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SEC Enforcement Division Issues Annual Report on FY2017


This week, the SEC Enforcement Division issued its annual report on its enforcement actions in Fiscal Year 2017 and its priorities for the future.

The SEC whistleblower office will put out a separate report, but the enforcement division noted that the SEC reviewed more than 16,000 tips and more than 20,000 reports of suspicious activity by broker-dealers. It will be interesting to see how many of the tips were through a Form TCR filed with the SEC whistleblower office versus tips provided through other methods. In past years, there have been roughly 4,000 Form TCRs filed.

Overall, the SEC had a good year in its enforcement actions in Fiscal Year 2017. The period of the report covers from October 2016 to September 2017, so it includes the last three months of President Obama’s term.

Over this period, the SEC brought 754 actions and obtained judgments and orders for more than $3.7 billion in disgorgement and penalties. Of the 754 actions, 446 were standalone actions in federal court or administrative proceedings, 196 were follow-on proceedings seeking criminal punishment or to bar an individual from securities involvement after another proceeding, and 112 were proceedings to deregister public companies for delinquent filings.

The SEC report also detailed the types of cases that were brought. The majority of actions were for issuer reporting (such as failure to report or accounting fraud), securities offerings and actions against investment advisors. Actions involving broker-dealers or cases involving insider trading and market manipulation made up the next tier of enforcement actions. In its list of noteworthy enforcement actions, it noted segments of cases involving a direct impact on retail investors, cyber-related misconduct, insider trading, issuer reporting/auditor misconduct, and other noteworthy actions (top two in this category were FCPA actions).

In FY2017, the SEC distributed a record $1.07 billion to harmed investors. A significant percentage of these funds were distributed from four funds setup following actions, although the total collective number of Fair Funds and Disgorgement Funds were over 50. The amount that the securities regulator is able to return to investors in the future will likely be limited by the Supreme Court’s decision in Kokesh v. SEC, which limited the period for disgorgement to the term of the statute of limitations (generally five years).

The SEC also noted noted five core principles. Of particular interest to our clients and potential whistleblowers will be three of them:

The Enforcement Division reiterated that one of its priorities is to protect the Main Street investor. The SEC formed a Retail Strategy Task Force to address harm to retail investors and announced they will continue to pursue securities fraud that impacts retail investors, including accounting fraud, pump and dump frauds, Ponzi schemes and other violations of the federal securities laws. Later in the document, it added other examples of misconduct to this list, including steering clients to higher-cost mutual funds, abuses in wrap-fee accounts, investment adviser recommendations to hold inverse exchange-traded funds, recommendations of unsuitable structured products to retail investors, and churning client accounts.

One of the priorities of the nation’s primary securities regulator is to keep pace with technology. The SEC noted that it is frequently encountering the broken of stolen inside information on the dark web and market manipulation through the hacking into of the electronic accounts of others. We continue to believe that this is going to be a fertile area for whistleblower tips in the next few years.

The SEC also plans to continue the pursuit of individuals who have engaged in wrongdoing. One or more individuals has been charged in more than 80 percent of the standalone enforcement actions brought by the SEC in the last six months. The focus on individual wrongdoers in addition to institutions will continue to be the rule, rather than the exception. The DOJ announced a similar stance two years ago encouraging an emphasis on individual accountability in the Yates Memo.

Over the next month, we’ll be getting a similar report from the CFTC and the Justice Department on the False Claims Act. Separate reports will be issued for the SEC, CFTC and IRS whistleblower programs, though the timing of these reports is a little less certain. Please stop back when they are posted to see summaries of them and our commentary.

Senate Considering Antitrust Whistleblower Protections Again


The bipartisan bill promoting whistleblower protections for individuals reporting antitrust violations, the Criminal Antitrust Anti-Retaliation Act (“CAARA”), is back in the Senate.

The law is co-sponsored by Senators Charles Grassley (R-Iowa) and Patrick Leahy (D-Vermont). On November 2nd, S. 807 advanced out of the Senate Judiciary Committee and the next step would be a vote by the Senate. Two years ago, the bill was adopted by the Senate unanimously but did not receive a vote in the U.S. House of Representatives.

The law amends the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 to provide covered individuals compensatory damages (reinstatement, backpay and special damages including litigation costs, expert witness fees and reasonable attorney’s fees) through a lawsuit.

The bill requires an individual who is discharged or otherwise discriminated against in violation of the law to file a complaint with the Secretary of Labor within 180 days of the date on which the violation occurs. If the Secretary of Labor has not issued a final decision within 180 days, and other conditions are met, the claimant can bring an action in the appropriate district court of the United States. This procedure mimics the procedure of some other employment law statutes.

The law protects reports of what a covered individual reasonable believes to be criminal antitrust conduct in violation of Section 1 or Section 3 of the Sherman Act made to a member of Congress or a federal regulatory or law enforcement agency. The law also covers various acts related to assisting a Federal Government investigation or proceeding, including testifying in it or otherwise assisting.

The law does not provide protections to individuals that planned and initiated a violation of the antitrust laws, another criminal law in conjunction with the violation of the antitrust law, or an obstruction or attempted obstruction of an investigation by the Department of Justice.

One thing that the law does not do is offer rewards to antitrust whistleblowers. In the past, whistleblower protections have in some instances been a precursor to subsequent adoption of a whistleblower reward program. Most recently, the Motor Vehicle Safety Whistleblower Act, adopted as part of the FAST Act, was preceded by the Moving Ahead for Progress in the 21st Century Act (MAP-21).

We’ll continue to post updates to the progress on CAARA as we find them.

IRS LB&I Now Has 24 Issues for Tax Examinations


The IRS Large Business & International Division (LB&I) is launching eleven compliance campaigns to target potential tax issues at the nearly 300,000 taxpayers within its jurisdiction. When a regulator announces that it will spend resources for investigation and enforcement in a particular area, it can be a good signal that it will look carefully at any credible whistleblower tips.

About 16 months ago, we covered the reorganization of the LB&I to focus on issue-based examinations. At that time, we noted three areas of focus: inbound distributions (repatriation of foreign cash), basket options (hedge fund conversion of short-term gains to long-term gains), and captive insurance (the insurance of remote risks as a tax shelter).

In January 2017, the IRS announced the identification and selection of 13 more campaigns. The were declared the “first wave” of issue-based compliance work in the official IRS announcement. The announcement of another eleven areas this month represents a substantial increase in the focused investigations of the division and a good sign that the IRS is having success with its new issue-based examinations model.

Here are the 24 areas of investigation that have been announced by LB&I, starting with the January issues and then turning to the November announcement:

IRC 48C Energy Credits: These advanced energy projects must be pre-approved for tax credits by the DOE and have been allocated a credit by the IRS.

OVDP Declines-Withdrawals: This examination will look at taxpayers who sought to voluntarily resolve non-compliance through the Offshore Voluntary Disclosure Program but were either denied access to the program or withdrew on their own initiative.

Domestic Production Activities Deduction: This relates to the IRC Section 199 deduction for qualified films. These examinations likely claim that gross receipts from either subscription packages of groups of channels or third-party produced content are not qualified films.

Micro-Captive Insurance: The improper reduction of aggregate taxable income through insurance contracts inconsistent with arm’s length transactions and sound business practices.

Related Party Transactions: This examination will look at transactions between commonly controlled entities that are transferring funds.

Deferred Variable Annuity Reserves & Life Insurance Reserves: The IRS is going to develop guidance to reduce uncertainty on the taxation of the life insurance industry, including tax reserves for life insurance contracts and deferred variable annuities with Guaranteed Minimum Benefits.

Basket Transactions: These are structured financial transactions used to defer taxes by treating ordinary income and short-term capital gain as long-term capital gain.

Land Developers – Completed Contract Method (CCM): Some large land developers with average annual gross receipts exceeding $10 million are improperly using the CCM accounting method to defer gains until the development is completed.

TEFRA Linkage Plan Strategy: The IRS will be developing new procedures to identify, link and assess tax on the terminal investors in a TEFRA partnership audit. TEFRA stands for the Tax Equity and Fiscal Responsibility Act of 1982, which consolidated examination, processing and judicial procedures for the tax treatment of partnerships.

S Corporation Losses Claimed in Excess of Basis: Shareholders in S corporations are only allowed to take pass through losses when they have sufficient stock or debt basis to absorb the claimed losses and deductions.

Repatriation: Many taxpayers are not properly reporting repatriations as taxable events on their filed returns.

Form 1120-F Non-Filer: Many foreign companies are not filing the required Form 1120-F when doing business in the United States.

Inbound Distribution: This involves transfer pricing issues where U.S. distributors of goods sourced from foreign-related parties do not have profits commensurate with their risks and the U.S. taxpayer would have higher returns in an arms-length transaction.

Form 1120-F Chapter 3 and Chapter 4 Withholding: This campaign will verify that withholding agents have filed the required Forms 1042, 1042-S, 8804, 8805, 288 and 8288-A before allowing refunds or credits to foreign entities filing Form 1120-F.

Swiss Bank Program: This will address noncompliance in the Swiss Bank Program, which helps Swiss financial institutions resolve their potential criminal liabilities by, in part, providing information on U.S. persons with beneficial ownership of foreign financial accounts.

Foreign Earned Income Exclusion: The IRS will conduct examinations and other efforts to address taxpayers who have claimed the foreign earned income exclusion but do not meet the requirements.

Verification of Form 1042-S Credit Claimed on Form 1040NR: This campaign will verify the withholding credits on Form 1042-S of a foreign person with U.S. source income subject to withholding before a refund is issued or a credit allowed.

Agricultural Chemicals Security Credit: This credit allows a 30 percent credit to any eligible agricultural business that pair or incurred security costs to safeguard agricultural chemicals. The IRS will be seeking to ensure that only qualified expenses by eligible taxpayers are considered and that those computing the credit are properly defining the term facilities to entitle them to the credit.

Deferral of Cancellation of Indebtedness Income: This will examine whether taxpayers who properly deferred cancellation of indebtedness (COD) income in 2009/2010 from the reacquisition of debt instruments report it properly beginning in 2014 (unless the law requires other reporting in their circumstances).

Energy Efficient Commercial Building Property: This campaign will ensure taxpayer compliance with the section 179D deduction for taxpayers who own or lease a commercial building and deduct the cost or portion of the cost of installing energy efficient commercial building property (EECBP).

Corporate Direct (Section 901) Foreign Tax Credit: This campaign will attempt to improve the IRS return examination process for domestic corporate taxpayers electing to take a credit for foreign taxes paid or accrued in lieu of a deduction. The IRS announcement noted that future FTC campaigns may address indirect credits and IRC 904(a) FTC limitation issues.

Section 956 Avoidance: This campaign will explore the use of cash pooling arrangements to improperly avoid the tax consequences of Section 956 when a Controlled Foreign Corporation (CFC) makes a loan to a US parent.

Economic Development Incentives: This campaign will look at the treatment of government economic incentives as non-shareholder capital contributions, allowing them to exclude it from gross income and claim a tax deduction without offsetting it by the tax credit received.

Individual Foreign Tax Credit (Form 1116): Examinations will look at taxpayers improperly calculating the Foreign Tax Credit amount on Form 1116. This credit is used to reduce U.S. income tax liability for the amount of foreign taxes paid on foreign source income.

Although some of the above issues seem to be efforts to improve internal procedures or clarify areas of the law where there has been some uncertainty by taxpayers, others could very well be the basis for a successful IRS whistleblower tip under section 7623(b) where more than $2 million is at issue.

The announcement of the additional 11 examination issues comes at the same time that there is a lot going on at the IRS. The U.S. House of Representatives is debating President Trump’s tax reform proposal and the Trump administration has appointed David Kautter as interim head of the IRS. Kautter temporarily replaces controversial IRS Commissioner John Koskinen, whose term came to an end yesterday. Koskinen was the 48th IRS Commissioner and has been serving in the role since he was sworn in at the end of 2013.

Grassley Proposes Whistleblower Amendments to Senate’s Tax Cuts and Jobs Act


Senator Grassley has proposed 15 amendments to the Senate bill for the Tax Cuts and Jobs Act. Two of those amendments are important to whistleblowers, so we are going to examine them in more detail here.

Amendment #1 from Grassley is intended to unify the tax treatment of whistleblower awards. The amendment seeks to extend the current above-the-line deduction available to successful whistleblowers under the Federal False Claims Act and IRS whistleblower program for attorney fees and court costs to other whistleblower programs.

What is an above-the-line deduction? It means that the US does not require the whistleblower to pay tax on the entire award (before subtracting out the portion paid under the False Claims Act or Internal Revenue Code Section 7623 (IRS Whistleblower program). This is provided for in IRC section 62(a)(20) and 62(a)(21).

If there is no above-the-line deduction, then the whistleblower pays tax on the entire amount of the reward as income and then the attorney would separately claim and pay taxes on the portion they are paid for fees as income.

The amendment would eliminate double taxation for the rewards under the State False Claims Acts, the SEC Whistleblower program, and the CFTC Whistleblower program.

Interestingly, the summary of the amendment does not mention the Motor Vehicle Safety Whistleblower Act, which was enacted in December 2015 as part of the FAST Act. This auto whistleblower law created a program at the Department of Transportation, likely to be handled by the NHTSA. As far as we have seen, the Department of Transportation has yet to issue the implementing regulations for it through. However, the NHTSA is accepting whistleblower tips according to its terms, which provide for submissions before the adoption of the final rules. We’ll be keeping a close eye when the precise language of the amendment is avaiable

Since the firm’s engagement letters do not cover tax advice on rewards and this is a complicated area of the law, we are unable to answer questions about specific situations. However, we do wholeheartedly support this amendment to avoid double taxing whistleblower award payments.

Amendment #2 by Grassley would clarify an important area of the IRS whistleblower program that has resulted in litigation in the U.S. Tax Court over the past few years. The amendment would define the term “proceeds” in IRC section 7623.

The proposed definition is: “(A) taxes, penalties, interest additions to tax, and additional amounts provided under the internal revenue laws, and (b) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate including (i) criminal fines and civil forfeitures, and, (ii) violations of reporting requirements.”

This word has been a point of contention because the U.S. is only required to pay out awards as a percentage of collected proceeds. The IRS interpretation has defined this term broadly, to exclude certain money collected by the IRS in enforcement actions. In a U.S. Tax Court lawsuit decided last year, the IRS took the position that only fines pursuant to Title 26 were collected proceeds. However, the Tax Court sided in favor of an expansive definition for whistleblowers.

Senator Grassley clearly wants to make sure that there is no more confusion over the desired scope of the whistleblower program, and has given it a broader definition than provided for in last year’s opinion. The adoption of this change would be in the interest of tax whistleblowers and we support it as well.

We’ll be closely following these amendments as their full text is published and they are debated.  Stay tuned!

Jim McEldrew’s Annual Railroad Worker Holiday Party Scheduled


Jim McEldrew has scheduled his annual holiday party for Philadelphia’s railroad workers.  This year, it will be Friday, December 8, 2017 starting at 6:30 PM at Chez Colette (located inside the Sofitel Hotel).  Chez Colette is located at 120 S. 17th St. in Center City, Philadelphia.

We look forward to another great turnout of SEPTA workers and others in the railroad industry.  Although we are sad that it could not be held at Pennsylvania 6 again (since they closed), we are looking forward to celebrating the holiday season at a new venue with old and new friends.

Past and present clients are, of course, welcome and should be receiving the below postcard invitation in the mail.  If we don’t have your address but you work for a railroad in the area, you are also free to join us – just make sure that you are RSVP so that we know you are coming.

In order to let the restaurant know how many people to expect, please RSVP by Tuesday, November 28, 2017 to Jessica Dinsdorf at McEldrew Young.  She can be reached at (215) 545-8800 (ask for Jessica) or email to jdinsdorf@mceldrewyoung.com .

The details from the invite are below.  We look forward to seeing you in early December!

Have Investors Been Harmed?


One of the central questions that we ask in the evaluation of information from potential whistleblowers is whether there is real and actual harm as a result of the company or individual breaking the law. In other words, is it merely a technical violation of the law or are there substantial damages as a result of the corporate or individual misconduct?

In cases under the False Claims Act, the damage is often monetary as the Government paid for items from the public fisc and did not receive what it thought it was getting. For example, in the case of home health care fraud where the individual is not homebound, the Government is paying for more expensive services that the individual simply does not need. Sometimes, it can also involve harm to patients, although this is not required.

In cases involving tips from SEC whistleblowers, the harm is usually to investors. If misrepresentations are made to separate investors from their money, it can be a clear case for SEC action. An article on Investment News over the weekend identified retail investor fraud as a priority target of SEC Chairman Jay Clayton during his administration. Looking at the enforcement actions brought and settled by the SEC over the past few weeks, it is clear that most actions involve some sort of investor harm. Here are some of the actions from October and early November:

Penny Stock Fraud: Unregistered brokers were hired to pitch penny stocks based on nonexistent patents. Investors were told their money would fund R&D, but it in fact was used for personal expenditures and to pay sales commissions.

Improper Solicitation: Individual raising funds misled potential investors with false claims about a pending acquisition.

Accounting Frauds: Rio Tinto solicited substantial funds when failing to write down a bad investment. In another action, biotech company violated accounting rules to improperly recognize revenue and make it appear to investors that revenue was growing steadily.

Improper Billing: A private equity partner charged clients for personal expenses.

Illegal Short Selling: The investment advisor firm shorted stock in the public market during a restricted period before it illegally bought shares issued in a follow-on offering. The rule promotes offering prices set by supply and demand rather than allow prices to be artificially depressed by short selling.

Insider Trading: An engineer bought stock and options prior to a company’s announcement of the discovery of a new oil source.

Account Takeover: Investor accounts were hijacked and traded without investor authorization for substantial losses after hours.

Each of these examples involves a clear case of investor harm. Due to the Government’s limited resources, it is easier to get the United States to spend resources for investigation and enforcement if the investor harm is clear. By assessing investor harm ourselves in advance of filing a whistleblower tip, we are attempting to screen cases to avoid bringing information to the Government which they will not be interested in pursuing.

If you have evidence of a violation of the federal securities laws, call 1-800-590-4116 to speak to one of our whistleblower attorneys in a free, confidential initial consultation. We can help evaluate your evidence and aid you in determining whether the matter is one that the Government will want to hear about from you.

Attorneys for St. Francis Center Nursing Home Abuse Victims in Darby


Our attorneys are now investigating nursing home abuse at the St. Francis Center for Rehabilitation and Healthcare after the Pennsylvania Attorney General’s Office raided the facility on Wednesday.

If you are a resident or family member of a resident at this facility who has been injured from the care provided at St. Francis nursing home in Darby, please call 1-800-590-4116 to speak to Attorney Dan Purtell in a confidential, free consultation.

PA inspected the facility in August after receiving five complaints. The inspection found severely deficient wound care, inadequate responses to changes in medical conditions, significant weight loss from residents not eating, and other problems.

The nursing home is operated by Center Management Group, a New York company that bought the 273 bed facility and six other senior-care locations from the Archdiocese of Philadelphia.

The facility’s license was revoked by the state of Pennsylvania after an August inspection found problems. The facility was operating during the appeal process. The PA Attorney General’s Office would neither confirm nor deny the existence of an investigation.

If you are a resident or family member of a resident at this facility who has been injured from the care provided at St. Francis nursing home, please call 1-800-590-4116 to speak to Attorney Dan Purtell in a confidential, free consultation.

DOJ Announces Largest Hospice Fraud Settlement Ever – $75 Million


The Justice Department announced the resolution of a False Claims Act lawsuit with a $75 million settlement by Chemed Corporation and various wholly-owned subsidiaries, including Vitas Hospice Services. The settlement is the largest amount ever recovered under the False Claims Act from a provider of hospice services, according to Acting Assistant Attorney General of the Civil Division, Chad A. Readler.

Vitas is the largest for-profit hospice chain in the United States, operating 51 for-profit hospice programs in 18 states. Historically, around 90% of Vitas’ revenue is derived from Medicare. Chemed acquired the Vitas-affiliated companies in 2004.


Crisis care is designed to allow a hospice provider to assist with the management of uncontrolled symptoms during a short period of time to return the patient to a state of comfort. It provides for around-the-clock care for up to 24 hours, with its appropriateness reassessed every 24 hours.

The lawsuit alleged that the Defendants submitted or caused false claims for crisis care services that were not provided to patients, that were inappropriately provided, or were not medically necessary because the patients were not in crisis during the periods that the Defendants claimed. According to the complaint filed by the United States, Vitas misled patients through their marketing materials to believe that patients would routinely receive “intensive comfort care” paid for by Medicare without informing them of the required acute medical symptoms. Vitas also used this marketing technique with potential referral sources.

According to the allegations in the complaint, Vitas not only distributed materials that incorrectly informed staff how and when to initiate crisis care, but the companies set aggressive goals for billing Medicare for crisis care. One nurse stated that she was sent to the home of patients for crisis care to find them not in crisis on more than one occasion. In one instance where crisis care rates dropped, Vitas’ Vice President of Operations sought an analysis of what caused the drop and how the location will correct it.

The complaint also alleges that Chemed and Vitas knew through regular internal audits that patients did not qualify for crisis care which they received or that the crisis care was inconsistent with the patient’s plan of care. Defendants were also aware that their Medicare reimbursement for crisis care far exceeded the rest of the hospice industry.

In many cases, according to the allegations, the care billed as “crisis care” by Vitas was simply a part of routine home care services. In total, the United States listed seven patient examples of this conduct.


It is well known that Medicare requires hospice patients to be terminal and have a life expectancy of 6 months or less. Hospice care is designed to provide end-of-life comfort and is not designed for patients still seeking a cure or who may live for years.

According to the allegations, Vitas also admitted patients who did not need end of life care and billed Medicare for them. Managers at Vitas’ headquarters set aggressive admissions goals and made focused inquiries when admission numbers were low. They also evaluated general managers of each program based on its profitability and as a result the program managers often disregarded nurse and doctor concerns regarding patients who were not terminally ill.

Vitas similarly evaluated marketing representatives based on meeting their admission goals and paid bonuses based on enrollment into the program. The company philosophy, according to one former hospice manager, was to sign everybody up. Medical staff also reported that they felt pressured to admit or readmit patients who were inappropriate. Another nurse reported that the goal at discharge meetings was to disregard as few patients as possible without regard to the appropriateness of care. One doctor even reported that he was overruled on several occasions when he did not certify patients as eligible for hospice.

The United States offered seven patient examples for the allegations that Defendants billed hospice care for patients who did not meet the Medicare requirements.


There were three whistleblower lawsuits filed against one or more of the companies involved in the settlement. The United States intervened in the lawsuits and transferred them to the Western District of Missouri, where they were consolidated with a lawsuit filed by the United States against the Defendants. As part of the settlement, Vitas entered into a five-year Corporate Integrity Agreement.

If you have evidence of hospice fraud occurring at another health care provider, call 1-800-590-4116 for a free consultation with a McEldrew Young False Claims Act attorney.

Cyber Unit and Retail Strategy Task Force Priorities According to SEC Co-Director of Enforcement Division


We wrote a few months back about the creation of the Cyber Unit and Retail Strategy Task Force at the SEC. In the Keynote Speech at the Securities Enforcement Forum, Co-Director of the SEC’s Division of Enforcement Stephanie Avakian provided additional information about the priorities of these units and the need for them to exist.

The SEC made these changes in order to align and focus resources in these key priorities in order to better fulfill the agency’s investor protection mission.


According to Avakian, the Cyber Unit was added because of the increased frequency of these securities violations and their increasing complexity. She identified three areas of misconduct that will be at the heart of this division. Previously, a large part of this expertise was gathered in the Market Abuse Unit during the investigation of serial insider trading schemes.

We’ve mentioned these areas here before in our discussions of cybersecurity, but they are worth mentioning again since they were explicitly laid out in the speech. First, they involve cyber-related misconduct that is used to gain an unlawful market advantage. Second, they include cases involving failures of a registered entity to take appropriate steps to safeguard information or maintain system integrity. Finally, they involve potential enforcement against a public company for failure to disclose cyber risks or incidents.

The SEC has already brought “a number of significant cases” involving cyber-related misconduct that has been used to gain an unlawful market advantage. These types of cases include (1) hacking to access material, nonpublic information in advance of an event, or to manipulate the market in a security (or group of securities); (2) account intrusions to conduct manipulative trading; and (3) disseminating false information online (EDGAR, twitter, etc.) to manipulate stock prices.

The SEC has already brought several cases in the second area, resulting from violations of Regulations S-P, S-ID, SCI and others. These regulations are designed to ensure system integrity and the appropriate safeguarding of information. In these cases, they often consider whether an examination by OCIE is more appropriate or whether an enforcement inquiry should be opened. This would obviously

Avakian noted specifically that there has yet to be a prosecution for a public company’s failure to disclose a cyber risk. However, she says that they can envision a case here enforcement would be appropriate. They just aren’t trying to “second-guess reasonable, good faith good faith disclosure decisions ….”

The new area that has been added to the Cyber Unit is responsibility for distributed ledger technology. The popularity of virtual currency and blockchain technology could “be an attractive vehicle for fraudulent conduct,” according to Avakian. The SEC has recently reminded companies and investors that Initial Coin Offerings are subject to the federal securities laws. Separately, CFTC Commissioner Brian Quintenz spoke at Georgetown University’s Fintech Week in mid-October and explained that ICO tokens could be a commodity subject to regulation by the CFTC.


This Task Force will be a dedicated staff that develops ideas and strategies for protecting retail investors through data analytics and machine learning. The staff will work closely with the Office of Compliance, Inspections and Examinations (OCIE) and will refer investigative work to other Enforcement Division staff.

Avakian provided a number of specific examples of the types of conduct where they will focus, including (1) investment professionals steering customers to higher fees; (2) abuses in wrap-fee accounts such as failing to disclose costs of trading through unaffiliated brokers; (3) buying and holding inverse exchange-traded funds (ETFs), especially in retirement accounts; (4) failure to fully and clearly disclose fees in structured products sold to retail investors; and (5) churning trading accounts to generate commissions.

The Co-Director of Enforcement specifically denied that the creation of this unit showed diminished focus or resources on policing Wall Street and fighting financial fraud.

The Task Force will also be focused on investor outreach, working with other areas of the SEC to identify areas where targeted education would benefit investors and empower them to make informed decisions about investments.


The dedication of these areas to groups of SEC staff demonstrate once again that credible whistleblower tips in these areas will be strongly considered. The SEC has already rewarded several whistleblowers for providing information against misconduct that would be difficult to detect and was adversely harming investors. And given statements concerning the potential harm from hacking and cybersecurity misconduct, it seems likely that rewards will follow in this area as well.

If you have evidence of a violation of federal securities laws or SEC regulations, call 1-800-590-4116 to get a confidential consultation with a McEldrew Young whistleblower attorney representing SEC whistleblowers.

SEC Charges Rio Tinto with Accounting Fraud


The U.S. Securities and Exchange Commission has filed a complaint in the Southern District of New York alleging violations of the Securities Act and the Exchange Act for an accounting fraud related to the valuation of a coal business in Mozambique, Africa. Rio Tinto settled the investigation of the UK Financial Conduct Authority for $35.6 million (USD). Australia is also reportedly investigating the allegations. Rio Tinto is one of the world’s largest metals and mining corporations with headquarters in London, England and Melbourne, Australia.

The SEC Complaint alleges that Mozambique acquired coal assets for $3.7 billion shortly after disclosing big losses from a previous large acquisition. Soon after the acquisition, Rio Tinto realized that there was less coal and the coal actually there was a lower quality than anticipated. They also faced challenges due to the lack of infrastructure to transport it. This significantly impaired the acquisition’s value and by May 2012, executives at Rio Tinto suggested that the subsidiary was worth negative $680 million.

The Complaint further alleges that Rio Tinto released misleading financial statements before a series of U.S. debt offerings. It ultimately raised $5.5 billion from U.S. investors, including $3 billion after May 2012 when it had been informed of its negative valuation.

The inflated valuation of the coal assets were discovered in January 2013 by an executive at Rio Tinto and reported to Rio Tinto’s Chairman. After a subsequent internal investigation, Albanese resigned and the company marked down the assets on their books more than 80 percent. It ultimately sold the Mozambique subsidiary for $50 million.

The complaint alleges that Rio Tinto’s leadership was familiar with the company’s accounting processes because of the previous valuation impairment and did not take steps to initiate the process or otherwise disclose the asset’s outlook. Instead, the leadership team concealed the loss internally and allowed public financial statements to be released without impairment of the asset.

For potential whistleblowers wondering what types of enforcement actions the SEC will bring under President Trump, this is probably a good example. If the facts are true as alleged, the company released misleading financial statements and raised billions of dollars from investors shortly thereafter. Given the previous failed acquisition, there is reason to believe this information would have been material to investors. And despite Rio Tinto’s large size (revenue of $33 billion (USD) in 2016), it is still a substantial amount for the company.

This is not the only accounting fraud case brought by the SEC recently. Last month, the SEC also settled an accounting fraud investigation involving Alere, a medical diagnostics firm bought by Abbott Labs earlier this year. According to the SEC order, Alere’s South Korean subsidiary Standard Diagnostics, artificially inflated revenues by recording sales before they were delivered to customers. Alere subsidiaries in other countries also engaged in improper revenue recognition practices regarding the timing of its reporting. As a result, Alere revised and restated revenue over a five year period to shift more than $260 million in revenue to a later quarter than the one in which it was originally recognized. The financial statements also included $3.3 million in profits from improper offers and payments to foreign government officials indirectly made by Alere’s subsidiaries in Columbia and India.

Prior to the Government’s investigations of investment banks for mortgage fraud, accounting fraud was a major area of focus for the SEC. In the past few years, some have assumed that the SEC would increase its resources in this area. Although cybersecurity still looms as a major issue, accounting fraud could be set for a comeback.

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