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April 18, 2018 SEC Fraud

False Claims Act’s “Alternate Remedy Provision” & The SEC Whistleblower Statute’s “Related Action” Provision

What is the False Claims Act Alternative Remedy Provision?

When a relator brings a false claims action in the name of the Government under the False Claims Act (“FCA”), the Government may elect to pursue its claim through any alternate remedy available to the Government, including any administrative proceeding, to determine a civil money penalty.  If any such alternate remedy is pursued in another proceeding, the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under the FCA. ((31 USC §3730(c)(5)).  Thus, the False Claims Act has an alternate remedy provision which gives the relator the same rights in the alternate proceeding that he or she would have had if the action had continued under the FCA.

There is no identical “alternate remedy” section in the SEC Whistleblower Statute or corresponding rules.  Section 21F of the Securities Exchange Act of 1934 (“Exchange Act”) (15 U.S.C. §78u-6), entitled “Securities Whistleblower Incentives and Protection,” requires the Securities and Exchange Commission (the “Commission”) to pay awards, subject to certain limitations and conditions, to whistleblowers who provide the Commission with original information about violations of the federal securities laws.  There is no provision for the Commission itself to pursue the claims through an alternate means or to pass the claims off to a different administrative agency or judicial body, and then pay an award to the whistleblower on any monetary result achieved by that agency or body.

SEC Whistleblower Relation Action

However, the whistleblower rules do allow a whistleblower to receive an award for a recovery in a “related action” – including actions brought by the Department of Justice – IF the SEC itself brings an action based on the whistleblower’s submission and recovers more than $1 million and the original information that the whistleblower gave to the Commission is the same information that led to the successful enforcement by the other entity in a “related action.”

A “related action” is a judicial or administrative action that is brought by:

  • (i) The Attorney General of the United States;
  • (ii) An appropriate regulatory authority;
  • (iii) A self-regulatory organization; or
  • (iv) A state attorney general in a criminal case,

§ 240.21F-3(b).

The legislative history of the Whistleblower rules shows that the regulators considered and specifically rejected allowing a whistleblower to receive an award for a recovery in a related action even in the absence of an action or recovery by the Commission:

“We have not modified the rule to permit a whistleblower to recover in a related action absent a successful Commission action, because the statute expressly requires a successful Commission action before there can be a ‘related action’ upon which a whistleblower may recover.”

Thus, if a whistleblower files a Form TCR with the SEC exposing fraudulent conduct and also gives original information to a judicial or administrative body such as the Department of Justice that takes independent action to prosecute the fraud, he or she will be entitled to receive an award on the result achieved by the other body if SEC itself also brings an action based on the whistleblower’s same information and recovers more than $1 million.

Note that a whistleblower who first provides original information regarding a fraud to an agency or body listed in § 240.21F-3(b) has 120 days from that date to submit the same information to the Commission in order to be eligible for an award based on any recovery achieved in an action by the Commission.  As 17 CFR 240.21F-4(7) makes clear:

If you provide information to the Congress, any other authority of the Federal government, a state Attorney General or securities regulatory authority, any self-regulatory organization, or the Public Company Accounting Oversight Board, or to an entity’s internal whistleblower, legal, or compliance procedures for reporting allegations of possible violations of law, and you, within 120 days, submit the same information to the Commission pursuant to § 240.21F-9 of this chapter, as you must do in order for you to be eligible to be considered for an award, then, for purposes of evaluating your claim to an award under §§ 240.21F-10 and 240.21F-11 of this chapter, the Commission will consider that you provided information as of the date of your original disclosure, report or submission to one of these other authorities or persons. You must establish the effective date of any prior disclosure, report, or submission, to the Commission’s satisfaction. The Commission may seek assistance and confirmation from the other authority or person in making this determination.

SEC whistleblowers may report violations of federal securities laws, violations of the rules of a self-regulatory organization (such as FINRA) or violations of the Foreign Corrupt Practices Act (which concerns allegations related to bribery of foreign officials).

Contact Us to Learn More

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  1. Fill out the contact form on this page.
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