SEC Whistleblower Program: Awards for Exposing Securities Fraud – Fraudulent Securities Offerings and Ponzi Schemes
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 10% and 30% of the monetary sanctions collected as an award.
According to a recent 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.
Offering Fraud: Misleading/Deceptive Investment Offerings
Offering fraud involves a security’s being offered to the public on terms that are materially misrepresented. For example, guaranteeing a return on an investment and offering “risk-free” investments are considered material misrepresentations. This type of fraud continues to be a focus of SEC enforcement. According to the SEC Whistleblower Office’s 2016 Annual Report to Congress, offering fraud was the second-most-common complaint reported by whistleblowers (15.6%), the most common being corporate disclosures and financials (17.5%). Tips about market manipulation were not far behind (12.3%).
SEC Enforcement Actions
- 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 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.
For more information about offering fraud, see the SEC’s Investor Alert: 10 Red Flags That an Unregistered Offering May Be a Scam.
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.
Warning Signs of 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.
SEC Enforcement Actions
- 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 as 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 a Ponzi-like payments, and transferred much of the remainder in transactions that appear unrelated to their purported business.
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 2011, the SEC Whistleblower Office has awarded more than $262 million in awards to whistleblowers. In March 2018, the SEC awarded $83 million to 3 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
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.” In 2017, Washingtonian magazine named two of our attorneys top whistleblower lawyers.
For more information about the SEC Whistleblower Program, see the following SEC posts:
- 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.