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SEC Whistleblower Guide

SEC Whistleblower Program: Awards for Exposing Securities Fraud and Ponzi Schemes

Under the SEC Whistleblower Program, whistleblowers may receive a reward for providing the SEC with original information about securities fraud. 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. Since the enactment of the SEC Whistleblower Program, the agency has paid more than $150 million in awards to whistleblowers.

According to a recent speech by SEC Enforcement Director Andrew Ceresney, offering fraud and Ponzi schemes are the types of cases where whistleblower 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 schemes, and due to their prevalence, offers the alert in five different languages: Chinese, Spanish, Portuguese, Vietnamese, and Creole.

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

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

In a recent offering-fraud enforcement action, 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.

In another offering-fraud action, 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.

Ponzi 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.

Warning Signs of a Ponzi Scheme

The SEC compiled a list of red flags that are common to most Ponzi schemes. These warning signs 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

In a recent enforcement action, 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. It was considered a Ponzi scheme because some of the money from new investors was used to pay earlier investors.

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.

In another enforcement action, 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.

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.

SEC Whistleblower Bounties

Whistleblowers are eligible to receive between 10% and 30% of the monetary sanctions collected. On September 22, 2014, a whistleblower was awarded more than $30 million for providing key information that led to a successful enforcement action.

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.

SEC Whistleblower Bounties

Additional Resources

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