Tips and Claims
About 12,000 tips came in the last fiscal year. They first go through an internal screening process that is supposed to select only the best for full investigations, which can last five years.

A separate group of attorneys review the records once the investigation is completed and makes a decision on which whistleblowers get paid. The agency has 13 full-time and three temporary attorneys who determine how much each claimant should get. The SEC refused to provide more detailed information on how decisions are made.

It has rejected claims because applicants hadn’t followed program rules while approving claims under similar circumstances.

For example, the law says the program can only make awards to people who provide original information that leads directly to a sanctions of $1 million or more.

But in March the commission overruled staff and awarded about $14 million to someone who SEC lawyers ruled “was not a whistleblower within the meaning of the statute” and that the claimant’s information did not lead to the success of the investigation.

It disagreed with some staff conclusions, and wrote it was in the “public interest” to waive the 30-day requirement for filing. The whistleblower waited four years.

Making Sense
McKessy, who headed the program for five years, said while some of the inconsistent decisions may look bad to the public, they are almost always based on the facts at hand.

McKessy pointed to the example of a financial firm employee who reported an ongoing fraud to a regulatory agency, which spent two years investigating and brought no charges. The informant then filed an SEC whistleblower complaint, which upheld the allegations, fined the company, and recouped money for defrauded investors, McKessy said.

“Our rule said it wasn’t a voluntary submission to us because the other agency had already investigated, and unfortunately, we probably can’t pay this guy,” McKessy said. But he lobbied the commission to waive the rules, and the informant was awarded the bounty.

In March, the D.C. Circuit Court of Appeals ruled that some agency regulations covering the criteria for awarding or denying claims were so “genuinely ambiguous” that courts have no choice but to defer to the agency’s judgment. The ruling cited the Supreme Court standard set in 2019 in Kisor v Wilkie, which said when the Department of Veterans Affairs rules were so muddled that courts couldn’t override certain decisions.

The appeals court said the agency’s decision was “reasonable” and let it stand.

“Are rules like this reviewed by the SEC general counsel? It would seem to me an agency like the SEC would want to do everything it could to make sure its regulations are clear,” D.C. Circuit Court of Appeals Judge David S. Tatelsaid during a January hearing. “This has got to be one of the sloppiest regulations I have ever seen.”

“You need to take at least from me a message back to the commission that they need to get their act together on these kinds of things,” Tatel said. “More importantly they need to have clarity in their regulations.”

Tight Circle
The program as crafted by Congress and SEC officials let tipsters report financial wrongdoing anonymously and then get between 10% and 30% of any money the agency recovered. It has made awards to more than 270 whistleblowers from a special fund set up by Congress. Any money recovered goes first to the fraud victims and what’s left is earmarked for the program.

One of those SEC officials involved in the program’s creation was Jordan Thomas. He left the agency days before the program went live in 2011 to set up what he called the nation’s first whistleblower practice at Labaton Sucharow. He spent a decade there, helping win more money for his clients than any firm in the country, before forming his own practice in 2022.

His four new partners are all former SEC officials, including Richard Levine, the SEC associate general counsel for legal policy until 2016.