Michael Johnston v. SEC

Citation: Not availableDocket: 21-1132

Court: Court of Appeals for the D.C. Circuit; September 23, 2022; Federal Appellate Court

Original Court Document: View Document

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Michael Johnston sought judicial review of a Securities and Exchange Commission (SEC) order that awarded him a whistleblower compensation for providing original information leading to a successful enforcement action against Citigroup, Inc. The SEC granted Johnston and his co-whistleblower, Michael Mittman, an award equal to 15 percent of the fine imposed on Citigroup, determining that they would split the award equally. Johnston contested this decision, particularly the equal division of the award. The Court of Appeals dismissed his petition regarding the division of the award for lack of jurisdiction and denied his challenge to Mittman's eligibility for an award, affirming that the SEC's decision was not arbitrary, capricious, or unsupported by substantial evidence.

Background details include that Johnston led a financial advisory team at Citi Smith Barney, which had previously brought an arbitration case against Citigroup related to significant financial losses during the 2008 crisis. Johnston independently discovered misrepresentations made by Citigroup regarding their risk assessments and subsequently reported these findings to the SEC, which led to a $189 million settlement. Both Johnston and Mittman submitted claims for whistleblower awards following the SEC's invitation, resulting in a preliminary recommendation for a joint award of $18.9 million.

Johnston's affidavit indicated that, despite more engagement with Michael Johnston, there was no clarity on Michael Mittman's contributions to the materials provided. The SEC regarded both men as joint providers of original information. Johnston filed objections to the Preliminary Order, supported by affidavits asserting his sole responsibility for uncovering misrepresentations, which constituted the only original information submitted by the Johnston Team. Mittman did not contest this recommendation or assert joint whistleblower status. In 2021, the SEC's Final Order awarded both Johnston and Mittman 15 percent of sanctions, amounting to $27 million, to be shared equally. The SEC dismissed Johnston's claim of an oral agreement specifying a 90% entitlement based on contributions. The SEC determined the joint status based on three key facts: their joint attendance at a 2010 SEC meeting, a letter from their counsel identifying them as a single team, and a lack of delineation of individual contributions during the investigation. Johnston's subsequent petition for review and Mittman's motion to intervene led to the court granting Mittman's motion but denying Johnston’s motion for summary reversal. Johnston argued that the SEC exceeded its authority by splitting the award, should have applied joint venture law, and that Mittman was ineligible due to a lack of original information. Mittman contended the court lacked jurisdiction over Johnston’s petition as it pertained to the award amount, a matter expressly excluded from judicial review under the relevant statute, 15 U.S.C. 78u-6. The court clarified that while it could review determinations on awards and eligibility, it could not review the amount awarded, thus limiting its jurisdiction regarding Johnston's claims.

The SEC contends that Johnston's argument regarding Mittman's ineligibility for a whistleblower award can be considered, but other arguments regarding the amount of the award cannot. Mittman claims Johnston's petition improperly seeks to reduce his award from $13.5 million to zero by questioning his eligibility, rather than addressing the award amount directly. Mittman argues that allowing such challenges could undermine Congress's intent to limit judicial review of award amounts. The SEC acknowledges that there is a distinction between challenges to eligibility and those affecting the amount of an award. Therefore, they assert that any determination affecting the amount but not eligibility is beyond their review authority. 

Johnston’s arguments are categorized into two groups: those challenging the division of the award and those addressing Mittman's eligibility. Three of Johnston's claims directly contest the division of the award—namely, his assertions regarding joint venture law, the parties' contract, and the SEC's authority to interpret agreement terms—thereby falling outside the jurisdiction for review. Conversely, Johnston's remaining arguments pertain to Mittman's eligibility for an award, which the SEC concedes. As a result, the motion to dismiss Johnston's petition is partially granted and partially denied, specifically excluding consideration of arguments related to the award amount. The review of eligibility follows the standards set by the Administrative Procedure Act, requiring the SEC to demonstrate that its actions are not arbitrary or capricious and are supported by a rational connection to the facts.

A whistleblower can consist of one or more individuals acting together. Johnston claims he is the sole whistleblower eligible for an SEC award, asserting he provided the key original information. In contrast, the SEC argues that both Johnston and Mittman, who presented as a team, should be considered for an award since they jointly provided original information as required by the whistleblower statute. The statute mandates that the SEC assess whether the information was original and led to successful enforcement actions, without considering who specifically developed the information. The definition of a whistleblower includes individuals or groups acting jointly, thus allowing multiple parties to be recognized for providing information. Johnston contends that each individual must have independently provided original information, but the SEC maintains that it can accept submissions from a team as collective original information. Johnston's argument incorrectly implies that the statute necessitates attributing parts of the submission to individual whistleblowers, while the SEC interprets the term "provided" to include contributions from a group, regardless of who developed the information.

Johnston argues his role in developing a back-test does not equate to sole responsibility for providing information to the SEC, contesting the SEC's interpretation of the whistleblower statute. The SEC's definition of a whistleblower, which includes "original information," is upheld as it aligns with statutory language. Johnston claims that Mittman must have personally provided original information to qualify for an award; however, Mittman satisfied all eligibility conditions by contributing as part of the Johnston Team. Johnston's assertion that separate award applications preclude joint whistleblower status is dismissed since the statute does not limit consideration based on application style. His interpretation of SEC regulations is incorrect, as the regulations allow for joint whistleblower recognition. Johnston's policy arguments against the SEC's interpretation are deemed forfeit as they were not raised previously. The Commission's conclusion that Johnston and Mittman jointly provided original information is validated as a lawful interpretation. Regarding factual disputes, the SEC's findings are conclusive if supported by substantial evidence, which Johnston challenges by highlighting that Mittman did not develop the back-test, suggesting a lack of equal partnership within the Team.

Johnston and Mittman acted jointly as whistleblowers when providing information to the SEC, as confirmed by substantial evidence. They presented themselves to the SEC as a team in July 2010, represented by the same attorney, Mr. Blumenfeld, who documented their submission of research related to the Falcon and ASTA/MAT Funds. Johnston’s application supports the joint effort, stating that both men conducted independent analyses and presented them to the SEC. Johnston's claims that the SEC should have explained its criteria for joint whistleblower status were rejected, as the SEC adhered to the ordinary meaning of the statutory term without needing additional justification. Furthermore, Johnston's argument regarding the SEC not addressing his supplemental evidence about the back-testing analysis was deemed irrelevant, as the focus is on who provided the information, not who developed it. Lastly, Johnston's assertion that the SEC's determination conflicted with its precedents was forfeited due to not being raised in his initial brief. The SEC's ruling is upheld, confirming that Johnston and Mittman acted jointly and that Mittman is eligible for an award, leading to a partial dismissal and denial of Johnston's petition for review.