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SEC Serves Up 2nd Whistleblower Award and Hints at Bigger Awards in the Near Future

The Securities and Exchange Commission (SEC) announced its second Dodd-Frank Act whistleblower award on June 12.   The related enforcement action involves Locust Offshore Management LLC, a sham hedge fund, along with its CEO Andrey C. Hicks for defrauding investors of $2.7 million. 

The SEC froze defendants’ assets, but the three whistleblowers who reported the fraud will have to wait until the SEC collects on its enforcement action Locust Offshore Management LLC before receiving their 15 percent reward. 

The whistleblowers will also be entitled to apply to the SEC for a whistleblower award based on the amounts collected by the Department of Justice in a related action of which the DOJ collected approximately $800,000 from Hicks to date. 

In March 2012, the United States District Court for the District of Massachusetts entered default judgments against Locust and Hicks and ordered them to pay approximately $7.5 million in disgorgement and penalties. Hicks also pled guilty to criminal fraud charges in 2012 and he was sentenced to 40 months in prison. 

The whistleblowers remain anonymous, but the related order stated that two of them provided information that prompted the SEC to open an investigation and stop the scheme before more investors were harmed. The third whistleblower confirmed much of the information the others had provided and identified key witnesses. A fourth application for an award was denied because the information provided did not lead to or significantly contribute to its enforcement action, as required by law. 

The awards stem from the SEC’s October 2011 lawsuit and emergency asset freeze, in which the SEC alleged that Hicks misled investors about his credentials and diverted investor assets to his personal bank account, rather than the hedge fund that Hicks purported to run. 

The awards are the second made under the SEC’s whistleblower program, which began operating in August 2011.  The SEC issued its first whistleblower award in August 2012. 

Congress authorized the whistleblower program in the 2010 Dodd-Frank Act to reward individuals who offer high-quality original information that leads to an SEC enforcement action resulting in sanctions of more than $1 million. Awards can range from 10 percent to 30 percent of the money collected.  The law also includes provisions to protect whistleblowers from being identified and safeguard them from retaliation. 

Stephen Cohen, Associate Director of the SEC’s Division of Enforcement, recently spoke at a panel at the Corporate Crime Reporter (CCR) conference in early May 2013 and indicated that “there will be a likely change in the discussion about the magnitude of some of these awards over the next six to twelve months.”  According to CCR, Cohen said that he expects that in the coming months, the whistleblower program will produce “incredibly impactful cases” with “some extremely significant whistleblower awards.” 

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