JOHN M. BARR; JOHN MCPHERSON v. SECURITIES AND EXCHANGE COMMISSION
No. 23-60216
United States Court of Appeals for the Fifth Circuit
August 30, 2024
Before SMITH, ENGELHARDT, and RAMIREZ, Circuit Judges.
IRMA CARRILLO RAMIREZ, Circuit Judge:
Two whistleblowers challenge the Securities and Exchange Commission‘s calculation of award amounts under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The petitions for review are DENIED.
I
A
This case concerns the extensive securities fraud perpetrated from 1999 to 2013 by Life Partners Holdings, Inc. (Life Partners). See SEC v. Life Partners Holdings, Inc., 854 F.3d 765, 773 (5th Cir. 2017). Because this Court has previously considered the details of the fraudulent scheme, see, e.g., id. at 772-74; Jacobs v. Cowley (In re Life Partners Holdings, Inc.), 926 F.3d 103, 112-14 (5th Cir. 2019), only immediately relevant facts are recounted here.
In 2012, the Securities and Exchange Commission (the SEC) “filed a civil action in federal district court charging [Life Partners] and three of its officers with violations of the anti-fraud provisions of the federal securities laws.” In late 2014, following a jury trial, the district court entered final judgment against Life Partners, in which it was ordered to pay $38.7 million in disgorgement and civil penalties. See SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d 615, 626 (W.D. Tex. 2014).
Before the district court entered final judgment on January 16, 2015, the SEC filed an emergency motion to appoint a receiver “to maintain the status quo, prevent further dissipation of assets from [Life Partners], and protect [Life Partners‘s] investors and creditors.” Four days after entry of final judgment, Life Partners filed a voluntary petition for Chapter 11 bankruptcy. The district court had not yet ruled on the SEC‘s motion to appoint a
In its capacity as an unsecured judgment creditor, the SEC filed a motion requesting that the bankruptcy court appoint a Chapter 11 trustee. The U.S. Trustee filed a similar motion. The bankruptcy court granted the SEC‘s motion, finding that Life Partners‘s gross mismanagement constituted cause for appointment of a trustee and the appointment would be in the best interests of Life Partners‘s creditors and investors.
In June 2016, the Chapter 11 trustee proposed a plan that was ultimately confirmed. Among other things, the plan proposed the creation of a “‘Creditors’ Trust,’ whose beneficiaries generally comprised unsecured creditors.” The plan listed the SEC‘s claim for the enforcement-action judgment as “its own creditor class,” “allocated a Creditor‘s Trust interest” to the SEC for the judgment‘s full amount, and “estimated the corresponding recovery as ‘Unknown.‘” As part of the plan, the SEC “agreed to reallocate any distributions with respect to its Creditors’ Trust interest to . . . the life-settlement investors . . . in return for [Life Partners‘s] agreement to voluntarily dismiss its appeal then pending” before this Court. See Order, SEC v. Life Partners Holdings, Inc., No. 14-51353 (5th Cir. Dec. 22, 2016). The bankruptcy court confirmed the plan in November 2016. Notably, “[u]ndisputed evidence in the administrative record reflects that, as of November 2020, there had been no collections or distributions with respect to the [SEC]‘s Creditors’ Trust interest.”
B
On April 1, 2015, the SEC posted a Notice of Covered Action, inviting individuals to apply for whistleblower awards in connection with the Life Partners enforcement action. John Barr and John McPherson (Petitioners) timely submitted their respective applications.
On September 28, 2020, the SEC‘s Claims Review Staff (CRS) issued Preliminary Determinations, advising Petitioners of the intent to recommend that Barr be denied an award and that McPherson be granted an award of “23% of the monetary sanctions collected, or to be collected.” The Preliminary Determination sent to McPherson1 explained that: (1) the SEC “shall pay an award to a whistleblower who provides original information that leads to the successful enforcement of the covered judicial or administrative action, or related action,” (2) “[a] bankruptcy proceeding is neither brought by the [SEC] nor does it arise under the securities laws,” (3) “a bankruptcy proceeding is not a related action, which must be ‘brought by’ a qualifying entity ‘based on’ the same original information that led to the successful enforcement of the covered action,” and (4) the bankruptcy case “was not brought by a qualifying entity but rather was initiated by a voluntary petition under Chapter 11 filed by Life Partners.”
Petitioners timely filed their respective written responses to the Preliminary Determinations. Barr primarily argued that CRS‘s determination to deny him an award was “based on inaccurate and incomplete information.” After pointing out alleged factual inaccuracies in a declaration CRS relied on and listing out his contributions to the SEC‘s work relating to Life Partners, Barr urged reconsideration and for the SEC to grant him an award. McPherson advanced two main arguments: (1) the whistleblower-award calculation should be based on what the SEC is “able to collect,” and (2) his whistleblower efforts warranted exercise of the SEC‘s statutorily delegated discretion to pay him a larger award.
On March 27, 2023, the SEC issued the final order regarding the whistleblower awards. It revised the ultimate recommendations in the Preliminary Determinations and granted Barr 5% and McPherson 20% of “the amounts collected or to be collected in connection with” the SEC‘s enforcement action. The SEC disagreed with McPherson‘s objections. Among other legal conclusions, the SEC stated: (1) it did not “walk away from a collection of $38.7 million” by voluntarily subordinating its interest in the Creditors’ Trust “because it would only have been able to collect a de minimis amount, and any such collections would have been dependent upon the [SEC] winning on appeal“; (2) the whistleblower-award calculation cannot be based on what the SEC “may have been able to but did not collect” because “the statutory maximum whistleblower award is based on the amount actually collected“; and (3) calculating the award “based on what the [SEC] hypothetically ‘was able to collect,’ but did not, would introduce uncertainty, inconsistency, and could delay the processing of award claims.”
Barr petitioned this Court for review of the SEC‘s final order on April 24, 2023, and McPherson petitioned the United States Court of Appeals for the D.C. Circuit for review on April 25, 2023. The D.C. Circuit subsequently transferred McPherson‘s petition to this Court under
II
Congress commits whistleblower-award determinations to the SEC‘s discretion.
An agency order is “arbitrary and capricious ‘if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.‘” Tex. Oil & Gas Ass‘n v. EPA, 161 F.3d 923, 933 (5th Cir. 1998) (quoting Motor Vehicle Mfrs. Ass‘n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)). But this review is “neither sweeping nor intrusive. Instead, we ‘ask whether the agency considered the relevant facts and articulated a satisfactory explanation for its decision; we cannot substitute our judgment for the agency‘s.‘” Fort Bend County v. U.S. Army Corps of Eng‘rs, 59 F.4th 180, 194 (5th Cir. 2023) (quoting Amin v. Mayorkas, 24 F.4th 383, 393 (5th Cir. 2022)). Pure questions of law are reviewed de novo. Tex. Clinical Labs, Inc. v. Sebelius, 612 F.3d 771, 775 (5th Cir. 2010) (quoting Alwan v. Ashcroft, 388 F.3d 507, 510 (5th Cir. 2004)); see Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2273 (2024). Agency decisions are “presumptively valid; the [petitioner] bears the burden of showing otherwise.” Tex. Tech Physicians Assocs. v. U.S. Dep‘t of Health & Hum. Servs., 917 F.3d 837, 844 (5th Cir. 2019).
III
A
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010), Congress “established ‘a new, robust whistleblower program designed to motivate people who know of securities law violations to tell the SEC.‘” Digit. Realty Tr., Inc. v. Somers, 583 U.S. 149, 155 (2018) (quoting S. REP. NO. 111-176, at 38 (2010)). The program‘s statutory framework is located in
The statute outlines the circumstances in which the SEC must pay out whistleblower awards:
In any covered judicial or administrative action, or related action, the [SEC], under regulations prescribed by the [SEC] and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the [SEC] that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate amount equal to—
(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and
(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.
Id.
The SEC is required to pay a whistleblower award in a “covered judicial or administrative action, or related action.” See id.
B
The SEC contends Petitioners forfeited their argument that the SEC‘s actions in the bankruptcy case initiated a new “covered” action. Petitioners disagree.
Arguments are forfeited if raised “for the first time on appeal.” Rollins v. Home Depot USA, 8 F.4th 393, 397 (5th Cir. 2021). An exception to this rule is that “an issue might be addressed for the
As noted above, when the SEC transmitted its Preliminary Determination to Barr, the document was redacted in great part, revealing information relevant only to Barr‘s award application. The SEC‘s explanation as to why it would recommend denying Barr an award rested on a single basis—that the information Barr provided “did not lead to the successful enforcement” of the SEC‘s enforcement action. Unlike with the Preliminary Determination McPherson received, the materials the SEC sent to Barr provided no indication of the SEC‘s interpretation of law now at issue before us.
The argument the SEC claims is forfeited is a purely legal one, and Barr had no notice or opportunity to contest the SEC‘s argument in the agency proceedings. See Bunker v. Dow Chem. Co., ---- F.4th ----, No. 24-20046, 2024 WL 3680804, at *4 n.3 (5th Cir. Aug. 7, 2024) (“Our decision not to address Bunker‘s newly raised arguments does not result in a miscarriage of justice. Bunker had every opportunity to present these arguments below.“). We find that a miscarriage of justice would result if we did not consider this purely legal argument since Barr was unaware of the SEC‘s legal position and had no opportunity to challenge it in the agency proceedings.2
C
Petitioners contend the bankruptcy case is a “covered judicial or administrative action” because, among other things, it is an action the SEC brought. They also contend the bankruptcy case is a “related action” because, among other things, it is an action the SEC or the Attorney General3 brought. The SEC disagrees.
1
The statutory provisions defining qualifying actions are not identical, but they do share a phrase—“action brought.” See
When interpreting acts of Congress, courts seek the ordinary meaning of the enacted language. Nat‘l Ass‘n of Priv. Fund Managers v. SEC, 103 F.4th 1097, 1110 (5th Cir. 2024). The statutory text is invariably the first and primary consideration, see Parada v. Garland, 48 F.4th 374, 377 (5th Cir. 2022) (per curiam), and “the words of a statute” are normally given “their ‘ordinary, contemporary, common meaning,’ absent an indication Congress intended them to bear some different import,” Williams v. Taylor, 529 U.S. 420, 431 (2000) (quoting Walters v. Metro. Educ. Enters., Inc., 519 U.S. 202, 207 (1997)). If a statute‘s text is
Section 78u-6 does not define the word “action” or the phrase “action brought,” so they take their “ordinary meaning.” See HollyFrontier Cheyenne Refin., LLC v. Renewable Fuels Ass‘n, 594 U.S. 382, 388 (2021) (quoting FDIC v. Meyer, 510 U.S. 471, 476 (1994)); see also Belt v. EmCare, Inc., 444 F.3d 403, 412 (5th Cir. 2006) (“[W]e routinely consult dictionaries as a principal source of ordinary meaning . . . .“). An “action” is a “civil or criminal judicial proceeding.” Action, BLACK‘S LAW DICTIONARY (12th ed. 2024). Precedent confirms this understanding of “action.” See Brown v. Megg, 857 F.3d 287, 290 (5th Cir. 2017) (“The ordinary meaning of ‘action’ is the entire lawsuit.“); Tejero v. Portfolio Recovery Assocs., L.L.C., 993 F.3d 393, 396 (5th Cir. 2021) (synonymizing an “action” with “a lawsuit“); see also Brownback v. King, 592 U.S. 209, 220 (2021) (Sotomayor, J., concurring) (“An ‘action’ refers to the whole of the lawsuit.“); Corley v. Long-Lewis, Inc., 965 F.3d 1222, 1236 (11th Cir. 2020) (Pryor, C.J., concurring) (“‘[A]n action[]’ . . . refers to ‘the whole case. . . .‘” (citation omitted)).
As for “action brought,” “[t]he dictionary defines to ‘bring an action’ as to ‘sue’ or ‘institute legal proceedings.‘” Serna v. L. Off. of Joseph Onwuteaka, P.C., 732 F.3d 440, 451 (5th Cir. 2013) (Smith, J., dissenting) (quoting Bring an Action, BLACK‘S LAW DICTIONARY 219 (9th ed. 2009)); see Dynamic CRM Recruiting Sols., L.L.C. v. UMA Educ., Inc., 31 F.4th 914, 919-23 (5th Cir. 2022) (conducting similar analysis of “brought before“); see also Action, MERRIAM-WEBSTER ONLINE DICTIONARY, https://www.merriam-webster.com/dictionary/action (last visited August 30, 2024) (“the initiating of a proceeding in a court of justice by which one demands or enforces one‘s right“). And because “[t]o ‘sue’ is ‘to institute a lawsuit against (another party),’ and to ‘institute’ is, in turn ‘to begin or start; commence,‘” Serna, 732 F.3d at 451 (Smith, J., dissenting) (original alterations and citations omitted); see id. (“[M]any federal statutes use ‘file’ and ‘bring’ interchangeably . . . .“), bringing an action refers to the act of filing a lawsuit or beginning legal proceedings. See Goldenberg v. Murphy, 108 U.S. 162, 163 (1883) (“A suit is brought when in law it is commenced, and we see no significance in the fact that in the legislation of congress on the subject of limitations the word ‘commenced’ is sometimes used, and at other times the word ‘brought.’ In this connection the two words evidently mean the same thing, and are used interchangeably.“). Federal courts agree on this understanding. See, e.g., Hong v. SEC, 41 F.4th 83, 95 (2d Cir. 2022) (“[C]ourts commonly refer to a party as having ‘brought an action,’ meaning that the party filed a lawsuit or formally initiated an administrative proceeding.“); United States ex rel. Chovanec v. Apria Healthcare Grp. Inc., 606 F.3d 361, 362 (7th Cir. 2010) (“One ‘brings’ an action by commencing suit.“); Chandler v. D.C. Dep‘t of Corr., 145 F.3d 1355, 1359 (D.C. Cir. 1998) (“[T]he phrase ‘bring a civil action’ means to initiate a suit.“).
2
Petitioners contend the SEC‘s motion to appoint a Chapter 11 trustee constituted bringing a qualifying action under § 78u-6(a).4 They maintain that once the bankruptcy
Key aspects of filing a motion to appoint a Chapter 11 trustee are incongruent with the plain meaning of bringing an action. First, bankruptcy cases are “commenced by the filing with the bankruptcy court of a petition,” not the filing of a motion to appoint a trustee.
Nevertheless, Petitioners argue that even though the bankruptcy case was not filed by a qualifying entity, bankruptcy actions are “an umbrella for a series of ‘cases within a case,‘” and filing the motion to appoint a trustee in Life Partners‘s bankruptcy case qualifies as an “action brought” by a qualifying entity.
Petitioners are generally correct that “bankruptcy case[s] embrace[] ‘an aggregation of individual controversies.‘”5 Ritzen Grp., Inc. v. Jackson Masonry, LLC, 589 U.S. 35, 37 (2020) (citation omitted). But they provide no authority to connect this general principle to the facts before us.
It is axiomatic that “statutory terms are generally interpreted in accordance with their ordinary meaning.” BP Am. Prod. Co. v. Burton, 549 U.S. 84, 91 (2006). As explained above, the ordinary meaning of “action brought” does not readily encompass a motion to appoint a Chapter 11 trustee, and Petitioners provide no authority explaining why the meaning of “action brought” should be understood as something other than its ordinary meaning. They merely point to the various ways in which the SEC and the U.S. Trustee were involved in the bankruptcy case. But it is not clear how or why these contentions
Additionally, there are key problems with Petitioners’ argument regarding the meaning of “action brought” and the focus on the word “proceeding.” They appear to argue that “action” and “proceeding” are synonyms, and therefore any “proceeding” within a bankruptcy case is an “action” for § 78u-6‘s purposes. While that might be the case in some instances, “proceeding” ordinarily refers to aspects of an already commenced “action.” See Proceeding, BLACK‘S LAW DICTIONARY (12th ed. 2024) (“The regular and orderly progression of a lawsuit, including all acts and events between the time of commencement and the entry of judgment. . . . An act or step that is part of a larger action.“). This is specifically the case in the bankruptcy context, in which a “proceeding” is “a particular dispute or matter arising within a pending case — as opposed to the case as a whole.” Id. Moreover, Petitioners’ argument that the “action brought” consists of all proceedings from the filing of the motion to appoint a trustee “up to and including the . . . court-ordered reorganization plan” demonstrates the extent to which they attempt to stretch the statutory language. This argument seemingly turns the ordinary meaning of “action brought” on its head. Petitioners do not provide authority explaining why the understanding they articulate is proper. See Deal v. United States, 508 U.S. 129, 131-32 (1993) (“[A]ll but one of the meanings [of a word] is ordinarily eliminated by context.“), superseded by statute on other grounds, First Step Act of 2018, Pub. L. No. 115-391, 132 Stat. 5194.
Given the lack of fit between the plain language of “action brought” and the filing of a motion to appoint a Chapter 11 trustee, we find that filing a motion to appoint a Chapter 11 trustee does not qualify as bringing a “covered judicial or administrative action” or a “related action.” See
3
Petitioners assert two additional arguments.
First, in a variation on their main argument, Petitioners contend that the SEC‘s involvement in the bankruptcy case constitutes a “covered judicial or administrative action” because the bankruptcy case was simply a “continu[ation]” of the SEC‘s “single enforcement strategy” that began with the enforcement action in the United States District Court for the Western District of Texas. But Petitioners do not grapple with the ordinary meaning of “action brought” in § 78u-6(a). Their “continuation” argument does not comport with the ordinary meaning of “bringing an action,” i.e., initiating a lawsuit or legal proceedings. See Harris v. Garner, 216 F.3d 970, 974 (11th Cir. 2000) (en banc) (“‘[B]rought’ and ‘bring’ refer to the filing or commencement of a lawsuit, not to its continuation.“). Petitioners’ reading would do away with the commencement aspect of “bringing an action.” See FCC v. AT&T Inc., 562 U.S. 397, 407 (2011) (declining to adopt a party‘s reading of a statutory term where the party did not provide a “sound reason in the statutory text or context to disregard” the term‘s “ordinary meaning“); see also
* * *
Because the motion to appoint a trustee in the bankruptcy case was not an “action brought by” a qualifying entity, it does not meet the definition of a “covered judicial or administrative action” under
D
Seeking a larger award amount than the SEC originally allotted, McPherson requests that we “clarify the extent of the [SEC]‘s exemptive authority” and remand for further consideration by the SEC. The authority McPherson refers to comes from
We have used this discretionary authority to exempt whistleblowers from certain of the program‘s rules under limited circumstances. However, the limitation on the amount of the award to be issued in connection with any Covered Action was set by statute, and we have never used our discretion under Section 36(a)(1) of the Exchange Act to exempt a whistleblower from a statutory requirement or to approve an award amount above the statutory limit. The text of the statute reflects a clear congressional design to grant awards of no more than 30 percent of the amounts collected. Congress established the same framework for awards to be paid to whistleblowers in cases brought by the Commodity Futures Trading Commission and under the Anti-Money Laundering Act. Given the clarity and consistency of the statutory design for whistleblower awards, the [SEC] does not believe it would be appropriate to use its exemptive authority to award an amount above the statutory limit even in cases such as this one, where a higher award amount might otherwise be warranted.
It did not take the position that it was statutorily precluded from exercising its exemptive authority as to McPherson.
Second, though McPherson claims the SEC has previously exempted whistleblowers from pertinent statutory requirements, he cites two supporting examples—only one actually involved the use of the exemptive authority, but there the SEC exempted the whistleblower from a regulatory, not statutory, requirement. See Order Determining Whistleblower Award Claim, Release No. 72727, 2014 WL 3749705, at *1 (July 31, 2014) (“[W]e therefore believe it appropriate in the public interest and consistent with the protection of investors to waive the ‘voluntary’ requirement of
To the extent McPherson‘s request is simply for the SEC to reconsider its exemptive-authority decision, McPherson must demonstrate that the SEC abused its discretion in declining to exempt McPherson from the statutory limits. See
IV
The petitions for review are DENIED.