SEC Targets Inadequate Disclosures
Recently, the SEC has refocused its efforts against against companies whose public filings or communications have mislead or deprived investors of material information. On February 24, 2017, the acting SEC Chair Michael Piwowar stated that the agency needs to take a second look at policies like disclosure requirements, high corporate penalties and accreditation rules that have adversely impacted investors. Indeed, investors need full, fair, and accurate disclosures to make informed decisions about investments.
Under the SEC Whistleblower Program, whistleblowers may receive a reward for reporting original information to the SEC about violations of federal securities laws, including inadequate disclosures. Since the law went into effect, the SEC has well in excess of $100 million to whistleblowers. The largest award to date, more than $30 million, was issued to a whistleblower who provided the SEC with key information that led to a successful enforcement action.
For more information about whistleblower rewards and bounties, contact the SEC whistleblower attorneys at Zuckerman Law at 202-262-8959.
Original Information Based on Independent Analysis
Whistleblowers must submit “original information” to be eligible for an award. This information may be derived from the whistleblower’s independent knowledge or independent analysis. Inadequate disclosure violations present an opportunity for individuals with in-depth market knowledge and experience to provide the SEC with information that may provide the springboard for an investigation.
For example, Regulation G and Item 10(e) of Regulation S-K govern the presentation of companies’ non-GAAP financial measures. These regulations require, among other things, that companies using a non-GAAP measure in their filings include:
- A presentation of the most directly comparable GAAP financial measure, with that presentation having equal or greater prominence than the disclosed non-GAAP measure; and
- A reconciliation showing the differences between the non-GAAP measure and the most directly comparable financial measure calculated in accordance with GAAP.
Accordingly, if an investor notices that either requirement is amiss from a company’s filings, he or she may submit a tip to the SEC and be eligible for an award. In early 2016, the SEC issued a $700,000 award to a whistleblower for his or her detailed analysis that led to a successful SEC enforcement action.
SEC Enforcement Actions
There are many examples of SEC enforcement actions based on inadequate disclosures. These include actions for accounting violations, deceptive non-GAAP financial measures, inadequate internal controls, investment fraud, and foreign bribery or FCPA violations. Even Warren Buffett has recently warned that non-GAAP numbers have been used to artificially boost earnings. We expect to see an increase in SEC enforcement in this area of inadequate disclosures.
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. Morgan Stanley was fined $50 million for similar inadequate disclosures in 2003.
In another action, on February 14, 2017, the SEC fined groups of investors that failed to properly disclose ownership information during a series of campaigns to influence or exert control over microcap companies. In each of these campaigns, the groups collectively owned more than five percent of the companies’ outstanding common stock, yet the required ownership filings to disclose that information to the investing public were either incomplete, untimely, or altogether absent. The investors agreed to penalties ranging from $30,000 to $180,000.
SEC Whistleblower Rewards and Bounties
Under the SEC Whistleblower Program, whistleblowers may be eligible for monetary awards when they voluntarily provide the SEC with original information about violations that leads the SEC to bring a successful enforcement action resulting in monetary sanctions exceeding $1,000,000. Whistleblowers are eligible to receive between 10 percent and 30 percent of the monetary sanctions collected.
SEC 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.