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.

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[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.

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^[1] https://www.investopedia.com/terms/p/pumpanddump.asp#:~:text=Pump%2Dand%2Ddump%20is%20a,to%20a%20higher%20share%20price.

^[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.

^[4] https://www.law360.com/articles/1282330/attachments/0

SEC PAYS WHISTLEBLOWER AWARD OF $50 MILLION -- ITS LARGEST EVER

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.