On a 2-1 decision, the Ninth Circuit has affirmed the right of internal whistleblowers to sue under the Dodd-Frank Act after they are retaliated against for informing their company of suspected violations of federal securities laws. The circuit split on anti-retaliation protections for internal SEC whistleblowers now consists of the Second and Ninth Circuits in favor and the Fifth Circuit against.
The Chief of the SEC’s Office of the Whistleblower, Jane Norberg, and the Director of the CFTC Whistleblower Office, Christopher Ehrman, spoke recently at the Practicing Law Institute’s program on June 28, 2017, titled Corporate Whistleblowing in 2017. Their comments covered a wide range of hot topics in the field of whistleblower law and were relayed in a recent JDSupra article, so we thought them appropriate to briefly detail here for current and potential Dodd-Frank whistleblowers.
A trader at a market making firm and his colleague filed a tip with the CFTC whistleblower program about suspected illegal spoofing by Igor Oystacher after discovering suspicious trading activity in the E-mini S&P 500 futures contract market in 2013, according to a Bloomberg article. The CFTC has brought a lawsuit against Oystacher and is seeking to bar him from trading while the lawsuit proceeds. Other agencies/exchanges, such as the Justice Department, continue to investigate the conduct underlying the case.
The U.S. Attorney’s Office has emerged victorious in a groundbreaking jury trial prosecuting a commodities trader for illegal spoofing. The jury found the high-frequency trader guilty of 12 counts of fraud and market manipulation of the futures market. It was the first criminal trial prosecuting spoofing.
Investor disclosures have been a bit of a hot button issue this week, with three topics hitting the news that impact issues concerning what corporations are required to tell their shareholders and potential purchasers. Update: After reviewing the news, it looks like there are two more as well.
JPM Investment Steering
J.P. Morgan Chase is expected to pay more than $150 million to settle an investigation into the disclosures its bankers made to clients as they steered them to in-house products. The SEC and Office of the Comptroller of the Currency have been investigating for at least a year because the bank’s products typically have higher fees than other options in the marketplace. The investigation is into the practices of the wealth management division at JPM toward their private-banking clients.
The investigation also relates to potential conflicts of interests. SEC registered investment advisers must meet the fiduciary standard with their clients. If hedge funds pay placement agent fees to JPM broker-dealer affiliates, the advisers may be conflicted.
Separately, Indiana has been conducting an investigation into JPMorgan procedures concerning the suitability of investments for clients. The media reports do not indicate that this investigation will be wrapped up as part of the settlement talks with the SEC.
The price of oil isn’t the only trouble that may be facing oil and gas companies. A group of Senators have sent a letter to the SEC asking them to investigate whether these companies have adequately disclosed the risks of their offshore operations to investors. The letter focuses on drilling in the Gulf of Mexico, Arctic Ocean and other areas. The Senators believe the inherent risks of environmental problems, equipment failures and financial costs may be insufficiently disclosed.
This letter follows up on a petition a number of organizations filed a petition with the SEC in April concerning disclosures made by Shell Oil regarding its Arctic drilling program. The petition suggests that the company has not adequately disclosed the potential for billions in losses from an oil spill at an exploratory well.
This could be an interesting potential area for a whistleblower with information about a company that is facing potential losses in the development of long term assets offshore and yet hasn’t disclosed them to investors.
A portion of the corporate disclosures required by the Dodd-Frank Act has been invalidated by a D.C. Circuit Court of Appeals ruling this week. Companies must file reports with the SEC stating whether products are free of conflict minerals. However, the company can not be forced to disclose on its website that its products are not conflict free. The D.C. Circuit relied on the free speech clause of the First Amendment.
The Ashley Madison hack and release of information about its customers may also cause the SEC to take another look at the disclosures required by corporations to investors related to cybersecurity. The SEC released guidance on cybersecurity issues to registered investment advisers this year but the last guidance for corporations related to cybersecurity risks and cyber incidents was issued in 2011. Given the substantial intrusions in this area since then, it seems like a topic that is ripe for additional comment by securities regulators. Ashley Madison isn’t publicly traded, but earlier this year it had discussed an IPO in London in the future. The escalation of these sorts of issues, including the insider trading cases, however, has to be on the radar of the SEC at this point.
Wachtell, Lipton has asked the SEC to consider eliminating the requirement for quarterly earnings reports. Corporations have come under criticism from politicians and others recently for share buybacks and other gimmicks to increase stock gains in the short term while neglecting long term investments needed to increase shareholder value in the long term. Corporations have been required by the SEC to provide a quarterly financial report since the 1970s. The original requirement dates back to 1934, when the annual requirement was installed.
Firing whistleblowers for informing the government about corporate activities has been standard practice at many businesses for a long time. That practice may be changing quickly if the government continues to pursue enforcement actions against companies engaged in retaliation and juries continue to provide multi-million dollar verdicts to whistleblowers.
The Commodity Futures Trading Commission (CFTC) has filed an enforcement action against one of the largest precious metals fraud cases in its history. In light of that action, we thought it important to remind victims and industry professionals about the CFTC whistleblower program, which offers rewards for nonpublic information about violations of the Commodity Exchange Act.