OBTAINING WHISTLEBLOWER STATUS THROUGH YOUR BROKER-DEALER’S COMPLIANCE DEPARTMENT

A financial adviser that provided a tip through his broker-dealer’s compliance department recently received a whistleblower award of $4.5 million.  In late May, the SEC accepted the Claims Review Staff’s Preliminary Determination recommending that hefty award.  

The SEC’s analysis hinged on the application of Exchange Act Rule 21F-4: whether “original information submitted by a whistleblower led to the successful enforcement of a judicial or administrative action.”  Rule 21F-4(c)(3) even allows for whistleblower status if you “reported [the] original information through [your broker-dealer’s] internal whistle blower, legal or compliance procedures for reporting allegations of possible violations of house before or at the same time of law before or at the same time to reported them to the Commission . . . You must also submit the information the Commission . . . within 120 days of providing it to the entity.  (Emphasis Added). 

This last clause is your key takeaway from this blog.  If you provide original information to your compliance department but fail to follow through with the Commission, you might lose out on millions of dollars!  It is also important to understand that 1) you are taking a risk, 2) the compliance or legal department might not investigate and report to the SEC without a push, and 3) Rule 240 is an extensive fine-print maze of definitions and procedures.  In sum, you should obtain legal counsel to help you evaluate your “original information” and guide you through a complicated process that can take years to run its course. 

There are many attorneys out there claiming on their websites that they represent whistleblowers. But if you are a financial advisor or investment adviser what you need is an attorney that has experience representing whistleblowers in the financial industry. Food for thought.

Food for Thought

Food for Thought:  To be updated periodically with quotes, excerpts, and tidbits!


An article on U-5 Defamation:  http://www.sfmslaw.com/Securities-Regulation-Corporate-Governance/U-5-Defamation.shtml

“The Supreme Court in an Interdependent World”

(The Wall Street Journal, 9.15.15; A7)

The Supreme Court Goes Global:

“Legal problems – human rights violations, threats to national security, computer hacking, environmental degradation, corporate fraud, copy-right infringement – surface beyond our borders and may become potential threats to us at home...the frequent presence of foreign-related issues in the court's cases has little or nothing to do with the current political debate about whether American courts, including the Supreme Court, should refer in their opinions to decisions of foreign courts. Judicial reference to foreign law and practices do not reflect the ideologies of justices – rather they reflect a world in which cross-boundary travel, marriage, commerce, crime, security needs and environmental impacts have become prevalent.”

- Supreme Court Justice Stephen Breyer

Change is the law of life. And those who look only to the past or present are certain to miss the future.

- John F. Kennedy

●●●●●●●●●●●●

A Texas attorney was sentenced to 35 months in prison and the surrender of his law license for misleading investors with artificially inflated stock prices of a sham company advertised to be on the verge of launch.

Martin Cantu and his partner Jason Wynn allegedly engaged in a $3 million conspiracy, netting about $550,000 and $2.5 million, respectively. Cantu still faces an $800,000 penalty from the U.S. Securities and Exchange Commission. [i]

Cantu pled guilty to conspiracy, but was also found guilty of securities fraud for his role in the unregistered stock offering of a web-based company that was never in a position to fulfill its promises to investors. After selling 10 million shares for one penny each, Cantu received 300,000 shares at no cost, just prior to a publicity campaign that included advertising in the USA Today newspaper.[ii]

Three million mailers were also distributed touting the company’s imminent launch, with promises of near limitless returns on the investment. In addition to the increased demand resulting from this publicity, the co-conspirators utilized brokerage accounts to buy shares and create the illusion of demand, while maintaining an inflated higher share price.[iii]

After accepting a plea deal, Wynn was sentenced to five years of probation and $425,000 in restitution. This does not include the $11 million SEC penalty he faces.[iv] Generally speaking, attorneys should never get personally involved with unregistered offerings.

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[i] Orzeck, K. (2015, December 15) Texas Atty Gets 3 Yrs. For Duping Investors in $3M Web Scam [electronic format]. Retrieved from http://www.law360.com/articles/738329

[ii] Ibid.

[iii] Ibid.

[iv] Ibid.

Is Broker/Trader liable for what Broker-Dealer approves?

There is an interesting albeit short article in this month's edition of Corporate Counsel regarding Goldman Sachs and its very own "Fabulous Fab". As you may recall, Goldman settled with the SEC recently for $550 million (without admitting wrongdoing) for its role in allegedly selling a mortgage backed securities vehicle to its customers that Goldman allowed a hedge fund to both assemble and bet against. Goldman's trader Fabrice Tourre became infamous for not only reducing to writing his callous appreciation for the irony of Goldman's position, but also for dubbing himself "Fabulous Fab." Now wonder pride is one of the 7 deadly sins. But I digress. General Counsel notes that one of the defenses Fabulous is asserting in response to the SEC's claims against him is that the product and procedures at issue had been vetted and approved by Goldman's compliance and legal departments. General Counsel oddly characterizes this as a "novel defense." I'm not sure it is novel or without merit. Indeed, it reminds me of a case I worked on where I represented the former brokers of a large regional broker dealer that was sued by a state regulator for its role in the traditional sale, but unexpected liquidity demise, of Auction Rate Securities. The regulator sued the broker-dealer and its trading desk employees for failing to train and disseminating inaccurate information regarding the risks and characteristics to its sales force/registered representatives. But it also simultaneously sued the allegedly untrained and inadequately informed representatives that sold the product to investors (why chose a coherent theory of liability unless you have to?). Of course, as predicted, the regulator dismissed the suit against the individual brokers--one months away from dieing from cancer--once the broker-dealer coughed up millions of dollars. So while Fab's arrogance may provide some insight in to a culture on Wall Street that needs to evolve for the better, his affirmative defenses aren't so novel, and may just have some merit. It is one thing when a broker disregards compliance and legal and engages in negligent or self-serving conduct, but it seems to be an entirely different story when he or she is merely selling a product that has structural deficits literally designed by his employer and principle, including legal and compliance experts. Stay tuned.