Tuesday, June 16, 2020

Are SEC Whistleblowers Really Safe Anymore?

Some federal courts have ruled that Whistleblowers are not protected from retaliation if they only make an internal report to their employer, rather than one to the SEC.  And a state district court recently ruled that a post-employment whistleblower’s submission to the SEC is subject to civil discovery even though there was no whistleblower retaliation claim pending. 

Contrary to the CFR and case law, the state court explicitly stated the whistleblower’s submission as a former employee is “too late” for whistleblower protections.  This, of course, actually encourages every employer to sue their former employees to gain knowledge and access to confidential submissions, even when the former employee isn’t claiming a retaliation discharge (because the employer didn’t even know about the submission prior to termination.)[1] The problem with this logic is that any such retaliation claim must be brought in federal court.  Moreover, federal regulations prohibit any type of harassment of or interference with even a former employee whistleblower.  If having to share every confidential tip and follow-up communication with the SEC with the subject of the tip isn’t interference, what is?  Food for thought.

[1] Let the fishing expeditions begin!  

Pump and dump

Author: Max Simpson

The U.S. Securities and Exchange Commission and Federal prosecutors are cracking down on “pump and dump” schemes designed to mislead securities regulators and defraud investors. A pump-and-dump scheme is generally understood to be any plan to boost the price of a stock based on false, misleading, or greatly exaggerated statements by individuals with an established position in the company’s stock or their proxies.[1] The perpetrators then sell their positions after the hype has led to an increase in the share price.[2] Essentially, the promoters manufacture a micro bubble by touting[3] the imminent success of a company while concealing their ownership and/or knowledge that their representations are untrue. Once investors pour in, “pumping” the stock price to new highs, the fraudsters sell their established position in the company, “dumping” the stock at its peak. They make a handsome profit, but once the company is unable to follow through on the hype, the microbubble pops and the stock price falls to new lows.

In recently unsealed court filings, the SEC brought a civil complaint against five Canadian citizens who allegedly used a web of offshore entities to buy stocks while hiding their insider ownership and evading securities rules.[4] The group used email promotions and cold calls to inflate the stock price. The Defendants then dumped their shares when the stock was at its peak, siphoning millions of dollars off the new investors. The five defendants "defrauded ordinary investors by misleading them to believe that they were purchasing shares in the ordinary course of the market, when — in reality — the shares being offered were being dumped by company insiders," the SEC said.

Criminal charges have also been levied against one of the defendants who prosecutors say fraudulently took control of a fake clothing company using an alias/alter ego, listed the company for sale on the market and profited from the sale of its shares. The company initially marketed itself as a maker of “anti-aging health and beauty products”. By late 2019 the company had shifted to “wearable tech” selling cold weather clothing but reported no sales according to the criminal complaint. Per prosecutors, the company promoted itself as having “the possibility to manufacture masks at some facilities.” A clear attempt to capitalize on the worldwide shortage of personal protective equipment during the COVID-19 pandemic. However, per the SEC the company has no inventory, revenue, or assets.

The SEC has identified one of the civil defendants as the ringleader who arranged transactions through several shell companies to avoid public registration statements that could have tipped investors off to the shares being dumped by the insiders.

Even during the COVID-19 pandemic, federal regulators are continuing to investigate and enforce rules designed to protect investors and prevent foul play. A federal crackdown on these illegal activities highlights the need for investors to remain vigilant when deciding how to invest their wealth. If you believe you have been defrauded by false promotions related to stock purchases or have been pulled into a “pump-and-dump” scheme, the experienced attorneys at Cosgrove Law Group, LLC available to discuss your situation.

[2] Id.
[3] This commonly occurs through press releases, cold calls, and advice posted on investing message boards. In some instances perpetrators use third party proxies or shell companies to publicize the stock.

Monday, June 8, 2020


The U.S. Securities and Exchange Commission awarded nearly $50 million to a whistleblower – its largest-ever sum to a single person in a case where someone who gave firsthand information about a company’s misconduct resulted in a large amount of money returned to harmed investors. The SEC said in an order that the unnamed whistleblower’s “information was highly significant,” as it “provided firsthand observations of misconduct by the company that was previously unknown to the staff.” The information “laid out in detail substantial aspects of the scheme and provided a road map for the investigation” that led to the commission’s bringing an enforcement action, the order says. The SEC’s order notes, “Claimant 1’s information allowed the Commission to bring an enforcement action that . . . returned a significant amount of money to those harmed by the company’s misconduct.” 
            The $50 million award eclipses $39 million awarded to an individual in 2018. Two individuals shared an award of nearly $50 million that same year, according to the SEC. “This award is the largest individual whistleblower award announced by the SEC since the inception of the program, and brings the total awarded to whistleblowers by the SEC to over $500 million, including over $100 million in this fiscal year alone,” Jane Norberg, chief of the SEC’s Office of the Whistleblower, said in a statement. “Whistleblowers have proven to be a critical tool in the enforcement arsenal to combat fraud and protect investors.” 
Whistleblowers awards range from 10% to 30% of the many collected when the monetary sanctions exceed $1 million, meaning this case involved at least $500 million in sanctions. Steven Peikin, co-director of the SEC’s Division of Enforcement, said in a recent speech that from mid-March to mid-May, the Commission received 4,000 whistleblower tips, 35% more than the same period the year before. There were 5,200 in all of 2019. 
Cosgrove Law Group, LLC has experience representing confidential SEC whistleblowers, both during and after the end of their tenure of employment. Food for thought.

Tuesday, May 26, 2020


For most of us, our retirement accounts suffered substantial losses with the advent of the Coronavirus pandemic. Should we blame our financial advisers for those losses? Probably not. But some portfolios did, however, suffer inappropriately excessive losses due to unsuitable asset allocations. For example, if you are retired, your portfolio should be allocated to weather almost any substantial economic downturn, whether caused by a cyclical downturn, an event like 9-11, a pandemic, a war, or any of the other myriad of causes for economic crises.

Of course, even the most suitable portfolio will suffer losses in the face of something like a pandemic. But if, for example, you are 70 years old and were in 100% equities with limited sector diversification--you might have a claim to recoup at least some of your losses.  Nobody should have had most of their nest egg invested in American Airlines Group stock!

A recent article in Financial Adviser Magazine predicted a surge in FINRA arbitration filings by investors.  The article noted that claims doubled after the 2008 market crash.  Attorneys quoted in the article predicted increases in claims related to oil and gas investments as well as real estate investment trusts.  Both have taken a heavy hit during the pandemic for obvious reasons.  
The attorneys at Cosgrove Law Group represent financial advisers as well as aggrieved investors. If you suffered substantial losses and you are above the age of 60, feel free to give us a call and we will evaluate your situation.  Likewise, if you are a financial adviser falsely accused of malfeasance, we have experience successfully defending against unfair claims as well. 

Sunday, April 12, 2020

SEC Action Stayed After Indictments

In the summer of 2019, the U.S. Securities and Exchange Commission (“SEC”) brought various claims against investment adviser Don LaGuardia, Jr. (“LaGuardia”) based upon allegations that he, among other things, engaged in improper accounting practices to inflate the value of a private investment fund.[1] But before the year was out, a grand jury returned indictments against LaGuardia as a result of the same alleged securities-fraud scheme.

The United States attorney subsequently moved to both intervene and stay the SEC’s civil action.  The SEC took no position on the motions, but LaGuardia opposed the stay.  Noting that “the overlap of the issues in the criminal and civil cases is a significant factor,” the court proceeded to apply the remaining five (5) of the six (6) factors set forth in Louis Vuitton Malletier S.A. v. LY USA, Inc., 676 F.3d 83 (2d Cir 2012). The court concluded that each factor weighed in favor of a stay, including the fact that an indictment had been returned and both the court’s and public’s interests would be served by a stay. See Opinion here.

The court’s rather efficient disposal of the Defendant’s opposition to the motion is instructive as to the historical preference for stays in the face of post-indictment collateral proceedings.  What is somewhat unusual about this case is the fact that it was Defendant clamoring for a simultaneous two-front war. If you have been the victim of a securities-fraud scheme, we are here to help.  

[1] Click here for SEC Complaint.

Thursday, August 15, 2019

Self-Reporting and Other Extraordinary Assistance Can Reap Benefits

FINRA and other regulators have long purported that substantial cooperation and self-reporting are given favorable consideration during the disciplinary phase after an investigation.

For over 15 years, FINRA (and its predecessor agencies) have encouraged member firms and associated persons to cooperate with them during exams and investigations in a candid manner, promising at least some level of leniency for those who do so. In July of this year, FINRA provided yet another public notice on this topic, Regulatory Notice 19-23 (“RN 19-23”).

RN 19-23 reiterates that pursuant to FINRA Rules 4530(b), 8210, and FINRA's Sanction Guidelines, a certain level of cooperation is expected any time FINRA is performing an examination, inquiry, or investigation. FINRA recognizes “extraordinary cooperation” as cooperation that is beyond “required cooperation” and does one or more of the following:
  1. Shows an acceptance of responsibility and an acknowledgment of the misconduct at issue prior to detection and intervention by a firm or regulator,
  2. Voluntarily employees initiatives to correct the issues prior to detection and intervention by a firm or regulator,
  3. Voluntarily attempts to remedy the misconduct by restitution or another appropriate remedies prior to detection and intervention by a firm or regulator,
  4. Voluntarily provides substantial assistance to FINRA during its examination and/or investigation of the misconduct at issue.
Per FINRA's Sanction Guidelines, “Sanctions in disciplinary proceedings are intended to be remedial and to prevent the recurrence of misconduct.” To the extent that member firms and associated persons show initiative in meeting this goal, FINRA states it will consider that fact when determining what, if any, disciplinary action they issue for misconduct. RN 19-23 provides three examples of FINRA adjusting its disciplinary decision based on what it deemed to be “extraordinary cooperation.”

FINRA also announces certain initiatives from time to time to further its goals of “investor protection and market integrity.” Once example of such an initiative is their “529 Plan Share Class Initiative” where FINRA encouraged member firms to review their 529 plan sales for common supervisory issues. To encourage firms to do this and to report their findings, FINRA stated they would issue settlement agreements for misconduct with no fines to remedy any identified and reported misconduct.

While there is always a risk when self-reporting, there is also a substantial risk in not doing so. Reviewing FINRA's RN 19-23 with counsel versed in securities regulations would be a wise first step in determining if and how you may wish to self-report or self-audit specific activity. Both member firms and associated persons can find themselves in a position where self-reporting should be considered. Taking that step can be daunting. Cosgrove Law Group, LLC has the experience to offer guidance and representation in such matters. Please give us a call!

Wednesday, August 14, 2019

Presidential Candidate Requests Information on Proposed Amendments to FINRA’s Expungement Rules

The Central Registration Depository (“CRD”) and the publicly available online portal, BrokerCheck, comprise FINRA’s registration and licensing system.  Via BrokerCheck, customers, employers, and regulators can access information regarding customer complaints levied against an individual broker.  BrokerCheck plays a key role in allowing customers to evaluate their broker’s track record before making investment decisions.  By the same token, adverse claims can have a devastating effect on a broker’s ability to retain their clients.   

As such, FINRA has established rules for the expungement of certain adverse claims from CRD.  Currently, FINRA Rules 12805 and 2080 control customer complaint expungement proceedings.  Rule 12805 requires that a broker file a Statement of Claim requesting expungement of the customer disclosure.  The panel must:

·    hold a recorded session regarding the appropriateness of the expungement;
·   when applicable, review settlement documents and consider the amount of payments made to any party;
·    provide a written explanation which indicates which of the grounds for expungement under Rule 2080 is the basis for the order; and
·    assess all fees for the hearing against the party requesting expungement.[1] 

Under Rule 2080, grounds for expungement include:

·    the claim, allegation or information is factually impossible or clearly erroneous;
·  the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation or conversion of funds; or
·    the claim, allegation or information is false.[2] 

Following an arbitration award recommending an expungement, the broker must then file a petition in a court of competent jurisdiction to obtain an order confirming the award and directing such expungement.

In December 2017, FINRA published Regulatory Notice 17-42, a proposed amendment relating to requests to expunge customer dispute information.  Regulatory Notice 17-42 would create a roster of arbitrators with specific training and experience to handle all expungement requests.  It would also require:

·       the broker to appear at his or her expungement hearing;
·       unanimous agreement of the three person arbitration panel;
·      expungement requests to be brought within one year of the dispute; and
·       minimum fees for filing expungement requests.[3] 

Since publishing Regulatory Notice 17-42 for public comment, FINRA has not submitted it to the SEC.  As such, the proposed expungement rules are not currently in effect.  In a March 2019 letter to FINRA President and CEO Robert Cook, Senator Elizabeth Warren requested an update on FINRA’s proposed rule changes to its customer dispute information expungement process.[4]  If eventually submitted and finalized, the new process for removing customer dispute information from a broker’s CRD will be more onerous on the broker and likely decrease the frequency with which expungement requests are granted.  Senator Warren’s letter requests, among other things, a timeline for when FINRA will submit Regulatory Notice 17-42 to the SEC for approval.

It is unclear if or when the new CRD expungement rules will be submitted to the SEC and put into effect.  FINRA spokespersons have declined to comment on the substance of Senator Warren’s letter, stating, “We have received the senator’s letter and are working to respond accordingly.”[5] 

Given the uncertainty of the status of FINRA’s expungement rules, it is important that brokers seeking CRD expungement select an attorney capable of guiding them through expungement proceedings under the current and any potential future FINRA rules.  Cosgrove Law Group, LLC has represented numerous individuals in CRD expungement proceedings under the current rules and stands ready to represent brokers in proceedings governed by the proposed amended rules.  If you are seeking expungement of customer complaints from your CRD/BrokerCheck, you may wish to consult with experienced counsel at Cosgrove Law Group.

BY: Max Simpson

[1] FINRA Rule 12805, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=7229
[2] FINRA Rule 2080, http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=8468
[4]Letter, Sen. Warren to Cook, March 21, 2019, https://www.warren.senate.gov/imo/media/doc/2019.03.21%20Letter%20to%20FINRA%20re%20Broker%20Expungement%20Data.pdf
[5] Financial-Planning.com, Warren presses FINRA for answers on expungement reform, https://www.financial-planning.com/news/elizabeth-warren-presses-finra-for-answers-on-expungement-reform