SEC Targets Disclosure Fraud
The SEC is consistently taking enforcement actions against companies whose public filings or communications have misled or deprived investors of material information. Investors need full, fair, and accurate disclosures to make informed decisions about investments. Disclosure fraud will likely be a top enforcement priority after the COVID-19 pandemic. Inaccurate or misleading disclosures about the impact of the pandemic on a company’s revenue or operations can give rise to an enforcement action.
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 Whistleblower Office has awarded nearly $1 billion in awards to whistleblowers. The largest SEC whistleblower award to date, $114 million, was issued to a whistleblower who provided the SEC with key information that led to a successful enforcement action.
If you have information that may qualify for an SEC whistleblower award or have suffered whistleblower retaliation, contact the Director of our SEC whistleblower practice at firstname.lastname@example.org 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. Read our tips for SEC whistleblowers and Forbes column about the success of the SEC whistleblower program.
“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 Based on Deficient Internal Controls
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.
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.
On May 11, 2017, the SEC announced that the former CEO of MDC Partners, Miles S. Nadal, has agreed to pay $5.5 million to settle charges that his perks were not properly disclosed to shareholders. In public companies, all perks, benefits, and other forms of compensation paid to CEOs and highly compensated executive officers must be disclosed. According to the SEC’s order, Nadal obtained nearly $11 million in perks beyond his disclosed benefits and $500,000 annual allowance. This included Nadal’s personal use of private airplanes, charitable donations in his name, yacht and sports car expenses, cosmetic surgery, and a wide range of other perks. Earlier in 2017, MDC Partners agreed to settle this disclosure failure for $1.5 million.
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 Lawyers
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.
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Drawing on substantial experience representing corporate whistleblowers in SOX whistleblower cases, our SOX whistleblower lawyers have published a free guide to SOX titled Sarbanes-Oxley Whistleblower Protection: Robust Protection for Corporate Whistleblowers:
Protections for SEC Whistleblowers
SEC Whistleblower Attorneys
For more information about SEC whistleblower rewards and bounties, contact the SEC whistleblower lawyers at Zuckerman Law at 202-262-8959.
The SOX whistleblower lawyers at Zuckerman Law have represented CEOs, CFOs, in-house counsel, partners at audit firms, and other senior professionals in high-stakes whistleblower matters. Click here to read reviews and testimonials from former clients.