Whistleblowers who exposed what has been called “one of the biggest frauds in Texas history” are not eligible to receive Securities and Exchange Commission (SEC) whistleblower awards based on the collections recovered in a bankruptcy proceeding, according to a recent ruling by the United States Court of Appeals for the Fifth Circuit.

The Fifth Circuit ruling, in the case Barr vs. SEC, highlights an important shortcoming in the SEC Whistleblower Program that can lead to an unfortunate outcome for whistleblowers. Despite the fact that whistleblowers voluntarily provided original information which led to a judgment against an entity for a combined $38.7 million in disgorgement and penalties, the SEC ultimately awarded the whistleblowers only $31,000, because the money to compensate investors was distributed in bankruptcy after the defendant took action to avoid paying the SEC’s judgment.

By limiting awards paid to meritorious whistleblowers solely as a result of the defendant entering voluntary bankruptcy proceedings, the SEC and courts are unnecessarily harming valuable informants and risk disincentivizing would-be whistleblowers.

Case Background

The SEC charged Texas-based financial services firm Life Partners Holdings, Inc. with misleading investors by failing to disclose that it was “systematically and materially underestimating the life expectancy estimates it used to price transactions.” In 2014, the SEC obtained a judgment against Life Partners for $38.7 million....

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