Securities Fraud

Overview

The mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. The breadth, speed, and complexity of today’s markets make those responsibilities more of a challenge than ever before. To carry out its critical mission, the SEC needs the assistance of individuals with knowledge, insight, and real time information about ongoing financial frauds. To do its job, the SEC needs whistleblowers.

The SEC Office of the Whistleblower

In the aftermath of the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which, among other landmark changes, created the Office of the Whistleblower at the SEC. The creation of an office within the SEC dedicated to whistleblowers was a practical response to the reality that many of the largest, most complex, and potentially damaging financial frauds could only be exposed with the assistance of individuals possessing inside information. The mission of the SEC Office of the Whistleblower is to encourage individuals (or groups of individuals) with knowledge of significant financial misconduct to come forward to the SEC. That includes individuals who are not U.S. citizens and individuals with knowledge about fraudulent activities taking place outside of the U.S. if those activities undermine the integrity of U.S. financial markets.

The SEC offers important protections and financial incentives to whistleblowers, including the option to submit information anonymously through their attorneys and safeguards against employer retaliation. In cases that result in monetary sanctions of more than $1 million, the SEC offers eligible whistleblowers awards between 10% and 30% of the total monetary sanctions collected. Over its relatively short history, the SEC Office of the Whistleblower has set new records each year for the size of the financial frauds it has exposed, the dollar amounts of sanctions it has helped the SEC recover, and the value of the awards it has shared with individual whistleblowers.

All investors owe a debt of gratitude to the men and women who have come forward to help uncover and stop false and misleading corporate reporting, fraudulent offerings, destabilizing market manipulations, insider trading, and similar schemes. For its part, the SEC has acknowledged the importance of those same whistleblowers by paying out more than $250 million in awards.

Common Securities Violations

Misuse of client funds, insider trading, and material misrepresentations in earnings calls, investor alerts, or SEC filings are some of the most common violations that have arisen from tips received by the SEC Office of the Whistleblower. Recent awards also indicate that the SEC will use its regulatory and enforcement powers to punish companies which violate the Foreign Corrupt Practices Act by paying kickbacks or bribes to foreign officials, and, in turn, will reward the whistleblowers who help uncover those activities.

Looking ahead, the SEC has begun to devote increased resources to cracking down on kickbacks, bribery, and bid rigging in the nation’s enormous municipal bond finance markets. The SEC has enacted a series of new reporting requirements with the aim of eliminating the ‘pay to play’ atmosphere that has prevailed in the municipal bond industry for decades. We expect that significant future whistleblower awards will be made to individuals who provide the SEC with information on the payment of bribes and kickbacks to city, county, or state officials in connection with the selection of firms involved in underwriting and marketing public bonds.

Successful SEC Whistleblower Cases and Awards

In March 2018 the SEC Office of the Whistleblower announced the largest single award in its history: a $50 million award shared between two whistleblowers whose information triggered an SEC enforcement action that resulted in Merrill Lynch paying $415 million to settle charges it had failed to safeguard customer assets and had misused customer funds to generate profits for the firm. In announcing the historic awards, the Chief of the SEC’s Office of the Whistleblower made clear: “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”

Other examples of recent successful SEC whistleblower cases include:

  • A $2 million award made under the SEC’s “safe harbor” provision to a former company insider who first reported the fraud to a different federal agency before providing the same information to the SEC.
  • A $4 million award to an overseas whistleblower whose information and assistance led to a successful SEC enforcement action.
  • A $4.5 million award to a whistleblower who reported violations of the Foreign Corrupt Practice Act internally and reported the same information to the SEC within 120 days.

State Securities Whistleblower Programs

Taking a page from the SEC’s successful whistleblower office, individual states are beginning to establish their own programs to encourage whistleblowers to help protect the public by reporting securities violations. Both Indiana and Utah have already established their own state whistleblower programs. Efforts are underway in New York and New Jersey to enact similar statutes.

Successful Cases and Awards

In 2016, the Indiana program made a $95,000 award to a whistleblower who provided information on improprieties at the asset management unit at JPMorgan Chase. JPMorgan Chase eventually paid $950,000 to the State of Indiana for activities that Indiana regulators described as “outside the standards of honesty and ethics generally accepted in the securities trade and industry.”

How to Report Securities Fraud

If you are considering submitting a tip, complaint, or referral to the SEC, we urge you to contact us for a free, confidential consultation to discuss the SEC whistleblower process and review all of your options. Our clients have sometimes elected to submit their tips, complaints, and referrals to the SEC anonymously, an option available to individuals who are formally represented by counsel. We can explain the filing process and the additional steps the SEC will take to protect the confidentiality of whistleblowers and their information.

The most powerful protections against employer retaliation are only available to employees after they formally report misconduct directly to the SEC. Our attorneys know the best strategies for protecting our whistleblower clients from harassment, demotion, or retaliation. We frequently work with leading employment attorneys from across the country to offer our clients the maximum protection available under the law.

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