SEC Advocates Broad Construction of Dodd-Frank Whistleblower Protection Provision

      SEC Advocates Broad  Construction of Whistleblower Protection Provision in Dodd-Frank Act The Securities and Exchange Commission (“SEC”) continues to advocate a broad … Continued

SEC Advocates Broad Construction of Dodd-Frank Whistleblower Protection Law

SEC Files Amicus Curiae Brief in Dodd-Frank Whistleblower Retaliation Case The Securities and Exchange Commission (“SEC”) continues to advocate a broad construction of the anti-retaliation … Continued

Investment Fraud Whistleblower Lawyers

The SEC protects investors against investment fraud, and it incentivizes whistleblowers to help expose such fraud and other violations of the federal securities laws. The Dodd-Frank Act, which was signed into law in 2010, entitles whistleblowers to receive a reward if their original information leads to a successful enforcement action with total monetary sanctions of more than $1 million.

Under the SEC Whistleblower Program, a whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC. The Dodd-Frank Act also protects SEC whistleblowers against retaliation.

Since 2012, the SEC Whistleblower Office has issued nearly $1.8 billion in awards to whistleblowers, including awards to our clients.

If you have information that may qualify for an SEC whistleblower award, contact the Director of our SEC whistleblower practice at [email protected] or call our leading SEC whistleblower lawyers at (202) 930-5901 or (202) 262-8959.

All inquiries are confidential. In conjunction with our courageous clients, we have helped the SEC halt multi-million dollar investment schemes, expose violations at large publicly traded companies, and return funds to defrauded investors.

Recently the Association of Certified Fraud Examiners published a profile of Matt Stock’s success working with whistleblowers to fight fraud:

SEC Targeting Investment Fraud

The SEC recently increased staffing in its investment adviser/investment company examination program by 20%, according to OCIE Director Marc Wyatt in a speech. Additionally, the SEC’s 2018 enforcement priorities, 2019 enforcement priorities, and 2020 enforcement priorities indicate the SEC will pay particular attention to:

• Disclosures of the costs of investing;
• Electronic investment advice;
• Wrap fee programs;
• Never-before-examined investment advisers;
• Senior investors and retirement accounts and products; and
• Mutual funds and exchange-traded funds (ETFs).

In addition, the SEC will continue to pay attention to other fraudulent offerings, such as Ponzi schemes and unregistered securities offerings.

Whistleblowers Are Critical to Enforcement of Anti-Fraud Laws

Despite the increased resources, whistleblowers remain a key source of information for the SEC.  Many registered investment advisers are regulated solely by the SEC, and unlike registered broker-dealers, investment advisers have no self-regulatory organization. Further, more than 2,000 new investment advisers have registered with the SEC within the past two years.

Whistleblowers play a vital role in helping the SEC enforce laws when its resources are stretched thin.  As SEC Chair Mary Jo White stated, “[Whistleblowers] provide an invaluable public service, and they should be supported…We have seen enough to know that whistleblowers increase our efficiency and conserve our scarce resources.”

Examples of Investment Company Act Violations

The SEC defines investment companies as any corporation, business trust, partnership, or limited liability company that issues securities and is primarily engaged in the business of investing in securities.  The SEC may bring an enforcement action against an investment adviser for a host of violations, including:

• Failing to disclose fees, charges, and conflicts of interest;
• Failing to maintain adequate written policies and procedures;
• Parking;
• Steering;
• False or misleading advertising; and
• Failing to safeguard customer data.

In the past year, notable areas of fraud that have produced substantial settlements and penalties include:

Failing to Disclose Fees, Charges, or Conflicts of Interest

Section 206 of the Investment Adviser Act of 1940 (IAA) prohibits fraudulent and deceptive conduct, and Section 207 proscribes material misstatements in investment adviser registration applications or reports.  The SEC relies on these statutory authorities to bring enforcement actions when investment advisers fail to disclose conflicts of interest, as well as client fees or charges.

For example, in December 2015, two JP Morgan wealth management subsidiaries agreed to pay $267 million to settle charges that they failed to disclose conflicts of interest to clients.  According to the SEC order, the investment advisory business and the bank invested clients in the firm’s own proprietary investment products without properly disclosing this preference.  In a parallel action, JP Morgan Chase Bank agreed to pay an additional $40 million penalty to the U.S. Commodity Futures Trading Commission (CFTC).  (Note: the CFTC also has a whistleblower program that offers rewards for original information that leads to successful enforcement actions.)

In the SEC’s press release, the Director of the Enforcement Division, Andrew J. Ceresney, stressed the importance of adequate disclosure concerning conflicts of interest.  He stated: “Firms have an obligation to communicate all conflicts so a client can fairly judge the investment advice they are receiving.  These J.P. Morgan subsidiaries failed to disclose that they preferred to invest client money in firm-managed mutual funds and hedge funds, and clients were denied all the facts to determine why investment decisions were being made by their investment advisers.”

Other notable recent actions for failures to disclose conflicts, fees, or charges include:

• In October 2015, three private equity fund advisers within the Blackstone Group paid almost $39 million to resolve allegations they violated Section 206 for failing to disclose accelerated monitoring fees and a conflict of interest. Nearly $29 million was returned to investors;
• In November 2015, Fenway Partners LLP and four of its employees paid more than $10 million to settle charges that it violated Section 206 by failing to disclose a conflict of interest regarding the payment of fund and portfolio company assets to former employees and an affiliated entity.
• In September 2016, WL Ross & Co. LLC paid $2.3 million to resolve charges that it failed to disclose material information regarding fee allocation practices, in violation of Sections 206(2) and 206(4).

Misrepresenting Investments

Lying to investors about how funds will be invested violates several anti-fraud provisions of the federal securities laws.  In January 2018, the SEC obtained approximately $8 million in disgorgement and penalties for a scheme in which an unregistered broker lied to prospective investors by stating that their funds would be invested in a low-risk, private off-shore trading program when in fact the investor funds were misused and misappropriated.  This scheme raised $15.8 million from 26 investors in eight states and entailed sending investors false profit statements and otherwise deceiving investors.

Failing to Maintain Adequate Written Policies and Procedures

Rule 206(4)-7 requires investment advisers to maintain written and policies and procedures reasonably designed to prevent violations of the IAA.  An investment adviser’s failure to do so violates Section 206(4).  The SEC routinely enforces this provision in conjunction with other charges.  Some of the cases above included charges that the investment advisers also violated Rule 206(4)-7.  Other examples include:

• On August 23, 2016, four private equity fund advisers affiliated with Apollo Global Management agreed to a $52.7 million settlement to resolve a variety of charges, including that the advisers violated Section 206(4) and Rule 206(4)-7 by failing to maintain adequate policies and procedures.
• On September 14, 2016, First Reserve Management LP resolved allegations, including that it had violated Rule 206(4)-7, for $3.5 million.

Parking and Steering

Parking and steering schemes may constitute fraudulent practices in violation of Section 206.  Parking is a practice of prearranged trading that benefits one account over another.  Unlawful steering occurs when an investment adviser directs a client to investments that will generate higher fees for the adviser, without disclosing the conflict of interest to clients.  Recent parking and steering cases include:

• In December 2015, Morgan Stanley Investment Management agreed to pay $8.8 million to resolve the SEC’s claim that a portfolio manager colluded with a brokerage firm trader to trade at prearranged prices to the benefit of some client accounts, but the detriment of others.
• In March 2016, three AIG affiliates paid more than $9.5 million to settle charges that they steered clients to investments that put unnecessary charges on the investor but generated an additional $2 million in fees without disclosing the conflict of interest.

False or Misleading Advertising

Section 206 of the IAA, and Rule 206(4)-1 in particular, also regulates investment advisers’ advertisements.  The rule limits testimonials and recommendations and prohibits false and misleading advertising. Past examples of false or misleading advertising/misconduct that led to or arose from the financial crisis include:

• Concealing risks, terms, and improper pricing from investors in CDOs and other complex structured products;
• Making misleading disclosures to investors about mortgage-related risks and exposure; and
• Concealing the extent of risky mortgage-related and other investments in mutual funds and other financial products.

This misconduct resulted in over 200 entities and individuals being charged by the SEC.  More recent examples of false or misleading advertising include:

• In December 2014, the SEC announced that investment management firm F-Squared Investments agreed to pay $35 million for defrauding investors through false performance advertising about its flagship product “AlphaSector.” According to the SEC’s order, virtually “all of F-Squared’s claimed outperformance relative to the S&P 500 Index…is attributable to its data compilation error.” AlphaSector became F-Squared’s largest ETF strategy on the market, with approximately $28.5 billion in assets following the strategy.
• In August 2016, the SEC charged thirteen investment advisory firms a total of $2.2 million for negligently relying on claims by F-Squared Investments that its AlphaSector strategy had outperformed the S&P Index for several years. The Director of the SEC Enforcement Division at that time, Andrew Ceresney, said: “When an investment adviser echoes another firm’s performance claims in its own advertisements, it must verify the information first rather than merely accept it as fact. These [thirteen] advisers negligently passed many of F-Squared’s claims onto their own clients, who were consequently relying upon false and misleading information when making investment decisions.”
• In May 2017, the SEC charged Bryant United Capital Funding, Inc. with inappropriately raising more than $22.7 million from 100 investors across the country by falsely promising investors a risk-free, guaranteed minimum 30% annual returns on the investments. In addition, the fraudster falsely told investors that their funds were placed in a safe escrow account to serve solely as proof of funds to secure a line of credit for the investments.

Failing to Safeguard Customer Data

Morgan Stanley Smith Barney LLC agreed to pay a $1 million penalty to settle charges for its failure to protect customer data.  According to the SEC order, the firm did not adopt written policies and procedures reasonably designed to protect customer data.  Some of the data was hacked and even offered for sale online.

According to PwC’s 2016 crime survey, economic crime has outpaced company preparedness and as a result, U.S. organizations have experienced an increase in cybercrime compared to prior years.  This will continue to be a priority enforcement area for the SEC.  Companies should ensure compliance with federal securities laws, which require investment companies to adopt written policies and procedures reasonably designed to protect customer records and information.

Negligent Conduct Violates the IAA and Scienter is Not Required

Unlike many other laws dealing with fraudulent conduct, the IAA may be violated when the investment adviser is merely negligent, as opposed to specifically intending to defraud a client.  For example, because Section 206(2) prohibits conduct that operates as a fraud, an investment adviser may engage in prohibited conduct merely through negligence.

2024 SEC Examination Priorities for Enforcement of the IAA

The SEC’s 2024 Examination Priorities clarify that particular examination focus will include:

• Marketing practice assessments for whether advisers, including advisers to private
  funds, have: (1) adopted and implemented reasonably designed written policies
  and procedures to prevent violations of the Advisers Act and the rules thereunder
  including reforms to the Marketing Rule; (2) appropriately disclosed their marketing-
  related information on Form ADV; and (3) maintained substantiation of their
  processes and other required books and records. Marketing practice reviews will
  also assess whether disseminated advertisements include any untrue statements of a
  material fact, are materially misleading, or are otherwise deceptive and, as applicable,
  comply with the requirements for performance (including hypothetical and
  predecessor performance), third-party ratings, and testimonials and endorsements.
• Compensation arrangement assessments focusing on: (1) fiduciary obligations of
  advisers to their clients, including registered investment companies, particularly
  with respect to the advisers’ receipt of compensation for services or other material
  payments made by clients and others; (2) alternative ways that advisers try to
  maximize revenue, such as revenue earned on clients’ bank deposit sweep programs;
  and (3) fee breakpoint calculation processes, particularly when fee billing systems are
  not automated.
• Valuation assessments regarding advisers’ recommendations to clients to invest
  in illiquid or difficult to value assets, such as commercial real-estate or private
  placements.
• Safeguarding assessments for advisers’ controls to protect clients’ material non-public
  information, particularly when multiple advisers share office locations, have
  significant turnover of investment adviser representatives, or use expert networks.
• Disclosure assessments to review the accuracy and completeness of regulatory filings,
  including Form CRS, with a particular focus on inadequate or misleading disclosures
  and registration eligibility

SEC Whistleblower Program

Under the SEC Whistleblower Program, whistleblowers may be eligible for monetary awards when they voluntarily provide the SEC with original information about violations of federal securities laws that leads the SEC to bring a successful enforcement action resulting in monetary sanctions exceeding $1 million.

The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.  Furthermore, the Dodd-Frank Act protects whistleblowers from retaliation by their employers for reporting violations of securities laws.

Whistleblowers may file a tip with the SEC anonymously if they are represented by an attorney.

SEC Whistleblower Process

For more information about the SEC Whistleblower Program, see our eBook Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award. Click below to hear SEC whistleblower lawyer Matt Stock’s tips for SEC whistleblowers:

Washington DC SEC Whistleblower Attorneys Representing SEC Whistleblowers Nationwide

For more information about whistleblower rewards and bounties, contact the SEC whistleblower lawyers at leading whistleblower firm Zuckerman Law at 202-262-8959.

• See our column in Forbes: One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective.
• See our column in Going Concern: Sarbanes-Oxley 15 Years Later: Accountants Need to Speak Up Now More Than Ever.
• See our post in Accounting Today: Whistleblower Protections and Incentives for Auditors and Accountants.
• See our post in The Compliance and Ethics Blog: Shkreli Trial Reveals the Challenges Faced by Compliance Whistleblowers.

Pro Se Sarbanes Oxley Whistleblower Prevails in Jury Trial

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ARB Decision in Nuclear Whistleblower Case Underscores Favorable Causation Burden for Whistleblowers

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Increase in Accounting Fraud Whistleblower Tips

Since the inception of the SEC Whistleblower Program, whistleblowers have played a critical role in assisting the SEC to uncover and halt accounting schemes, including accounting fraud whistleblowers that we have successfully represented at the SEC.

Contact us today to find out the strategies we have successfully employed to get awards for whistleblowers disclosing accounting fraud to the SEC.

According to the SEC Whistleblower Program’s 2020 Annual Report, a majority of whistleblowers tips submitted to the SEC each year relate to violations in corporate disclosures and financials (see examples of accounting violations in our Accounting Today article “The top 10 ways that companies cook the books,” which is also available here.):

• 2011: 51 corporate disclosures and financials tips
• 2012: 547 corporate disclosures and financials tips
• 2013: 557 corporate disclosures and financials tips
• 2014: 610 corporate disclosures and financials tips
• 2015: 687 corporate disclosures and financials tips
• 2016: 938 corporate disclosures and financials tips
• 2017: 954 corporate disclosures and financials tips
• 2018: 983 corporate disclosures and financials tips
• 2019: 1,107 corporate disclosures and financials tips
• 2020: 1,710 corporate disclosures and financials tips

A whistleblower providing original information about accounting fraud may be eligible to receive an award under the Dodd-Frank Act’s SEC Whistleblower Program. Even auditors and accountants are eligible to receive awards under the program.

If you have original information about accounting fraud that you would like to report to the SEC Whistleblower Office, contact the Director of our SEC whistleblower practice at [email protected] or call our leading SEC whistleblower lawyers at (202) 930-5901 or (202) 262-8959. All inquiries are confidential.

In conjunction with our courageous clients, our SEC whistleblower lawyers have helped the SEC halt multi-million dollar investment schemes, expose violations at large publicly traded companies, and return funds to defrauded investors.

Recently the Association of Certified Fraud Examiners published a profile of Matt Stock’s success working with whistleblowers to fight fraud:

See our article: How to Report Accounting Fraud and Earn an SEC Whistleblower Award.

SEC Whistleblower Program and Accounting Fraud

Under the SEC Whistleblower Program, whistleblowers may be eligible for monetary awards when they voluntarily provide the SEC with original information about violations of federal securities laws, including accounting fraud. Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected if their tip leads to a successful enforcement action resulting in monetary sanctions exceeding $1,000,000.

The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Whistleblowers can even submit a tip anonymously if represented by counsel.

In a 2016 keynote speech, the SEC Enforcement Director confirmed the SEC’s continued focus on issuer reporting and disclosure violations. To date, and as detailed in the SEC Division of Enforcement’s 2020 Annual Report, this focus has remained consistent:

“Integrity and accuracy in financial statements and issuer disclosures are critical to the functioning of our capital markets. During the last fiscal year, the Division maintained its ongoing focus on identifying and investigating securities laws violations involving different components of the financial reporting process.”

How to Qualify for an Accounting Fraud SEC Whistleblower Award

For more information about the SEC Whistleblower Program, see our eBook Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award. Click below to hear SEC whistleblower lawyer Matt Stock’s tips for SEC whistleblowers:

SEC Whistleblower Awards for Accounting Fraud Whistleblowers

Since 2012, the SEC Whistleblower Office has issued more than $1.2 billion in awards to whistleblowers. The largest SEC whistleblower awards to date are $114 million and $110 million.

If you have information that may qualify for an SEC whistleblower award, contact the Director of our SEC whistleblower practice at [email protected] or call our leading SEC whistleblower lawyers at (202) 930-5901 or (202) 262-8959.

All inquiries are confidential. In conjunction with our courageous clients, we have helped the SEC halt multi-million dollar investment schemes, expose violations at large publicly traded companies and return funds to defrauded investors.

Accounting Fraud and Abuses & SEC Enforcement Actions

Former SEC Chair Mary Jo White emphasized that [c]omprehensive, accurate, and reliable financial reporting is the bedrock upon which our markets are based, and is essential to ensuring public confidence in them.” As such, the SEC has increased the number of enforcement actions for accounting fraud and other accounting violations, including:

Improper Revenue Recognition

According to a Report Pursuant to Section 704 of the Sarbanes-Oxley Act of 2002, during the five years preceding the enactment of SOX, the “SEC brought the greatest number of actions [involving issuer financial-report violations] in the area of improper revenue recognition: 126 of the 227 enforcement matters involved such conduct, including the fraudulent reporting of fictitious sales, improper timing of revenue recognition, and improper valuation of revenue.” The following enforcement actions are examples of improper revenue recognition schemes that could qualify for an SEC award.

• SEC v. Garthright

The SEC charged SMF Energy Corp. and its officers with accounting fraud for inflating revenues through a fraudulent billing scheme. According to the SEC’s complaint, the billing scheme “increased the amount of gallons of fuel invoiced beyond what was actually delivered to customers,” which resulted in false and misleading disclosures in the company’s SEC filings. The billing scheme circumvented SMF Energy’s internal accounting controls and led to, among other things, materially overstated revenues, profit margins, shareholders’ equity, and net income in its SEC filings.

The scheme resulted in several SEC violations, including the failure to maintain a system of internal controls sufficient to ensure that its customers were charged in accordance with their respective contracts, the failure to record revenues and liabilities in accordance with GAAP, and the failure to design (or to cause others to design) disclosure controls and procedures that would have caused the company to disclose and report that it recognized revenue from improper charges to customers. The SEC disgorged all ill-gotten profits and proceeds received as a result of the actions.

• SEC v. MedQuist, Inc.

The SEC charged MedQuist with accounting fraud when it secretly inflated customer bills by increasing the number of lines of medical test that it purportedly transcribed. According to the SEC’s complaint, the “scheme was able to continue for several years because the unit of measure upon which bills to many customers were based . . . could not be verified by customers. Knowing that its customers were unable to verify line counts on bills, [MedQuist] . . . manipulate[d] line counts on customer bills to reach specific revenue and margin targets.” MedQuist and its Director, President, and Chief Operating Officer were charged with violating securities laws.

• SEC v. L3 Technologies, Inc.

The SEC charged L3 for failing to maintain accurate books and records and failing to maintain adequate internal controls when the company improperly recorded $17.9M in revenue from a contract by creating invoices associated with unresolved claims that were not delivered when the revenue was recorded. According to the SEC’s order, employees “immediately reported concerns regarding potential violations of L3’s accounting policies and internal accounting controls to L3’s internal ethics department,” but the subsequent ethics review failed to uncover the misconduct due, in part, to “a failure by ethics investigators to adequately understand the billing process.”

• SEC v. Dickson

The SEC charged IGI Inc. with fraudulent accounting practices and reporting, inadequate internal controls, and books-and-records violations for engaging in fraudulent sales-cutoff practices and other improper accounting practices. As a result of the improper sales-cutoff practices, “IGI misstated its assets, revenues, and net income” for several years.

• SEC v. Putnam

The SEC charged Anicom Inc. and its directors with violating federal securities laws after the company falsely reported millions of dollars of nonexistent sales to inflate net income by more than $20M. According to the SEC’s complaint, Anicom included in its financial statements millions of dollars in sales to a fictitious customer, SCL Integration.

• SEC v. Tangoe

Tangoe paid $1.5 million to settle charges that it reported revenue prematurely for work that had not been performed and for transactions that did not produce any revenue at all. According to the complaint, the violations included: “1) counting customers’ prepayments for future services as current revenue; 2) improperly recording a loan from a business partner as revenue; 3) recording revenue in the wrong reporting periods; 4) prematurely recording revenue from contingent fee arrangements; 5) recording revenue from customers who were unlikely to pay; 6) violating the accounting rules for bad debt reserves; and 7) prematurely counting revenue from long-term contracts with ongoing obligations.”

Inadequate Internal Controls over Financial Reporting (ICFR)

• SEC v. Monsanto

On February 9, 2016, the SEC announced that Monsanto agreed to pay an $80 million penalty for inadequate internal accounting controls. According to the SEC’s order, the company failed to properly account for millions of dollars in rebates offered to retailers and distributors of Roundup after generic competition had undercut its prices and caused the company to lose significant share in the market. Monsanto booked substantial amounts of revenue from sales incentivized by the rebate program, but failed to recognize all of the related program costs at the same time. A whistleblower received a more than $22 million award for disclosing this fraud to the SEC.

Improper Accounting of Expenses

• SEC v. Penn West Petroleum

Penn West, a Canadian-based oil and gas company has agreed to pay $8.5 million in civil penalties for fraudulently moving hundreds of millions of dollars in expenses from operating expense accounts to capital expenditure accounts. This accounting fraud artificially reduced the company’s operating costs by as much as 20 percent in certain periods.  The object of the scheme was to deceive investors about a key publicly reported metric concerning the cost of oil extraction and processing needed to sell a barrel of oil.

As alleged in the SEC’s complaint, Defendants engaged in three principal types of improper accounting practices in furtherance of their scheme:

• Defendants improperly moved certain expenses that had been recorded in Penn West’s operating expense accounts to its capital expenditure accounts, a reclassification practice known internally at Penn West as “reclass to capital.” This had the effect of moving the expenses from the company’s income statement, where they appeared as expenses, to the company’s balance sheet, where they appeared as assets, thus lowering the company’s reported operating expenses and making it appear that Penn West was investing capital in support of increased production.
• Defendants improperly moved certain operating expenses to Penn West’s royalty account, a line item on the company’s income statement intended to show money expended paying royalties to the owners of land on which Penn West drilled. This practice was referred to internally as “reclass to royalty.”
• Defendants improperly took excess operating expense amounts that had been accrued in prior accounting periods, but not expended, which should have been written off, and instead reduced those accruals in subsequent periods to reduce Penn West’s operating expenses and make them appear more consistent over the course of the year. This practice was referred to internally as “accrual softening.”

Channel-Stuffing

• SEC v. Symbol Technologies Inc.

On April 27, 2015, the SEC obtained a $131 million judgment against Symbol Technologies Inc. for fraudulent revenue-recognition practices, including quarter-end “stuffing” of Symbol’s distribution channel to help meet revenue and earnings targets imposed by its CEO.

• SEC v. Bristol-Myers Squibb

On August 4, 2004, Bristol-Myers Squibb agreed to pay a $150 million fine for selling excessive amounts of pharmaceutical products to its wholesalers ahead of demand in order to falsely inflate earnings. The channel-stuffing resulted in the company improperly recognizing revenue from $1.5 billion in sales to its two largest wholesalers. In addition, the SEC filed charges against two former Bristol-Myers officers for the fraudulent earnings management scheme.

For additional information, see our article on how to report channel stuffing and earn an SEC whistleblower award.

Fraudulent Management Estimates and “Cookie Jar” Reserves

• SEC v. Computer Sciences Corporation

On June 5, 2015, Computer Sciences Corporation agreed to pay $190 million to settle charges that the company engaged in a wide-range accounting-and-disclosure fraud that materially overstated its earnings and concealed from investors significant problems with its largest contract. According to the SEC’s order, the company’s former Finance Director prepared a fraudulent accounting model in which he included made-up assumptions to avoid reporting a negative hit to the company’s earnings. The company also overstated its earnings by using “cookie jar” reserves and by failing to record expenses as required.

Improper Post-Closing Entries

• SEC v. Weatherford International

On September 27, 2016, Weatherford International agreed to pay a $140 million penalty to settle charges that it inflated its earnings by using deceptive income-tax accounting. According to the SEC’s order, Weatherford fraudulently lowered its year-end provision for income taxes each year so the company could better align its earnings results with its earlier-announced projections and analysts’ expectations. The company lowered its year-end provision for income taxes by making numerous post-closing adjustments to fill gaps and meet its previously disclosed effective tax rate.

Auditor-Independence Violations

• SEC v. E&Y

On September 19, 2016, the SEC announced that public accounting firm Ernst & Young had agreed to pay $9.3 million to settle charges that two of the firm’s audit partners had “inappropriately close personal relationships” with their clients and thereby violated independence rules designed to ensure that firms maintain their objectivity and impartiality during audits. In one of the SEC’s orders, an EY audit partner was having a romantic relationship with a client’s Chief Accounting Officer. The main EY audit partner on the account noticed signs of this romantic relationship but failed to perform a reasonable inquiry. In the SEC’s second order, an audit partner was accused of excessive socializing with a client’s Chief Financial Officer. This socializing included attending sporting events, taking vacations, and incurring other significant entertainment expenses that did not serve a proper a business purpose.

Improper Asset Valuations

• SEC v. Miller Energy Resources Inc.

On August 6, 2015, Miller Energy Resources Inc. was charged with inflating values of oil and gas properties, resulting in misstated financial statements. According to the SEC’s order, the company overstated the properties’ value by more than $400 million as a result of the CFO’s relying on a reserve report that did not reflect fair value of the assets. In addition, the CFO double-counted $110 million of fixed assets already included in the reserve report.

Misleading Non-GAAP Financial Measures

• SEC v. SafeNet, Inc.

Recently, the SEC issued new guidance on its interpretation of the rules and regulations on the use of non-GAAP financial measures. In a previous enforcement action, the SEC fined a company more than $1 million for misleading non-GAAP financial measures.

See more about deceptive non-GAAP financials in our article in Accounting Today: Deceptive non-GAAP financials will lead to future SEC whistleblower awards.

Retaliating Against Whistleblowers

• SEC v. SandRidge Energy Inc.

On December 20, 2016, the SEC settled an internal-whistleblower retaliation claim with an Oklahoma energy company, SandRidge Energy Inc., for $1.4 million. According to the SEC order, the company used illegally restrictive separation agreements forbidding former employees from cooperating in SEC and other government investigations, and that SandRidge fired an employee who raised concerns about its accounting.

Largest Accounting Scandals

The table below identifies some of the largest SEC enforcement actions against companies for accounting fraud:

Accounting Fraud SEC Whistleblower Lawyers

Leading SEC whistleblower law firm Zuckerman Law represents whistleblowers worldwide before the SEC under the Dodd-Frank SEC Whistleblower Program. The firm has a licensed Certified Public Accountant and Certified Fraud Examiner on staff to enhance its ability to investigate and disclose complex financial fraud to the SEC, and two of the firm’s attorneys served in high-level positions at a government agency that protects whistleblowers. Firm Principal Jason Zuckerman has been named by Washingtonian Magazine as a “Top Whistleblower Lawyer” and the firm has been ranked by U.S. News as a Tier 1 Firm in Labor & Employment Litigation.

Whistleblower law firm Zuckerman Law has substantial experience investigating securities fraud schemes and preparing effective submissions to the SEC concerning a wide range of federal securities violations, including:

• Accounting fraud;
• Investment and securities fraud;
• Insider trading;
• Foreign bribery and other FCPA violations;
• EB-5 investment fraud;
• Manipulation of a security’s price or volume;
• Fraudulent securities offerings and Ponzi schemes;
• Hedge fund fraud;
• Unregistered securities offerings;
• Investment adviser fraud;
• Broker-dealer anti-money laundering program violations;
• False or misleading statements about a company or investment;
• Inadequate internal controls;
• Deceptive non-GAAP financials;
• Improper revenue recognition;
• Violations of auditor independence rules;
• Misleading or incomplete cybersecurity disclosures; and
• Blockchain fraud.

To schedule a free preliminary confidential case review with the SEC whistleblower attorneys at Zuckerman Law, click here or call us at 202-262-8959.

Process to Obtain SEC Whistleblower Award for Reporting Accounting Fraud

SEC Whistleblower Protections for Disclosures of Accounting Fraud

The SOX whistleblower lawyers at Zuckerman Law represent accountants in whistleblower retaliation claims, including claims brought under the whistleblower protection provision of the Sarbanes-Oxley Act and the Dodd-Frank Act.

The whistleblower protection provision of the Sarbanes-Oxley Act provides robust protection to corporate whistleblowers, and indeed some SOX whistleblowers have achieved substantial recoveries.  

Leading SOX whistleblower law firm Zuckerman Law issued a free guide to the SOX whistleblower protection law: Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.  The guide summarizes SOX whistleblower protections and offers concrete tips for corporate whistleblowers based on lessons learned during years of litigating SOX whistleblower cases.

See our column in Going Concern:  Sarbanes-Oxley 15 Years Later: Accountants Need to Speak Up Now More Than Ever.

Accounting Fraud SEC Whistleblower Rewards

Transcript: As a former external auditor, I’m well-aware of the pressures that are involved with auditors and accountants. Especially when an SEC filing date is coming up. Perhaps there will be disagreements with clients or disagreements about a specific number in the financial statements.

Luckily for accountants and auditors there are many new lays that have been enacted that offer protections and incentives for raising reasonable concerns. Under the Sarbanes-Oxley Act and Dodd-Frank Act employees are protected against retaliation from their employer if they raise reasonable concerns about one of these violations.

In addition, in certain circumstances auditors and accountants may even qualify for an SEC whistleblower award for raising concerns about violations of federal securities laws.

Whistleblower Lawyer Zuckerman Will Speak at Risk, Ethics & Compliance Forum

Whistleblower lawyer Jason Zuckerman, Principal of Washington, DC firm whistleblower firm Zuckerman Law, will speak at the November 2, 2016 Thomson Reuters Legal Executive Institute … Continued

Top-Rated Market Manipulation Whistleblower Lawyers

Our firm’s SEC and CFTC whistleblower lawyers help whistleblowers worldwide investigate and disclose to the SEC and CFTC market manipulation schemes and our clients’ disclosures have helped halt significant market manipulation schemes.

Federal law prohibits market manipulation in securities, swaps, commodities, and futures markets. The SEC and CFTC define market manipulation as “intentional conduct designed to deceive investors by controlling or artificially affecting the [trading] market[s].” Fraudsters use various techniques to affect the supply or demand for these investment products. Common market manipulation schemes include:

• spreading false or misleading information;
• improperly limiting the number of publicly available shares; and
• rigging quotes, prices, or trades to create a false or deceptive demand.

Recently, the SEC and CFTC have stepped up their enforcement to combat market manipulation schemes. Under the Dodd-Frank Act’s whistleblower reward programs, whistleblowers are eligible to receive awards for reporting market manipulation. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC and CFTC.

On October 21, 2021, the CFTC awarded a whistleblower $200 million for providing information that led the CFTC and another federal agency to take enforcement actions to combat the manipulation of financial benchmarks used by global banks.

In FY 2021, the most common SEC complaint category reported by SEC whistleblowers was market manipulation.  In particular, 3090 whistleblower tips filed in FY 2021 pertained to market manipulation. 

Contact us today to find out the strategies that we have successfully employed to secure SEC whistleblower awards for our whistleblower clients.

SEC and CFTC Market Manipulation Whistleblower Awards

Under the SEC Whistleblower Program and CFTC Whistleblower Program, whistleblowers may be eligible for monetary awards if they voluntarily provide the SEC or CFTC with original information about market manipulation that leads either agency to bring a successful enforcement action that results in monetary sanctions exceeding $1 million. Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected.

To date, the SEC issued nearly $1.3 billion in awards to whistleblowers and the CFTC has issued more than $100 million in awards to whistleblowers. The largest SEC whistleblower awards to date are $114 million, $50 million and $50 million. The largest CFTC whistleblower awards to date are $45 million, $30 million and $10 million.

If you are seeking representation in an SEC or CFTC market manipulation whistleblower case, contact the Director of our Whistleblower Rewards Practice or call our leading whistleblower lawyers at (202) 930-5901 or (202) 262-8959. All inquiries are confidential. In conjunction with our courageous clients, we have helped the SEC halt multi-million dollar investment schemes, expose violations at large publicly traded companies and return funds to defrauded investors. Read our tips for SEC whistleblowers and Forbes column about the success of the SEC whistleblower program.

Recently the Association of Certified Fraud Examiners published a profile of SEC whistleblower lawyer Matt Stock’s success working with whistleblowers to fight fraud:

Click here to read reviews from clients that we have represented in whistleblower rewards and whistleblower retaliation matters.

SEC and CFTC Enforcement Actions Combating Market Manipulation Schemes

There are many market manipulation schemes that may qualify for an award under the CFTC and SEC Whistleblower Program. Recent enforcement actions suggest the agencies may focus on three types of market manipulation:

• Benchmark Rates Manipulation;
• Pump-And-Dump Schemes; and
• Spoofing Schemes.

Benchmark Rates Manipulation

In a benchmark-rate-manipulation scheme, individuals seek to increase or decrease impartial global reference rates for their own financial gain. This misconduct is typically associated with U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX) benchmark-swap rates, LIBOR, Euribor, and other foreign interest-rate benchmarks.

Citibank Ordered to Pay $250M for Benchmark Manipulation

On May 25, 2016, the CFTC ordered Citibank to pay $250 million for attempted manipulation and false reporting of USD ISDAFIX benchmark-swap rates. The CFTC uncovered numerous instances of Citibank’s USD ISDAFIX misconduct through the bank’s exotic traders’ instant messages.

Notably, as of May 25, 2016, the CFTC has imposed more than $5.08 billion in penalties in its investigation of global benchmark-rate manipulation. Over $1.8 billion of these penalties have been imposed on 6 banks for misconduct relating to foreign-exchange benchmarks, while over $3.21 billion has been imposed for misconduct relating to ISDAFIX, LIBOR, Euribor, and other interest-rate benchmarks.

USB and HSBC Agree to Pay $28M to Settle Allegation of Benchmark Manipulation

On July 11, 2017, USB Group AG and HSBC Holdings agreed to pay $28 million to settle allegations that the banks manipulated an interest rate used to set terms for swap transactions. In total, 14 banks have been accused of the wrongdoing and, as of July 11, 2017, 10 of 14 banks have settled for more than $408 million, including:

• Goldman Sachs: $56.5M
• JPMorgan Chase: $52M
• Bank of America: $50M
• Credit Suisse: $50M
• Deutsche Bank: $50M
• Royal Bank of Scotland: $50M
• Citigroup: $42M
• Barclays: $30M

Pump-And-Dump Market Manipulation Schemes

In a pump-and-dump scheme, individuals seek to boost a company’s stock (which they own) by issuing false or misleading statements to the marketplace. Lately, these statements have been disseminated through social media, such as Facebook and Twitter, as well as on bulletin boards and in chat rooms. After “pumping” up the stock through these false or misleading statements, the promoters then “dump” their shares to quickly profit from the misinformation.

SEC Uncovers $78 Million Pump-And-Dump

On November 15, 2015, the SEC uncovered a $78 million pump-and-dump orchestrated by Marley Coffee’s CEO, Shane Whittle. Whittle had secretly gained control of millions of the company’s shares by using a reverse merger and spreading the stock to offshore entities controlled by three accomplices to the scheme. After acquiring the stock, Whittle initiated fraudulent promotional campaigns, which caused the stock price to soar. Whittle then sold the fraudulently pumped-up stock and made millions of dollars in illicit profits.

According to the complaint, the SEC sought injunctions, disgorgement of profits, prejudgment interest, and penalties; the SEC also sought penny-stock bars against all of the individuals and an officer-and-director bar against Whittle.

Scottish Trader Sends False “Tweets” in a Pump-And-Dump Scheme

In another enforcement action, the SEC brought charges against a Scottish trader whose false “tweets” caused the stock prices of two companies to drop sharply and triggered a trading halt in one of those companies. The scheme involved the traders deceptively creating Twitter accounts of well-known securities research firms and posting false statements about the two companies. Specifically, he posted a series of tweets indicating that Audience Inc. was under investigation by the DOJ. He also tweeted that Sarepta Therapeutics Inc. was under investigation by the FDA. As a result, the companies’ stock plunged 28% and 16%, respectively.

According to the SEC’s complaint, the trader was charged with securities fraud and was subject to disgorgement and a monetary penalty.

SEC Prosecutes Telemarketing Boiler Room Scheme

On July 12, 2017, the SEC brought a complaint charging thirteen individuals with operating cold calling scams that cheated seniors out of more than $10 million using threatening and deceitful sales techniques to pressure victims into purchasing penny stocks.  The telemarketers directed their customers to place trades at a certain price and would then purchase opposing sell orders, thereby enabling them to make instant profit of millions of dollars.  Reminiscent of scenes from the movie The Wolf of Wall Street, the sales tactics were especially aggressive.  As an example of the strong-arm tactics employed in this scheme, the complaint alleged that one of the telemarketers told a victim who called to complain, “I am tired of hearing from you. Do you have any rope at home? If so tie a knot and hang yourself or get a gun and blow your head off.”

Spoofing Schemes

In a spoofing scheme, individuals use algorithms or other means to outpace other market participants and manipulate markets in their favor. Under the Dodd-Frank Act, spoofing is defined as “the illegal practice of bidding or offering with intent to cancel before execution.” In a typical spoofing scheme, high-frequency traders use algorithms to place a substantial amount of bids or offers on a particular security or commodity with no intention of executing. By placing these bids or offers, the traders create the illusion of demand, which subsequently drives up the trading price. Alternatively, traders also use algorithms to cancel a substantial number of bids or offers, to create the illusion of exchange pessimism. This drives down the trading price. Traders are able to profit from this manipulation by synchronizing their buying and selling with the resultant market fluctuations.

CFTC Orders High-Frequency Trader to Pay $2.8M

In the first case under Dodd-Frank’s anti-spoofing law, the CFTC ordered Panther Energy Trading LLC and high-frequency trader Michael Coscia to pay $2.8 million for illegally placing and quickly canceling bids and offers in futures contracts. The new anti-spoofing law carries a $1 million fine for each instance of spoofing. The law also carries a $250,000 fine for each count of commodities fraud.

Citigroup Global Markets, Inc. Charged $25M for Spoofing

On January 19, 2017, the CFTC charged Citigroup $25 million for spoofing in the U.S. Treasury futures markets and for failing to diligently supervise the activities of its employees and agents in conjunction with the spoofing orders. According to the agency’s Order, Citigroup’s unlawful conduct occurred between July 16, 2011 and December 31, 2012 when five of Citigroup’s traders engaged in spoofing more than 2,500 times.

CFTC Director of Enforcement Aitan Goelman commented: “Spoofing is a significant threat to market integrity that the CFTC will continue to vigorously investigate and prosecute. Additionally, as this action shows, registrants with supervisory responsibilities must provide their employees with sufficient training and have in place adequate systems and controls to detect spoofing. Failure to do so will have significant consequences.”

Protections for Corporate Whistleblowers Reporting Market Manipulation

The SEC and CFTC Whistleblower Programs also protect the confidentiality of whistleblowers and do not disclose information that might directly or indirectly reveal a whistleblower’s identity. Furthermore, the Dodd-Frank Act protects whistleblowers from retaliation by their employers for reporting violations to the SEC or CFTC.

In addition, the anti-retaliation provision of the Sarbanes-Oxley Act provides robust protection for corporate whistleblowers.  To learn more about corporate whistleblower protections, download our guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.

CFTC and SEC Market Manipulation Whistleblower Reward Attorneys

For more information about whistleblower rewards and bounties for reporting market manipulation, contact the SEC and CFTC whistleblower lawyers at Zuckerman Law at 202-262-8959.

For more information about the SEC Whistleblower Program, download Zuckerman Law’s eBook: SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award

Click below to hear SEC whistleblower lawyer Matt Stock’s tips for SEC whistleblowers:

How We Can Help You Obtain an SEC Whistleblower Award for Disclosing Market Manipulation

Process to Qualify for an SEC Market Manipulation Whistleblower Award

Protections for Whistleblowers Reporting Market Manipulation

Market Manipulation Whistleblower Bounties

CFTC Whistleblower Alert About Spoofing in the Commodities and Derivatives Markets

SEC Whistleblower Lawyer Will Speak at Webinar About Whistleblower Investigations

Whistleblower lawyer Jason Zuckerman, Principal of Washington, DC firm whistleblower firm Zuckerman Law, will speak at a Rossdale webinar on October 26th about whistleblower investigations.  … Continued

Washington DC Whistleblower Lawyer Jason Zuckerman Will Speak at DC Bar Panel About Whistleblower Litigation

Washington DC whistleblower lawyer Jason Zuckerman will speak at the DC Bar’s annual CLE Changing Currents in Employment Law 2016: Recent Trends and Developments on … Continued

SEC Orders Company to Pay $500K For Whistleblower Retaliation

  SEC Enforcement Action for Whistleblower Retaliation On September 29, 2016, the SEC ordered International Game Technology (IGT) to pay a $500,000 penalty for terminating … Continued

The attorneys at leading whistleblower law firm Zuckerman Law routinely represent accountants and auditors in whistleblower retaliation and SEC whistleblower rewards claims.  Zuckerman Law has secured SEC whistleblower awards for auditors and accountants and has also obtained relief for auditors and accountants in Sarbanes-Oxley whistleblower retaliation matters.

One of the attorneys at the firm is a licensed CPA and CFE who worked at a big four audit firm and knows first-hand the difficult challenges that auditors face in reporting fraud.   Zuckerman Law counsels accountants and auditors concerning the complex legal issues that arise in internal and external audits and in connection with the preparation of financial statements, including:

• Financial statement fraud
  • Improper revenue recognition
  • Concealed liabilities and expenses
  • Improper disclosures
  • Fraudulent management estimates
  • Misleading non-GAAP reporting
• Inadequate SOX-required internal controls and fraud detection failure
  • Noncompliance with Section 404 of SOX
  • Management override of internal controls
  • Ineffective fraud risk management control policies
• SEC Reporting violations
  • Knowingly issuing financial statements that contain material misstatements or lack required disclosures
  • Inappropriately reporting internal controls as effective
  • Issuing misleading press releases
• Fraudulent “tone at the top”
  • Retaliating against employees for raising concerns about wrongdoing
  • Pressure to engage in earnings management or other fraudulent activity
• Independence violations and other conflicts of interest
  • External auditor independence violations, including Section 206 of SOX requiring a one-year cooling off period before members of the audit team can begin working for the client in a key financial oversight role
  • Audit Committee independence violations
  • Fraudulent related party transactions

Recently the Association of Certified Fraud Examiners published a profile of Matt Stock’s success working with whistleblowers to fight fraud:

See our column in Forbes:  One Billion Reasons Why The SEC Whistleblower-Reward Program Is Effective

See our column in Going Concern:  Sarbanes-Oxley 15 Years Later: Accountants Need to Speak Up Now More Than Ever

Our attorney’s experience includes:

• Representing partners and directors at big four audit firms in whistleblower matters;
• Representing internal auditors under federal and state whistleblower protection laws;
• Representing a senior audit official at a large public company before the SEC;
• Representing accountants and auditors in internal investigations and SEC investigations;
• Investigating and filing whistleblower reward disclosures before the SEC, CFTC, DOJ and IRS.

To schedule a free preliminary consultation, click here or call us at 202-262-8959.

 

SOX Whistleblower Attorneys

 

We have assembled a team of leading whistleblower lawyers to provide top-notch representation to whistleblowers.  Let us put our unique experience and credentials to work for you:

• • Matt Stock is a Certified Public Accountant, Certified Fraud Examiner and former KPMG external auditor.  As an auditor, Stock developed expertise in financial statement analysis and internal controls testing and fraud recognition.  He uses his auditing experience to help IRS, CFTC and SEC whistleblowers investigate and disclose complex financial frauds to the government and develop a roadmap for the SEC to take an enforcement action.  Matt has been interviewed on CNBC, quoted extensively about whistleblower rewards in the media, and is the lead author of SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award.
  • Described by the National Law Journal as a “leading whistleblower attorney,” founding Principal Jason Zuckerman has established precedent under a wide range of whistleblower protection laws and obtained substantial compensation for his clients and recoveries for the government in whistleblower rewards and whistleblower retaliation cases.  He served on the Department of Labor's Whistleblower Protection Advisory Committee, which makes recommendations to the Secretary of Labor to improve OSHA’s administration of federal whistleblower protection laws.  Zuckerman also served as Senior Legal Advisor to the Special Counsel at the U.S. Office of Special Counsel, the federal agency charged with protecting whistleblowers in the federal government.  At OSC, he oversaw investigations of whistleblower claims and obtained corrective action or relief for whistleblowers.
  • Zuckerman was recognized by Washingtonian magazine as a “Top Whistleblower Lawyer” (2020, 2018, 2017, 2015, 2009, and 2007), selected by his peers to be included in The Best Lawyers in America® in the category of employment law (2011-2021) and in SuperLawyers in the category of labor and employment law (2012 and 2015-2021), is rated 10 out of 10 by Avvo, based largely on client reviews, and is rated AV Preeminent® by Martindale-Hubbell based on peer reviews
  • We have published extensively on whistleblower rights and protections, and speak nationwide at seminars and continuing legal education conferences.  We blog about new developments under whistleblower retaliation and rewards laws at the Whistleblower Protection Law and SEC Awards Blog, and in 2019, the National Law Review awarded Zuckerman its “Go-To Thought Leadership Award” for his analysis of developments in whistleblower law.
  • Our attorneys have been quoted by and published articles in leading business, accounting, and legal periodicals, including The Wall Street Journal, Forbes, CNBC, MarketWatch, Vox, Accounting Today, Going Concern, Law360 – Expert Analysis, Investopedia, The National Law Review, inSecurities, Government Accountability Project, S&P Global Market Intelligence, Risk & Compliance Magazine, The D&O Diary, The Compliance and Ethics Blog, Compliance Week and other printed and electronic media.

ABOUT ZUCKERMAN LAW

Summary

We are a Washington, DC-based law firm that represents whistleblowers in whistleblower rewards and whistleblower retaliation matters and litigates discrimination claims on behalf of employees in the District of Columbia, Maryland, and Virginia. The firm is dedicated to zealously advocating on behalf of our clients to achieve justice and accountability.

 

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