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.