The U.S. Securities and Exchange Commission (SEC) has acknowledged that activist investor Kyle Bass should have been paid as a whistleblower two years ago, marking what appears to be the first instance of the SEC overturning a decision to deny an award following a federal court challenge. The SEC’s new ruling awarded Bass $400,000 for exposing fraud at a Dallas land developer, though Bass had originally sought $2.5 million. A second whistleblower involved in the same case was awarded over $2 million.
The SEC initially denied Bass’s claim, arguing that he acted on behalf of his company, Hayman Capital Management, rather than as an individual whistleblower. However, after Bass appealed to the U.S. Court of Appeals for the Fifth Circuit, the SEC requested the case be returned to the commission for reevaluation. The SEC concluded that Bass did act as an individual tipster, reversing its previous ruling.
Bass’s attorney, Katherine S. Addleman of Haynes & Boone, L.L.P., indicated that the reversal was anticipated given the SEC’s admission of its initial error. Despite this, the SEC reserved the right to reject Bass’s application again for different reasons. Addleman criticized the SEC’s whistleblower program for a lack of transparency and inconsistent decision-making processes. “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,” she noted.
This sentiment has been echoed in other federal court appeals concerning the SEC’s whistleblower decisions, with many failing and some still pending. A Bloomberg Law investigation highlighted issues within the program, pointing out its excessive secrecy and inconsistent application of rules. While appellate courts have criticized the SEC’s decisions and rule-making process, they have generally deferred to the commission’s interpretation of its own rules.
Kyle Bass’s efforts exposed a Ponzi scheme at United Development Funding (UDF), leading to criminal convictions of four executives and SEC sanctions. Bass’s uncovering of the fraud also resulted in a significant monetary gain for him through short-selling UDF stock. Bass had previously expressed frustration with the SEC in a Bloomberg Television interview, stating, “They denied our award when we gave them an 80-page PowerPoint that was connecting all the dots for them.”
The SEC’s decision was further reversed on another ground: the waiver of its requirement that all tipsters file a Tips, Complaints and Referrals form through its online system. Initially, the SEC denied the waiver, but later agreed it would be in the “public interest and consistent with the protection of investors” to grant the waiver in Bass’s case.
Signs indicate that other whistleblowers may gain traction in overturning SEC denials. The Fifth Circuit is set to hear oral arguments in an appeal by three whistleblowers who exposed fraud by a Texas insurance company, helping recover over $1 billion for investors. The SEC argued it could not pay these whistleblowers as the funds were recovered through bankruptcy proceedings, a claim under dispute in the upcoming case.
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