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!

SEC’s Whistleblower Rewards Program – Who are the Real Bounty Hunters?

The U.S. Securities and Exchange Commission (“SEC”) made its first payout of $50,000 to a whistleblower since a program was created last year to reward people who provide regulators with evidence of securities fraud. 

The SEC set up a whistleblower program in August 2011 to reward individuals who provide evidence of securities law violations which lead to SEC sanctions of more than $1 million. The program was authorized in the 2010 financial-regulation overhaul. Potential awards could range from 10 percent to 30 percent of the money collected. 

The unnamed whistleblower helped the SEC bring an enforcement action that resulted in more than $1 million in sanctions.  The SEC rewarded the anonymous whistleblower 30% of the recovery.  So far the SEC has only collected $150,000 but as more of the sanctions are recovered, the whistleblower’s reward will increase.  The SEC believes the announcement of its first reward payout will give the program a boost.  However a second person in the same matter was denied a whistleblower reward because the information provided by the person did not lead to or significantly contribute to the enforcement action. 

While the program is supposed to encourage individuals to come forward with information relating to securities fraud, Peter Sivere, a former compliance officer at JPMorgan Chase had a much different experience with his efforts to “do the right thing.”  To be clear, the story of Peter Sivere occurred from 2003 to 2005 before the whistleblower program was adopted by the SEC. 

During an SEC investigation of whether a New Jersey hedge fund, a big client of JPMorgan, was late trading mutual funds, Sivere was allegedly terminated from JPMorgan for turning over emails to the SEC and expressing concerns that JPMorgan was not fully cooperating with the investigation.  The emails indicated that JPMorgan had provided a $105 million line of credit to the hedge fund that it used to facilitate its late trading in mutual funds.  Late trading occurs when one buys shares at the day’s final price even though the market has closed. 

Before his termination, Sivere contacted SEC lawyer George Demos by email seeking to become a whistleblower and inquiring whether he would be able to collect a reward for his information.  Even though Demos informed him that a “bounty” would not be available, Sivere turned the emails over to the SEC anyways.  Sivere was later fired and JPMorgan reported on his U-5 that he was terminated for “accessing e-mails without authorization.”  JPMorgan later agreed in a settlement to amend his U-5 to state his employment ended as a result of a “disagreement regarding the scope of [Sivere’s] authority.” 

Sivere reported the alleged retaliation to the Occupational Safety and Health Administration (“OSHA”) and it was discovered during their investigation that Demos informed JPMorgan’s lawyers that Sivere had asked the SEC for a whistleblower bounty and Demos even encouraged JPMorgan to use this information in the lawsuit between Sivere and JPMorgan.  While Demos’ behavior violates SEC protocol, and the allegations were confirmed by the SEC’s inspector general, no disciplinary action was taken against Demos.  In fact, Demos held his position with the SEC until 2009.
 
More recently, a whistleblower’s identity was inadvertently revealed during an SEC investigation of Pipeline Trading Systems, LLC when an SEC lawyer shared the whistleblower's notebook with one of Pipeline’s executives.  The executive recognized the whistleblower's handwriting.  The whistleblower, Peter Earle, was a former employee of one of Pipeline’s trading affiliates and expressed his disappointment in the SEC’s failed efforts to keep his identify private.

The new whistleblower rewards program is supposed to guarantee anonymity, yet the SEC has scars from the past which might be counter intuitive for the program, especially since no action was taken against Demos for the confidentiality violation. 

If you think you have information that may lead to a recovery under the whistleblower program, contact the attorneys at Cosgrove Law Group, LLC to have your rights represented and your identity protected.

Diamond Foods Announces Audit Committee Findings in Response to SEC and Federal Investigations

Diamond Foods is facing a formal investigation by the SEC and federal prosecutors as to whether certain financial practices involved criminal fraud.  The investigation revolves around how the company made crop payments to walnut growers.  In response, Diamond engaged an audit committee to conduct an internal inquiry into the allegations.    

Diamond made sizable payments to its walnut growers in September that they claimed were an advance on their 2011 crop.  However, three walnut growers allege that they told Diamond that they did not intend to deliver their 2011 crops to Diamond but were assured by company representatives that they could cash the checks anyway.  Some critics believe the payments were used to inflate last year’s earnings by shifting costs into the current year.  Diamond’s fiscal year ends in July so the September payment shifted the costs into the 2012 accounting year.  Diamond contended that these “momentum payments” were made in an effort to optimize cash flow for growers and initially denied that these payments were compensation for last year’s crop.   

Because of the investigation, Diamond has announced that its plans to acquire Pringles from Proctor & Gamble are on hold.  Diamond planed to pay most of the purchase price by issuing its stock to Proctor and Gamble shareholders.  The deal, which was initially valued at $2.35 billion, is now valued at $2 billion based on Diamond’s current stock price.  The company’s stock price was trading around $96 in September are now trading around $33. 

Thus far, Diamond has cooperated fully with the investigation.  The investigation has also opened Diamond up to several securities class-action lawsuits.     

More recently, the audit committee for the company conducted the internal probe on the accounting treatment of the walnut payments.  It concluded that approximately $20 million “continuity” payments made to growers in August, 2010 and approximately $60 million “momentum” payments made in September 2011 were not properly accounted for in the correct periods.  Furthermore, the audit committee identified material weaknesses in Diamond’s internal control over financial reporting. 

In response to these findings, Diamond’s Board of Directions has taken several corrective actions such as appointing a new Chief Executive Officer and Chief Financial Officer.  Diamonds will restate its 2010 and 2011 financial statements. 

Investigators are now likely to review Diamond’s accounts very carefully because accounting violations are rarely an isolated incident.  Diamond is also likely to face a civil enforcement action by the SEC for failure to maintain accurate books and records and failure to maintain adequate internal controls.