WASHINGTON/LONDON (Reuters) – The U.S. Justice Department and Securities and Exchange Commission must review whether an ex-Royal Bank of Scotland employee is owed a whistleblower payout and provide documents relating to his case, a federal U.S. court said on Tuesday.
FILE PHOTO: The U.S. Securities and Exchange Commission logo adorns an office door at the SEC headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ernst
The U.S. Second Circuit Appeals Court decision could set an important precedent for other whistleblowers who say they have been unjustly denied bounties under the SEC’s program to reward tipsters.
Former RBS risk manager Victor Hong sued the agencies in February alleging they flouted the law “in bad faith” when assessing whether he was due a payout for helping federal probes into the British bank’s mis-selling of mortgage bonds in the run-up to the 2007-08 financial crisis.
In August 2018, RBS agreed to pay $4.9 billion to end the probes, which were led by the Justice Department. No portion of that fine has ever been deemed eligible for a reward under the whistleblower program, public records show.
Hong had asked the court to compel the SEC and the Justice Department to produce all records relating to the RBS settlement and to deem it eligible for a potential tipster reward, according to the filings, which Reuters has reviewed.
The Justice Department and SEC have not said publicly why the RBS settlement was deemed ineligible. The SEC declined to comment while the Justice Department did not immediately provide comment.
In a Jan. 30 filing the Justice Department asked that the court dismiss the petition against the agency on the grounds that the SEC was “the only appropriate respondent” but on Tuesday the court denied that request.
Established by the 2010 Dodd Frank Act after the financial crisis, the whistleblower program has resulted in more than $2 billion in penalties and $450 million in rewards, SEC data shows.
Currently, the SEC can reward tipsters whose original information leads to a penalty exceeding $1 million with rewards of between 10% and 30% of the fine.
It may also pay a reward in related enforcement actions brought by other agencies provided the settlement was based on the same information the tipster originally gave the SEC.
In a March filing, the SEC said it had not considered Hong’s argument that the Justice Department settlement was a related enforcement action but could do so if the court were to return the case to the SEC for review.
The court on Tuesday said it granted the SEC’s request to review the case, based on its “representation that it will, in good faith … address [Hong’s] arguments regarding the record and its rejection of his application.”
A former managing director of risk management at RBS’s U.S. operations, Hong resigned two months into the job after discovering billions of dollars of mortgage bonds had been mispriced.
He first approached the SEC and Justice Department offering information in December 2007, according to the filings.
He later met with Justice Department officials in December 2014, and provided testimony and documents, according to the filings which include copies of subpoenas, Hong’s formal SEC tip, and emails with Justice Department officials.
The filings suggest Hong’s information also “significantly” contributed to the success of a separate $5.5 billion settlement RBS agreed with the Federal Housing Finance Agency (FHFA) in 2017 on behalf of housing finance giants Fannie Mae and Freddie Mac which had bought mortgage bonds from RBS.
Hong also asked the court to deem that settlement a related action eligible for a reward, the filings show. It was not clear on Tuesday if the SEC would factor that settlement in to its review. The FHFA did not immediately provide comment.
The SEC may deny claims for a range of reasons, including that the tip did not offer new information or prompt any action.
Reporting by Michelle Price in Washington and Sinead Cruise in London; Editing by Kirsten Donovan and Matthew Lewis