13-4404-ag Stryker v. Securities

13-4404-ag
Stryker v. Securities and Exchange Commission,
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2014 3
4
(Argued: September 29, 2014 Decided: March 11, 2015) 5
6
Docket No. 13-4404-ag 7
8
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9
LARRY STRYKER, 10
11
Petitioner, 12
13
v. 14
15
SECURITIES AND EXCHANGE COMMISSION, 16
17
Respondent. 18
- - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - 19
20
B e f o r e: WINTER and CHIN, Circuit Judges, and OETKEN, 21
District Judge.*
22
23
Petition for review of the Securities and Exchange 24
Commission’s denial of a claim for a whistleblower award. We 25
hold that the SEC’s interpretation of Section 21F of the 26
Securities Exchange Act was reasonable and therefore entitled to 27
deference under Chevron, U.S.A., Inc. v. Natural Res. Def. 28
Council, Inc., 467 U.S. 837 (1984). We deny the petition. 29
30
31
* The Honorable J. Paul Oetken, of the United States District Court for
the Southern District of New York, sitting by designation.
1

-- 1 of 10 --

STEPHEN M. KOHN (Karim H. Kamal, New 1
York, NY, Michael D. Kohn & David K. 2
Colapinto, Kohn, Kohn & Colapinto, LLP, 3
Washington, DC, on the brief), Kohn, 4
Kohn & Colapinto, LLP, Washington, DC, 5
for Petitioner. 6
7
WILLIAM K. SHIRLEY (Anne K. Small, 8
Michael A. Conley, John W. Avery, 9
Stephen G. Yoder, on the brief), 10
Securities and Exchange Commission, 11
Washington, DC, for Respondent. 12
13
Dean A. Zerbe, Zerbe, Fingeret, Frank & 14
Jadav PC, Houston, TX, for Amicus 15
Curiae. 16
17
WINTER, Circuit Judge: 18
19
Larry Stryker petitions for review of an order of the 20
Securities and Exchange Commission (“SEC”) denying his claim for 21
a whistleblower award. He sought the award under Section 21F of 22
the Dodd-Frank Act (“Dodd-Frank”), 15 U.S.C. § 78u-6, based on 23
information he supplied to the SEC that it relied upon in a 24
successful enforcement action. The SEC held that, because the 25
information was submitted before enactment of Dodd-Frank, 26
petitioner did not qualify for an award under Section 21F(b)(1) 27
of the Securities Exchange Act of 1934 and Rules 21F-(3)(a) and 28
21F-4(c). Concluding that the SEC’s interpretation of Section 29
21F was within its authority and consistent with the legislation, 30
we deny the petition. 31
32
33
34
2

-- 2 of 10 --

BACKGROUND 1
Between 2004 and July 2009, petitioner submitted information 2
to the SEC’s Enforcement Division regarding alleged wrongdoing by 3
Advanced Technologies Group LTD (“ATG”) and an involved 4
individual. In March 2009, the SEC opened an investigation of 5
the alleged misconduct. It interviewed petitioner the following 6
month. The SEC subsequently filed an enforcement action against 7
ATG and the individual, charging them with violating Section 5 of 8
the Securities Act of 1933. In November 2010, the SEC reached a 9
settlement with the respondents to the enforcement action. The 10
district court for the Southern District of New York approved the 11
settlement, whereby ATG and the individual were held liable for a 12
little over $19 million. Advanced Tech. Group Ltd., Exchange Act 13
Release No. 70772, 2013 WL 5819623 (Oct. 30, 2013); see SEC v. 14
Advanced Tech. Group, Ltd., No. 10-CV-4868 (S.D.N.Y. 2011). 15
On January 11, 2011, petitioner submitted an application for 16
a whistleblower award under Section 21F of Dodd-Frank based on 17
the successful enforcement action. The SEC’s preliminary 18
determination recommended that his award claim be denied. It 19
stated, in relevant part: 20
The information provided by Claimant 21
[Stryker] prior to July 21, 2010 . . . is not 22
“original information” within the meaning of 23
Section 21F(a)(1) of the Exchange Act and 24
Rule 21F-4(b)(1)(iv) thereunder because it 25
was not provided to the Commission for the 26
first time after July 21, 2010 . . . . 27
3

-- 3 of 10 --

1
Petitioner’s response to the preliminary determination did 2
not dispute that he provided the information in question before 3
July 2010. Rather, he argued that the definition of “original 4
information,” as set forth in the quoted Rule, was “contrary to 5
the statute insofar as it requires that information be submitted 6
to the Commission for the first time after Dodd-Frank’s effective 7
date.” 8
On October 30, 2013, the SEC issued a final order denying 9
petitioner’s claim for the reasons given in its preliminary 10
determination. 11
DISCUSSION 12
Section 21F(f) of the Securities Exchange Act, 15 U.S.C. 13
§ 78u-6(f), authorizes us to review the SEC's denial of a 14
whistleblower award. Where the ruling is based on an 15
interpretive rule or regulation promulgated by the SEC pursuant 16
to legislation, our review uses the familiar two-step framework 17
set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, 18
Inc., 467 U.S. 837, 842-43 (1984). We have described the Chevron 19
test as follows: 20
At step one, we consider whether Congress has 21
directly spoken to the precise question at 22
issue. If the intent of Congress is clear, 23
that is the end of the matter; for the court, 24
as well as the agency, must give effect to 25
the unambiguously expressed intent of 26
Congress. To ascertain Congress's intent, we 27
begin with the statutory text because if its 28
language is unambiguous, no further inquiry 29
4

-- 4 of 10 --

is necessary. Only if we determine that 1
Congress has not directly addressed the 2
precise question at issue will we turn to 3
canons of construction and, if that is 4
unsuccessful, to legislative history to see 5
if those interpretive clues permit us to 6
identify Congress's clear intent. 7
8
If, despite these efforts, we still cannot 9
conclude that Congress has directly addressed 10
the precise question at issue, we will 11
proceed to Chevron step two, which instructs 12
us to defer to an agency's interpretation of 13
the statute it administers, so long as it is 14
reasonable. 15
16
N.Y. ex rel. N.Y. State Office of Children & Family Servs. v. 17
U.S. Dep’t of Health & Human Servs. Admin. for Children & 18
Families, 556 F.3d 90, 97 (2d Cir. 2009) (citations and internal 19
quotation marks omitted); see also United States v. Connolly, 552 20
F.3d 86, 89 (2d Cir. 2008) (applying the two-step inquiry as 21
required by Chevron). 22
We therefore turn to Step 1 and the pertinent statutory 23
language. Section 21F provides that, where the monetary 24
sanctions imposed in an SEC enforcement action exceed $1 million, 25
the SEC must make a whistleblower award to individuals who 26
voluntarily provided the SEC with "original information" about 27
the underlying violation of securities laws. See 15 U.S.C. 28
§ 78u-6(a), (b). Section 21F defines "original information" as 29
information that: 30
(A) is derived from the independent knowledge 31
or analysis of a whistleblower; 32
5

-- 5 of 10 --

(B) is not known to the Commission from any 1
other source, unless the whistleblower is the 2
original source of the information; and 3
(C) is not exclusively derived from an 4
allegation made in a judicial or 5
administrative hearing, in a governmental 6
report, hearing, audit, or investigation, or 7
from the news media, unless the whistleblower 8
is a source of the information. 9
10
Id. § 78u-6(a)(3). Recognizing that this definition leaves a 11
number of loose ends, Congress also provided that a putative 12
whistleblower must provide the requisite information in the form 13
and manner required by SEC's rules and regulations. See id. 14
§ 78u-6(a)(6); see also id. § 78u-7(a) (providing the SEC with 15
rulemaking authority to "issue final regulations implementing the 16
provisions of section 78u-6"). 17
Such rules and regulations would be of necessity promulgated 18
sometime after Dodd-Frank was passed, and Congress also 19
recognized that information from putative whistleblowers might be 20
volunteered to the SEC before such promulgation. To allow for 21
such submissions to qualify for a whistleblower award, Congress 22
created an express safe harbor for "[i]nformation provided to the 23
Commission in writing . . . prior to the effective date of the 24
regulations, if the information is provided by the whistleblower 25
after July 21, 2010." Id. § 78u-7(b). To give effect to the 26
safe harbor, the SEC adopted Rule 21F-9(d), which states: 27
If you submitted original information in 28
writing to the Commission after July 21, 2010 29
(the date of enactment of . . . Dodd-Frank 30
but before the effective date of these rules, 31
6

-- 6 of 10 --

your submission will be deemed to satisfy the 1
requirements set forth in paragraphs (a) and 2
(b) of this section. 3
4
17 C.F.R. § 240.21F-9(d). 5
6
Like the statutory definition of "original information," the 7
safe harbor provision does not expressly state whether 8
information submitted prior to July 21, 2010 might still qualify 9
for a whistleblower award. Congress, however, did provide that 10
“original information” had to be submitted in conformity with the 11
SEC's rules and regulations. See 15 U.S.C. § 78u-6(a)(6). After 12
considering comments from the public on proposed rules 13
implementing the whistleblower provisions of Dodd-Frank, the SEC 14
adopted Rules 21F-1 through 21F-17. 17 C.F.R. §§ 240.21F-1 to 15
-17. Rule 21F-4(b)(1)(iv) provides that whistleblower awards may 16
be made only for information "[p]rovided to the Commission for 17
the first time after July 21, 2010." This Rule was the basis of 18
the denial of an award to petitioner who now challenges it as 19
invalid. We reject that challenge. 20
The sole basis for petitioner’s claim is Section 21F, which 21
was not enacted until after he took the actions that are the 22
grounds for the award sought. If the purpose of Dodd-Frank was 23
to encourage whistleblower activity, already completed actions 24
would arguably not qualify. We need not, however, decide if 25
Congress clearly intended to bar a whistleblower award to 26
petitioner at Chevron Step 1 because even if Dodd-Frank is 27
7

-- 7 of 10 --

ambiguous, we defer to the SEC’s interpretation of Dodd-Frank at 1
Step 2. Section 78u-7(b)’s safe harbor and Section 78u- 2
6(c)(2)(D)’s provision that, to qualify as “original 3
information,” information must be submitted pursuant to the SEC's 4
rules and regulations, support the SEC’s position that 5
information submitted before July 21, 2010 does not qualify as 6
“original information.” Congress delegated to the SEC rulemaking 7
authority to implement the whistleblower award program and 8
specific authority to determine the "form and manner" in which 9
information had to be submitted in order to qualify as “original 10
information.” See 15 U.S.C. § 78u-6(a)(6). Under Dodd-Frank, 11
the only genre of information exempted from the requirement that 12
it be submitted pursuant to the SEC's applicable rules and 13
regulations is that described in the Section 924(b) safe harbor, 14
i.e., information "provided to the Commission . . . prior to the 15
effective date of the regulations, if the information is provided 16
by the whistleblower after July 21, 2010." Id. § 78u-7(b). This 17
limited exclusion from the otherwise required compliance with 18
rules and regulations to be promulgated by the SEC supports an 19
inference that Rule 21F-4(b)(l)(iv) is consistent with 20
legislative intent. See United States v. Johnson, 529 U.S. 53, 21
58 (2000) ("When Congress provides exceptions in a statute, . . . 22
. [t]he proper inference . . . is that Congress considered the 23
issue of exceptions, and, in the end, limited the statute to the 24
8

-- 8 of 10 --

ones set forth."); Gulino v. N.Y. State Educ. Dep't, 460 F.3d 1
361, 375 (2d Cir. 2006) (similar). 2
Even if Congress's intent is unclear, therefore, under Step 3
2 of Chevron, the SEC's interpretation, as set forth in Rule 4
21F-4(b)(1)(iv), was reasonable and entitled to deference. We 5
“will defer to a reasonable agency interpretation of ambiguous 6
statutory language when it appears that Congress has delegated 7
authority to the agency generally to make rules carrying the 8
force of law, and that the agency interpretation claiming 9
deference was promulgated in the exercise of that authority." 10
Cohen v. JP Morgan Chase & Co., 498 F.3d 111, 124 (2d Cir. 2007) 11
(internal quotation marks omitted). To find an agency's 12
interpretation is reasonable, we "need not conclude that the 13
agency construction was the only one it permissibly could have 14
adopted." Mei Juan Zhang v. Holder, 672 F.3d 178, 183 (2d Cir. 15
2012) (internal quotation marks omitted). Because the SEC’s 16
interpretation was fully consistent with the legislation's safe 17
harbor provision, the SEC's final order against petitioner is 18
valid. 19
CONCLUSION 20
Even if Dodd-Frank is ambiguous in relevant part, 21
petitioner's submission of information to the SEC did not qualify 22
as statutorily defined whistleblower information because it: (i) 23
did not conform to the SEC's Rule 21F-4(b)(1)(iv), which 24
9

-- 9 of 10 --

disqualified information submitted prior to July 21, 2010; and 1
(ii) did not fall within Congress's safe harbor, which excluded 2
from its protection information submitted prior to that date. We 3
therefore deny the petition. 4
5
10

-- 10 of 10 --