Prejudgment Interest in Securities Cases can Substantially Add to a Whistleblower’s Potential Recovery

The Dodd-Frank Act allows whistleblowers who submit information about securities violations to the Securities and Exchange Commission (SEC) to recover from between 10%-30% of any SEC recovery, including civil penalties, disgorgement, and interest. The SEC must recover over $1 million in order for a whistleblower to receive an award for securities violation information. Civil penalties can be up to $150,000 for individuals and $750,000 for entities for each violation. The SEC can also seek disgorgement—which has been defined by the courts as all the profits a defendant derives from his ill-gotten gain. In addition to disgorgement, the SEC can also seek prejudgment interest on disgorgement.

The availability of prejudgment interest is one reason why awards for securities violations can be very large. In most other areas of law only post-judgment interest is available. In other words, the plaintiff only receives interest from the time in which the jury or judge enters judgment until the time that a defendant pays the award. In SEC cases, however, prejudgment on disgorgement may be awarded on a discretionary basis.[1] According to case law, "The time frame for the imposition of prejudgment interest usually begins with the date of the unlawful gain and ends at the entry of judgment."[2] One court explained the theory behind awarding prejudgment interest in saying had the defendant “been able to borrow the millions of dollars he spent that he obtained through his violations, he would have had to have paid significant interest on the loans.”[3] Prejudgment interest can greatly add to the amount the SEC recovers, particularly since there may be years between the time that the defendant commits the fraud and the time a court enters a judgment. For instance, in SEC v. Huff the court awarded $3 million in prejudgment interest on a disgorgement of $10.017 million for one of the defendants in the case.[4] Given the ability of the SEC to recover civil penalties, disgorgement, and prejudgment interest, companies that violate securities laws can expect to face heavy financial consequences for their violations.

    

[1] See S.E.C. v. Huff, 758 F.Supp.2d 1288, 1363 (S.D.Fla. 2010). 

[2] S.E.C. v. Yun, 148 F.Supp.2d 1287 (M.D.Fla. 2001). 

[3] S.E.C. v. Huff, 758 at 1363. 

[4] Id.  at 1366-67. 

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Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice — Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

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