The Potential Rewards for Blowing the Whistle on Wall Street Just Went Up

August 2, 2019

by M&S Staff

Mehri & Skalet associate Ezra Bronstein is featured in the Columbia Law School Blue Sky Blog, discussing recent legal developments that could dramatically increase the size of financial rewards to SEC whistleblowers, under the Dodd-Frank Act.  Ezra’s blog is reproduced below.

As an incentive to blow the whistle, the Securities and Exchange Commission awards tipsters who supply credible information resulting in successful enforcement actions up to 30 percent of monetary penalties paid by securities violators. The unique features of the program encourage tipsters from all walks of life and sectors to step forward. For example, the SEC paid $4.5 million to a former Brazilian orthopedic surgeon for blowing the whistle on a kickback scheme orchestrated by a global medical device manufacturing company. To date in 2019, the SEC has awarded nearly $60 million to five individuals.[1]


The size of a whistleblower bounty is a percentage of the associated penalty. In a recent and particularly significant case, three tipsters blew the whistle on Merrill Lynch’s misuse of customer cash, and the SEC awarded them $83 million after reaching a $415 million settlement with the company.[2] In total, since the whistleblower program’s launch in 2011, the SEC has awarded over $384 million to 64 tipsters.[3] Suffice it to say that the program is a success.[4]


Deciding whether to blow the whistle is not an easy decision. Among other things, whistleblowing comes with significant professional risks. This is particularly true for those who work in the close-knit world of the financial services industry. However, potential tipsters of insider trading violations will likely find comfort in knowing that the potential for large awards has just become greater thanks to a decision by the Second Circuit Court of Appeals, the federal court responsible for deciding many of the nation’s highest-profile white collar and Wall Street cases.

In a recent case, SEC v. Rajaratnam, the Second Circuit approved a $92.8 million penalty against convicted fraudster Raj Rajaratnam.[5] Rajaratnam was the founder of the now-defunct Galleon Group, one of the world’s largest hedge-funds in its heyday. Galleon collapsed after Rajaratnam, and several of his colleagues, became ensnared in an insider trading scandal in 2009. After a trial in 2011, Rajaratnam was convicted on 14 counts of securities fraud for insider trading, sentenced to 11 years in federal prison, and ordered to pay more than $50 million in restitution.[6]


The SEC brought a parallel civil case against Rajaratnam seeking the maximum civil monetary penalties allowed under Section 21A of the Securities Exchange Act of 1934, 15 U.S.C. § 78u-1, for some of the same insider trading conduct that formed the substance of the criminal case. Given his prior criminal conviction for that conduct, finding him civilly liable for the illegal trades was easy, but determining the amount of the civil penalty was more complicated.[7]

Under 15 U.S.C. § 78u-1, courts can penalize an insider trader up to “three times the profit gained or loss avoided” from the illegal trading.[8] But the statutory formula does not explain whose “profits gained or losses avoided” it refers to. One plausible interpretation is the total gains caused by illegal trading. Another possible interpretation is the insider trader’s personal stake in the profits generated from the trades. Rajaratnam had executed illegal insider trades in Galleon’s accounts and in an Intel executive’s account. The total gain to Galleon and its investors from these illegal trades was nearly $31 million. However, Rajaratnam’s personal share of those gains was the $4.7 million he derived from management fees and his stake in Galleon’s funds. The SEC argued that the court ought to treble the total amount of profit gained, or loss avoided, attributable to the illegal trades (i.e., $31 million), which would translate into a nearly $93 million penalty. Not surprisingly, Rajaratnam argued that only his personal gain (i.e., $4.7 million) was eligible for trebling. The district court sided with the SEC and imposed the nearly $93 million penalty.


Rajaratnam appealed to the Second Circuit and lost.[9] Among other things, he argued that the lower court should have trebled only his personal gains from the illegal trading, that the court wrongfully considered his personal wealth when deciding on the size of the penalty, and that his civil penalty should be offset by the amount of his criminal penalties. The Second Circuit firmly rejected these arguments. Most important, it affirmed the lower court’s interpretation of 15 U.S.C. § 78u-1 when it considered the total gain derived from illegal trading. The court took it a step further and held that the statute makes insider traders eligible for trebled penalties calculated based on third parties’ profits even if the tippers themselves did not receive “pecuniary gains for their tips.”[10] The court also held that the magnitude of a defendant’s wealth may be considered when calculating the size of a penalty so long as the lower court does not demonstrate a “vindictive bias or hostility towards persons of means,” and that courts are not required to offset civil penalties by the amount of criminal penalties.[11]


What Rajaratnam’s case means for potential whistleblowers is that the SEC can sanction extremely wealthy insider traders for the total gains resulting from the illegal trades even if the trading occurred, and profits were gained, in others’ accounts. This is the first time that any court of appeals has seriously grappled with 15 U.S.C. § 78u-1.[12] Given its physical presence in the nation’s financial capital, the Second Circuit deeply influences the direction of securities law nationwide, and reverberations of the decision will be felt throughout the country.



[1] See, SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers. Available at Awards $4.5 Million to Whistleblowers Whose Internal Reporting Led to Successful SEC Case and Related Action; Available at; SEC Press Release, SEC Awards $50 Million to Two Whistleblowers. Available at:

[2] See, SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers. Available at

[3] See, SEC Press Release, SEC Awards $3 Million to Joint Whistleblowers. Available at

[4] The SEC’s sister agency, the Commodity Futures Trading Commission, has issued over $85 million in awards since the start of its whistleblower program in 2014, through 2018.  See, .

[5] SEC v. Rajaratnam, 918 F.3d 36 (2d. Cir. 2019).

[6] See United States v. Rajaratnam, 719 F.3d 139 (2d Cir. 2013) (affirming Rajaratnam’s conviction), cert. denied573 U.S. 916, 134 S. Ct. 2820, 189 L. Ed. 2d 785 (2014).

[7] SEC v. Rajaratnam, 822 F. Supp. 2d 432, 433 (S.D.N.Y. 2011).

[8] 15 U.S.C. § 78u-1(a)(2).

[9] SEC v. Rajaratnam, 918 F.3d 36 (2d. Cir. 2019).

[10] Id. at 43.

[11] Id. at 45-46.

[12] Seee.g., SEC v. Happ, 392 F.3d 12, 47-48 (1st Cir. 2004) (articulating the applicable factors considered when evaluating whether to impose civil penalties under 15 U.S.C. § 78u-1 and, without significant analysis, affirming the lower court’s imposition of a penalty).