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Our lawyers help SEC whistleblowers provide information about suspected violations of federal securities laws to the U.S. Securities and Exchange Commission. For original information that leads to a successful enforcement action or substantial assistance with an existing investigation, the Government pays a reward to the whistleblower pursuant to the terms of the Dodd-Frank Act and its whistleblower program. This information may include evidence of:
About the Program
In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Part of this reform package provided for the creation of Whistleblower Reward Programs through both the Securities & Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”).
The SEC and CFTC Whistleblower Programs provide monetary incentives for persons who voluntarily provide original information about possible violations of the Federal Securities Laws or Commodity Exchange Act that result in an order of monetary sanctions exceeding $1 million dollars. Original information is information derived from independent knowledge that is not publicly available. Information may be publicly available if it contains independent analysis and is not already known by the SEC or CFTC.
Types of Securities Fraud
Unregistered / Unlicensed Parties: The SEC imposes registration requirements on certain individuals and companies engaged in securities transactions, such as brokers and investment advisers. The failure to comply with these requirements can lead to substantial sanctions when combined with other issues.
Accounting Fraud: The SEC brings cases of accounting fraud against public companies and their auditors in order to protect investors who trade on incorrect information. These cases typically involve improperly booked revenue, asset valuations or expenses intended to inflate revenue or profit and meet investor expectations.
Chinese Co. Accounting Fraud: The SEC is investigating several Chinese companies for accounting fraud and some companies are rumored to have proposed management buy-outs of shareholders in order to avoid potential inquiries.
Independent Auditors: Misconduct by independent auditors is also on the radar of the SEC. They are interested in learning about auditors who fail to conduct audits in accordance with Public Company Accounting Oversight Board Standards, especially if they result in the dissemination of materially false and/or misleading information. They are also interested in accounting firms acting as an independent auditor while performing non-audit services for the same client.
Improperly Adjusted Profits: A report by the Associated Press of 500 major companies has found the gap between adjusted profits and profits according to general accepted accounting principles (GAAP) has widened in the past five years. According to the report, one of every five companies has “adjusted” profits in excess of net income by more than fifty percent. The “adjusted” numbers may be starting to add up to a potential problem.
Inflated Asset Values: The SEC is on the alert for the use of accounting tactics that portray income or profit based predominately on the reclassification of assets where said classifications are not accompanied by proper and sufficient disclosures to investors.
Private Equity Fees: The SEC has identified numerous problems at private equity advisors, including issues with the collection of fees, allocation of expenses, hidden fees, and the improper disclosure of valuations. The SEC’s Andrew Bowden indicated that, on almost 50% of the investigations, the SEC Office of Compliance Inspections and Examinations (OCIE) finds violations of the law or material weaknesses in controls in the adviser’s collection of fees and allocation of expenses. Three main areas where potential violations have been identified are in the costs of operating partners, cost-shifting over the life of the limited partner agreement and hidden fees that are not adequately disclosed to investors. Other potential violations include cases of accelerated monitoring fees for portfolio companies, administrative or transaction fees not contemplated by the limited partnership agreement, or other undisclosed fees charged to the investors.
Broken Deal Expenses: The propriety and sufficiency of disclosures and any conflicts of interests during the allocation of expenses from unsuccessful buyout opportunities by private equity funds is an issue currently under investigation by the U.S. Government.
Monitoring Termination Fees: The securities regulators are interested in cases of inadequately disclosed accelerated monitoring fees charged to portfolio companies when the company is sold.
Stapled Transactions: SEC officials have expressed concerns about private equity funds combining the sale of assets in a current fund with a required investment in a new fund. According to the website Pensions & Investments, this could be an area of focus for the office of compliance inspections and examinations. Generally, the general partner of a fund gives investors the option of cashing out their position or investing in a new fund when closing down a past fund. The prohibited “stapled transaction”, however, may sell the old fund and its remaining portfolio companies to a new fund with different terms. The limited partners in the deal may not be aware of it until after it is done, since only the advisory committee needs to approve asset-sale transactions.
Asset Manager Conflicts of Interest: Advisers and Companies violate their fiduciary duties if they fail to disclose a conflict of interest.
Asset Management Fees: The SEC annual Examination Priorities for 2014 included two practices which may steer investors to accounts with higher fees than are warranted by their investment goals and situation. Specifically, the SEC expressed concern that investors may be overpaying in fee-based accounts (due to reverse churning) and IRA rollovers when lower cost options are available.
Retirement Advisers: The SEC has issued a Risk Alert to advisers and brokers offering investment advice regarding retirement planning and to investors in retirement as part of a multiyear investigation into the industry. The review will ensure that brokers and advisers have a reasonable basis for their recommendations, avoid inherent conflicts of interest, and that companies have adopted effective compliance programs and oversight of their staff. The SEC review will also look at whether marketing materials are accurate without omitting material information and whether disclosures, including the fees charged, are complete and accurate.
Material Misrepresentations to Investors: Material misrepresentations to investors are taken seriously by the SEC. Failure to disclose material information about a company, including revenues, liabilities, assets and corporate management, are all a major problem. Such misrepresentations are particularly alarming when made in relation to a security offering. Manipulation of financial statements through mark-to-market pricing or improper accounting adjustments are also an area where the SEC tends to protect shareholder investments. Similarly, misappropriation of investor funds for personal or business expenses is a common area of enforcement. Furthermore, the SEC prohibits misrepresentations regarding the intended use of funds from a security offering or the manner in which client accounts will be invested.
Ponzi Schemes: The SEC has been especially diligent regarding ponzi schemes following the Bernie Madoff debacle. Typically, ponzi schemes involve promises of extraordinary or guaranteed results while the individuals operating the scheme pay early investors with money obtained from subsequent investors. They are a house of cards that will eventually fall apart when the operators can no longer recruit enough investors to pay out to the earlier investors, leaving existing investors vulnerable to near total losses.
Price/Market Manipulation: Market manipulation is a classic violation of securities laws. Unscrupulous individuals may artificially increase the price or volume of a stock in order to attract other investors. One example is “banging the close”, in which orders are sent to the market at the end of trading in order to influence the closing price. Another is a form of microcap stock fraud where a party issues false and misleading press releases and statements to investors to pump and dump the stock. Again the variations are immense and you should consider reporting any conduct that improperly manipulates the price of securities on the market.
Immigrant Investor Fraud: There have been several cases over the past few years where investments were solicited internationally with promises of improved chances at immigration. These solicitations may be illegal either when done by an unregistered brokerage company or when they involve material misrepresentations to the investors.
Public Pension Funds: The improper solicitation of public pension fund business and inadequate disclosures of fund fees by private equity is another hot area for securities investigations.
Insider Trading & Insider Disclosures: The SEC has prosecuted both individuals trading on inside information and individuals tipping others to material, nonpublic information who then trade based upon the prohibited information. Suspicious transactions such as the purchase of call options in close proximity to earnings or merger announcements may garner close scrutiny. The SEC has also pursued successful enforcement actions against high-level corporate executives or officers who fail to follow or attempt to circumvent rules regarding stock ownership disclosure and trade reporting. The SEC is also investigating activist investors for collusive alliances. Investors who agree to jointly vote securities are required to disclose such arrangements and declare a group if they own at least 5% of a company’s shares of stock or are soliciting other shareholder votes.
Insider Trading via Hacking: There have been several cases now of hackers targeting company email accounts or unpublished press releases in order to gain nonpublic information to use for trading.
Hacking Corporate Disclosures: Corporations are required to disclosure insecurities or hacking incidents that may have a material effect on their accounting.
Market Access (Out of Control Computer Programs): Traders and brokers are required to have adequate internal controls in place to ensure that they do not cause a market disruption with their electronic trading.
Data Reporting: Brokers and traders are required to accurately report certain data to the exchanges about their trades. The failure to report this data correctly can result in monetary sanctions.
Regulation SHO: Trade execution platforms must use up to data easy to borrow lists in the short sale of securities. Platforms cannot delay the listing of stocks as hard to borrow out of convenience.
Front Running: This technique is typically used by a broker who profits from sending orders into the marketplace to trade ahead of a large client order. The individual trading ahead profits because the large order is likely to move the market or acts as a safety net to prevent any risk from the trades made with knowledge of the impending larger order. It may also apply to high frequency traders, who have been accused of pinging to acquire the nonpublic information.
Best Execution: Brokers are legally required to seek the best execution reasonably available for their customers’ orders. To comply with this requirement, brokers evaluate the orders they receive from all customers in the aggregate and periodically assess which competing markets, market makers, or electronic communications networks (ECNs) offer the most favorable terms of execution. The National Best Bid and Offer (NBBO) requires that customers receive the best prevailing ask price when they purchase securities and the best prevailing bid price when they sell securities.
Spoofing / Pinging: The Dodd-Frank Act explicitly made spoofing, the practice of bidding or offering with the intent to cancel the bid or offer before execution, a violation of the Commodity Exchange Act. Yet, reports suggest that many traders continue to use electronic algorithms to quickly place and cancel bids and offers in the marketplace. It would not be surprising if the arrest of Navinder Sarao for manipulating the futures market through electronic trading in connection with the 2010 flash crash is the beginning of a series of larger enforcement actions against the high frequency trading industry.
Bonds, Mutual Funds & ETFs: This may be the next frontier for corporate wrongdoing. Pretty much every expert on the market in July 2015 agreed that problems with bond market liquidity had the potential to devastate the economy. If misconduct arises in this area, it could be the next mortgage fraud scandal. There are numerous potential issues already, from misleading statements by issuers and underwriters of municipal bonds to concerns that funds are holding too many illiquid assets to meet redemption requests.
Structured Notes: Commissioner Luis Aguilar told a securities conference that the SEC will bring more enforcement actions against companies selling complex securities and structured products, including equity-indexed annuities, leveraged and inverse ETFs, reverse convertibles, alternative mutual funds and structured notes, to less sophisticated retail investors. The talk highlighted structured notes as one area that has become popular and targets retail investors. According to the data, 99% of purchasers in the $45 billion market are retail investors. A recent Investor Bulletin from the Commission pointed out that the complexity of the payoff structures, opaque pricing, high fees, illiquidity and other risks makes it difficult to believe that investors who are not highly trained financial professionals can understand them with the current disclosures.
Pre-IPO Tech Trading: Hedge funds and venture capitalists are being probed by the SEC for trading shares off exchange in emerging pre-IPO tech companies.
High Frequency Trading: Regulators have only recently begun to fine market participants for misconduct in this area and we expect there will be a great deal of rules coming in the future. When HFTs are engaged in wrongdoing listed in this guide, expect them to be investigated by securities regulators.
Dark Pool Disclosures & Conflicts of Interest: Dark pools seem to increasingly be the target of investigations by securities regulators. SEC Chair Mary Jo White expressed concern about the lack of transparency in dark pools in a speech. There are concerns about them in conjunction with possible material misrepresentations to customers concerning the operation of the dark pools.
Exchange Misconduct: The SEC also investigates violations of the rules by exchanges, and have sanctioned exchanges for failure to enforce Commission and exchange rules, inadequate investigation of compliance problems and unauthorized accommodations for member firms. When exchanges implement new businesses practices, or modify existing ones, without putting in place an exchange rule where one is required, they can also be subject to sanction. Rewards may be limited in this area because of the eligibility requirements for whistleblowers.
Virtual Currency Manipulation / Bitcoins: Even though some believe that virtual currencies like the bitcoin are the “Wild West” of financial products, the SEC and CFTC both regulate aspects of this digital currency. Violations of the law involving investment offerings, bitcoin exchanges, and other activities may garner the attention of regulators because of the timeliness of the product and a desire to prevent individuals and business from taking advantage of the public in a new and popular area for currency transactions.
The Foreign Corrupt Practices Act (FCPA): The Foreign Corrupt Practices Act prohibits gifts, bribes and otherwise improper payments to foreign government officials to obtain or retain business. A public company may be found to have violated the FCPA even if the conduct is done by certain third parties or through an intermediary. The FCPA also prohibits inaccurate books and records, as well as insufficient internal controls to detect corruption and prevent it from being included in financial statements. This has been the subject of several enforcement actions and SEC representatives believe it will be a fertile ground for whistleblowing. FCPA violations occur all over the world with recent successful litigation stemming from conduct in India, Korea, Japan, China, Nigeria and Brazil.
Nepotistic Interns (FCPA): The SEC has been investigating the Wall Street hiring of family members of powerful individuals at sovereign wealth funds and state owned enterprises as FCPA violations.
Iran (FCPA): The nuclear accord opens the way for US and international businesses to establish business relationships in Iran once the sanctions are lifted. Given the size of the potential market, companies will be rushing to secure investments and the fastest way for them to do so will be to pay people with local ties to bribe officials.
Anti-Money Laundering / Bank Secrecy Act / Export Controls & Sanctions: Certain aspects of cases concerning violations of these laws may interest the SEC. Whistleblowers can also report the failure to comply with Title 31 concerning anti-money laundering to FINCEN and earn a reward up to $150,000.
Other: Above are some examples of the more frequently occurring violations of federal securities laws that may be brought to the attention of the SEC through the whistleblower program. However, it is not an exclusive list and the next generation of securities fraud may not be listed on here at all.
We Will Represent Individuals at All Stages
1. Initial Discovery & Investigation: If you suspect fraud or misconduct, we can help evaluate whether it violates the law and identify what evidence you would need to successfully report it to the U.S.
2. Pre-Internal Reporting: We can help evaluate your options and determine whether the law requires you to internally report your suspicions of corporate wrongdoing as well as discuss the likelihood of retaliation.
3. Post-Internal Reporting: Many companies ignore whistleblowers, unfortunately. We will help you take your information to the U.S. Government if your internal report has failed.
4. Post-Retaliation: We help whistleblowers who are facing or who have suffered retaliation, whether still working for the company or following termination.
5. After Securing Other Employment: Some whistleblowers now prefer to blow the whistle on corporate wrongdoing as they are leaving. We understand the advantages to this method. We can help evaluate whether you have the evidence needed to blow the whistle.
6. Third-Parties: Experts, consultants, clients, contractors and others with knowledge of industries are now blowing the whistle. There are special issues for those who do not have insider knowledge about wrongdoing from working there. We can help you navigate them.
7. After External Reporting: Some of our clients have already reported to the government before contacting us. Although we prefer to be a part of the process from start to finish, we will evaluate your case to see whether we can add value to your existing submission. whether you have already filed a whistleblower tip or have gone through another government agency.
8. Award Determination Process: The SEC allow individuals to submit tips and many people do so on their own. However, some individuals submitting tips while unrepresented recognize that an attorney can add value in making the case for an award and a higher percentage at the conclusion of the process.
We have written extensively about SEC enforcement actions, the whistleblower program and reward announcements on our blog. For past coverage and the latest information about the SEC, please click here.