Noted short seller Carson Block and his equity firm Muddy Waters LLC and a former business associate Kevin Barnes are in dispute over a $14 million whistleblower award by the SEC enforcement action in 2015. In a lawsuit not involving this firm but filed in the New York Supreme Court, Barnes seeks half for his joint role in a report that tipped the SEC that Focus Media Holding Ltd and its chairman and CEO, Jason Jiang, did not divulge important information regarding the company’s 2010 sale. The SEC fined Jiang and the company $55.6 million.
A fruitful collaboration
In an interview with the Wall Street Journal, Barnes claimed that he and Block collaborated on exposing misconduct among Chinese companies, including Focus Media. Citing his concerns over potential legal liability, Barnes would provide content and publish it under Block’s name. The two share the proceeds from legal or regulatory action and would independently short-sell Focus Media stocks as the research was released. It is a common strategy to highlight a company’s weakness or bad behavior and then sell its stock. The two men sealed the deal with a handshake.
Since this took place in 2011, the SEC’s cash-for-tips program (10% to 30% cut of enforcement actions worth more than $1 million) established by the 2010 Dodd-Frank Act was in its infancy. Nonetheless, Barnes’s mailing list for his reports did include SEC enforcers.
Award initially went to Block and Muddy Waters
The new lawsuit alleges that Block improperly took complete control over the report. In keeping with whistleblower policy, the SEC did not publicly name the authors or the cases connected to the award. It eventually decided to award Block and not Barnes even though it knew the latter was one of the authors.
Another cautionary tale
Whistleblowing remains a complicated act. So, it is essential to work closely with an attorney who can protect the rights and interests of the whistleblower client. Legal help can minimize the risk and maximize the impact of the information and the resulting reward.