SEC Answers to Denying Whistleblower Award in New Court Session

The Securities and Exchange Commission (SEC) is answering to denying a whistleblower award in a new court session.

An appeals court upheld the U.S. Securities and Exchange Commission’s decision to deny a whistleblower award in a case involving short seller Carson Block, while at the same time broadly questioning how the agency decides who receives awards from its cash-for-tips program. 

Last year, the Justice Department targeted Muddy Waters for flooding the market with fake orders, also known as ‘spoofing’.

Founder of Muddy Waters, Carson Block was served with a search warrant by an FBI agent.

The ongoing investigation was one of the many probes targeting hedge funds for illegal short selling strategies at the time.

Claimant Jamie Doe filed a whistleblower award application with the SEC, claiming to be a principal author of a 2011 report published by equity research firm Muddy Waters that contained information of the alleged misconduct.

His application was denied by the agency even though the SEC order cited the report in its investigation and settlement and credited Doe as an author of the report.

The SEC said Doe failed to provide the information directly to the SEC as the staff found the public report themselves, disqualifying Doe as a whistleblower. 

The Third Circuit decision on Friday agreed with the SEC’s decision, saying the appellant failed to demonstrate the SEC acted arbitrarily in concluding his application failed to meet the whistleblower requirements.

The award was instead given to Kevin Barnes, the direct informant in the case.

Hedge Fund Planned Whistleblower Scheme

To complicate matters, Muddy Waters’ CEO planned this whistleblower event only to get sued by his accomplice in the end.

Kevin Barnes, a private investor, last year sued Carson Block in New York federal court, saying that the two men worked together in producing the research that ultimately led to the SEC award and that they agreed to share proceeds from legal or regulatory actions stemming from their research, The Wall Street Journal previously reported.

Barnes is seeking $7 million from Block.

Cason Block is suing Barnes for defamation claiming he has suffered damages of more than $75,000.

A magistrate judge in the Texas case suggested in March the case be dismissed, to which Block objected.

The New York case is pending.

“Mr. Barnes looks forward to continuing his meritorious claims against Mr. Block for breach of their partnership agreement in the ongoing Southern District of New York matter.

Mr. Barnes will not be dissuaded by spurious accusations in improper venues,” Evan Fried, an attorney at law firm Slarskey who is representing Barnes, said in an email. 

Read: Citadel Draws Fresh Scrutiny from SEC in New Risky Bets

Other SEC News Today

Bankers are urging the SEC to looking into manipulative trading, particularly into abusive short selling.

Earlier this month, Reuters reported that the White House had vowed to monitor the possibility of illegal short selling as shares in the banking sector plunged.

Now The American Bankers Association on is urging federal regulators to investigate significant short sales of publicly traded banking equities that it said were “disconnected from the underlying financial realities.”

Retail investors are raising concerns over the banking sector’s requests, stating that the SEC should address manipulative trading practices in individual company stocks too, not just within the banking sector.

“We urge the SEC to consider all its existing tools and to take measures to reduce the avenues for abusive trading practices and restore investor confidence,” the banking group said.

“These measures include, at a minimum, a clear message and appropriate enforcement actions against market manipulation and other abusive short selling practices.”

Days after White House press secretary Karine Jean-Pierre said President Biden’s administration was looking into short seller activity around bank shares in the United States, triggering predictions of a possible ban, JPMorgan CEO has expressed his view that short-selling of bank stocks should, indeed, be prohibited.

Specifically, Jamie Dimon believes that regulators “vigorously” go after unscrupulous short-sellers, or anyone doing anything wrong in terms of stock options, derivatives, and short-sales, as he told Bloomberg TV anchor Francine Lacqua in an interview published on May 11.

You can read his entire take here.

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