By Sinead Cruise
(Reuters) – A former Royal Bank of Scotland managing director is taking to the U.S. Supreme Court his bid to collect a whistleblower award of at least $490 million from the U.S. government for reporting what he called unlawful conduct related to mortgage-backed securities.
Victor Hong on Monday appealed a lower court’s ruling that found him ineligible for a whistleblower award under a 2010 federal law because the U.S. Securities and Exchange Commission (SEC) passed along information he provided in 2014 to the Justice Department rather than bringing its own action against RBS, now called NatWest Group PLC.
A three-judge panel of the New York-based 2nd U.S. Circuit Court of Appeals in July ruled unanimously against Hong, a veteran New York-based banker whose tips helped federal agencies secure more than $10 billion in settlements with RBS in 2017 and 2018.
Hong voluntarily reported what he called unlawful conduct related to RBS’s valuation of mortgage-backed securities to the SEC, which then shared his tips with the Justice Department, helping federal prosecutors and the Federal Housing Finance Agency (FHFA) secure settlements.
Hong has been pursuing compensation he has said he is owed under a program created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law enacted in response to the 2008 financial crisis. The measure authorizes awards worth up to 30% of the government’s recovery in “judicial or administrative actions” or “related actions” brought by the SEC.
RBS agreed to settle Justice Department and FHFA investigations over its sales of residential mortgage-backed securities in the run-up to the financial crisis. The bank denied wrongdoing.
The SEC did not pursue its own action against RBS in this instance.
An SEC spokesperson declined to comment on Hong’s appeal.
The petition Hong filed on Monday asks the Supreme Court to consider what constitutes an “action” within the SEC’s whistleblower incentive program.
Hong has argued that referring prosecution to other agencies based on information provided by whistleblowers to the SEC should be included and that, without a change to the law, the incentives for white-collar whistleblowers to report abuses in the financial sector are vastly reduced.
The petition, provided by Hong to Reuters, said “the current scheme is strongly discouraging to potential whistleblowers with significant information of violations, because there is no predictability of payout.”
“The better a whistleblower’s information, the larger the sanctions, the larger the whistleblower award, and the greater the self-interested motivation for the SEC to take enforcement actions that it has conveniently placed outside of Dodd-Frank’s reach,” it added.
Hong’s lawyer, Richard Corenthal of the firm Archer Byington Glennon & Levine, said the 2nd Circuit’s decision, if allowed to stand, effectively undermines Dodd-Frank’s “purpose” and the aspirations of Congress.
“Why should someone working in the finance industry come forward to report securities fraud, at the risk of being fired and jeopardizing their careers and families, when the SEC and other federal agencies can easily use the information to obtain a valuable financial settlement and then deny the whistleblower an award?” Corenthal asked.
RBS was not a party to the case.
(Reporting by Sinead Cruise in London; Editing by Will Dunham)
