[00:00:01] Speaker 02: Faith number 21-1165, Eugene C. Ross, Appellant, versus Securities and Exchange Commission. [00:00:08] Speaker 02: Mr. Cohn for the Appellant, Mr. Rady for the Appellate. [00:00:12] Speaker 04: Mr. Cohn, good morning. [00:00:13] Speaker 04: Please proceed. [00:00:14] Speaker 05: Good morning. [00:00:15] Speaker 05: Yes. [00:00:15] Speaker 05: My name is Steve Cohn. [00:00:17] Speaker 05: I'm the attorney for the petitioner, Eugene Ross. [00:00:21] Speaker 05: This case raises three issues in which the commission committed error. [00:00:26] Speaker 05: First, in not finding original information. [00:00:30] Speaker 05: Second, in not finding Mr. Ross was voluntary. [00:00:33] Speaker 05: And third, not granting exemptive relief. [00:00:39] Speaker 05: in regard to the voluntary issue. [00:00:43] Speaker 05: The SEC improperly put a straight jacket on the concept of voluntary. [00:00:50] Speaker 05: And in so doing, they actually went against the three False Claims Act cases that they cited in their rulemaking to justify the current rule. [00:01:07] Speaker 05: They cited three cases also in their brief. [00:01:10] Speaker 05: The first was US X-Rail fine. [00:01:13] Speaker 05: And in that case, the court approved a dictionary definition of voluntary that is identical to the one that we were using. [00:01:24] Speaker 05: They used Webster's, we used Oxford, but applying that definition Ross was voluntary. [00:01:31] Speaker 05: Second, in the case of Surgaard, [00:01:36] Speaker 05: The whistleblower was involved in the fraudulent activity and the contact with the government was initiated by a subpoena. [00:01:48] Speaker 05: In our case, it's the exact opposite. [00:01:52] Speaker 05: Ross had no involvement. [00:01:54] Speaker 05: He discovered it. [00:01:55] Speaker 05: He was the true original source. [00:01:58] Speaker 05: And the contact was initiated only after he worked extensively [00:02:05] Speaker 05: with the victim and her attorney, they met 16 times where he helped explain the frauds. [00:02:14] Speaker 05: In Surrogate, they criticized the relator being complacent, reluctant, and delinquent. [00:02:24] Speaker 05: None of those apply to Ross, exact opposite. [00:02:27] Speaker 05: The third case, [00:02:29] Speaker 05: relied upon by the commission in justifying its rule, Barth, is extremely enlightening. [00:02:37] Speaker 05: Because in that case, this is what the court says, that the voluntary concept was to prevent opportunistic suits by private persons who became aware of the fraud, but [00:02:52] Speaker 05: played no part in exposing it. [00:02:57] Speaker 01: I think that to me, your bigger problem than the voluntary definition is the fact that the statute defines original information in such a way to appear to be that it has to be provided after July 21, 2010. [00:03:14] Speaker 01: And it seems that the statute says that in both [00:03:22] Speaker 01: subsection B there of that pertinent section in the original information definition. [00:03:29] Speaker 01: And it also implies the same in subsection C about awards where it says, well, you can get an award or a violation that happens before July 21st, 2010, so long as the information that you are providing. [00:03:50] Speaker 01: this after that date. [00:03:51] Speaker 01: So why isn't that clear? [00:03:54] Speaker 05: And your honor, first, I would agree that if the commission had found original information, I do believe they would have looked at voluntary differently. [00:04:04] Speaker 05: And I do believe that they would have looked at the exemptive relief differently. [00:04:09] Speaker 05: But going to original information, your arguments with what you're laying out, the commission laid out, all made sense [00:04:18] Speaker 05: prior to the Supreme Court's decision in digital. [00:04:23] Speaker 05: Digital changed the entire analysis. [00:04:26] Speaker 05: Why? [00:04:27] Speaker 05: Because what digital said is in the statutory definitional section, not the regulation, the statutory definitional section was unambiguous. [00:04:42] Speaker 05: If it's unambiguous and precisely defines the term, [00:04:48] Speaker 05: the statutory definition of original information, which is a term of art, was precise. [00:04:59] Speaker 05: unambiguous. [00:05:01] Speaker 05: It met the exact standard that the Supreme Court identified in digital. [00:05:07] Speaker 05: And what's important about digital is the lower courts, the Second Circuit, which did Stryker, the Ninth Circuit, they did the precise analysis that the commission wants you to do here. [00:05:19] Speaker 05: But what the Supreme Court said unanimously, no, this is a specific definition. [00:05:26] Speaker 05: It uses the term means. [00:05:30] Speaker 05: And here's their words, Congress has directly spoken to the precise question at issue. [00:05:38] Speaker 05: Therefore, no deference should be given to the contrary view. [00:05:44] Speaker 05: As for the definition of original information, they spoke precisely to it. [00:05:49] Speaker 05: It's laid out clearly. [00:05:52] Speaker 05: And as the Supreme Court said, the commission was therefore put. [00:05:56] Speaker 01: I think that it's laid out clearly but in laid out clearly in a way that that that means that the information has to be provided after July 21 2010. [00:06:09] Speaker 05: Well, your honor, if you look at the statutory definition, it has three components. [00:06:16] Speaker 05: Derived from independent knowledge, yes, Ross met that. [00:06:20] Speaker 05: Not known to the commission from any other source, unless Ross was the source, yes, Ross met that. [00:06:27] Speaker 05: And not known from a public source, yes, Ross met that. [00:06:31] Speaker 05: That's the precise definition. [00:06:34] Speaker 05: Now, if you go back to digital, [00:06:38] Speaker 05: What you'll see is that there were other parts of the statute that supported the commission's interpretation of the term whistleblower. [00:06:49] Speaker 05: In fact, the retaliation section which was at issue actually had a definition. [00:06:56] Speaker 05: of a protected disclosure that included internal disclosures. [00:07:03] Speaker 05: So what the commission said is that this part of the statute, the retaliation part, and that's what was at issue in digital, it defined a protected disclosure is going internal. [00:07:17] Speaker 01: Well, I think, I think, I'm understanding each other. [00:07:21] Speaker 01: So I understand your your argument about the definition and I should have been clear the definitions appear in section 76 new dash six. [00:07:34] Speaker 01: i'm talking about 76 new dash seven that talked about implementation in transition provisions. [00:07:44] Speaker 01: That's the section that I think has to be read in conjunction with the definitions to understand what Congress meant when it said, what is original information. [00:07:59] Speaker 05: Okay, so that section. [00:08:01] Speaker 05: and section seven, there are two things to keep in mind. [00:08:05] Speaker 05: One, they're creating a safe harbor for people who don't use the proper form to submit a claim. [00:08:12] Speaker 05: So what the commission is arguing that a safe harbor provision dealing with how you file somehow becomes a negation of a mandatory statutory definition. [00:08:26] Speaker 05: Second, and this is important, the commission. [00:08:29] Speaker 02: Not mandatory, but a precondition. [00:08:34] Speaker 02: Even if you meet all the standards, you still have to file after this date. [00:08:38] Speaker 02: And if you didn't file after this date, your claim is not properly a whistleblower claim under the statute. [00:08:46] Speaker 02: Why isn't that the way to read the statute? [00:08:50] Speaker 05: First is because the commission decided that he didn't provide original information. [00:08:56] Speaker 05: They did not issue a rule on the other provisions of the statute. [00:09:00] Speaker 05: And they didn't issue a rule. [00:09:03] Speaker 05: The rule at issue here interprets original information. [00:09:08] Speaker 05: And you may ask, why did they do that and not create a rule under subsection seven? [00:09:13] Speaker 05: The reason is if you look at their rulemaking authority, it only goes to subsection six. [00:09:20] Speaker 05: And this is what's very critical. [00:09:22] Speaker 05: It gave the commission tremendous authority [00:09:26] Speaker 05: to deny claims that are not submitted in the form required by the commission. [00:09:34] Speaker 05: That safe harbor provision prevented the commission from denying a claim that was not presented in the proper form between the time that the statute was passed [00:09:50] Speaker 05: and they did their final regulations. [00:09:53] Speaker 01: I don't see how you can read that in that manner, counsel. [00:09:57] Speaker 01: I mean, section six sets forth the definitions and then section seven says, look, commission, issue regulations to implement this. [00:10:13] Speaker 01: And then in that subsection a and then then subsection be it says, look, you can still present original information before those regulations are implemented. [00:10:29] Speaker 01: Because we know that that may take a while, just so long as it's after the July 21 2010 date. [00:10:36] Speaker 01: And then Congress uses the date again in talking about awards and subsection C to say, you know, if the violation is before the July 21, 2010 date, that will preclude you from getting an award so long as you provide the information after that date. [00:11:00] Speaker 01: is the way that I read all of those things together. [00:11:04] Speaker 01: So, you know, I don't understand this whole thing that you're saying about, oh, it's just about whether there's some form that is properly complied with. [00:11:19] Speaker 01: It's all about how to implement the regulatory scheme. [00:11:25] Speaker 05: Your honor. [00:11:26] Speaker 05: I'm just essentially saying that's a plausible explanation of the power of that of subsection seven. [00:11:34] Speaker 05: They didn't issue a rule based on subsection seven. [00:11:40] Speaker 05: They issued a rule interpreting original information. [00:11:45] Speaker 05: And under digital, you just can't give the commission the benefit of the doubt. [00:11:51] Speaker 05: If they did one under subsection seven, it's a different case. [00:11:54] Speaker 05: But under digital, there's a precise definition of original information. [00:12:01] Speaker 05: It has three parts. [00:12:03] Speaker 05: And under digital, the analysis must stop there. [00:12:08] Speaker 01: That's our position. [00:12:10] Speaker 01: So you're saying that when they did the rulemaking at issue here, they didn't cite subsection seven as they did not base a rule on subsection seven. [00:12:21] Speaker 05: They didn't look at subsection seven and create a rule on timing of filing claims. [00:12:28] Speaker 01: That's not my question. [00:12:30] Speaker 01: Did they cite subsection seven as their authority for promulgating the rule? [00:12:34] Speaker 01: Yes. [00:12:35] Speaker 05: That would be in the Federal Register. [00:12:36] Speaker 05: I could double check and see that. [00:12:38] Speaker 05: That would be in the Federal Register under this part. [00:12:43] Speaker 05: But our position is very clear. [00:12:45] Speaker 05: It's immaterial. [00:12:46] Speaker 05: Congress created a mandatory definition. [00:12:52] Speaker 05: When one looks at that definition in the context of digital, it's binding. [00:12:57] Speaker 05: When one looks at the fact that there are other parts of the statute that could [00:13:04] Speaker 05: alter that determination. [00:13:07] Speaker 05: What the Supreme Court said in digital, no go. [00:13:11] Speaker 05: You stick with that definition. [00:13:13] Speaker 05: And although it's a little nuanced, in the definition of a retaliatory action in [00:13:23] Speaker 05: Dodd-Frank Act. [00:13:25] Speaker 05: There was a provision that says all claims under the Sarbanes-Oxley Act, which included internal. [00:13:31] Speaker 05: So the Supreme Court is looking at a statute that has one part protecting internal disclosures, another part in which defines a term [00:13:43] Speaker 05: And what they said is the definition of the term is controlling, you don't even look at those other parts of the statute. [00:13:52] Speaker 04: And we think- All right, Judge Wilkins, has he answered your question? [00:13:55] Speaker 04: Thank you. [00:13:57] Speaker 01: Yes. [00:13:58] Speaker 04: All right, Judge Rogers, do you have any questions? [00:14:01] Speaker 03: No, I've asked my question. [00:14:03] Speaker 03: And Judge Wilkins has asked those questions as well. [00:14:06] Speaker 04: All right, Mr. Cohn, then we'll give you a minute reply, but we'll hear from Mr. Rady now. [00:14:12] Speaker 04: Good morning. [00:14:14] Speaker 00: Good morning, your honors. [00:14:16] Speaker 00: This is John Rady on behalf of the Securities and Exchange Commission. [00:14:20] Speaker 00: This court should affirm the commission's order that denied Mr. Ross's whistleblower claim for either of two independent reasons. [00:14:26] Speaker 00: And I'd like to start with original information. [00:14:30] Speaker 00: With respect to that statutory term, the commission at least reasonably determined [00:14:35] Speaker 00: that Congress and Dodd-Frank established a whistleblower program that operates prospectively in order to incentivize whistleblowers to come forward. [00:14:43] Speaker 00: This interpretation is supported by the text and context of the relevant statutory provisions, most importantly, the statutory safe harbor in section 78 U-7B that only protects information submitted after Dodd-Frank was adopted. [00:14:58] Speaker 00: And I'd like to answer a question that Judge Wilkins posed to my opposing colleague, [00:15:03] Speaker 00: The commission did cite this section in both his proposing release and the final rule, and those citations are in the proposing release that 75 Federal Register 70492 and footnote 20. [00:15:17] Speaker 00: And in the final adopt and release that 76 Federal Register 34310 and that's footnote 94. [00:15:30] Speaker 00: The Second Circuit in the Stryker case relied on this provision and other statutory provisions to determine that the Commission's interpretation was reasonable. [00:15:39] Speaker 00: Under those provisions, and is relevant here, Mr. Ross did not submit any original information after Dodd-Frank was enacted that led to the successful enforcement of a covered action and his claim should be denied for that reason. [00:15:54] Speaker 01: Let me ask you a hypothetical. [00:15:56] Speaker 01: Let's suppose that the date weren't an issue. [00:16:01] Speaker 01: And you had someone in Mr. Ross's position who discovers a fraud and reports it to his client and reports it to his employer. [00:16:13] Speaker 01: And they both say, we need to have our lawyers check into it. [00:16:19] Speaker 01: Thank you very much. [00:16:22] Speaker 01: And, and, and, you know, we'll get back to you in both the client and the employer contact the SEC with the information [00:16:33] Speaker 01: And then the SEC reaches out to Mr. Ross. [00:16:41] Speaker 01: And he doesn't call the SEC because he's been told by his client and his employer that they want to have their lawyers look into it. [00:16:52] Speaker 01: first, but under the SEC's rule, he would not be acting voluntarily if he completely cooperated from that point because he didn't make the first phone call to them, even though he would still be considered to be the source and the originator of the information, right? [00:17:18] Speaker 00: Your honor, that is a correct interpretation of the commission's role. [00:17:21] Speaker 01: How does that make any sense at all? [00:17:25] Speaker 00: Yes, your honor. [00:17:27] Speaker 00: I think if you look at the text of the statute using the word voluntarily, if you look at the context of the fact that this is a whistleblower statute, if you look at the legislative history, and I think specifically in the Senate report at pages 38 and 110 to 112, which is referenced in the digital realty, [00:17:45] Speaker 00: It's clear that Congress was trying to create a new whistleblower program that was going to incentivize whistleblowers to do one thing. [00:17:53] Speaker 00: As the Digital Realty Court said, a core objective of Dodd-Frank's whistleblower program is to get people to come forward and tell the commission information. [00:18:02] Speaker 00: you know, nobody's arguing that it's a bad thing if Mr. Ross tells his client, tells his employer, but we're really, what we're setting up this flexible program to do and we're giving them a statutory lead. [00:18:15] Speaker 01: Well, the way that the rule would work would be if he feels like his obligation before he goes running to the SEC is to tell his client first and to tell his employer first. [00:18:28] Speaker 01: And he does so, and they say, thank you, we're going to contact the SEC now. [00:18:36] Speaker 01: He has to say, oh no, no, no, let me call the SEC first. [00:18:42] Speaker 01: Otherwise, I don't get any credit for this. [00:18:46] Speaker 01: That's how this works. [00:18:47] Speaker 01: There's gotta be like a race to see who calls the SEC first. [00:18:50] Speaker 01: He's gotta like not follow his client's wishes. [00:18:55] Speaker 01: or his employer's wishes and call the SEC first. [00:19:00] Speaker 01: That's the way this is supposed to work. [00:19:02] Speaker 00: Your honor, I think this statute I think is designed, as the commission said in its adoption release, I think it's also clear in the legislative history once again. [00:19:12] Speaker 00: It's designed to get whistleblowers to come forward and tell the commission information early. [00:19:16] Speaker 00: We do want to encourage people [00:19:19] Speaker 01: If he tells his client about the fraud and the client says, I'm going to call the SEC, why isn't that completely consistent with the statute? [00:19:34] Speaker 01: He knows the SEC is going to be called immediately because of his actions. [00:19:39] Speaker 01: He's not the one making the call. [00:19:43] Speaker 00: Your honor, I think two answers to that question. [00:19:46] Speaker 00: I think the first is very similar to what [00:19:49] Speaker 00: Essentially, the last answer is that, again, I think what we're, what the commission wanted to wanted whistleblowers to do is phone the SEC, you know it, it didn't want to encourage people to go through more securities routes to get there it wants people to just directly contact the SEC. [00:20:05] Speaker 00: And the second answer to your honors question and although this isn't a point that I think is. [00:20:10] Speaker 00: that it hasn't come up in the context of this appeal, I think Your Honor's hypothetical is getting close to a situation in which it would be possible that two whistleblowers are acting jointly together. [00:20:22] Speaker 00: And that is something that the statute provides for, you know, at some point, if it became the case that, you know, hypothetical Mr. Ross's client here, you could imagine other hypotheticals, if they're working together to give the commission information, [00:20:38] Speaker 00: of blowers for purposes of an award. [00:20:40] Speaker 00: Now, that's not relevant in this appeal. [00:20:43] Speaker 00: The commission rejected that possibility based on the facts here, but that would be something that would, I think, address some hypotheticals along those lines. [00:21:00] Speaker 00: Unless your honors have further questions about. [00:21:02] Speaker 02: Well, I thought of a financial one as well. [00:21:06] Speaker 02: government doesn't want to pay whistleblower awards if it can get the information directly from the client or the employer. [00:21:21] Speaker 02: It's not a statute designed to employ attorneys and pay them awards. [00:21:28] Speaker 02: It's a statute designed to get the information fast in order to cut off [00:21:36] Speaker 02: any potential fraud. [00:21:38] Speaker 02: I mean, that's another way of responding that it may not be the best choice from one point of view, but it is a choice that was deliberately made. [00:21:56] Speaker 02: And if it doesn't make sense in the long run, they can always ask Congress to amend that. [00:22:05] Speaker 02: It's not as though the opposite view is nonsensical that we would have to reject it, which I think is the underlying thesis of hypothetical. [00:22:19] Speaker 02: Maybe I'm wrong. [00:22:21] Speaker 02: Anyway, it's not before us. [00:22:25] Speaker 00: Your honor, I think that's exactly right, your honor. [00:22:28] Speaker 00: And I think if you look at legislative history once again, it's clear that the whistleblower program here is something new that's meant to augment what the commission has already been doing. [00:22:39] Speaker 00: So I think that's just another point that is exactly consistent with what your honor is saying. [00:22:45] Speaker 00: If there's no further questions on any of the points raised in the briefs, the commission is happy to rest on its brief. [00:22:51] Speaker 04: All right. [00:22:52] Speaker 04: Thank you. [00:22:52] Speaker 04: Mr. Cohn, why don't you take one minute? [00:22:58] Speaker 05: is thank you just very quickly on the voluntary issue. [00:23:02] Speaker 05: All of the exemptive relief. [00:23:07] Speaker 05: cases would support having granted that from Mr. Ross. [00:23:11] Speaker 05: But more important, the three cases cited by the commission, their own rulemaking, all would support our interpretation. [00:23:19] Speaker 05: And specifically, the Barth case, which identifies whether they had a part in exposing it, they cite to the Wang case in that decision, which talks about directly or indirectly disclosing it. [00:23:35] Speaker 05: In regard to the original information, I would call the court's attention to the legislative history, the Senate report that says the law was based on the IRS law. [00:23:46] Speaker 05: the IRS law contained precisely what the commission did in the rulemaking. [00:23:52] Speaker 05: It had a date that you must file after this law is passed. [00:23:57] Speaker 05: Congress did not include that provision in this law, even though they had it right in front of them when they drafted it. [00:24:05] Speaker 05: And there's case law that we have cited that says that would be intentional exclusion of that type of provision. [00:24:13] Speaker 05: Thank you very much, Your Honors. [00:24:14] Speaker 04: All right, thank you, counsel. [00:24:16] Speaker 04: Madam Clerk, if you'd please adjourn court.