December 6, 2021

Federal court confirms that certain whistleblower protections extend to investors

On November 17, 2021, the US District Court for the Southern District of New York granted the Securities and Exchange Commission’s motion for summary judgment on Count V of an Amended Complaint, essentially confirming that whistleblower protections provided under Rule 21F-17 of the Exchange Act of 1934, which protects a person’s ability to directly communicate with the SEC and prohibits any attempt to impede these communications, are not limited to company employees but extend to third-parties including company investors.  

The decision was issued as part of an investment fraud case in which defendants Collector’s Coffee, Inc. and its founder and CEO Mykalai Kontilai were accused of violating Rule 21F-17 for having its investors sign a stock purchase agreement in 2015 that prohibited them from contacting or communicating with any government or administrative agency for any purpose that may prompt an investigation into the company.  In 2017, the defendants also entered into settlement agreements with two investors in which the investors were prohibited from communicating with any regulatory agency, including the US SEC.  The defendants also admitted to enforcing this communications clause by suing an investor, on at least one occasion, who communicated with the SEC, and afterwards shared the existence of the lawsuit with the other investors.

In its decision, the court reaffirmed its rejection of the defendants arguments that Rule 21F-17 should be struck down because it exceeded the SEC’s rulemaking authority and violated the First Amendment of the US Constitution – arguments that the court originally rejected when it denied defendants’ motion to dismiss in July 2021 – holding again that the Rule 21F-17 was promulgated appropriately by the SEC and did not violate the first amendment.   The court also held that a violation of Rule 21F-17 occurs when any person is prevented from communicating with the SEC.  The court also found that the undisputed facts of this case involving defendants that not only aimed to prevent communications with the SEC but actually sued to prevent these communications and then advertised the lawsuits in an effort to hinder further communications by its investors, were “undoubtedly” the type of “actions to impede” that Rule 21F-17 was intended to prevent.  As a result, the court granted the SEC’s motion for summary judgment as it relates to Count V’s Rule 21F-17 violations and denied defendants’ motion for summary judgment on Count V.

SDNY Decision and Order | Amended Complaint