New SEC whistleblower rule threatens law firm compensation, lawsuit claims

In March 2018, the Securities and Exchange Commission reached new heights in its program for rewarding whistleblowers who expose corporate wrongdoing, paying out what at the time was a record-setting bounty of $83 million to three whistleblowers who helped the agency bring an enforcement action years earlier against Bank of America’s Merrill Lynch brokerage unit.

Behind the award was a fourth figure: Jordan Thomas, a partner at the law firm Labaton Sucharow and former SEC official, who had represented the three whistleblowers and stood to bring in a multimillion-dollar payday.

Nearly three years later, Thomas is now suing the SEC in Washington’s federal trial court over a new rule that he and other whistleblower advocates fear will discourage corporate insiders from coming forward. The complaint said the new SEC rules would lead to lower contingency fees for the firm and incentive compensation for Thomas.

In a lawsuit filed Wednesday, Thomas asked a federal judge to overturn an SEC rule, finalized in late 2020, that affords the commission more leeway to lower awards it deems unnecessarily large. The SEC previously saw itself as lacking that discretion and bound by the language of the Dodd-Frank financial reform law, which dictated that whistleblowers could receive between 10% and 30% of monetary sanctions depending on their degree of assistance and other factors.

“In reliance on the prior rules, courageous whistleblowers have put their careers and lives on the line to assist the Commission—including wearing FBI wires, testifying in high-profile trials, and smuggling key documents out of foreign countries. Now, in the middle of the proverbial football game, the Commission has moved the goal posts on literally hundreds of SEC whistleblowers,” the complaint said.

The case was assigned to U.S. District Judge Christopher Cooper of the District of Columbia, a 2014 appointee who joined the bench from Covington & Burling.

An SEC spokesperson declined to comment.

In an interview, Thomas said he looked initially at building a coalition of nonprofits to bring the lawsuit but opted against that approach over concerns about them lacking standing, or eligibility, to challenge the rule. Thomas said whistleblowers would also have difficulty contesting the rule because of the lack of transparency into the SEC’s decision-making for awards, making it unclear whether or how the new rule influenced the final amount of any bounty they received.

Thomas said he consulted a legal ethics expert and was told he needed to bring the lawsuit himself, in part out of a fiduciary duty to protect clients hoping to receive awards from the SEC.

“I couldn’t do anything but this. You have a fiduciary duty to your clients, and they are threatening their interests,” Thomas said of the SEC. “That’s what forced my hand.”

The rule, Thomas added, “hurts whistleblowers, it hurts investors, it hurts law firms, and it hurts me.”

Thomas, the named plaintiff in the suit, turned to J. Michael Connolly of Consovoy McCarthy, a boutique law firm that has represented President Donald Trump in the face of congressional investigations and has advanced conservative causes for states including Texas, New Hampshire, Arizona and Alaska. The firm has raked in hundreds of thousands of dollars from Trump’s campaign. Connolly’s standard hourly rate in 2019 was $950, and Steven Begakis, an associate working with Connolly on the suit, was billing $600 that year, public records show.

The new SEC rule was narrowly approved by a Republican-controlled agency under the leadership of Jay Clayton, the Senate-confirmed director.

Clayton said in September the rules would “provide additional transparency into our award determination process—including by codifying current practices—and add additional process efficiencies that will help us get more money into the hands of whistleblowers faster.”

Connolly said in the complaint that the original rules “encouraged whistleblowers to come forward by guaranteeing that those individuals who acted properly would be awarded accordingly and would not have their awards unfairly and arbitrarily diminished.”

The new rule, allowing the SEC to take the sheer size of an award into account when setting bounties, “will have devastating effects on the Commission’s whistleblower program because it will disincentivize knowledgeable individuals from coming forward and blowing the whistle,” Connolly added.

The lawsuit included a description of how Thomas shepherds clients through the SEC’s whistleblower program, under which corporate insiders and other tipsters need to retain legal counsel to assist the commission anonymously. Connolly described Thomas as “one of the most prominent whistleblower attorneys in the country,” his practice as “ultra-selective.”

“Every year his team screens more than 300 potential cases, but he typically accepts fewer than 12 as clients,” Connolly wrote. He said that Thomas’ services include “24/7 legal and emotional support to his clients as they navigate difficult professional and personal terrain.”

The SEC does not reveal the names of whistleblowers and their lawyers in announcing awards. In some instances, law firms put out news releases touting the fact a client, usually anonymous, was the recipient of a multimillion-dollar award.

Connolly said Thomas has multiple paydays on the horizon. Thomas currently has nine whistleblower clients awaiting final decisions about whether they are entitled to an award, Connolly wrote in the lawsuit.

“The monetary sanctions in these cases exceed $1 billion, and his clients collectively are eligible for awards of more than $300 million. On each of these potential awards, [Thomas’] firm will receive a fee and [Thomas] will receive incentive compensation for recovering the award on behalf of his client,” Connolly wrote.

The SEC’s new rule, he added, “will reduce the amount of the awards that Plaintiff’s current clients will recover which will, in turn, lower his law firm’s contingency fee and his incentive compensation.”