuss the allegations against Amerindo. Nothing in the record
suggests that Ross was subpoenaed or otherwise compelled to
comply with the request. Ross met with DOJ and SEC
attorneys later that month and disclosed the evidence of
Amerindo’s violations and Ross’s efforts to document and
report them to Bear Stearns. He continued to meet with DOJ
and SEC attorneys several times between 2005 and 2008 and
testified in the criminal prosecution of the Amerindo
executives.
The Commission filed a civil enforcement action against
Amerindo and its two senior executives in June 2005, alleging
violations of the Securities Act of 1933, the Securities
Exchange Act of 1934 (Exchange Act) and the Investment
Advisers Act of 1940. The SEC amended its complaint a few
months later to allege additional securities law violations but,
before the end of the year, the district court ordered a stay of
discovery in the civil action during the pendency of the
criminal proceedings. After the two executives were convicted
4
on several counts of fraud in 2008, proceedings in the civil
action resumed in 2010 and the Commission filed a second
amended complaint. In 2011, Ross submitted his formal
whistleblower disclosures to the Commission, “incorporat[ing]
by reference all the ‘original information’ voluntarily provided
by Ross since his discovery of the fraud.” Appellant’s Br. 13.
In May 2014, the district court entered final judgment in the
civil action in favor of the SEC and ordered Amerindo and the
individual defendants to pay approximately $100 million in
disgorgement, prejudgment interest and civil penalties.
Following the successful enforcement action, the SEC
Office of the Whistleblower published a Notice of Covered
Action regarding the Amerindo proceeding and invited
claimants to submit whistleblower award applications. Ross
filed a timely application for an award. The SEC’s Claims
Review Staff (CRS) examined Ross’s award claim and issued
a preliminary determination denying it. Joint Appendix (J.A.)
477. The CRS reasoned that (1) Ross “did not voluntarily
provide original information to the Commission as defined by”
Exchange Act Rule 21F-4(a), J.A. 477; see 17 C.F.R.
§ 240.21F-4(a); (2) Ross’s submissions in 2005 through 2008
did not constitute “original information” as defined in
Exchange Act Rule 21F-4(b) because he submitted them before
July 21, 2010, when the governing statute was enacted, J.A.
477; see 17 C.F.R. § 240.21F-4(b)(1)(iv); and (3) Ross’s
disclosures, including the 2011 filings, “did not lead to” the
successful enforcement action as required by Exchange Act
Rule 21F-4(c), J.A. 477; see 17 C.F.R. § 240.21F-4(c).
Ross then challenged the CRS’s preliminary determination
by submitting a timely written response to the SEC as permitted
by 17 C.F.R. § 240.21F-10(e). He argued that a whistleblower
satisfies the statute’s “voluntariness” requirement, 15 U.S.C.
§ 78u-6(b)(1), by disclosing evidence of a securities law
5
violation to the victim who then relays the information to the
Commission. J.A. 484–91, 485 (“In regard to ‘voluntary
submissions,’ the inquiry must center on whether or not the
‘original information’ about the fraud was ‘voluntarily’
disclosed by the whistleblower to the client.”). In the
alternative, Ross urged the Commission to waive the
“voluntariness” requirement under 15 U.S.C. § 78mm(a)(1),
given his “extraordinary circumstances.” J.A. 497–500. He
maintained that the statutory definition of “original
information” does not require the disclosure to be submitted
after the date of the statute’s enactment as set forth in the
implementing regulation. J.A. 491–95; see 15 U.S.C.
§ 78u-6(a)(3); 17 C.F.R § 240.21F-4(b)(1)(iv). And he claimed
that his disclosure led to the successful enforcement action
because it formed “the basis of SEC critical filings in 2012
through 2014.” J.A. 495–97.
Taking up Ross’s challenge, the SEC first concluded that
Ross’s submission did not meet the “voluntariness”
requirement because he did not submit his evidence directly to
the Commission until after he received a request from the
government and he did not act jointly with his client when she
disclosed the information to the SEC. J.A. 504–05 (citing
15 U.S.C. § 78u-6(a)(6) (defining “whistleblower” as “any
individual who provides, or 2 or more individuals acting jointly
who provide, information relating to a violation of the
securities laws to the Commission” (emphasis added))). The
SEC rejected Ross’s alternative argument and declined in its
discretion to waive the “voluntariness” requirement because
doing so would conflict “with the statutory purpose of
incentivizing whistleblowers to come forward early rather than
waiting for authorities to ‘come knocking on the door.’” J.A.
506 (citation omitted). Second, the Commission determined
that information provided before the statute’s enactment is not
“original information” because the statute excludes from the
6
definition information provided before July 21, 2010. J.A. 506–
07. It followed the Second Circuit’s reasoning in Stryker v.
SEC, 780 F.3d 163 (2d Cir. 2015), which upheld the exclusion
of information provided to the SEC before July 21, 2010, from
the definition of “original information.” Id. at 164, 167. The
Commission rejected Ross’s contention that the United States
Supreme Court’s decision in Digital Realty Trust, Inc. v.
Somers, 138 S. Ct. 767, 781–82 (2018), which held that the
statutory definition of “whistleblower” was “clear and
conclusive,” had any bearing on the definition of “original
information.” J.A. 507. Third and finally, the SEC held that
Ross’s 2011 filings did not, as the SEC staff stated, “contribute
in any way to the Commission’s original complaint . . . nor the
Commission’s first amended complaint” and they “did not
impact, affect, or contribute in any way to the Commission’s
[second amended complaint] . . . or any other efforts by the
Commission after the filing of the original complaint.” J.A. 508
(quotation marks omitted). Accordingly, the Commission
denied Ross’s whistleblower award application.
II. Analysis
A.
The SEC had jurisdiction to consider Ross’s whistleblower
award application pursuant to 15 U.S.C. § 78u-6(b). We have
jurisdiction of the appeal under 15 U.S.C. § 78u-6(f) and
17 C.F.R. § 240.21F-13 (“A determination of whether or to
whom to make an award may be appealed within 30 days after
the Commission issues its final decision to the United States
Court of Appeals for the District of Columbia Circuit.”).
Whistleblower award determinations “shall be in the discretion
of the Commission,” 15 U.S.C. § 78u-6(f), and may be set
aside if “arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A).
7
Where, as here, the Congress has delegated rulemaking
authority to the Commission under the Exchange Act, its
regulations interpreting “voluntary” and “original information”
are reviewed under the familiar two-step framework of
Chevron U.S.A. Inc. v. Natural Resources Defense Council,
Inc., 467 U.S. 837 (1984). See 15 U.S.C. § 78u-6(j) (SEC
“shall have the authority to issue such rules and regulations as
may be necessary or appropriate to implement the provisions
of this section consistent with the purposes of this section”); id.
§ 78w(a)(1) (SEC “shall . . . have power to make such rules and
regulations as may be necessary or appropriate to implement
the provisions of” the Exchange Act). “Under Chevron review,
we first assess whether the statute directly speaks ‘to the
precise question at issue’ so as to foreclose (or compel) the
agency’s interpretation.” SoundExchange, Inc. v. Copyright
Royalty Bd., 904 F.3d 41, 55 (D.C. Cir. 2018) (quoting
Chevron, 467 U.S. at 842). If it does, “we ‘must give effect to
the unambiguously expressed intent of Congress.’” Id. (quoting
Chevron, 467 U.S. at 843). If it does not, “we defer to the
agency’s resolution of the statute’s ambiguity as long as its
interpretation is reasonable.” Id.B.
“Under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376(2010) [(codified in scattered sections of the U.S. Code)], the
Congress created a whistleblower award program that provides
monetary incentives to individuals with knowledge of
securities violations to assist the government in identifying and
prosecuting the violations.” Doe v. SEC, 28 F.4th 1306, 1311
(D.C. Cir. 2022) (per curiam); see Digital Realty, 138 S. Ct. at773–74. Under the Act, the Commission is authorized to give
monetary awards to “whistleblowers who voluntarily provided
original information to the Commission that led to the
8
successful enforcement of the covered judicial or
administrative action” and that “results in monetary sanctions
exceeding $1,000,000.” 15 U.S.C. § 78u-6(a)(1), (b)(1). The
Congress further authorized the Commission “to issue such
rules and regulations as may be necessary or appropriate to
implement” the whistleblower program and provided it the
discretion to determine “whether, to whom, or in what amount
to make awards.” Id. § 78u-6(f), (j); see Digital Realty,
138 S. Ct. at 775.
“Following Dodd-Frank’s enactment and a notice-and-
comment period, the SEC accordingly adopted final rules to
implement the whistleblower program.” Doe, 28 F.4th at 1312
(citing Securities Whistleblower Incentives and Protections,
76 Fed. Reg. 34,300 (June 13, 2011)). The promulgated rules
define “[v]oluntary submission of information,” “[o]riginal
information” and when information “leads to successful
enforcement,” each of which is statutorily required for award
eligibility. 17 C.F.R. § 240.21F-4(a), (b), (c). Thus, a
claimant’s failure to satisfy any one of these statutory
requirements dooms his whistleblower award application. See
15 U.S.C. § 78u-6(b)(1).
The Dodd-Frank Act first requires a whistleblower award
applicant to “voluntarily” provide original information to the
SEC. Id. The statute, however, does not define “voluntarily.”
Acting pursuant to its delegated rulemaking authority, id.
§ 78u-6(j), the SEC issued Rule 21F-4(a) providing that a
whistleblower’s submission is considered voluntary if
submitted “before a request, inquiry, or demand that relates to
the subject matter of [the] submission is directed to” the
whistleblower or his attorney by, inter alia, the Commission,
17 C.F.R. § 240.21F-4(a)(1)(i).
9
The Act next requires whistleblower submissions to the
SEC to contain “original information.” 15 U.S.C.
§ 78u-6(b)(1). It defines “original information” as information
that (1) “is derived from the independent knowledge or analysis
of a whistleblower”; (2) “is not known to the Commission from
any other source, unless the whistleblower is the original
source of the information”; and (3) “is not exclusively derived
from an allegation made in a judicial or administrative hearing,
in a governmental report, hearing, audit, or investigation, or
from the news media, unless the whistleblower is a source of
the information.” 15 U.S.C. § 78u-6(a)(3)(A)–(C). The
associated Rule 21F-4(b), which also defines “original
information,” includes a fourth requirement: the information
must have been “[p]rovided to the Commission for the first
time after July 21, 2010,” the date of Dodd-Frank’s enactment.
17 C.F.R. § 240.21F-4(b)(1)(iv).
Ross challenges the Commission’s interpretation of
“voluntary” and “original information.”
C.
Turning to the Commission’s interpretation of “original
information” in Exchange Act Rule 21F-4(b), we first examine
“whether Congress has directly spoken to the precise question
at issue.” Chevron, 467 U.S. at 842. In doing so, “[w]e do
not . . . construe statutory phrases in isolation; we read statutes
as a whole.” United States v. Morton, 467 U.S. 822, 828 & n.8
(1984) (citing cases). We follow this “cardinal rule” because
“the meaning of statutory language, plain or not, depends on
context.” King v. St. Vincent’s Hosp., 502 U.S. 215, 221 (1991)
(citations omitted).
10
As explained, § 78u-6(a)(3) of the Exchange Act lists three
requirements in its definition of “original information.”1
15 U.S.C. § 78u-6(a)(3). But this is not the only provision of
Dodd-Frank addressing “original information.” The very next
section involves the “[i]mplementation and transition
provisions for whistleblower protection.” Id. § 78u-7. It
requires that the Commission “shall issue final regulations
implementing the provisions of section 78u-6,” id. § 78u-7(a),
and its subsection covering “original information” instructs:
Information provided to the Commission in
writing by a whistleblower shall not lose the
status of original information (as defined in
section 78u-6(a)(3) of this title, as added by this
subtitle) solely because the whistleblower
provided the information prior to the effective
date of the regulations, if the information is
provided by the whistleblower after July 21,
2010.
Id. § 78u-7(b) (emphasis added). Although this subsection
includes in the definition of “original information” submissions
made after the date of Dodd-Frank’s enactment but before the
effective date of the SEC’s implementing regulations, it
expressly excludes information submitted before July 21, 2010.
By citing directly to the “original information” definition in
§ 78u-6(a)(3), it makes crystal clear that the Commission, in
crafting its implementing regulations, must exclude this
1
There is no dispute that Ross satisfies each of the three
requirements: (1) the information was “derived from [his]
independent knowledge [and] analysis”; (2) Ross was “the original
source of the information”; and (3) the information was not “derived
from an allegation made in a judicial or administrative hearing, in a
governmental report, hearing, audit, or investigation, or from the
news media.” 15 U.S.C. § 78u-6(a)(3)(A)–(C).
11
category of submissions from the definition of “original
information.” The SEC did just that in Exchange Act Rule
21F-4(b). Contrary to Ross’s contention, the SEC did not
“alter[] a term defined by the statute” or “improperly add[] a
fourth requirement to the definition.” Appellant’s Br. 44. It
adhered to the Congress’s express command by defining
“original information” to include the three requirements of
§ 78u-6(a)(3) and the additional timing requirement of
§ 78u-7(b).2 See 17 C.F.R § 240.21F-4(b)(1)(i)–(iv). Read in
tandem, these two statutory provisions are sufficient for us to
conclude under Chevron Step 1 that the Congress has indeed
spoken directly and unambiguously to the precise question at
issue and the SEC followed this directive to the letter.3 Cf.
Stryker, 780 F.3d at 166–67 (declining to decide whether
Congress spoke unambiguously to issue and concluding
Commission’s interpretation in Rule 21F-4(b)(1)(iv) “was
reasonable and entitled to deference” under Chevron Step 2).
2
The Commission was consistent throughout the rulemaking
process that its definition of “original information” include, as
mandated by the statute, the requirement that the information be
submitted after Dodd-Frank’s enactment date. See Proposed Rules
for Implementing the Whistleblower Provisions of Section 21F of the
Securities Exchange Act of 1934, 75 Fed. Reg. 70,488, 70,492 n.20
(proposed Nov. 17, 2010); Securities Whistleblower Incentives and
Protections, 76 Fed. Reg. 34,300, 34,310 n.94 (June 13, 2011).
3
Section 78u-7(b)’s exclusion of information submitted before
July 21, 2010, contrasts with the very next provision of § 78u-7,
which expressly extends award eligibility to whistleblowers who
report violations that “occurred prior to July 21, 2010,” 15 U.S.C.
§ 78u-7(c) (emphasis added), as long as the whistleblowers come
forward after this date. The contrast is further evidence that the
Congress’s timing restriction on “original information” was no
accident, given that it knew how to provide for retrospective
application where it wanted to.
12
The statute, therefore, “compel[s]” the Commission’s
interpretation. SoundExchange, 904 F.3d at 55.
Ross insists that our and the SEC’s conclusion is
foreclosed by the Supreme Court’s holding in Digital Realty. It
is not. There, the Court invalidated the Commission’s
interpretation of the term “whistleblower,” which would have
allowed an individual to qualify as one under Dodd-Frank’s
anti-retaliation protections without providing information to
the SEC, because it conflicted with the statutory definition.
138 S. Ct. at 775–78 (explaining that “the term ‘whistleblower’
in § 78u-6(h) [(the anti-retaliation provision)] carries the
meaning set forth in the section’s definitional provision”); see
15 U.S.C. § 78u-6(a)(6) (defining “whistleblower” and
requiring submission of “information relating to a violation of
the securities laws to the Commission” (emphasis added)).
Here, unlike in Digital Realty, Rule 21F-4(b) does not conflict
with the statutory definition of the term in question—namely,
§ 78u-6(a)(3)’s “original information.” The Rule complies
with it. See 17 C.F.R. 240.21F-4(b)(1)(i)–(iii) (incorporating
the three statutory requirements set forth in § 78u-6(a)(3)(A)–
(C)). The fourth requirement—that information be submitted
after July 21, 2010—also complies, rather than conflicts, with
the Act because § 78u-7(a) and (b) explicitly direct the
Commission to supplement the definition of “original
information” in § 78u-6(a)(3) with this requirement. See
17 C.F.R. § 240.21F-4(b)(1)(iv). Ross urges us to look only at
§ 78u-6(a)(3) and ignore § 78u-7(b). To do so, however, would
contravene the Supreme Court’s instruction that we “are not at
liberty to dispense with [a] condition . . . Congress imposed.”
Digital Realty, 138 S. Ct. at 777. Ross’s reliance on Digital
Realty is therefore misplaced, as the Court’s holding there has
no bearing on other provisions of the Dodd-Frank Act that
expressly instruct the SEC on the implementation of certain
statutory definitions.
13
Ross first provided information to the Commission about
the Amerindo securities violations between 2005 and 2008. His
formal whistleblower disclosures submitted in 2011
incorporated this same information by reference and “all of the
information contained in the filing was already known to the
government.” Appellant’s Br. 29. Because Ross provided
information to the SEC before July 21, 2010, his submissions
do not qualify as “original information” as defined by the
Congress in the Dodd-Frank Act.
As Ross fails to satisfy one of the statutory requirements
for whistleblower award eligibility, we need not address his
challenge to the Commission’s interpretation of “voluntary” set
forth in 17 C.F.R. § 240.21F-4(a) or its denial of Ross’s request
to exempt him from the requirement that the information be
submitted voluntarily.
For these reasons, the SEC’s order is affirmed.
So ordered.