The U.S. Second Circuit Appeals Court will on Tuesday consider arguments by an ex-Royal Bank of Scotland (RBS.L) employee who is suing the U.S. Justice Department and Securities and Exchange Commission for a bounty he says he is owed under a whistleblower program.
The suit brought by former RBS risk manager Victor Hong could result in a landmark ruling if the court finds the agencies broke the law, or force them to reconsider his case or produce documents that may shed light on how they handled it.
In February, Hong filed a petition with the court alleging the agencies 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 has 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 the court has yet to grant that request.
REWARDS
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 will consider that option on Tuesday, or it may require the agencies to produce documents on how they handled the case, or conclude that the agencies breached Dodd Frank and force them to process Hong’s reward claim.
A former managing director of risk management at RBS’ 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.
He has asked the court to deem that settlement a related action eligible for a reward. 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.
