All eyes have recently been focused on the U.S. Department of Justice’s announcement of its new corporate whistleblower awards program. The DOJ’s program potentially could have a significant impact on future corporate crime prosecutions, but meanwhile the Securities Exchange Commission’s whistleblower program has been up and running for years and indeed just passed the thirteenth anniversary of its launch date. The SEC’s recent announcement of two substantial awards in connection with a single matter highlights the program’s continuing significance, as well as the sheer magnitude of the awards that can be available under the program.

On August 23, 2024, the SEC announced the award of more than $98 million to two whistleblowers “whose information and assistance led to an SEC enforcement action and an action brought by another agency.” As discussed below, the amount of the two awards taken collectively, while impressive, is not the largest of awards given under the SEC’s whistleblower program. The SEC’s August 23, 2024, press release about the new awards can be found here. The SEC’s August 23, 2024, Award Order can be found here.

According to the SEC’s heavily redacted award order, the first of the two whistleblower’s “voluntarily provided original information that caused the Commission” and to another unnamed agency “to open investigations leading to the successful enforcement” of the federal securities laws, and after making the initial report, provided what the press release called “critical additional information and additional assistance.”  The first whistleblower was awarded more than $82 million.

The second whistleblower, whose information was provided later, also, according to the award, had contributed original information that “significantly contributed to the success” of the referenced enforcement action. The press release clarified that the second whistleblower contributed to “one aspect of the actions.” The second whistleblower was awarded more than $16 million.

Under the SEC’s whistleblower program, whistleblower awards can range from 10% to 30% of the money collected of the SEC enforcement action based on the whistleblower report results in fines and penalties exceeding $1 million. In its press release about the most recent awards, the SEC emphasized that the payments to whistleblowers are made from a Congressional established fund, which, according to the agency “is financed entirely through monetary sanctions paid to the SEC by securities law violators.”

In its award order, the SEC noted that the second of the two whistleblowers involved in this matter had filed a motion for reconsideration seeking a higher award percentage. The second whistleblower had argued that the information provided by the first whistleblower was “less than remarkable” and that not all of the information provided by the first whistleblower had proved to be factually correct. The SEC found that the award percentages appropriately recognized each of the two whistleblower’s respective contributions. The agency also noted that the first whistleblower’s information and assistance were “critical to the investigation and had a significantly greater impact on the success of the enforcement actions.”

Discussion

The two awards, taken collectively, while substantial, do not represent the largest of awards in the history of the SEC’s whistleblower program. The largest award in the program’s history is the May 2023 award of nearly $279 million to a single informant. According to information on the SEC Office of the Whistleblower’s webpage (here), the $98 million in total awarded to these two whistleblowers is the fifth largest collective amount awarded in connection with a single enforcement action, and the $82 million awarded to the first whistleblower here is the fourth largest ever individual award.

While the SEC whistleblower program has resulted in a number of very significant whistleblower awards as a result of significant enforcement actions the agency has been able to pursue based on the informants’ reports, the program has not really had one of the effects that I initially thought it would have.

That is, I had thought that as a result of the enforcement activity arising from the whistleblower reports, there would be a significant number of follow-on private securities class action lawsuits based on the information that first came to light as a result of whistleblower reports. By and large, the anticipated follow-on securities litigation hasn’t happened. While there has been at least one securities class action lawsuit filed following a whistleblower report (a January 2021 securities suit against Exxon Mobil, discussed here), there have not otherwise been, so far as I am aware, any other follow-on private securities lawsuits following enforcement actions arising from whistleblower reports.

To be sure, it may be that there have been other follow-on securities suits following whistleblower report-initiated enforcement actions. The SEC’s practice of heavily redacting its award orders (done in order to protect the anonymity of the whistleblowers) makes it difficult, if not impossible, to tell which enforcement action the awards relate to. Even allowing for the possibility that there have been other follow-on actions without an apparent connection to a whistleblower report, the SEC whistleblower program has had less of an impact on private securities litigation than I had anticipated.

As significant as many of the larger whistleblower awards have been, the SEC’s whistleblower program itself has been criticized. Among other things, the program has been criticized for the low number of awards relative to the high number of reports, as well as the substantial lag time involved with the awards the agency ultimately made. In addition, according to a August 22, 2024 Bloomberg opinion column (here, the agency has also been criticized for its poor communications with whistleblowers following their reports, contributing to mental health issues for the informants.

At this point, there is nearly universal agreement that artificial intelligence (AI) is (or at least will be) transformative. It is also clear that as companies struggle to adapt to the new technology, they also face a host of challenges, including disclosure and regulatory risks, and the related risk of litigation. As a result, AI poses an exceptionally difficult set of circumstances for corporate directors, as discussed in an August 14, 2024, Wall Street Journal article entitled “Why AI Risks Are Keeping Board Members Up at Night” (here). As the article makes clear, while many directors recognize the importance of getting a handle on AI and how it might affect their companies, they are struggling to find the right approach even as AI-related questions become more pervasive.

Continue Reading Boards of Directors and AI-Related Concerns

As readers know, issues surrounding the timeliness of notice of claim are among the most frequently litigated insurance coverage issues. Notice of claims delays occur for many reasons; sometimes, for example, the policyholder does not recognize a particular matter as constituting a claim within the meaning of the policy; sometimes there are process or communications issues that interfere with notice timeliness.

In a recent case and that touches on many of these issues, the Second Circuit, applying New York law, held that an earlier demand letter met the policy’s claim definition, and that the question of whether the provision of notice of claim on Monday morning just after the Saturday expiration of the policy was untimely must be remanded for further consideration by the district court. This case is a cautionary tale in many ways and provides an appropriate occasion to review of some of the first principles of claim notice. The Second Circuit’s August 13, 2024, Summary Order can be found here. (Hat Tip to Geoff Fehling of the Hunton Andrews Kurth law firm for his August 15, 2024 LinkedIn post about the decision, here).

Continue Reading Thinking About Notice of Claim Timeliness

Here at The D&O Diary, we track new securities class action lawsuit filings to identify emerging litigation trends and to track filings that reflect existing trends. Every now and then, we spot new suits that reflect multiple different trends in a single complaint. A new securities lawsuit filed earlier this week against Chinese online retailer PDD Holdings (formerly known as Pinduoduo) is an example of one of these multi-trend suits. As discussed below, the lawsuit shows how privacy-related issues, cybersecurity issues, and geopolitical issues can translate into securities class action litigation. A copy of the August 13, 2024, complaint against PDD can be found here.

Continue Reading Online Retailer Hit with Privacy, Security, and Forced Labor-Related Securities Suit

One of the more interesting recent litigation phenomena is that even though we are now well into the fifth year since the initial COVID outbreak in the U.S., COVID-related securities lawsuits continue to be filed. Indeed, in its recent survey of first half 2024 securities lawsuit filings, NERA noted COVID-related filings as one of the factors contributing to the volume of securities suit filing in the year’s first half, and indeed noted that COVID-related suit filings YTD were on pace to exceed the number COVID-related suit filings during the full year 2023. In the latest example of these securities suit filing trends, earlier this week, a plaintiff shareholder filed a COVID-related suit against cloud computing products company Extreme Networks, based on allegations that the company had misrepresented the long-term effects of COVID-related supply chain disruption on the company’s sales backlog. A copy of the August 13, 2024, complaint can be found here.

Continue Reading Extreme Networks Hit with COVID-Related Securities Suit

In a significant number of the many SPAC-related lawsuits that have been filed in recent years, SPAC investors allege that executives at the previously private target company into which the SPAC merged made pre-merger misrepresentations about the target company’s operations or prospects. In an interesting decision in a securities suit involving Lucid Motors and that has a great deal of potential significance for many of these SPAC-related suits, the Ninth Circuit has held that the SPAC investors, who were neither purchasers nor sellers of the stock of the target company, lack standing to pursue their claims against Lucid Motors for alleged pre-merger misrepresentations. The Ninth Circuit’s August 8, 2024, opinion in the Lucid Motors case can be found here.

Continue Reading 9th Circ.: SPAC Investors Lack Standing to Sue Over Merger Target Company’s Misrepresentations

The number of federal court securities class action filings in the year’s first half project to a year-end total roughly level with year-end total number of suit filings last year, while case resolutions (dismissals and settlements) are on track to exceed 2023 levels, according to a recent report from NERA. The August 6, 2024, report, entitled “Recent Trends in Securities Class Action Litigation: 2024 H1 Update,” can be found here.

Continue Reading NERA: First Half Securities Suit Filings Roughly Level with Last Year’s Pace

In an unusual lawsuit that pairs individual wrongful termination allegations with class action securities law claims, a former employee and present shareholder of a unit of the UK-based publishing and data analytics firm RELX PLC alleges that the company fired him in retaliation for raising concerns about the company’s “greenwashing.” He also alleges that the company misled investors about the company’s climate commitments and its climate-related actions. The complaint alleges that the company made public commitments to climate remediation but at the same time continued to engage in business activities contrary to these commitments. As discussed below, this new lawsuit, although unusual, underscores the fact that climate related allegations, including greenwashing allegations, continue to represent a significant potential source of D&O liability. A copy of the August 6, 2024, complaint can be found here.

Continue Reading Publishing and Data-Analytics Firm Hit With “Greenwashing” Securities Suit

As I previously noted (here), late last week a CrowdStrike shareholder initiated a securities class action lawsuit against the company and certain of its executives based on allegations relating to the company’s alleged role in the recent global IT outage. As I think we all fully understood at the time, the company’s legal woes would hardly be contained to that single lawsuit. As might be expected, additional lawsuits have also started to arise, including an action filed against the company on Monday on behalf of all airline passengers whose air travel was disrupted by the IT outage. A copy of the new complaint against CrowdStrike can be found here.

Continue Reading CrowdStrike Hit with Class Action Suit Filed on Behalf of Airline Passengers

One of the more notable fiduciary liability trends in recent years has been the wave of employer-sponsored retirement account excess fee litigation. In the following guest post, Neil R. Morrison, Lars Golumbic, and Kara Petteway Wheatley take a look at a possible new fiduciary liability trend – health plan fee litigation. Neil is an Associate Vice President and Claims Counsel at Sompo, North America in Morristown, N.J., and Lars Golumbic and Kara Petteway Wheatley are Principals at Groom Law Group, Chartered in Washington, D.C. This article was originally published by Mealey’s Litigation Report: ERISA.  I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.

Continue Reading Guest Post: Health Plan Fee Litigation: The Next Wave of ERISA Litigation?