SEC Whistleblower Reward Program: Who is an “eligible” whistleblower for an award under the program?

Most individuals, regardless of citizenship, are “eligible” whistleblowers if they voluntarily provide the SEC with original information about a possible violation of the federal securities … Continued

What is the SEC Whistleblower Program?

SEC Whistleblower Program The SEC Whistleblower Program offers awards to eligible whistleblowers who provide original information that leads to successful SEC enforcement actions with total monetary sanctions exceeding $1 … Continued

A Tale of Two Whistleblowers: Lessons Learned from December 2016 SEC Whistleblower Award

On December 5, 2016, the SEC issued an award determination resolving two whistleblowers’ claims based on the same action against the same entities.  One whistleblower … Continued

Lawyers Representing SEC Whistleblowers

Under the SEC Whistleblower Program, whistleblowers may receive a reward if they provide the SEC with original information about violations of securities laws, including engaging in brokerage activity and charging fees without registering as a broker-dealer. A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected if their information leads the SEC to a successful enforcement action with monetary sanctions in excess of $1 million. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.

Since 2012, the SEC has paid $1.3 billion in awards to whistleblowers. The largest SEC whistleblower awards to date are $114 million and $50 million. See our article: How to Report Unregistered Convertible Debt Lenders or Penny Stock Dealers and Earn an SEC Whistleblower Award.

Our firm has secured multi-million dollar SEC whistleblower awards for 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 SEC whistleblower lawyer Matt Stock’s success working with whistleblowers to fight fraud:

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

When Must a Broker Register?

Under Section 15 of the Securities Exchange Act of 1934, most “brokers” and “dealers” must register with the SEC.  A “broker” is defined broadly as “any person (individual or entity) engaged in the business of effecting transactions in securities for the account of others.”  A “dealer” is defined as “any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise.”

On the SEC’s Broker-Dealer page, it notes that “[s]ometimes you can easily tell if someone is a broker or dealer.  For example, a person who executes transactions for others on a securities exchange clearly is a broker.  And a firm that advertises publicly it makes a market in securities is obviously a dealer.  Other situations can be less clear.”

If an individual or entity is a broker or dealer, it must be properly registered before it provides brokerage services and receives compensation in return.

SEC Enforcement Actions

SEC Enforcement Action Against Private Equity Fund

On June 1, 2016, the SEC announced that a private equity fund advisory firm, Blackstreet Capital Management, and its owner have agreed to pay more than $3.1 million to settle charges that they engaged in brokerage activity and charged fees without registering as a broker-dealer.  According to the SEC’s order, Blackstreet fully disclosed to its funds and investors that it would provide brokerage services in exchange for a fee, yet the firm failed to comply with the registration requirements to operate as a broker-dealer.

In addition, the SEC investigation revealed that the owners engaged in conflicted transactions and inadequately disclosed fees and expenses.  Notably, the SEC has recently made violations by investment advisers and companies an enforcement priority.

SEC Enforcement Action Against Offshore Broker-Dealers

On April 18, 2013, the SEC charged Gibraltar Global Securities, Inc. a Bahamas-based broker-dealer, $25 million for unlawfully operating as a broker-dealer in the United States.  According to the SEC’s complaint, the Bahamas-based broker-dealer clearly targeted and solicited U.S. customers though its website by:

• Offering “offshore” brokerage services with commissions comparable to those on the “mainland.”
• Stating that “[u]sing a Gibraltar offshore brokerage account will enable you to trade on most stock exchanges in the world at a cost equivalent to that incurred using mainland brokers, without paying taxes on the profits.”
• Promising prospective customers an “extra layer of confidentiality” to protect assets from “government seizures or frivolous divorce settlements.”
• Showing price-volume graphs solely for U.S. markets.
• Only charging fees in U.S. dollars – with no provision for currency exchange.

Using these marketing tactics, the Bahamas-based broker-dealer was able to sell approximately $100 million of low-priced microcap securities on behalf of U.S. customers, charging them commissions of between 2-3%.

SEC Fines Florida-based Mining Corp. $8.5 Million

In August 2017, the SEC charged Florida-based Hidalgo Mining Corp. $8.5 million after the company and two of its executive mislead investors in a Mexican silver mine. According to the SEC’s complaint, the company raised $10.35 million from approximately 85 investors by misleading investors about the investment and violating federal securities laws, which included:

• Failing to register with the SEC in order to lawfully sell the securities;
• Making personal written guarantees to some investors that the company’s executives would “assume full responsibility” for repaying investors if the company defaulted (which they could not);
• Failing to disclose this guarantee to the other investors; and
• Failing to disclose to investors that 10% of their investments would be used to pay commissions directly to the executives and the sales team to push their securities offering.

In 2014, the Hidalgo Mining Corp. defaulted and the company executives could not repay the investors. The company allegedly defaulted due to lack of capital and low silver prices. This scheme appears to be prevalent in Florida. In December 2014, the SEC brought a similar enforcement action against a Florida-based gold mining investment company, Aurum Mining LLC. According to the SEC’s complaint, the company and its executives raised approximately $4 million from investors in Florida by making false statements about the investment. The executives then used the funds to purchase personal luxury items, including upscale apartments in Lima and other living and travel expenses.

SEC Whistleblower Reward 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. Click below to hear SEC whistleblower lawyer Matthew Stock’s tips for SEC whistleblowers:

Qualifying for an SEC Whistleblower Award

Whistleblower Protections for SEC Whistleblowers

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.

For more information about protections and remedies for corporate whistleblowers, download our free guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.

SEC Whistleblower Attorneys

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

U.S. News and Best Lawyers® have named Zuckerman Law a Tier 1 firm in Litigation – Labor and Employment in the Washington DC metropolitan area in the 2018 edition “Best Law Firms.”  Washingtonian magazine named two of our attorneys top whistleblower lawyers.

Tips to Successfully Navigate the Process to Obtain an SEC Whistleblower Award

Whistleblowers Help CFTC Obtain Record Penalties for Commodities Fraud

On November 21, 2016, the CFTC released its annual enforcement results for FY 2016.  According to the report, the agency filed 68 enforcement cases and … Continued

Fraudulent Securities Offerings and Ponzi Scheme Whistleblower Lawyers

Under the SEC Whistleblower Program, whistleblowers may receive a reward for providing the SEC with original information about securities fraud, including fraudulent securities offerings and Ponzi schemes. If the SEC uses a whistleblower’s information to bring a successful enforcement action, the whistleblower is eligible to receive between 10% to 30% of the collected monetary sanctions as an award.

Since 2012, the SEC has awarded nearly $1.3 billion to whistleblowers under the program. The largest SEC whistleblower awards to date are $114 million and $50 million.  Our attorneys have substantial experience helping the SEC to halt more than $1 billion in ponzi schemes and fraudulent securities offerings.

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.

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

Read our tips for SEC whistleblowers and Forbes column about the success of the SEC whistleblower program.

According to a speech by former SEC Enforcement Director Andrew Ceresney, fraudulent securities offerings and Ponzi schemes are the types of securities fraud cases where whistleblowers’ assistance is especially valued. The Director noted that whistleblowers have helped the SEC identify false and misleading statements in offering memoranda and marketing materials, which enables the agency to act quickly and prevent investment frauds from luring more investors. The SEC has issued an investor alert about these fraudulent securities schemes.

Fraudulent Investment Offerings

The SEC targets investment offerings that contain false or misleading statements as well as fraudulent investment offerings, such as Ponzi or Ponzi-like schemes (see the SEC’s list of red flags that an offering may be a scam). This type of fraud continues to be a focus of SEC enforcement. According to the SEC Whistleblower Office’s 2020 Annual Report to Congress, offering fraud was the second most common complaint reported by whistleblowers (16%). The most common tip is related to corporate disclosures and financials (25%).

SEC Enforcement Actions Against False or Misleading Investment Offerings 

• On October 13, 2015, UBS agreed to pay $19.5 million to settle charges that it misled U.S. investors about its structured-notes trading strategy. According to the SEC’s press release, UBS falsely stated that the investment relied on a “transparent” and “systematic” currency-trading system that used “market prices” to calculate the financial instruments underlying the index. In reality, UBS failed to disclose hedging trades that reduced the index price by about 5%. As a result of the reduced index price, investors lost roughly $5.5 million.
• On March 9, 2016, the SEC charged California’s largest agricultural water district with misleading investors about its financial condition as it issued a $77 million bond offering. The water district represented to investors that it met or exceeded a 1.25 debt service coverage ratio, which it was required to maintain pursuant to a previous bond offering. In order to meet this ratio, the water district used misleading accounting to record additional revenue by reclassifying funds from reserve accounts. The general manager of the water district jokingly referred to these transactions as “a little Enron accounting.” The actual coverage ratio was only .11, instead of the 1.25 reported to investors.
• On August 15, 2018, the SEC filed an emergency action against Equitybuild, Inc. and Equitybuild Finance, LLC, charging them with operating a $135 million offering fraud involving real estate. According to the SEC’s complaint, the defendants raised these funds by falsely promising safe investments fully secured by income-producing real estate. Thereafter, the defendants took 15-30% of investors’ funds as undisclosed fees, hiding the fees by reporting inflated acquisition costs, and contrary to defendants’ representations, the real estate did not earn enough to pay the double-digit returns promised to investors. As a result, the defendants could only pay earlier investors by raising funds from unwitting new investors in a Ponzi-like fashion.

For more information about offering fraud, see the SEC’s Investor Alert: 10 Red Flags That an Unregistered Offering May Be a Scam.

Ponzi and Pyramid Schemes

The SEC defines a Ponzi scheme as “an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” The fraudsters are able to keep the scheme running only by attracting new money to make promised payments to earlier-stage investors, thereby creating the false appearance that investors are profiting from a legitimate business. The schemes tend to collapse when the fraudsters are unable to recruit new investors or when a large number of investors ask to cash out.

According to the SEC, in the classic Pyramid scheme, “participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.”

How to Spot a Ponzi Scheme

The SEC compiled a list of red flags that are common to most Ponzi schemes, which include:

• high investment returns with little or no risk;
• overly consistent returns;
• unregistered investments;
• unlicensed sellers;
• secretive and/or complex strategies;
• issues with paperwork; and
• difficulty receiving payments.

How to Spot a Pyramid Scheme

For more information about pyramid schemes, see the SEC’s Investor Alert: Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.

SEC Enforcement Actions Against Ponzi and Pyramid Schemes

• On March 10, 2016, the SEC charged an investment group and three top executives with hiding the rapidly deteriorating financial condition of the enterprise while raising more than $350 million from investors. In the scheme, the executives defrauded more than 1,500 investors into believing that they were investing in healthcare, education, and transportation when their money was really being used to keep the firm from going bankrupt. The operation showed some of the typical warning signs of a Ponzi scheme, such as promising high rates of return that ranged from 8.5% to 10%. In late 2015, the scheme unraveled after the firm could no longer meet scheduled redemptions.
• On March 24, 2016, the SEC charged a real estate company with engaging in a $2.7 million Ponzi scheme that targeted elderly investors. Like many Ponzi schemes, the company “guaranteed income” to investors. This income was purportedly derived from the profits of a Pennsylvania real estate venture that bought, redeveloped, and sold properties. In reality, the company did not operate a real estate venture, and it used the investments for personal expenses, such as purchasing tickets for sporting events, paying college tuition, and maintaining personal credit cards.
• On May 1, 2018, the SEC announced fraud charges against Arthur Adams and his company, Madison Timber Properties, for running an $85 million Ponzi scheme. According to the SEC’s complaint, Adams lied to investors by telling them their money would be used by his company to secure and harvest timber, and promised annual returns of 12-15%. Instead of using the investors’ money for timber, Adams used it to pay for his own personal expenses, to develop an unrelated real estate project, and to pay back early investors with later investors’ funds.
• On June 19, 2018, the SEC obtained an asset freeze for a $102 million Ponzi scheme. According to the complaint, the defendants raised money from more than 600 investors across the United States. Then, instead of investing the funds as advertised, the fraudsters spent at least $20 million to enrich themselves, paid $38.5 million in Ponzi-like payments, and transferred much of the remainder in transactions that appear unrelated to their purported business.
• On September 19, 2018, the SEC obtained an asset freeze for a $345 million Ponzi scheme. According to the SEC’s complaint, three defendants raised the $345 million from 230 investors across the United States by promising significant profits from the purchase and resale of consumer debt portfolios. Instead of using investors’ money as promised, the defendants allegedly used the funds to make Ponzi-like payments to earlier investors and fund their extravagant lifestyles, including the purchase of luxury homes for millions and 25 high-ends cars for approximately $10.2 million, among other things.

For more information about Ponzi schemes, see the SEC’s General Resources on Ponzi schemes here.

Dodd-Frank 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 that results in monetary sanctions exceeding $1,000,000.

Since 2012, the SEC Whistleblower Office has awarded nearly $1.3 billion in awards to whistleblowers.

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 Bounties

Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected.

Corporate Whistleblower Protection

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. To learn more about corporate whistleblower rights and protections, download our free guide Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers.

SEC Whistleblower Attorneys

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

U.S. News and Best Lawyers® have named Zuckerman Law a Tier 1 firm in Litigation – Labor and Employment in the Washington DC metropolitan area in the 2020 edition “Best Law Firms.”  In 2017, Washingtonian magazine named two of our attorneys top whistleblower lawyers.

SEC Whistleblower Process

Additional Resources

For more information about the SEC Whistleblower Program, see the following SEC posts:

• SEC v. Merrill et al., case number 1:18-cv-02844,
• SEC Litigation Release: SEC v. Tropikgadget FZE,
• SEC Press Release: SEC v CKB168,
• SEC Press Release: SEC v Rex Venture Group,
• FTC Blog: Pyramids of Fortune?
• FTC Article: Multilevel Marketing
• SEC Investor Alert: Social Media and Investing – Avoiding Fraud,
• SEC Investor Bulletin: Affinity Fraud,
• Investor.gov Article: Avoiding Fraud, and
• SEC Interpretative Release: Multi-level Distributorships & Pyramid Sales Plans.

New Administration Should Avoid Gutting the SEC’s Remarkably Successful Whistleblower Reward Program

Press reports indicate that a repeal of the Dodd-Frank Act is among the top policy priorities of the Trump Administration. Though there are provisions in … Continued

IAF Report Underscores Importance of Whistleblower Rewards and Protections for Internal Auditors

Pressure on Auditors to Suppress Audit Findings A report from the Internal Audit Foundation reveals that 23% of internal auditors still experience pressure to suppress … Continued

CFTC Whistleblower Reward Lawyers

The CFTC Whistleblower Reward Program provides whistleblowers with a strong monetary incentive, as well as anti-retaliation protections, for reporting wrongdoing to the CFTC. This includes violations or fraud in connection with:

• Commodity futures;
• Commodity options;
• Swap trading markets;
• Derivatives; and

• Foreign corrupt practices.

On October 21, 2021, the CFTC awarded a whistleblower $200 million for providing information that led the CFTC to evidence of wrongdoing concerning the manipulation of financial benchmarks used by global banks. Approximately 65% of whistleblower cases filed at the CFTC involve charges of commodities fraud, market manipulation schemes, and spoofing. Whistleblower tips to CFTC have helped drive record-level enforcement activity.

Since 2014, the CFTC has issued more than $325 million in awards to whistleblowers. The largest CFTC whistleblower awards to date are $200 million, $45 million, $30 million, and $10 million. Whistleblower disclosures have enabled the CFTC to bring successful enforcement actions against wrongdoers with orders for more than $3 billion in monetary relief. See our recent post How to Report Swaps Manipulation or Swaps Reporting Violations and Qualify for a CFTC Whistleblower Award.

Call our CFTC whistleblower lawyers today at 202-930-5901 or contact us here to find out if you are eligible for a CFTC whistleblower award. A delay in reporting commodities fraud can potentially disqualify a whistleblower from recovering an award or can lower a whistleblower award, so call us today for a free consultation. We represent CFTC whistleblowers concerning a wide variety of market manipulation schemes.

Our experienced CFTC whistleblower lawyers are frequently quoted in the media about

whistleblower reward programs.  Recently, the Wall Street Journal quoted Jason Zuckerman in an article titled Senate Passes Bill to Fund CFTC Whistleblower Program, and quoted Matthew Stock, Director of our Whistleblower Rewards Practice, in an article titled CFTC Whistleblower Tips and Awards Fall After Record 2018.

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

CFTC Whistleblower Reward Program

Under the CFTC Whistleblower Reward Program, the CFTC will issue rewards to whistleblowers who provide original information that leads to CFTC enforcement actions with total civil penalties in excess of $1 million (see how the CFTC calculates monetary sanctions). A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected.

Original information “leads to” a successful enforcement action if either:

1. The original information caused the staff to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the Commission brought a successful action based in whole or in part on conduct that was the subject of the original information; or
2. The conduct was already under examination or investigation, and the original information significantly contributed to the success of the action.

In determining a reward percentage, the CFTC considers the particular facts and circumstances of each case. For example, positive factors may include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake.

Awards are paid from the CFTC Customer Protection Fund, which is financed through monetary collected by the CFTC in any covered judicial or administrative action that is not otherwise distributed, or ordered to be distributed, to victims of a violation of the CEA underlying such action.

Anonymous Whistleblowing to the CFTC

If represented by counsel, a whistleblower may submit a tip anonymously to the CFTC. In certain circumstances, a whistleblower may remain anonymous, even to the CFTC, until an award determination. However, even at the time of a reward, a whistleblower’s identity is not made available to the public.

The confidentiality protections of the CEA require the CFTC not to disclose information that “could reasonably be expected to reveal the identity of the whistleblower.”  According to a recent report of the CFTC Whistleblower Office, the Office takes steps to protect whistleblower confidentiality.  For example, in a recent fiscal year the Office considered 267 requests to produce documents from the investigation and litigation files of the Enforcement Division and found 16 requests to implicate whistleblower-identifying information.  The Office worked with the Enforcement Division to remove whistleblower-identifying information or otherwise take steps to preserve whistleblower confidentiality.

CFTC Whistleblower Awards

The table below identifies some of the largest CFTC whistleblowers awards:

Protections Against Whistleblower Retaliation

Whistleblowers are also afforded substantial protection against retaliation.  Specifically, an employer may not “discharge, demote, suspend, threaten, harass, directly or indirectly, or in any manner discriminates against, a whistleblower” for legally reporting wrongdoing. In the event that an employer retaliates against a whistleblower, the law provides for substantial relief. This may include reinstatement, back pay, and compensation for related expenses such as litigation costs and reasonable attorneys’ fees.

A whistleblower is entitled to this protection even if they do not receive a reward. The anti-retaliation provision applies to any whistleblower who possesses “a reasonable belief that the information the whistleblower is providing relates to a possible violation of the Commodity Exchange Act (CEA), or the rules or regulations thereunder, that has occurred, is ongoing, or is about to occur.”

The CFTC can take enforcement action against an employer that “retaliates against a whistleblower by discharge, demotion, suspension, direct or indirect threats or harassment, or any other manner of discrimination” because the whistleblower provided “information to the Commission after reporting the information through internal whistleblower, legal or compliance procedures.”  17 C.F.R. 165.20(b).

If you have suffered whistleblower retaliation, call the whistleblower retaliation lawyers at our firm at 202-262-8959.

CFTC Prohibits “Gag Clauses” in Confidentiality and Employment Agreements

The rules implementing the CFTC whistleblower program prohibit employers from taking steps to impede whistleblowers from communicating with the CFTC staff.  In particular, 17 C.F.R. § 165.19(b) provides:

No person may take any action to impede an individual from communicating directly with the Commission’s staff about a possible violation of the Commodity Exchange Act, including by enforcing, or threatening to enforce, a confidentiality agreement or predispute arbitration agreement with respect to such communications.

This prohibition is critical to the success of any whistleblower program because companies often use overly broad confidentiality agreements to silence and punish whistleblowers.

Experienced CFTC Whistleblower Lawyers

The whistleblower lawyers at Zuckerman Law have substantial experience representing corporate whistleblowers in whistleblower protection and whistleblower rewards cases.

Our team of attorneys includes a licensed Certified Public Accountant and Certified Fraud Examiner whose experience working at a large audit firm enhances the firm’s to investigate complex fraud schemes and prepare effective submissions to the CFTC.  For a free, confidential consultation, click here or call us at 202-262-8959.

Violations of the CEA that Qualify for a CFTC Whistleblower Award

The largest CFTC whistleblower awards to date are $200 million, $45 million, and $30 million.  The main types of violations that may qualify for a CFTC whistleblower award include:

Spoofing

Spoofing is a form of market manipulation where traders artificially inflate the supply and demand of an asset to increase profits.  Traders engaged in spoofing typically place a large number of orders to buy or sell a certain stock or asset without the intent to follow through on the orders.  This deceptive trading practice leads other market participants to wrongly believe that there is pressure to act on that asset and “spoofs” other participants to place orders at artificially altered prices.

Spoofing affects prices because the artificial increase in activity on either the buy or sell side of an asset creates the perception that there is a shift in the number of investors wanting to buy or sell.  Spoofers place false bids or offers with the intent to cancel before executing so that they can then follow-through on genuine orders at a more favorable price.  Often, spoofers use automated trading and algorithms to achieve their goals.  According to a CFTC alert on spoofing related to CEA violations, the CFTC is concerned with conduct such as:

• manual and automated trading schemes that place and quickly cancel bids and offers in futures contracts in order to benefit other orders and/or positions;
• orders being quickly placed and canceled at or near the best bid or offer, especially if opposite-side orders are filled;
• multiple orders of the same size repeatedly and simultaneously being placed and canceled; and
• any scheme designed to cause prices to artificially move.

Examples of CFTC spoofing enforcement actions include:

• In November 2019, the CFTC imposed $67.4 million in sanctions against Tower Research Capital LLC, a proprietary trading firm, arising from a manipulative and deceptive scheme.  On thousands of occasions, three former Tower traders, placed orders to buy or sell futures contracts with the intent to cancel those orders prior to execution.  The traders often used an order splitter to enter several smaller, randomly-sized orders in an attempt to obscure their scheme from other market participants.  According to a CFTC press release, “[t]he traders engaged in this scheme to induce other market participants to trade against their genuine orders—by intentionally sending a false signal to the market that they wanted to buy or sell the number of contracts specified in the spoof orders and creating a false impression of supply or demand—so that the genuine orders would fill sooner, at better prices, or in larger quantities than they otherwise would.”
• In August 2021, a federal jury convicted Edward Bases and John Pacilio, two former Merrill Lynch traders, for engaging in a multi-year fraud scheme to manipulate the precious metals market.  According to a press release announcing the action, the two traders fraudulently pushed market prices up or down by routinely placing large “spoof” orders in the precious metals futures markets that they did not intend to fill.  After manipulating the market, Bases and Pacilio executed trades at favorable prices for their own gain, and to the detriment of other traders.  The DOJ’s Indictment detailed how Bases and Pacilio discussed their intent to “push” the market through spoofing in electronic chat conversations.
• In September 2020, JPMorgan Chase & Co. agreed to pay disgorgement of $920 million in parallel actions brought by the CFTC, DOJ, and the SEC engaging in manipulative trading of U.S. Treasury securities.  According to the SEC’s order, certain traders on J.P. Morgan Securities’ Treasuries trading desk placed genuine orders to buy or sell a particular Treasury security, while nearly simultaneously placing spoofing orders, which the traders did not intend to execute, for the same series of Treasury security on the opposite side of the market.  The spoofing orders were intended to create a false appearance of buy or sell interest, which would induce other market participants to trade against the genuine orders at prices that were more favorable to J.P. Morgan Securities than J.P. Morgan Securities otherwise would have been able to obtain.

Corrupt Practices

Although the SEC and DOJ are responsible for enforcing the FCPA, the CFTC can take enforcement actions to combat violations of the CEA connected to corrupt practices, including bribes or kickbacks paid to improperly influence government officials in connection with regulated activities such as trading, advising, or dealing in swaps or derivatives.  As explained in a March 6, 2019 CFTC Enforcement Advisory and public remarks by Director of Enforcement James M. McDonald at the ABA’s National Institute on White Collar Crime, the CFTC’s anti-fraud authority permits it to police foreign bribes where violations of the CEA carried out through foreign corrupt practices.  McDonald explained:

Companies and individuals engaging in foreign corrupt practices should recognize that this sort of misconduct might constitute fraud, manipulation, false reporting, or a number of other types of violations under the CEA, and thus be subject to enforcement actions brought by the CFTC.  Bribes might be employed, for example, to secure business in connection with regulated activities like trading, advising, or dealing in swaps or derivatives.  Corrupt practices might be used to manipulate benchmarks that serve as the basis for related derivatives contracts.  Prices that are the product of corruption might be falsely reported to benchmarks.  Or corrupt practices in any number of forms might alter the prices in commodity markets that drive U.S. derivatives prices.  We currently have open investigations involving similar conduct.

In December 2020, the CFTC exercised that authority by imposing a $95 million civil penalty to settle charges against Vitol Inc, for manipulative and deceptive conduct involving foreign corruption and physical and derivatives trading in the U.S. and global oil market.  The CFTC found that “Vitol committed fraud by making corrupt payments (e.g., bribes and kickbacks) to employees and agents of certain state-owned entities (SOEs) in Brazil, Ecuador, and Mexico to obtain preferential treatment and access to trades with the SOEs to the detriment of the SOEs and other market participants.”  The corrupt payments were concealed by funneling them through offshore bank accounts or to shell entities, and at times, issuing deceptive invoices for purported “market intelligence” or “sell support.”  The objective of these illicit payments was to secure unlawful competitive advantages in trading physical oil products and derivatives.

Trading on Material Nonpublic Information

The Dodd-Frank Act expanded the CFTC’s authority to police misappropriation of confidential information and insider trading in commodities markets.  Similar to the SEC’s Rule 10b-5, CFTC  Rule 180.1 prohibits manipulative and deceptive devices, i.e., fraud and fraud-based manipulative devices and contrivances employed intentionally or recklessly, regardless of whether the conduct in question was intended to create or did create an artificial price.

The fraud or manipulation must be in connection with any swap, or contract of sale of any commodity in interstate commerce, or contract for future delivery on or subject to the rules of any registered entity.  Examples of prohibited trading include:

• trading on material nonpublic information (MNPI) that was obtained by fraud or deception;
• trading on market-moving information that the source had a duty to protect;
• brokers front running customer orders or taking the other side of any customer order without consent; and
• improperly disclosing MNPI or using MNPI provided by a counterparty without the counterparty’s consent.

An example of the CFTC enforcing its prohibition against the misappropriation of MNPI is a September 29, 2016 enforcement taken against Jon P. Ruggles for engaging in fraudulent, fictitious, and non-competitive trades in crude oil and heating oil futures and options and RBOB gasoline futures on the NYMEX.  The CFTC’s order settling the charges requires Ruggles to disgorge ill-gotten gains totaling $3,501,306, imposes a civil monetary penalty of $1.75 million, and permanently bans him from trading and registering with the CFTC.  Ruggles, who was responsible for developing his former employer’s fuel hedging strategies and for executing the employer’s trades in certain NYMEX products, misappropriated the employer’s trading information for his own benefit in personal accounts that he controlled.

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 the U.S. Dollar International Swaps and Derivatives Association Fix (USD ISDAFIX), benchmark-swap rates, LIBOR, Euribor, and other foreign interest-rate benchmarks.

On May 25, 2016, the CFTC ordered Citibank to pay $250 million for attempted manipulation and false reporting of USD ISDAFIX benchmark-swap rates.  According to a CFTC press release, Citibank traders “attempted to manipulate and made false reports concerning the USD ISDAFIX by skewing the Bank’s USD ISDAFIX submissions . . . in order to benefit the Bank’s trading positions at the expense of its derivatives counterparties.”   The CFTC uncovered numerous instances of Citibank’s USD ISDAFIX misconduct through the bank’s exotic traders’ instant messages.  In March 2008, one of Citibank’s exotics traders stated in separate instant messages to other market participants that “[I] moved the screen btw” and “[I] moved the screen to 183 on 2s10s…[One of Citibank’s swaps traders] is pretty good at it,” and “[I] push the 2s10s swap on the screen to 183.4, very proud of myself.”

How the CFTC Determines Whistleblower Awards

According to the CFTC’s Enforcement Manual, “[w]hen the CFTC obtains a judicial or administrative order that—by itself or together with judgments or orders in related CFTC enforcement actions or Related Actions brought by certain other entities—imposes monetary sanctions exceeding $1,000,000, then the order becomes a covered judicial or administrative action upon which the CFTC may pay out whistleblower awards. The WBO will then post a Notice of Covered Action, and whistleblowers may begin applying for awards.”

A recent CFTC order awarding $10 million to a CFTC whistleblower clarifies that the CFTC employs a flexible approach to weighing the positive and negative award criteria and no one factor is dispositive:

The analytical framework in the Rules provides general principles without mandating a particular result. The criteria for determining the amount of an award in Rule 165.9, 17 C.F.R. § 165.9, are not listed in any order of importance and are not assigned relative importance. Rule 165.9(b) provides a list of factors that may increase the award amount, and Rule 165.9(c) provides a list of factors that may decrease the award amount. However, the Rules do not specify how much any factor in Rule 165.9(b) or (c) should increase or decrease the award percentage. Not satisfying any one of the positive factors does not mean that the award percentage must be less than 30%. and the converse is true. Not having any one of the negative factors does not mean the award percentage must be greater than 10%. These principles serve to prevent a vital whistleblower from being penalized for not satisfying the positive factors. For example, a whistleblower who provides the Commission with significant information and substantial assistance such as testifying at trial and producing documents containing direct evidence of violations could receive 30% even if the whistleblower did not participate in any internal compliance systems. In contrast, in order to prevent a windfall, a whistleblower who provides some useful but partial information and limited assistance to the Commission may receive 10% even if none of the negative factors were present.

Key Rules Governing CFTC Whistleblower Award Eligibility

Audit Reveals IRS Whistleblower Program Needs Improvements

TIGTA Audits of IRS Whistleblower Program According to an audit report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS Whistleblower Office (WO) … 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.

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.