(Recasts first sentence to reflect court order, adds details of
decision and implications, other details)
By Michelle Price and Sinead Cruise
WASHINGTON/LONDON, May 12 (Reuters) - The U.S. Justice
Department and Securities and Exchange Commission must review
whether an ex-Royal Bank of Scotland employee is owed a
whistleblower payout and provide documents relating to his case,
a federal U.S. court said on Tuesday.
The U.S. Second Circuit Appeals Court decision could set an
important precedent for other whistleblowers who say they have
been unjustly denied bounties under the SEC's program to reward
tipsters.
Former RBS risk manager Victor Hong sued the agencies in
February alleging they flouted the law "in bad faith" when
assessing whether he was due a payout for helping federal probes
into the British bank's mis-selling of mortgage bonds in the
run-up to the 2007-08 financial crisis.
In August 2018, RBS agreed to pay $4.9 billion to end the
probes, which were led by the Justice Department. No portion of
that fine has ever been deemed eligible for a reward under the
whistleblower program, public records show.
Hong had asked the court to compel the SEC and the Justice
Department to produce all records relating to the RBS settlement
and to deem it eligible for a potential tipster reward,
according to the filings, which Reuters has reviewed.
The Justice Department and SEC have not said publicly why
the RBS settlement was deemed ineligible. The SEC declined to
comment while the Justice Department did not immediately provide
comment.
In a Jan. 30 filing the Justice Department asked that the
court dismiss the petition against the agency on the grounds
that the SEC was "the only appropriate respondent" but on
Tuesday the court denied that request.
REWARDS
Established by the 2010 Dodd Frank Act after the financial
crisis, the whistleblower program has resulted in more than $2
billion in penalties and $450 million in rewards, SEC data
shows.
Currently, the SEC can reward tipsters whose original
information leads to a penalty exceeding $1 million with rewards
of between 10% and 30% of the fine.
It may also pay a reward in related enforcement actions
brought by other agencies provided the settlement was based on
the same information the tipster originally gave the SEC.
In a March filing, the SEC said it had not considered Hong's
argument that the Justice Department settlement was a related
enforcement action but could do so if the court were to return
the case to the SEC for review.
The court on Tuesday said it granted the SEC's request to
review the case, based on its "representation that it will, in
good faith ... address [Hong's] arguments regarding the record
and its rejection of his application."
A former managing director of risk management at RBS's U.S.
operations, Hong resigned two months into the job after
discovering billions of dollars of mortgage bonds had been
mispriced.
He first approached the SEC and Justice Department offering
information in December 2007, according to the filings.
He later met with Justice Department officials in December
2014, and provided testimony and documents, according to the
filings which include copies of subpoenas, Hong's formal SEC
tip, and emails with Justice Department officials.
The filings suggest Hong's information also "significantly"
contributed to the success of a separate $5.5 billion settlement
RBS agreed with the Federal Housing Finance Agency (FHFA) in
2017 on behalf of housing finance giants Fannie Mae and Freddie
Mac which had bought mortgage bonds from RBS.
Hong also asked the court to deem that settlement a related
action eligible for a reward, the filings show. It was not clear
on Tuesday if the SEC would factor that settlement in to its
review. The FHFA did not immediately provide comment.
The SEC may deny claims for a range of reasons, including
that the tip did not offer new information or prompt any action.
(Reporting by Michelle Price in Washington and Sinead Cruise in
London
Editing by Kirsten Donovan and Matthew Lewis)
