Goldman v Dell: Will SEC enforcement volatility sideline securities whistleblowers?

by Kurt Schulzke

Why did Dell pay $100 million in a strong case while Goldman Sachs paid $550 million in what many say was a “weak case”?   Why did Michael Dell and Kevin Rollins end up settling for $4 million each but Goldman’s Lloyd Blankfein paid nothing?  For would-be SEC whistleblowers  — whose financial rewards depend on “monetary sanctions” collected by the SEC in similar cases — these are important questions.

While many False Claims Act whistleblowers are primarily motivated by non-monetary considerations — such as the desire to curtail patient-harming Medicare fraud or mitigate risk to military personnel — a preponderance of SEC whistleblowers will likely focus on the expected financial payoff.*  This is partly because the new SEC whistleblower statute, Section 922 of the WSRCPA, casts a wider net than the False Claims Act to include whistleblowers whose contribution of “original information” may consist of professional analysis of data publicly available from SEC filings and news sources instead of inside information.  Likewise, individuals capable of identifying securities fraud — unlike most corporate insiders who bring FCA claims — are likely to be relatively “savvy” investors or financial industry professionals who know securities fraud when they see it.

For the investor-whistleblower set, Richard Sauer’s NYT op-ed points to a risk inherent in the SEC’s whistleblower program: volatility of returns resulting from the unpredictability of monetary and other penalties imposed in securities fraud cases.**

Securities statutes and regulations provide broad theoretical penalty parameters.  For example, Securities Act Section 24 imposes a fine of no more than $10,000 and up to five years in prison for “willful” violation of any provision of the Act or related rules and regulations.  In contrast, maximum per-violation penalties of the 1934 Exchange Act range, under Section 32(a), from $5,000,000 and 20 years in prison (individuals) to $25,000,000 (companies).

Similarly, violations of Section 30A (also known as the Foreign Corrupt Practices Act) yield maximum penalties of $100,000 and 5 years in prison (individuals) and $2,000,000 (companies).

In another arena regulated by the SEC, Section 42(e)(2) of the Investment Company Act of 1940 lays out a significantly more complicated, three-tiered penalty system beginning with the greater of pecuniary gain or $5,000-100,000 (individuals) and $50,000-$100,000 (companies).

Despite the theoretical certainty, the government’s practical application of the norms is all over the map as illustrated by the disparity between the Dell and Goldman Sachs settlements.   In the supposedly “stronger” case, Dell settled for $100 million while, in the weaker, Goldman paid $550 million.   If the SEC is serious about encouraging whistleblowers in the securities arena, it could start by providing more guidance on why it settles cases the way it does.

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* While FCA whistleblowers may be motivated by other factors, attorneys who earn a living representing whistleblowers (and government attorneys who prosecute FCA claims) necessarily must evaluate each FCA claim on its financial merits.

** This is not to say that False Claims Act settlements are predictable.  They are not.  However, the FCA does provide a rational starting point for relators and their attorneys to ballpark the financial possibilities.

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