[00:00:00] Speaker 04:
All right, good morning.

[00:00:02] Speaker 04:
So for the Doe versus United States Securities and Exchange Commission case number 23-271, each side will have 15 minutes.

[00:00:11] Speaker 04:
If the appellants would like to reserve time for rebuttal, please be aware you are responsible for keeping track of your time and please do let me know if you plan to reserve some time.

[00:00:21] Speaker 02:
Thank you, Your Honor.

[00:00:21] Speaker 02:
I do plan to reserve some time, say three minutes for rebuttal if I may.

[00:00:25] Speaker 04:
You may and you're Mr. Hilbert.

[00:00:26] Speaker 02:
My name is John Hilbert, Hilbert and Satterly from San Diego.

[00:00:30] Speaker 02:
I represent the petitioner in this matter, John Doe.

[00:00:35] Speaker 02:
I'm going to refer to the petitioner as either the claimant or my client or Mr. Doe given the confidential nature of this particular proceeding.

[00:00:45] Speaker 02:
And I assume that my opposing counsel will do the same to protect the identity of Mr. Doe.

[00:00:52] Speaker 02:
This case involves

[00:00:54] Speaker 02:
my client's legitimate request for whistleblower award under the Dodd-Frank Act for reporting ongoing securities frauds that the commission used to support its enforcement action against the various defendants.

[00:01:11] Speaker 02:
Although the administrative record overwhelmingly supports the issuance of a whistleblower award, the commission denied the client's request

[00:01:24] Speaker 02:
by ignoring certain undisputed facts and several relevant factors.

[00:01:29] Speaker 02:
The facts that qualify my client for a whistleblower award are not in dispute.

[00:01:35] Speaker 02:
They include the fact that at the time my client discovered the ongoing fraud by the defendants in the civil action, there was a pending civil action that in which there was a pending preliminary injunction that prohibited these defendants from committing further securities violations.

[00:01:54] Speaker 02:
In that context, my client was approached by one of the fraudsters, one of the defendants, and that fraudster tried to induce my client to participate in a further fraud, the same type of fraud that was the subject of the action and supported the preliminary injunction.

[00:02:15] Speaker 01:
But it was different.

[00:02:16] Speaker 01:
The SAC fraud was different from what the agency was prosecuting, correct?

[00:02:25] Speaker 02:
No.

[00:02:26] Speaker 02:
With all due respect, I don't think it was different.

[00:02:28] Speaker 01:
It involved a different fraud scheme, right?

[00:02:33] Speaker 02:
Well, it involved the same type of fraud and fraud scheme as the earlier ones.

[00:02:42] Speaker 02:
The only difference was

[00:02:45] Speaker 02:
S.A.C.

[00:02:46] Speaker 02:
fraud was a difference in time.

[00:02:49] Speaker 02:
The earlier frauds were all based upon separate fraud dealing.

[00:02:53] Speaker 01:
Mr. Hilbert, let's get some facts straight.

[00:02:56] Speaker 01:
The S.A.C.

[00:02:58] Speaker 01:
prosecution did not deal with any facts regarding S.A.C., correct?

[00:03:05] Speaker 02:
Up until that point.

[00:03:06] Speaker 01:
Up until that point.

[00:03:07] Speaker 02:
Up until that point, and it's correct.

[00:03:08] Speaker 01:
And did they use the facts?

[00:03:12] Speaker 01:
of the SAC fraud to prosecute the claim that they had pending?

[00:03:19] Speaker 02:
Yes, they did.

[00:03:20] Speaker 02:
How?

[00:03:20] Speaker 02:
Because they amended their complaint and added the SAC fraud and the contempt order to the second amended complaint.

[00:03:30] Speaker 02:
The SEC wants to suggest that that was just a procedural allegation, but that's not the way

[00:03:35] Speaker 02:
Actions pled, that's not the way the action proceeded.

[00:03:39] Speaker 02:
The action is pled alleging the facts of the SAC fraud and the contempt order and those allegations are incorporated into each and every claim of fraud and each and every cause of action.

[00:03:55] Speaker 02:
It's not only incorporated by the reference but it's also referred to by allegations in the various claims when the SEC alleges that

[00:04:05] Speaker 02:
these frauds, the similar frauds, everybody acknowledges, the SEC acknowledges, the court acknowledged that these are similar frauds.

[00:04:13] Speaker 01:
Let me ask you one more question before we get into that.

[00:04:15] Speaker 01:
Was any money exchanged because of the SAC fraud?

[00:04:19] Speaker 02:
No.

[00:04:19] Speaker 02:
Thank you.

[00:04:20] Speaker 02:
Unfortunately, but fortunately it was, the SAC fraud was cut off

[00:04:25] Speaker 02:
prior to the consummation of any of the frauds.

[00:04:29] Speaker 02:
But it's important to put in context that at the time of the contempt order that stopped this SAC fraud in its tracks, no one knew whether or not Mr. McGinn had consummated any of these frauds and collected a bunch of money from victims.

[00:04:42] Speaker 04:
How are these awards funded?

[00:04:45] Speaker 02:
These whistleblowers?

[00:04:45] Speaker 02:
Awards are funded not from the monies collected but by a separate whistleblower fund set up by the government.

[00:04:54] Speaker 04:
So in theory, if there was no money ever collected on a case, could there still be a whistleblower award?

[00:05:02] Speaker 02:
No, but it's not because the money, the awards come from that collection.

[00:05:08] Speaker 02:
It's because the amount of the award is dependent upon the amount collected in the whistleblower action.

[00:05:19] Speaker 02:
percentage that is assigned to the whistleblower award.

[00:05:24] Speaker 02:
It doesn't come from the pot of money collected.

[00:05:26] Speaker 02:
It comes from a different pot of money, but the determination is based upon the amount of money collected.

[00:05:32] Speaker 01:
But no money was collected in the action because of the SAC fraud, because no money ever changed hands in the SAC fraud, correct?

[00:05:42] Speaker 02:
That's correct, but that's not a requirement for a whistleblower award.

[00:05:49] Speaker 01:
information provided to the Commission must only lead in part to the... How did the SAC claim lead in part to the recovery of funds in the non-SAC frauds?

[00:06:09] Speaker 02:
Because it was an integral part of the overall enforcement action against these defendants.

[00:06:16] Speaker 02:
involved the same type of fraud, and as a result, the court ordered disgorgement, which is the definition of monetary sanctions.

[00:06:27] Speaker 03:
If it was such an integral part, why did the district court not even mention it in its order-granting summary judgment?

[00:06:32] Speaker 02:
Because it didn't have to.

[00:06:33] Speaker 02:
The remedies for that fraud had already been obtained by the SEC and issued by the court.

[00:06:40] Speaker 02:
Shut down SAC.

[00:06:42] Speaker 02:
Freeze those assets.

[00:06:44] Speaker 02:
Discorge any assets that

[00:06:46] Speaker 02:
They did have.

[00:06:48] Speaker 02:
It turns out that they didn't have it yet, fortunately, because my client's prompt action notifying the SEC was able to allow the SEC to stop dead in its tracks the same type of fraud that had been the subject of the complaint and the preliminary injunction.

[00:07:05] Speaker 02:
the contempt matter based upon my client's evidence was totally dependent upon the plenary injunction action, which was... But the contempt matter didn't produce any funds that could be used to disgorge and reward, right?

[00:07:24] Speaker 02:
That is correct, but it doesn't... If you look carefully at the rules in the statute,

[00:07:29] Speaker 02:
The separate proceeding, if they want to call it the separate proceeding, does not require that the separate order

[00:07:40] Speaker 02:
lead directly to the recovery of funds.

[00:07:43] Speaker 02:
It only has to be part of the enforcement action, and that's what... Let me ask you this.

[00:07:48] Speaker 04:
If the SAC offering was the only reason we were here, that that's the only thing they had against these fraudsters, does John Doe still get anything, even if no money came to light?

[00:08:02] Speaker 02:
No, but not because it has to lead to the recovery of money.

[00:08:09] Speaker 02:
It's hard to distinguish.

[00:08:13] Speaker 02:
It's because if there was no money recovered in this whole civil action, for example, then there would be no whistleblower awards.

[00:08:20] Speaker 02:
And that's not because

[00:08:22] Speaker 02:
They didn't do a good thing and report the frauds and stop the frauds in its place.

[00:08:28] Speaker 02:
But it's based upon the statutory scheme that talks about the amount of the award being tied to the collections.

[00:08:36] Speaker 02:
There's nothing in the code or the rules that require the whistleblower claimant to monetize his information.

[00:08:45] Speaker 02:
He only asked to prove that his information caused the

[00:08:52] Speaker 02:
SEC to investigate, in this case, a new line of fraud that was related to the old fraud, and that they got remedies, in this case, based upon the contempt.

[00:09:07] Speaker 04:
What are you saying that, explain to me factually, what is it that had your client not brought the SAC offering to the SEC, what would they not have been able to prove?

[00:09:19] Speaker 04:
How would their outcome be different?

[00:09:21] Speaker 02:
Because if then the fraudsters would have been able to consummate their frauds, creating another potential $5 million in injury to potential investors, by providing the SEC the information necessary to stop this fraud in its tracks, my client's activity and the contempt motion

[00:09:46] Speaker 02:
protected the funds that were actually collected that were going to be distributed to the injury, preserved those funds from dissipation by the fraudsters because they could have continued to dissipate these funds.

[00:10:01] Speaker 02:
They had not been collected yet.

[00:10:04] Speaker 02:
But the contempt order shut them down and prevented it from dilution.

[00:10:10] Speaker 01:
Yes, Your Honor.

[00:10:11] Speaker 01:
Trace for me the causative chain between your client's information about SAC from which no funds were recovered and the recovery by the SEC of the funds on the other frauds.

[00:10:25] Speaker 01:
What's the causative connection?

[00:10:28] Speaker 02:
The fact is that the SAC fraud was just a continuation of the earlier fraudulent activity that supported the SEC's complaint and that

[00:10:42] Speaker 02:
formed the basis for the preliminary injunction.

[00:10:45] Speaker 02:
The contempt on the SAC fraud was wholly dependent upon the relationship between the SAC fraud and the earlier frauds.

[00:10:55] Speaker 01:
And your position is that the SAC wouldn't have been able to get the preliminary injunction without the SAC information?

[00:11:02] Speaker 02:
No.

[00:11:03] Speaker 02:
They would not have been able to get the additional injunctive relief that was provided in the contempt measure.

[00:11:11] Speaker 02:
They already had the preliminary injunction

[00:11:14] Speaker 02:
The SNU fraud was a violation of that preliminary injunction, giving rise to the contempt proceeding in which the court awarded additional relief.

[00:11:24] Speaker 01:
Is it your position that out of that additional relief, your client should share?

[00:11:29] Speaker 02:
My client should get a whistleblower award.

[00:11:32] Speaker 02:
Again, the whistleblower award does not reduce the amount to be distributed to the harmed investors.

[00:11:40] Speaker 02:
It just provides a basis for determining the amount.

[00:11:43] Speaker 02:
So giving my client the whistleblower award that he deserves does not dilute the funds available for the investors.

[00:11:55] Speaker 02:
However, had my client not brought this to the attention, the fund available for investors would be diluted and possibly dissipated.

[00:12:09] Speaker 02:
The SEC's position basically wants to take the

[00:12:14] Speaker 02:
contempt proceeding based upon my client's original information and put it in a box, separate, and analyze it separately.

[00:12:21] Speaker 02:
But the record doesn't allow that to happen.

[00:12:23] Speaker 02:
It has to be talked about and analyzed in the context of the whole enforcement action by the SEC.

[00:12:32] Speaker 02:
There was a contempt motion based on all of the facts that my client brought.

[00:12:41] Speaker 02:
The SEC certainly thought that it was related and it arose out of the same nucleus of facts.

[00:12:47] Speaker 02:
Otherwise, they wouldn't have made those allegations in their pleadings in support of the contempt order.

[00:12:55] Speaker 02:
They wouldn't have amended their complaint to occlude these allegations as a further support for the relief and the overall action.

[00:13:04] Speaker 04:
Council, would you like to save the remaining time for your rebuttal?

[00:13:07] Speaker 02:
I would, thank you, Your Honor.

[00:13:08] Speaker 02:
Thank you.

[00:13:10] Speaker 02:
Well, I'll save my time.

[00:13:11] Speaker 02:
Thank you.

[00:13:12] Speaker 04:
Appreciate it.

[00:13:12] Speaker 04:
Thank you.

[00:13:13] Speaker 04:
I'll give you a full three minutes.

[00:13:14] Speaker 04:
Thank you.

[00:13:26] Speaker 00:
Your honors, Stephen Yoder for the Securities and Exchange Commission.

[00:13:30] Speaker 00:
May it please the court?

[00:13:32] Speaker 00:
Does Mayne argument misses the mark?

[00:13:34] Speaker 00:
He contends that the Commission failed to apply the definition of the term action in its own rules in this case.

[00:13:41] Speaker 00:
But as the Commission explained, Doe's claim fails regardless of whether that definition applies here.

[00:13:47] Speaker 00:
Specifically, assuming Doe is correct that the contempt proceeding was part of the covered action, the Commission reasonably determined that even so, his information did not lead to the successful enforcement of that action under Rule 21F4C.

[00:14:05] Speaker 00:
Under C1, the commission reasoned that the covered action was not based on Doe's information about the SEC offering, because that offering was never incorporated in the allegations of misconduct by defendants.

[00:14:17] Speaker 01:
Then why did you amend your complaint?

[00:14:21] Speaker 00:
Your Honor, the docket suggests that there was a motion to dismiss that was decided not long before the commission amended its complaint, and that the

[00:14:31] Speaker 00:
There were actually multiple motions.

[00:14:32] Speaker 00:
They were granted in part.

[00:14:34] Speaker 00:
And so the most obvious explanation from the docket is simply that the commission wanted its complaint to conform to the district court's decision on those motions.

[00:14:45] Speaker 01:
So there was a motion to dismiss that was denied, right?

[00:14:52] Speaker 00:
Granted in part and denied in part, as I understand.

[00:14:54] Speaker 01:
Yes.

[00:14:57] Speaker 01:
the Commission want to add the SAC information from Doe after that ruling?

[00:15:09] Speaker 00:
Your Honors, the Commission staff added that information simply to the procedural history of the complaint.

[00:15:16] Speaker 00:
Why they added it, I can't say.

[00:15:17] Speaker 00:
That's part of the staff's prosecutorial discretion in terms of how they decide to bring the action, but they did not include it in the allegations of misconduct.

[00:15:27] Speaker 04:
Council, would John Doe have a better argument if money had actually been collected?

[00:15:37] Speaker 00:
Yes, Your Honor.

[00:15:38] Speaker 04:
He would.

[00:15:39] Speaker 04:
So if he would have waited until the fraudsters got away with it a little bit more, he would have been in a better position than letting you know ahead of time?

[00:15:47] Speaker 00:
That's a fair question, Your Honor.

[00:15:50] Speaker 00:
It's absolutely the case.

[00:15:52] Speaker 00:
The commission is not accusing Doe of doing anything wrong here.

[00:15:55] Speaker 00:
He absolutely did the right thing in bringing information about misconduct to the commission's attention.

[00:16:01] Speaker 00:
But the way that Congress wrote this statute, it does not reward everyone who brings information to the commission.

[00:16:06] Speaker 00:
It doesn't even reward everyone if the commission uses that information.

[00:16:11] Speaker 00:
Congress wrote the statute

[00:16:13] Speaker 00:
to require that the information must lead to the successful enforcement of the Commission's action.

[00:16:19] Speaker 00:
And the Commission exercised its rulemaking authority under Section 21FJ to implement that provision.

[00:16:27] Speaker 00:
And that resulted in Rule 21F4C, which we've been talking about and which, as I understand it, Mr. Doe does not challenge as being consistent with the statute.

[00:16:38] Speaker 00:
This is simply a balance that Congress struck and the Commission is trying to act consistently with that balance by applying its rules as written.

[00:16:53] Speaker 01:
had no purpose other than, quote, as you say, procedural and for staff reasons that you haven't plumbed, right, in making the amendment.

[00:17:05] Speaker 01:
It seems to me that if the motion to dismiss was in part

[00:17:12] Speaker 01:
granted and then the commission amended his complaint to put in those allegations.

[00:17:22] Speaker 01:
It did so

[00:17:23] Speaker 01:
as part of the enforcement action to show that these, um, malefactors were still up to the business which the SEC was prosecuting.

[00:17:34] Speaker 01:
So they would add weight to the allegations that they were, uh, violating the law.

[00:17:42] Speaker 01:
Um, you can't just get rid of an amendment by saying, well, I don't know why they did it.

[00:17:47] Speaker 01:
It's the staff.

[00:17:48] Speaker 01:
They made, they had a procedural reason.

[00:17:51] Speaker 01:
They were adding these allegations, I think, for the purpose of showing that McGinn was a bad actor.

[00:18:01] Speaker 01:
Wasn't that so?

[00:18:02] Speaker 00:
That may very well be the case, Your Honor, but regardless, the standard remains whether Doe's information made a significant contribution to the Commission's action under C-2.

[00:18:12] Speaker 01:
So the question is here whether it was arbitrary and capricious to deny that it made a significant contribution.

[00:18:21] Speaker 00:
That's correct.

[00:18:23] Speaker 00:
And that arbitrary and capricious standard does give the Commission some level of discretion to make that decision, but it also has teeth.

[00:18:31] Speaker 00:
It requires the Commission to explain its decision based on the facts of the record and in reasonable fashion to draw a line from those facts to the conclusion it ultimately draws.

[00:18:42] Speaker 00:
And in this case, Your Honor, the factual record amply supports the Commission's conclusion.

[00:18:49] Speaker 00:
Pardon me.

[00:18:51] Speaker 00:
As we point out in our brief,

[00:18:53] Speaker 00:
Doe's information about the SAC offering was never added to the allegations of misconduct.

[00:18:58] Speaker 00:
It played no role in the decision as to liability.

[00:19:03] Speaker 00:
That decision was predicated on collateral estoppel from a parallel criminal conviction for some of the offerings that the defendants brought, but not for the SAC offering.

[00:19:15] Speaker 00:
And it also similarly played no role in the entry of relief at the end of the action.

[00:19:20] Speaker 00:
Typically what the commission does in the significant contribution cases is to try to draw a dotted line, if you will, from the information to the resolution of the action and the entry of relief to determine what kind of contribution was made.

[00:19:38] Speaker 00:
This is the first case in the 15 years that we've had this program where the information

[00:19:43] Speaker 00:
was not used in the action broadly on the merits and in entering relief.

[00:19:51] Speaker 01:
Is that in the record?

[00:19:52] Speaker 00:
The absence is reflected in the record, Your Honor.

[00:19:57] Speaker 00:
So if Your Honor wishes, I would point Your Honor to, let's see, I forget which volume, but it's in the excerpts of record page

[00:20:14] Speaker 00:
Pardon me.

[00:20:19] Speaker 00:
Let's see.

[00:20:21] Speaker 00:
Page 118 is where the judicial court makes its decision based on the collateral estoppel effect of the convictions.

[00:20:29] Speaker 00:
And it makes no mention at all of the SAC offering.

[00:20:36] Speaker 00:
And in this case, the commission reasonably determined that there was no causal

[00:20:41] Speaker 00:
chain between Mr. Doe's information and the final resolution of the action.

[00:20:46] Speaker 00:
So then the question became, what is the significance of the contempt proceeding within the broader action as a whole?

[00:20:54] Speaker 00:
And the commission explained on the facts of this record, at least, that Mr. Doe's information did not result in the freezing or recovery of any assets.

[00:21:05] Speaker 00:
And based on that fact, it reasonably drew the

[00:21:08] Speaker 00:
the conclusion that Mr. Doe's contribution was not significant.

[00:21:13] Speaker 03:
Doe contends that the administrative record was incomplete and that there were gaps in Mr. Stelting's declaration.

[00:21:20] Speaker 03:
How do you respond to those arguments?

[00:21:22] Speaker 03:
Yes, your honor.

[00:21:24] Speaker 00:
To be clear, I'm not exactly sure how or what Mr. Doe meant by gaps because in his reply brief, he says, well, I never mentioned the word gap in my opening brief.

[00:21:36] Speaker 00:
The commission's approach to the Stulting Declaration is that it is a fact declaration.

[00:21:43] Speaker 00:
Mr. Stulting was a fact witness because he was one of the enforcement staff who was primarily responsible for the investigation and the action.

[00:21:51] Speaker 00:
In his declaration, he's speaking as a fact witness.

[00:21:55] Speaker 00:
Doe would essentially have him act, as I understand it, as an expert witness, and have him opine on the various legal standards and legal requirements to render him eligible for an award, such as significant contribution or common nucleus of operative facts.

[00:22:12] Speaker 00:
Those simply aren't things that one would expect a fact witness to address, and that's what Mr. Stulting's declaration was for on this record.

[00:22:20] Speaker 00:
So we don't believe there are any gaps.

[00:22:25] Speaker 04:
I want to briefly address a few things that Mr. Yoder talked about.

[00:22:42] Speaker 02:
allegations relating to the SEC fraud and contempt were actually incorporated into the merits of the complaint.

[00:22:49] Speaker 02:
Each cause of action was referenced and incorporated by reference, as well as included as a basis for the relief by the allegation that the frauds continued up until the present time of the second amended complaint, which included the SEC fraud.

[00:23:07] Speaker 01:
Was there any amendment of the criminal action indictment?

[00:23:13] Speaker 02:
Not that I'm aware of, but it's not accurate that the summary judgment motion, that's one of the other points, was based solely on the collateral estoppel effect of the criminal action.

[00:23:22] Speaker 02:
If you look at the court's ruling on the MSJ, the

[00:23:27] Speaker 02:
raised judicata effect or the collateral estoppel effect of the criminal proceeding was significant, but it wasn't the only basis for the ruling.

[00:23:38] Speaker 02:
In the prayer for the complaint that gave rise to the summary judgment, the SEC asked for first references the earlier relief included in several orders, including the relief ordered in the contempt proceeding, and then says,

[00:23:56] Speaker 02:
We want additional relief as well.

[00:23:59] Speaker 02:
So it's clearly they were relying on the fact that this relief from the contempt order had been previously provided.

[00:24:06] Speaker 02:
The Stolting Declaration is deficient because all it does is start the improper record from the beginning of the analysis.

[00:24:21] Speaker 02:
It does not address undisputed facts relating to my client's original information and the use of that information to support the contempt proceeding.

[00:24:32] Speaker 02:
It ignores the fact that this information was discovered by my client that was not known to the commission.

[00:24:39] Speaker 02:
was provided to the commission, which the commission recognized was part and parcel of the same fraudulent scheme and made that point in its contempt papers and resulted in a contempt order that granted the SEC significant additional relief that had not yet been requested or obtained.

[00:24:58] Speaker 01:
Did the contempt order result in any further funds for disgorgement?

[00:25:03] Speaker 02:
The contempt order was a monetary sanction as that term is defined in the rules.

[00:25:10] Speaker 01:
Against.

[00:25:12] Speaker 02:
Against.

[00:25:12] Speaker 02:
Against McGinn.

[00:25:13] Speaker 02:
Against McGinn.

[00:25:15] Speaker 02:
And because the term of monetary sanction includes the requirement to discourage any funds collected.

[00:25:24] Speaker 02:
It just so happens fortuitously, because my client's immediate action, no funds had yet been lost.

[00:25:31] Speaker 02:
But the order for discouragement, which is what the rules define as a monetary sanction, was in place.

[00:25:41] Speaker 04:
All right.

[00:25:41] Speaker 04:
Any other questions?

[00:25:43] Speaker 04:
Thank you.

[00:25:44] Speaker 04:
Your time is up.

[00:25:44] Speaker 02:
Thank you, Your Honors.

[00:25:45] Speaker 02:
Have a good morning.

[00:25:46] Speaker 04:
I appreciate that.

[00:25:48] Speaker 04:
This matter is now submitted and the court will now take a 10 minute recess.

[00:25:51] Speaker 04:
Thank you.