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Securities Law Violations & the SEC Whistleblower Program

The mission of the U.S. Securities & Exchange Commission (SEC) is twofold – to protect investors and to maintain the integrity of the securities markets. In response to the public outcry over the corporate and financial industry scandals which followed the 2008 Financial Crisis, Congress vastly improved the SEC’s ability to achieve these goals. It authorized, as part of the Dodd-Frank Act, the establishment of the SEC Whistleblower Program.

SEC Whistleblower Program Basics

SEC WhistleblowerUnder the rules of the SEC Whistleblower Program, individuals who voluntarily provide the SEC with “original information” regarding violations of United States securities laws that leads to successful SEC enforcement actions resulting in monetary sanctions of more than $1 million are eligible to share in the recovery. In particular, they may be entitled to receive 10-30 percent of the monetary sanctions collected.

Thus far, the program has been a tremendous success, resulting in the recovery by the SEC of more than $2 billion in monetary sanctions, of which some $500 million has been returned to injured investors, and the award of some $387 million to whistleblowers. The SEC takes the achievements of the program as a point of pride and has stated that it is having a “significant positive impact” on the protection of markets and both sophisticated and Main Street investors.

How SEC Whistleblower Tips are Submitted

Whistleblowers are required to submit their information through the SEC’s Tips, Complaints, and Referrals Intake and Resolution System on Form TCR. Submissions should be timely, specific, supported by evidence if possible, and include a detailed description of the relevant activities, practices, or transactions that the whistleblower avers violate the securities laws. It is generally advisable to obtain the assistance of an experienced whistleblower attorney to help prepare your TCR submission.

To be “original” for purposes of the SEC Whistleblower Program, the information that the whistleblower provides must not already be known to the SEC. While most tips consist of factual information derived from nonpublic sources, tips may also be based on the whistleblower’s analysis of information that is publicly available. The SEC has made clear, however, that, to be eligible for awards, analysis-type whistleblower submissions must include “evaluation, assessment, or insights” surpassing what would be “reasonably apparent” to the SEC based on the publicly available information itself.

The Ability to Proceed Anonymously

Significantly, the SEC whistleblower program enables whistleblowers to proceed and collect their rewards anonymously. Submissions to the SEC need not disclose the identity of the whistleblower provided that the whistleblower is represented by an attorney.

Claiming Awards Under the SEC Whistleblower Program

It is important to know that SEC whistleblower awards are not issued automatically. Instead, the SEC posts Notices of Covered Actions on its website – which whistleblower attorneys regularly monitor – whenever potentially eligible enforcement actions are resolved. Applications for whistleblower awards must then be filed with the SEC within 90 days.

The rules of the SEC whistleblower program provide for whistleblower awards in the amount of 10-30 percent of amount collected. The specific percentage is determined by the SEC in its discretion and depends on a series of factors. These include the significance of the information that the whistleblower provided, the extent to which the whistleblower assisted the investigation, and the enforcement interests at stake.

Notably, a whistleblower can be eligibility for an award even if the information they provided was not what caused the SEC to open the relevant investigation. That a whistleblower’s information contributed to an already pending investigation can be sufficient to be eligible for an award.

Who are SEC Whistleblowers?

SEC whistleblowers typically reside in the United States but need not be. In fact, the SEC has received submissions from whistleblowers in dozens of foreign countries, including, primarily: Australia, Canada, China, Chile, Germany, India, Russia, South Africa, and the United Kingdom.

There is also no requirement that a whistleblower be an insider or employee of the financial institution, corporation, or other alleged violator that is the subject to the tip. While this is usually the case, actionable tips have also been received by the SEC from victims of the alleged securities law violations and individuals working elsewhere in the same industry as the alleged violator. Tips have also been received from individuals who learned of the misconduct in question through a personal relationship with the violator or who simply have expert knowledge of the industry.

Types of Securities Law Violations That Can Form the Basis for an SEC Whistleblower Tip

The securities laws are convoluted and complex, and any violation can form the basis for an SEC whistleblower tip. However, whistleblower submissions to the SEC generally involve these common types of violations:

→ Corporate Disclosures and Financials

Corporate Disclosure and Financial violations relate to allegations that a corporation or other issuer of securities filed disclosures or financial statements with the SEC that contained materially false or misleading statements or omissions.

→ Offering Fraud

Offering Fraud occurs when a company offers securities for sale by means of offering documents that contain materially false or misleading statements or omissions. The offering in question can involve equity, debt, or hybrid securities. It can also involve securities that are registered with the SEC and traded on an exchange or that are exempt from registration and sold to accredited or institutional investors in “private placements.” It can also involve municipal securities, i.e., debt securities issued by state and local governments and public authorities.

→ Market Manipulation

Market Manipulation is a catch-all term encompassing various methods of artificially distorting or rigging the supply or demand of a particular security or market with the goal of misleading investors. It includes Pumping and Dumping (hyping a company’s stock through false or misleading statements, then abruptly selling the shares), Bear Raiding (selling a target stock short while disseminating false rumors about the company), Painting the Tape and the related practices of Wash Trading and Matched Orders (coordinated purchases and sales for the purpose of influencing a security’s price or to create the false impression of demand, trading activity, or volume), and Spoofing (a trader placing orders with the intent to cancel the order prior to execution).

→ Insider Trading

Insider Trading consists of buying or selling securities while in possession of material nonpublic information about the securities, the company, or the issuer. Most insider trading violations are committed by corporate insiders. However, anyone privy to nonpublic information who has a legal duty to keep that information confidential may be subject to insider trading liability. This can include individuals (tippees) who receive information from others (tippers).

→ Trading & Pricing

Trading & Pricing refers to a number of illegal trading tactics, including Late Trading (recording mutual fund trades after the fund has already declared its net asset value for the day), Marking the Close (trading moments before the end of a session in order to influence the closing price), Front Running (trading ahead of customers or other investors while having advance knowledge of their orders), Dark Pool Violations (misrepresenting to investors that high-frequency traders are being excluded from a dark pool when, in fact, they are being allowed to participate), Freeriding (buying and then selling a position in a cash account without first depositing the funds necessary to settle the purchase), Stock Parking (selling securities to a friendly trader at another firm with an agreement to repurchase the position at a later time for the purpose of evading regulatory or disclosure requirements that would have applied if the securities had remained on the seller’s books), Naked Shorting (short-selling without owning the stock or ensuring that it is available to borrow), and Churning (excessively trading a discretionary customer account for the purpose of generating commissions).

→ Violations of the Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA) generally prohibits companies from paying, offering, or arranging to pay bribes to officials of foreign governments to secure business. The bribe need not be in the form of money but can be anything of value. The statute also imposes certain corporate accounting requirements to prevent violative payments from being concealed from auditors, shareholders, and the SEC.

→ Unregistered Offerings

Unregistered Offerings. Under the federal securities laws, securities offerings and sales must be registered with the SEC unless they meet an exemption. The exemptions from registration are set forth in Regulation D of the Securities Ac. It is a serious violation to sell unregistered securities without meeting all the requirements and conditions for an exemption.

"I can't say how lucky I feel to have found Mark Strauss to represent me in my whistleblower case. He earned my trust and put me at ease from day one. He guided me through every step, and his work ethic and dedication were amazing..." Mehmet K., Istanbul, Turkey, client
"This is to thank you for the settlement and relator award .... Thank you for all you do to bring more justice in a world where it's needed so badly." David D., Hong Kong, client
"I was referred to Mark Strauss for my whistleblower case by another respected attorney. Mark's professionalism and expertise were apparent from our first meeting and throughout the handling of the case. It was a long process, but he was at my side the entire time, went above and beyond, and got a great result. I recommend him highly." Ken K., Great Neck, N.Y., client
"I enjoyed the argument. This is a well briefed, well argued case, which I don't get all the time. So I express my appreciation to ... counsel ...." Hon. Carla R. Bebault, United States District Court Judge, District of Minnesota
"This has been an extraordinarily well-tried case. I want to thank counsel ...." Hon. Edgardo Ramos, United States District Court Judge, Southern District of New York
"Mark is a zealous advocate for justice. His dogged efforts have led to substantial recoveries for his whistleblower and securities litigation clients. If you are looking for an attorney who is not afraid to face Goliath, Mark is the one." Christopher Studebaker, Esq., former colleague