A federal court appeal by two whistleblowers, John McPherson and investor John Barr, who provided crucial information to the Securities and Exchange Commission (SEC) leading to the recovery of $1 billion for defrauded investors, now stands as a significant test for the future of the SEC’s whistleblower program, in light of a recent Supreme Court decision. The backdrop to this case is the Supreme Court’s recent rejection of the Chevron doctrine, which has historically mandated judicial deference to an agency’s interpretation of ambiguous statutes.
McPherson and Barr had tipped off the SEC about fraudulent activities by Life Partners, a Texas-based viatical firm, and aided the agency in building a comprehensive case. It culminated in a judgment that resulted in a recovery of about $1 billion for investors. Though the SEC initially suggested they deserved a combined award of 25% of the recovered funds, the two never received the payout. Instead, the SEC ruled that since the majority of the funds were recuperated through bankruptcy proceedings, the whistleblowers were effectively entitled to nothing.
The controversy centers around whether the SEC can exclude bankruptcy recoveries from whistleblower awards. The legislation under the Dodd-Frank Act, which established the SEC’s whistleblower program, does not address whether recoveries obtained via bankruptcy should be factored into awards, making this case ripe for judicial scrutiny. Notably, with the Supreme Court having recently overturned the Chevron doctrine, the Fifth Circuit will now be making determinations without deferring to the SEC’s interpretation of the statute. Legal experts suggest that this change means any SEC regulations inconsistent with the statute are likely to face challenges.
Attorneys have pointed out that Congress did not intend for whistleblowers to be denied rewards just because a company enters bankruptcy due to its fraudulent activities. This point was underscored during prior rule-making debates wherein experts testified, including Harry Markopolos, the analyst who uncovered Bernie Madoff’s Ponzi scheme. Markopolos testified that excluding bankruptcy recoveries would deter whistleblowers from exposing significant frauds, as companies often end up in bankruptcy following the discovery of such activities.
The Fifth Circuit, known for its recent critical stance towards the SEC, will examine the intricacies of this case closely. The broader implications of the Supreme Court’s decision to overturn Chevron are anticipated to influence not just this case but also the future conduct and regulatory reach of the SEC’s whistleblower program. More details can be found in the Bloomberg Law article.