The Securities and Exchange Commission this week rewarded three whistleblowers for their assistance in bringing an enforcement action against a “sham hedge fund.” The case marks the second time the Commission has awarded a whistleblower bounty since the passage of the Dodd-Frank Act.

An SEC order issued on June 12, allots each of three whistleblowers a 5 percent take from forthcoming fines that will be collected in relation to its enforcement action against Locust Offshore Management and CEO Andrey C. Hicks. Hicks and his firm are accused of having defrauded investors of $2.7 million. In March 2012, the U.S. District Court for the District of Massachusetts entered default judgments against Locust and Hicks and ordered them to pay approximately $7.5 million in disgorgement and penalties. Hicks also pleaded guilty to criminal fraud charges in 2012 and was sentenced to 40 months in prison.

Although the SEC obtained a freeze on the defendants' assets, it has not yet collected anything on these judgments. That means immediate payments will not be made to the whistleblowers. The Department of Justice, in a related action, has collected approximately $800,000 from Hicks to date, however, and the whistleblowers will also be entitled to apply for an award based on this amount.

Congress authorized the whistleblower program in the 2010 Dodd-Frank Act to reward individuals who offer “high-quality, original information” that leads to an enforcement action and sanctions of more than $1 million. Awards can range from 10 percent to 30 percent of the money collected, divided among validated tipsters.

The SEC's whistleblower program became operational in August 2011 and its first award (in the amount of $50,000) was approved in August 2012. As was the case with that initial bounty, the latest announcement does not identify the whistleblowers by either name or title. It does explain, however, that two of them provided information that prompted the SEC to open an investigation. The third whistleblower confirmed much of the information the others had provided and also identified key witnesses.

A fourth application for an award was denied because the information “did not lead to, or significantly contribute to” an enforcement action. In its order, the SEC, referring to that fourth claimant, stressed that “to be considered for an award… a whistleblower must voluntarily provide the Commission with original information that leads to a successful enforcement judicial, or administrative action.”

The most recent award may signal a coming wave of whistleblower payments. While speaking on a panel at the Corporate Crime Reporter conference last month Stephen Cohen, associate director of the SEC's Division of Enforcement, said “there will be a likely change in the discussion about the magnitude of some of these awards over the next six to twelve months.” The program will produce “some extremely significant whistleblower awards,” he promised.