Mortgage banker’s failed appeal sheds light on opaque SEC bounty process

(Reuters) – The president of the mortgage company MNI failed Tuesday to persuade the District of Columbia U.S. Court of Appeals that the Securities and Exchange Commission wrongfully denied him a bounty for information he provided about Bank of America mortgage-backed securities.

The MNI president, who litigated anonymously at the D.C. Circuit, claimed that he gave the SEC and the Justice Department information that helped the government reach a nearly $17 billion global settlement with BofA in 2014, including a $245 million SEC deal. The SEC commissioners rejected his application for a reward from its whistleblower program, based on declarations from three SEC staff lawyers who said the information Doe provided – more than a year after the commission had begun investigating BofA’s MBS practices – did not contribute to the case or lead to the settlement. D.C. Circuit Judges Karen Henderson and Douglas Ginsburg sided with the SEC in an unpublished order Tuesday, holding that Doe offered no good reason to second-guess the SEC’s determination.

It’s quite rare, according to whistleblower lawyers Jordan Thomas of Labaton Sucharow and Rebecca Katz of Motley Rice, for rebuffed tipsters to go to court to challenge SEC orders denying them a bounty. It’s rarer still for those challenges to succeed. Katz said she’s aware of only three cases, in addition to the Doe case, in which SEC whistleblowers sought review of final commission orders in the appellate courts – and the challengers lost all three. Thomas said he’s not aware of a single successful appeal by an SEC whistleblower.

Doe’s longtime counsel, Clifford Marshall of Marshall, Roth & Gregory, declined to comment on the D.C. Circuit ruling. But Marshall said he believes the SEC’s whistleblower bounty process is flawed. “Many times, the basis for the SEC’s final whistleblower decision is less than transparent,” Marshall said. “I cannot believe that was the intent of Congress in enacting Dodd-Frank.”

Given the rarity of SEC whistleblower appeals and Doe’s focus on process at the D.C. Circuit, it’s worth delving into the Doe appeal for what it reveals about a program that, as the SEC pointed out in its brief to the D.C. Circuit, has awarded more than $500 million to tipsters – but has left other purported whistleblowers, like Doe, dissatisfied with their awards and the SEC’s justification for them.

Doe said he went to the SEC in December 2011 to accuse BofA of putting a squeeze on companies that generated mortgage loans when it received buyback demands from Fannie Mae and Freddie Mac, then booking some of the billions it allegedly received from those loan originators as income. He met with SEC agents for four hours in April 2012. Doe alleged that SEC investigators told him they were part of a larger task force investigating mortgage-backed securities and that he should reach out an assistant U.S. Attorney in Charlotte, North Carolina, where BofA is headquartered.

MNI soon thereafter filed a False Claims Act case against the bank in federal court in Charlotte. Doe said he met again with SEC investigators in June 2012, along with other members of the federal government’s MBS Task Force. Over the next few years, Doe said, he was in regular contact with DOJ prosecutors about his qui tam allegations. At his direction, Doe said, at least one MNI employee also met with DOJ investigators.

In Doe’s view, the SEC claims that BofA ultimately agreed to settle “mirrored” the allegations he brought to the commission in 2011. He was one of more than a dozen people who asked for a bounty for supplying the SEC with a tip about Bank of America.

In 2017, the SEC staff issued a preliminary determination rejecting Doe’s bounty claim, along with those of the other purported BofA whistleblowers, because, according to the staff, none of the claimants provided information that led the SEC to begin or significantly expand its investigation. (Remember, the…