The Woodbridge Group of Companies – Another Ponzi Targeting Utahns

The Woodbridge Group of Companies was run by a flashy promoter in Los Angeles named Robert Shapiro.  Woodbridge marketed promissory notes (which were in reality unregistered securities) to an estimated 7,000 retail investors throughout the United States, including Utah.  Investors were told their funds would provide a safe, secured return from short-term real-estate loans.

In reality, investor money was used to fund real-estate purchases made by shell companies run by Shapiro himself, including high-priced luxury homes in Los Angeles according to the SEC lawsuit filed in December of 2017.  The SEC alleged that investors received monthly interest checks that were actually funded by money from newer investors, which is a classic Ponzi scheme.

This story about the case appeared in the Wall Street Journal today, and is a follow-up to the WSJ’s fascinating article about the case from February:

 

Woodbridge Bankruptcy Spotlights CEO’s Luxury Spending

The money for his lavish lifestyle came from the pockets of thousands of people, from an 89-year-old widow in a memory care facility in Tennessee to ABC news anchor George Stephanopoulos, according to the Securities and Exchange Commission, which has accused Mr. Shapiro of running a Ponzi scheme.

“Like many others, I was a victim of Woodbridge and now must deal with the consequences of its bankruptcy,” Mr. Stephanopoulos told The Wall Street Journal. Woodbridge filed for chapter 11 bankruptcy protection on Dec. 4, a few days after Mr. Shapiro stepped down from the chief executive spot and, according to court papers, spent $16,000 of company money at Macy’s.

He expected to stay on as a $2 million-a-year consultant, but the arrangement didn’t last long: Woodbridge cut ties to him after the SEC sued him and the company for fraud on Dec. 20.

 Mr. Shapiro denies running Woodbridge as a Ponzi scheme and is fighting the SEC case in federal court in Florida. However, his former company has said it would admit to running a Ponzi scheme, and is providing details with new bankruptcy court filings that sketch a picture of a troubled company with tangled finances.

Woodbridge promised investors safe returns on short-term notes, which were to be secured by valuable real estate in some of the priciest markets in the country, from the Holmby Hills area of Los Angeles to Aspen, Colo.

An SEC fraud case filed in federal court in Florida alleges the real estate was bait to draw investors into Woodbridge’s $1.2 billion Ponzi scheme. Cash that came in from new investors was recycled to pay older investors, according to the civil fraud complaint and bankruptcy court testimony from an SEC expert.

The SEC lawsuit was the culmination of a year-long federal investigation into Woodbridge, which sold unregistered securities, often through unlicensed agents. Securities authorities in Arizona, California, Iowa, New Jersey, Oregon, South Carolina and Colorado were also looking into Woodbridge, court papers say.

Now in the hands of legal and real estate professionals, Woodbridge continues to operate under the watchful eyes of the SEC and a bankruptcy judge. The first order of business: start selling Woodbridge’s portfolio of more than 130 properties which are estimated to be worth more than $650 million and start paying off investors.

Estimates are that investors could get from 45% to 76% of what they are owed, if things go according to plan in Woodbridge’s bankruptcy proceeding. That recovery estimate doesn’t include what Woodbridge might be able to recover from lawsuits against its ex-chief executive and brokers that sold the notes, court papers say.

Mr. Shapiro invoked his Fifth Amendment right not to testify against himself during the SEC probe, and in the face of questions from creditors. His lawyer didn’t respond to a request to discuss Woodbridge’s spending.

In addition to paying Mr. Shapiro’s credit card bills, country club dues and other expenses, Woodbridge transferred $3.8 million to his wife, Jeri, in the year before the company’s bankruptcy filing, most of it through a media-buying company she owned, court records show. Others in the Shapiro circle—a nephew, an uncle, a brother-in-law, a stepson—profited as well, according to court records.

Investors such as Mr. Stephanopoulos could also come under scrutiny for possible clawback lawsuits. Mr. Stephanopoulos received $2.5 million in investor payments from Woodbridge in the 90-day period before the bankruptcy, court papers say. By that time, the SEC had gone public with its probe of Woodbridge. Court papers didn’t say how much Mr. Stephanopoulos invested.

 In many Ponzi schemes, the chief recovery for investor victims is suing other victims on the premise that the financial pain of the fraud should be shared equally.

“I will pursue any valid claims I have and will comply with all proper rulings of the bankruptcy court,” Mr. Stephanopoulos told the Journal.


Lessons to be Learned

Overall, I think there are a number of lessons to be learned from this very large (alleged) Ponzi scheme.

First, regardless of what you are told, Woodbridge Notes are securities under federal and state law.  All investments – including the purchase of promissory notes – must be made through a licensed stock broker or registered investment adviser.   Insurance salesmen are not able to solicit or recommend these investments unless they have the proper securities licenses.  If you want to find out if your “financial planner” or “retirement planner” has a securities license run their name through FINRA’s BrokerCheck database.

Second, there is a reason why it is very difficult to find investments that pay high monthly returns on a consistent basis; it’s just not sustainable.  Investments that pay monthly interest at above-market rates are, in my opinion, very likely to be a Ponzi scheme — or to turn into one eventually.  There just aren’t many businesses that can generate returns like that on a consistent basis.

Third, if your financial adviser recommends an investment like this make sure he or she has a big errors and omissions insurance policy, because that may be your only way to get your money back.

For more ideas on how to avoid losing money in a Ponzi Scheme, check out my Top Ten Ways to Avoid Losing Money in an Investment Scam.

I am working on a number of cases involving the Woodbridge Group of Companies, if you lost money and would like to discuss your legal options please contact me.

 

Copyright © 2018 by Mark W. Pugsley, All Rights reserved.

Did you send me a letter? Call me!

I know this is an unusual post but someone recently sent me a copy of an unsigned whistleblower letter to the SEC.  This post is for that person:

To the person who sent me an unsigned letter involving a company with the initials TEG or EA (I don’t want to identify the company here) please call me or email me immediately.  I can help you!

You have a very interesting whistleblower case, but it appears from your letter that you are still working with the company which is the subject of your report.  Understandably, you are concerned about protecting your identity and your job.  I get it.

The good news is that the SEC’s whistleblower rules provide attorneys with powerful ways to protect your identity, and from retaliation by the company – but there is a catch.

In order to submit a tip submit anonymously you must have an attorney represent you in connection with your submission.  For my whistleblower clients I typically prepare a lengthy submission with a detailed description of the illegal conduct and the statutes that have been violated, and then I transmit it to the SEC on their behalf.

In some cases my clients prefer to remain anonymous.  In those situations my client’s name does not appear on the submission and remains unknown to the SEC staff – and to the company.  The identity of the whistleblower is known only to me and will be protected from disclosure by the attorney-client privilege.

And if the company eventually figures out who you are I can help protect you from retaliation.  The law is clear: employers may not discharge, demote, suspend, harass, or in any way discriminate against you for providing information to the SEC under the whistleblower program, or assisting in any investigation. In fact, retaliation against a whistleblower will likely lead to a separate enforcement action by the SEC against a company and a civil lawsuit (filed by me).  Also, under the Sarbanes-Oxley Act, you may be entitled to file a complaint with the U.S. Department of Labor if you are retaliated against for reporting possible securities law violations.  We can help with that too.

The good news is that individuals who provide original information that leads to an SEC enforcement action with $1,000,000 in fines and penalties will likely qualify for an award.  Awards are between 10% and 30% of the money collected by the SEC – and if the fraud is significant the numbers can be huge.   The SEC’s Office of the Whistleblower recently announced that it has paid a record award of nearly $50 million to two whistleblowers, and a third whistleblower was paid more than $33 million.

There are significant benefits to whistleblowers, so you absolutely want to be in a position to apply for an award.  But you have not done enough to qualify for a whistleblower award at this point.  More needs to be done.

So please, call me!

Mark Pugsley

Direct: 801-323-3380

Email

 

FBI Article on Affinity Fraud in Utah

This is a re-post of a great article on the unique problem we have with affinity fraud here in Utah.  This article appeared on the FBI’s website yesterday.


Affinity Fraud

White-Collar Criminals Use Bonds of Trust to Prey on Investors

White-Collar Crime Offender Registry Website (Stock)

Financial fraudsters are known to be an unscrupulous lot, but it is particularly loathsome when these white-collar criminals exploit trusting members of their own church or social circle to line their pockets.

Financial crimes based on bonds of trust—known as affinity fraud—occur throughout the United States but are especially prevalent in Utah, where members of The Church of Jesus Christ of Latter-day Saints too often are victimized by savvy fraudsters who claim to be just like them.

“These are greedy individuals who will stop at nothing,” said John Huber, the U.S. Attorney for the District of Utah, a lifelong resident of the state and member of the Mormon Church. “What’s so disconcerting is that these criminals approach us at church or through associations at our work or referrals from friends. They are silver-tongued devils—wolves in sheep’s clothing who will take our money and we’ll never see it again.”

So serious is the problem of affinity fraud in Utah that in 2015 the state legislature passed a law establishing an online white-collar crime registry—similar to sex-offender registries—which publishes the names, photographs, and criminal details of individuals convicted of financial fraud crimes in the state going back a decade. Currently, there are 231 individuals listed on the registry.

In addition, a collaboration between federal, state, and local law enforcement partners has resulted in the Stop Fraud Utah campaign, which aims to educate the public about affinity fraud—what people can do to avoid it and how best to report it if they have been victimized.


In Their Words

A Utah woman who believed she had done her homework on retirement investments later discovered she was part of an elaborate scam that cost her thousands.

Transcript | Download

John Huber, U.S. Attorney for the District of Utah, describes how affinity fraud takes advantage of established “relationships of trust.”

Transcript | Download

Michael Pickett, supervisor of the white-collar crime squad in the FBI’s Salt Lake City office, describes tactics fraudsters use to prey on potential affinity fraud victims.

Transcript | Download

Richard Best, regional director of the Securities and Exchange Commission’s Salt Lake office, describes taking precautions against affinity fraud.

Transcript | Download


“Within the Mormon population, there is a well-known sense of trust,” said Special Agent Michael Pickett, a veteran white-collar crime investigator in the FBI’s Salt Lake City Division. “Unfortunately, that trust can sometimes take the place of due diligence, and that’s when individuals are more susceptible to being victimized.”

Affinity fraudsters are expert manipulators. “They are great salesmen,” Pickett explained. They will approach members of their social or religious circle with a promising investment opportunity—one that pays a high rate of return—and then use a variety of high-pressure tactics to get their victims’ money.

Pickett described some of the fraudsters’ ploys: “This is a once in a lifetime opportunity. You don’t want to be the one who passed up buying Amazon when it was first offered. You don’t want to be the one that blows that opportunity, but you have to do it now. If you wait, the opportunity is gone. And by the way, you are one of the few people I am making this offer to, so let’s just keep it between ourselves.”

“This type of fraud is significant,” Pickett said. “Within the Utah area, we are investigating more than $2 billion worth of fraud. In the last four months, we’ve opened 10 new cases.” He added that Utah consistently ranks among the top five states for the FBI’s most significant white-collar crime cases.

Too often, individuals dreaming about getting the great deal promised to them by a trusted friend or associate fail to see the red flags. “A key to this is communication,” Pickett said. “You have to do your due diligence. Talk to a neighbor or a family member. Add a little common sense to the equation, and try to separate truth from fiction.”

That’s where the Stop Fraud Utah campaign comes in. “The strategy for law enforcement is not to deal with fraud as a reaction, but to deal with it on the front end,” said Richard Best, regional director of the Salt Lake City office of the U.S. Securities and Exchange Commission (SEC), a partner in the campaign. “The best way to stop fraud is to avoid fraud, and the best way to do that is to educate the community so that when they are confronted with situations—opportunities, as fraudsters would say—they know to ask the right questions.”

Established earlier this year, the Stop Fraud Utah campaign has sponsored several fraud seminars around the state, which are free and open to the public. And because victims of affinity fraud typically call their local police departments to report these crimes, there is also an effort to train local law enforcement personnel on how to identify white-collar fraud, what evidence to collect, and the proper state and federal agencies to report it to for further investigation.

The high level of collaboration among Stop Fraud Utah campaign partners is “crucial to our success here,” Best said. “I cannot stress that enough. The SEC’s relationship with the FBI and the U.S. Attorney’s Office is one of the best I have ever seen.” Other members of the campaign include the Utah Attorney General’s Office, the Internal Revenue Service, and the state’s Consumer Protection Division.

“In Utah, we have to do something to stop fraudsters from exploiting people who trust them,” said U.S. Attorney Huber. That’s why the state’s top law enforcement official has personally attended fraud seminars to caution the public about affinity fraud. “I know Utah very well,” he said. “It troubles me to see good people who have worked very hard to set aside retirement funds and nest eggs lose that to people who seemingly have no conscience.”

Unlike a drug addict who might rob a bank out of desperation, Huber added, financial fraudsters’ crimes are ruthlessly premeditated. “These perpetrators, with a smile on their face and a twinkle in their eye, approach with a handshake and a hug, with intent and with persistence, to violate the trust of their victims and to take their life’s earnings.”

Wolves in Sheep’s Clothing

The white-collar criminals who commit affinity fraud are often charismatic salesmen capable of deceiving even sophisticated investors.

Special Agent Michael Pickett, a veteran financial fraud investigator in the FBI’s Salt Lake City Division, offers a case in point:

His team was investigating a scam artist who had fraudulently collected approximately $5 million from investors—and who would later go to jail for his crimes.

“We talked with one of his victims, an elderly lady, who knew this gentleman very well,” Pickett said. “She had been associated with him for years. Her husband, who had recently passed away, had been good friends with him as well.”

The woman had invested and lost more than $100,000 with the individual. Investigators spoke to her and made her understand that she had been the victim of a fraud. “Ultimately, she agreed to wear a wire for us and talk with the individual to get his sales pitch so we could use that in court against him,” Pickett explained. “She knew it was fraud and agreed to help us.” Wearing the wire, the victim spoke with the man who had taken her money. “She came back about two hours later,” Pickett said, “ready to invest more money with this individual.”

FBI agents were able to talk her out of investing more funds, Pickett said, “but that’s how good a salesman he was—and it was all based on that relationship of trust.”

SEC Creating Searchable Database of Bad Brokers

This is a repost of an article that appeared in ThinkAdvisor today.  Apparently the SEC agrees with one of the main goals of this website; people are increasingly googling the names of people they want to do business with, so information about people who have a documented history of unethical or fraudulent conduct needs to be easier to find.  The only reservation I have about this approach is that the database will be limited to (1) individuals,  and (2) those “who have been barred or suspended as a result of federal securities law violations.”

This leaves a number of gaps.  I think the database should include companies that have a history of fraud (which could include a number of well-known companies), and it should also include companies and individuals who have been barred or suspended by FINRA or state regulatory agencies.  But otherwise its a good first step!  -MWP

SEC Creating Searchable Database of Bad Brokers

The site ‘will be particularly valuable’ for spotting fraudsters who have been stripped of their registrations, Clayton said

 

SEC Chairman Jay Clayton. (Photo: Diego Radzinschi/NLJ)The Securities and Exchange Commission is creating a website that will contain “a searchable database of individuals” who have been barred or suspended as a result of federal securities law violations, the agency’s chairman, Jay Clayton, said Wednesday.

“This resource is intended to make the prior actions of repeat offenders and fraudsters more visible to investors,” Clayton said at the Practising Law Institute’s 49th Annual Institute on Securities Regulation conference in New York.

“Clearly, there are fraudsters in our marketplace who are seemingly unafraid of, or undeterred by, the risk of being caught. The SEC can target the underlying conduct of those fraudsters – and we do – but we also can and should arm investors with information that makes it more difficult for them to be defrauded.”

The searchable website, Clayton continued, “will be particularly valuable when bad actors have shifted from the registered space for investment advisors and broker-dealers to the unregistered space.”

Clayton stated in late September that the agency was planning to compile data on people who are not registered as advisors or brokers in order to catch more incidences of fraud.

During his Wednesday comments, Clayton said that the securities regulator reminds investors “repeatedly that they should conduct a background check before investing with a financial professional, and we are showing them how to do just that” with the upcoming website and with FINRA’s BrokerCheck.

Clayton told audience members that the SEC should continually be asking: “Are there opportunities to deter, mitigate or eliminate wrongdoing before an enforcement action becomes necessary?”

Looking back at enforcement actions brought by the agency, he continued, “a common theme emerges – where opacity exists, bad behavior tends to follow.”

The agency’s enforcement division, he said, “will continue to be active in pursuing cases where hidden or inappropriate fees are at issue, but we also are exploring whether more can be done to clarify fee disclosures made to retail investors and, thereby, deter and reduce the opportunities for misbehavior.”

As an example, he cited firms that invest clients’ money in a mutual fund share class that charges a 12b-1 fee when a lower-cost share class of the same fund is available, “or advisors may improperly choose to use fund assets to pay expenses that should be paid by the firm.”

Customers, he added, “may be deceived if brokers charge fees that are designed to cover the costs of services provided, while also marking up the prices of securities to earn a profit that is not disclosed.”

Barred Broker Hank Brock Pleads Guilty to $10 Million Tax Fraud Scheme

Henry (“Hank”) Brock of St. George, Utah pleaded guilty on Monday to tax evasion, securities fraud and wire fraud. According to the Department of Justice press release, Brock sold fraudulent tax-avoidance and investment strategies to his clients through a financial services company he ran called Mutual Benefit International Group, Ltd.  and through its subsidiaries, Brock Seminars LLC, and MB Holdings BVI, LLC.  The DOJ alleged that as president of Mutual Benefit Brock marketed a fraudulent tax scheme investment called “IRA Exit Strategy” to potential investors through seminars, phone calls, mailings, emails and online ads from 2009 through 2017.

According to the Felony Information that was filed on October 17, 2017, Brock promised investors that this IRA Exit Strategy would help them to avoid paying taxes on IRA withdrawals, which are normally subject to IRS penalties and taxes. Specifically, Brock gave his clients tax forms which falsely showed they were investors in his business, and that the company had incurred substantial losses.  These losses were then used to offset tax liabilities from their IRA withdrawals on fraudulent income tax returns that they were instructed to file with the IRS.

According to the Department of Justice, Brock fraudulently raised over $10.8 million by making false representations to investors regarding this “IRA Exit Strategy,” and by misrepresenting the financial condition of his company and other matters.  On at least one occasion the DOJ alleges Brock transferred $196,323 of a client’s investment funds and used the money for his own personal and business expenses.

Brock faces a maximum sentence of five years in prison for tax evasion, 20 years in prison for securities fraud and 20 years in prison for wire fraud. He will also be ordered to pay restitution and monetary penalties.  Sentencing is scheduled for March 5, 2018 before U.S. District Court Judge Ted Stewart.

This is not the first time that Brock has had run-ins with government regulators.  In April of 2006 he entered into a Stipulation and Consent Order with the Utah Division of Securities, which is obtainable through a government records (GRAMA) request.  As part of  that settlement Brock was barred from associating with a broker-dealer or investment adviser licensed in the State of Utah – for life.

He was also specifically prohibited from “advising individuals in any way regarding the sale, promotion or purchase of securities; and presenting seminars in order to solicit business for, or otherwise make referrals to, for any form of compensation, any broker-dealer, agent, investment adviser or investment representative licensed in Utah.”

It is unclear to me whether Brock violated the terms of his settlement with the state when he solicited investors for Mutual Benefit, but I assume the state is looking into that possibility.

Although this 2006 settlement is no longer available on the Division of Securities’ online database, the fact that Brock has been permanently barred from selling securities is disclosed on FINRA’s website brokercheck.com.  It is always a good idea to run a search on Broker Check before doing business with anyone in the financial services industry.

Mr. Brock is also somewhat infamous for a lawsuit he filed against the Utah Division of Securities in 2010 for $357.6 million.  In the lawsuit he an another man, Jay Rice, accused state regulators of targeting them without proof of wrongdoing in an over-zealous campaign to bring down securities violators. They claimed that they were put out of business and forced to declare bankruptcy as a result of the agency’s actions. “They destroyed my reputation maliciously and wholly without cause,” Mr. Brock said in an interview at the time. “ Among the claims in the lawsuit are allegations that the Securities Division bribed Mr. Rice’s clients, went through Mr. Brock’s computers without permission and sent out a press release announcing the action to bar him from the securities industry that contained false information.

U.S. District Court Judge Tena Campbell initially dismissed the case in July 2010 based on governmental immunity, but then the U.S. 10th Circuit Court of Appeals reversed and remanded just the portion of the case alleging violations of their state constitutional rights.

If you lost money or are facing IRS penalties after working with Hank Brock of Mutual Benefit International Group please share your story in the comments below.

Copyright © 2017 by Mark W. Pugsley. All Rights Reserved.

 

The Financial Fraud Institute is coming to St. George, Utah

STOP FRAUD UTAH and the Financial Fraud Institute are coming to St. George!  The event will take place on November 2nd from 4:00 to 7:00 p.m., at the Dixie Center.  The keynote speaker will be John W. Huber the United States Attorney for the District of Utah. Click on this link to access the brochure.

STOP FRAUD UTAH is a collaboration of federal, state, and local law enforcement and self-regulatory organizations working together to fight fraud in Utah by educating the community about ways to avoid being victimized. What is unique about this program is the depth of cooperation among federal, state, local law enforcement and self-regulatory organizations.  STOP FRAUD UTAH includes the following state and federal agencies:

• The SEC
• The United States Attorney’s Office
• The Commodities Futures Trading Commission
• The FBI
• The IRS
• The Financial Industry Regulatory Authority (FINRA)
• Utah Attorney General’s Office
• Utah Division of Securities
• Utah Division of Consumer Protection
• Salt Lake County Attorney’s Office
• Utah County Attorney’s Office
• Washington County Attorney’s Office

Additionally two panels made up of presenters from many of the agencies listed above will discuss financial fraud and consumer fraud. Informational booths from the various agencies, as well as the AARP, Utah Retirement Systems, Adult Protective Services, the Utah Department of Veterans & Military Affairs and the Better Business Bureau will be available to provide information to attendees.

STOP UTAH FRAUD

Utah Federal, State, and Local Government Officials Join Forces to Educate Investors on How to Avoid Fraud

Public Seminars to be Held in Salt Lake City and Utah County

SALT LAKE CITY  April 5, 2017 – In a new, collaborative effort, Utah federal, state and local government officials established the Financial Fraud Institute and will hold two separate multi-agency seminars designed to educate Utah investors and consumers on how to recognize and avoid financial and consumer fraud, announced U.S. Securities and Exchange Commission Regional Director Richard R. Best and U.S. Attorney for the District of Utah John W. Huber.  The free seminars are open to the public and will be held in Salt Lake City on April 26 and in Utah County on May 10.

Officials from the U.S. Securities and Exchange Commission, U.S. Attorney’s Office, Utah Attorney General’s Office, Financial Industry Regulatory Authority (FINRA), Utah Division of Securities, U.S. Commodity Futures Trading Commission, Utah Division of Consumer Protection, FBI, IRS and Salt Lake/Utah County Attorneys offices will participate in the seminars. Utah Attorney General Sean Reyes will be the keynote speaker at the April seminar and Chief Magistrate Judge Paul M. Warner of the U.S. District Court for the District of Utah will be the keynote speaker at the May seminar. These are the first in a series of seminars to be held by representatives of the Financial Fraud Institute.

The seminars will provide information on:  key questions to ask before making investment decisions; where to find free and unbiased information; how to spot financial scams; and how to report suspected fraud.


WHO:      National and local experts from federal and state law enforcement and financial regulatory agencies

WHAT:    Financial Fraud Institute Seminars to educate investors and consumers on how to recognize and avoid fraud.

Salt Lake City

WHEN:                      April 26 in Salt Lake City

                                    5:00 p.m. – 8:30 p.m. See full agenda

WHERE:                   University of Utah, S.J. Quinney College of Law Auditorium

                                    383 S. University St., Salt Lake City, UT 84112

Free parking at the University of Utah Stadium

Utah County

WHEN:                      May 10 in Utah County

                                    5:00 p.m. – 8:30 p.m. See full agenda

WHERE:                   Utah Valley University, Classroom Building Rooms 101B and 101C

                                    800 W. University Parkway, Orem, UT 84058

Those interested in attending the seminars must register at: Salt Lake City and Utah County, or call 801-579-6191. For more information, visit www.utfraud.com.

The seminars are open to the press.  Press interested in attending the events should contact Melodie Rydalch of the Utah U.S. Attorney’s Office on 801-243-6475 or melodie.rydalch@usdoj.gov.

ACCESS THE STOP FRAUD UTAH WEBSITE HERE

Follow us on Twitter at #StopFraudUtah.

 

SEC Publishes Recommendation on How Avoid Common Investment Scams in 2017

The Securities and Exchange Commission has published its annual list of tips designed to help investors with managing their money and avoiding common scams in the New Year.  Here is the list which is published by the SEC’s Office of Investor Education and Advocacy:

SEC INVESTOR BULLETIN: 10 INVESTMENT TIPS FOR 2017

12/27/2016

Whether you are a first-time investor or have been investing for years, here are 10 tips from the SEC’s Office of Investor Education and Advocacy to help you make better informed investment decisions and avoid common scams in 2017.

1. Always check the background of an investment professional—it is easy and free. You can find details of an investment professional’s background and qualifications through the search tool on the SEC’s website for individual investors, Investor.gov.  If you have any questions about checking the background of an investment professional, you can call our toll-free investor assistance line at (800) 732-0330 for help.

2. Promises of high returns with little or no risk are classic warning signs of fraud.  Every investment carries some degree of risk and the potential for greater returns often correlates with greater risk.  Ignore so-called “can’t miss” and “guaranteed risk-free” investment opportunities.  Better yet, report them to the SEC.

3. Be careful when using social media as an investment tool.  Social media and the Internet have become important tools for investors, but also present opportunities for fraudsters to lure investors into a wide range of scams.  For additional information on ways to avoid fraud through social media, please read our bulletin on Social Media and Investing.

4. It can be costly to ignore fees associated with buying, owning, and selling an investment product.  Expenses vary from product to product, and even small differences in costs can mean large differences in earnings over time.  An investment with high costs must perform better than a low-cost investment to generate the same returns.Read our bulletin on How Fees and Expenses Affect Your Investment Portfolio to learn more.

5. Be alert to affinity fraud.  Affinity frauds target members of identifiable groups, such as the elderly, religious or ethnic communities, or the military.  Even if you know the person making the investment offer, be sure to check out the investment and the person’s background—no matter how trustworthy the person seems.

6. Any offer or sale of securities must be either registered with the SEC or exempt from registration.  Otherwise, it is illegal.  Registration is important because it provides investors access to key information about the company’s management, products, services, and finances. Always check whether an offering is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.

7. Diversification can help reduce the overall risk of an investment portfolio.  By picking the right mix of investments, you may be able to limit your losses and reduce the fluctuations of your investment returns without sacrificing too much in potential gains.  Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.

8. Did you know that active trading and some other very common investing behaviors actually can undermine investment performance? According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state, or company, and holding on to losing investments too long and selling winning investments too soon.

9. If you are investing or saving toward a goal, or just want to learn about how your money can grow under various hypothetical scenarios, take advantage of our compound interest and savings goal calculators.These calculators are great tools to help inform any decisions you make about your investing and saving.

10. Unbiased resources are available to help you make informed investing decisions. Whether checking the background of an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a significant advantage for investing wisely.  A great starting point is Investor.gov.

If you have questions about your investments, your investment account or a financial professional, don’t hesitate to contact the SEC’s Office of Investor Education and Advocacy online or on our toll-free investor assistance line at (800) 732-0330.


The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Does Disclosure of a Ponzi Scheme in the PPM make it legal? No.

Dee_Randall-1Dee Randall ran one of Utah’s largest Ponzi schemes, raising more than $72 million from approximately 700 investors nationwide.

On June 18, 2014 Utah Attorney General Sean D. Reyes’ office filed a criminal information and affidavit of probable cause against Randall for multiple counts of securities fraud and other related charges.  Randall, a resident of Kaysville, Utah, was charged with 21 second degree counts of felony securities fraud, one third-degree felony securities fraud count, and one second degree count of pattern of unlawful activity.

At the initial hearing on his criminal case victims testified that Randall, who was the owner of Horizon Mortgage & Investment, sold what he called “Horizon Notes” which were supposed to pay annual returns of 9 to 17 percent.  Investors were told that their funds would be used to finance car loans and real estate, but in reality Randall used investor funds for other things, such as payments to his other entities and payments to earlier investors – a classic Ponzi scheme. If you are in the market for a new home then you need, NorthPoint Mortgage.

What is unique about this case is Randall argued in court that although it may have been a Ponzi it was nevertheless legal because he disclosed it to his investors in the Private Placement Memoranda (or PPM).  Specifically, he disclosed that he was going to use new investor money to make payments to earlier investors, apparently hoping such a disclosure would get around securities laws.  So if you tell someone you’re going to defraud them is it still fraud?

Keith Woodwell, head of the Utah Division of Securities, says there’s no such thing as a “legal fraud” since Utah law also says it is illegal to operate a business in way that defrauds investors. “Using money from new investors to pay older investors, with no way to generate profits to pay people back, is a fraud regardless of whether you disclose it or not.”  This novel argument was also rejected by the bankruptcy judge.

My question is this: did anyone ever actually read the Horizon PPM?  PPM’s are required for a non-registered offerings of securities and are definitely worth reading before you invest.  In this case potential investors who read the PPM would have discovered that their money was going to be used to pay off other investors and (hopefully) would have declined to participate in this investment opportunity.  But the unfortunate reality is that  hardly anyone ever reads PPM, they are long and usually difficult to understand.

After months of legal maneuvering, this week Randall finally pleaded guilty to four counts of securities fraud and one count of pattern of unlawful activity, each punishable by up to 15 years in prison. Sentencing is set for Feb. 6, 2017.

If you are a victim of the Dee Randall/Horizon Financial scam feel free to share your story in the comments below.   The bankruptcy trustee is Gill Miller of Rocky Mountain Advisory, and his website can be found here.

Whistleblower Claims under the Dodd-Frank Act

This is a repost of an article by Jennifer Korb that appeared in the Utah Bar Journal:

sec-logo-2-200x200Whistleblower Claims under the Dodd-Frank Act: Highlights from the SEC’s Annual Report to Congress for the 2014 Fiscal Year

On November 17, 2014, the U.S. Securities and Exchange Commission (referred to herein as the SEC or the Commission) issued its annual report to congress on the Dodd-Frank Whistleblower Program for the 2014 fiscal year, which ended September 30, 2014 (the Report). See 2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program (last visited June 1, 2015). This is the third such report since the Whistleblower Program went into effect in August 2011.

The Report provides an overview of the Whistleblower Program, including its history and purpose, the activities of the Office of the Whistleblower (OWB),[i] detailed information regarding the claims for whistleblower awards and profiles of whistleblower award recipients, and information about the Commission’s efforts at combating retaliation.  The Report acknowledges three “integral” components of the Whistleblower Program, (1) monetary awards, (2) protection from retaliation, and (3) confidentiality protection, and that the success of the program depends upon the Commission’s and OWB’s ability to further these objectives.

Amongst the notable events of 2014 are the issuance of the largest whistleblower award to date ($30 million), and the filing of the Commission’s first enforcement action under the anti-retaliation provisions of the Dodd-Frank Act.  These events signify that the Commission is serious about encouraging whistleblowers and that public companies should pay particular attention to how they handle internal reports.

The Commission has experienced a few setbacks, however, when it comes to the scope of the anti-retaliation provisions.  In two private actions, the anti-retaliation provisions have been narrowed to cover only those who complain to the Commission, thus excluding those who complain only to a company supervisor or compliance officer.  This narrowing goes against the Commission’s recommendation and final rule and the Commission’s position in amicus curiae briefs endorsing the more liberal interpretation expanding anti-retaliation protection to those who report to the Commission or to their employer.

The Basics of a Dodd-Frank Whistleblower Claim

A whistleblower claim is only available to an individual or individuals,  not entities.  See 17 C.F.R. § 240.21F-2(a)(1).  A claim may be submitted online through the Commission’s Tips, Complaints and Referrals Portal or by mailing or faxing the appropriate form to the OWB.[ii]  A claim may be submitted anonymously as long as the individual is represented by an attorney.  While an individual may submit a claim without the assistance of counsel (if anonymity is not a concern), a knowledgeable attorney can help the whistleblower craft a strong submission and advocate for a higher award during the decision-making process.

In the event the Commission does not take an action based on the information provided by a whistleblower, the Dodd-Frank Act does not allow a whistleblower the right to continue on their own with a private action.

A claimant is eligible to receive a whistleblower reward if he or she voluntarily provides the Commission with “original information” about a possible violation of the federal securities laws that has occurred, is ongoing, or is about to occur.  The information provided must lead to a successful Commission action that results in an award of monetary sanctions exceeding $1 million.  See 15 U.S.C.A. § 78u-6(a)(1) and (b).

The Commission’s Rule 21F-4 provides a tremendous amount of detail regarding what it means to provide “original information.”  See 17 C.F.R. § 240.21F-4(b). In short, original information is derived from a person’s independent knowledge (not from publicly available sources) or independent analysis (evaluation of information that may be publicly available but which reveals information not generally known) and is not already known by the Commission.  See Commission’s Frequently Asked Questions #4.

An eligible whistleblower may receive an award of anywhere from 10 to 30% of monetary sanctions collected in actions brought by the Commission as well as related actions brought by other regulatory and law enforcement authorities.  See 15 U.S.C.A. § 78u-6(b). “Related actions” include judicial or administrative actions brought by the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case that is based on the same original information the whistleblower voluntarily provided to the Commission.  See 17 C.F.R. § 240.21F-3.

The OWB posts on its website Notices of Covered Actions for each Commission action exceeding $1 million in sanctions.  In the 2014 fiscal year alone the OWB posted 139 such notices.  See Report at 13.  If a claimant has been working with the Commission on a particular matter, the Commission will contact the claimant or his or her counsel and alert them to the opportunity to apply for an award.  See Commission’s Frequently Asked Questions #11. Claimants have ninety days from the date of the Notice of Covered Action in which to file a claim for an award, or the claim will be barred.  See 17 C.F.R. § 240.21F-10.  To file a claim for an award, the claimant must complete the appropriate form and either mail or fax it to the OWB.  According to the Commission, the majority of applicants who went on to receive an award, were represented by counsel when they applied for the award.  See Report at 17.

The Commission considers a number of factors in determining the appropriate amount of an award.  The award percentage may be increased depending on the significance of the information provided, the extent of the assistance provided, the extent to which the claimant participated in the company’s internal compliance systems, and the Commission’s interest in deterring violations of the particular securities laws at issue.  The Commission may reduce the amount of an award if the claimant has some culpability for the violations, if there was an unreasonable delay in reporting the violations, or if the claimant interfered with the company’s internal compliance systems.  A complete list of criteria used to determine award amounts is included in the Commission’s Rule 21F-6.  See 17 C.F.R. § 240.21F-6

Attorneys at the OWB evaluate each application for an award and work with the enforcement staff responsible for the action to get a full understanding of the contribution made by the applicant.  Based on the information collected, the OWB prepares a written recommendation as to whether the applicant should receive an award, and if so, how much.  A Claims Review Staff (comprised of five senior officers in Enforcement, including the Director of Enforcement) then considers the OWB’s recommendation and issues a Preliminary Determination setting forth its opinion regarding allowance of the claim, and the amount of any proposed award.  See Report at 13.

An applicant can seek reconsideration of the Preliminary Determination by submitting a written response within 60 days of (i) the date of the Preliminary Determination, or (ii) the date OWB made the record available to the applicant for review, whichever comes later.  After considering the applicant’s written response, the Claims Review Staff issues a Proposed Final Determination, and the matter is then handed to the Commission for its decision and Final Order.  All Final Orders are redacted before being posted on the OWB’s website, to protect the identity of the applicant.  Id. at 14.

The denial of an award may be appealed within 30 days of the issuance of the Commission’s Final Order.  The applicant may appeal to the United States Court of Appeals for the District of Columbia or to the circuit court where the claimant resides or has his or her principal place of business.  An award that is based on appropriate factors and that is within the specified range of 10 to 30%, however, is not appealable.  See 17 C.F.R. § 240.21F-13. The three most common reasons for a denial of a claim are that (1) the information was not original because it was not provided to the Commission for the first time after July 21, 2010 (when the Dodd-Frank Act was signed into law), (2) the claimant failed to submit the application for award within 90 days of the posting of a Notice of Covered Action, and (3) the claimant’s information did not lead to a successful enforcement action.  See Report at 15.

The anti-retaliation provisions of the Dodd-Frank Act provide a private right of action for a whistleblower who alleges he experienced retaliation from his employer as a result of providing information to the Commission under the whistleblower program or assisting the Commission in any investigation or proceeding based on the information submitted (a “whistleblower-protection claim”).  A whistleblower has a generous six to ten years from the date of the alleged violation in which to file a whistleblower-protection claim.  15 U.S.C. § 78u-6(h)(1)(B)(iii) (statute of limitations). Relief available to a prevailing whistleblower includes reinstatement to his former position, two times the amount of back pay owed plus interest, and compensation for litigation costs, expert witness fees, and reasonable attorneys’ fees.  15 U.S.C.A. § 78u-6(h)(1). Additionally, under Rule 21F-2, the Commission itself may take legal action through an enforcement proceeding against an employer who retaliates against a whistleblower.  As discussed below, the Commission took advantage of this provision for the first time in 2014.

Whistleblower tips (and awards) are on the rise.

 From 2012 to 2014, the number of whistleblower tips received by the Commission increased more than 20%, and the SEC issued more whistleblower awards in the 2014 fiscal year than in all previous years combined.  See Report at 1 and 20.  According to the Report, the Commission received a total of 10,193 tips since the inception of the program in August 2011.  Of those 10,193 tips, fourteen resulted in monetary awards, nine of which were authorized during the 2014 fiscal year.

Of those individuals who have received awards since the inception of the program, over 40% were current or former company employees, and 20% were contractors or consultants.  Of those current or former company employees, over 80%  went to their supervisor or compliance personnel before going to the Commission, in an attempt to remedy the problem internally.  See id. at 16.

In their complaint forms, whistleblowers are asked to identify the nature of their allegations.  The three most commonly picked categories are Corporate disclosures and financials, offering fraud, and manipulation, and these three have consistently ranked the highest since the beginning of the program.  Id. at 21.

The hot spots for whistleblower tips in the United States are California, Texas, Florida and New York.  Utah tipsters numbered 33 in 2014, compared to 556 in California, 264 in Florida, 204 in New York and 208 in Texas.  International hot spots include the United Kingdom, India, Canada and China.  The total number of tips from abroad during 2014 was 448 or approximately 11.51% of all tips received by the Commission that year.  Id. at 28 and 29.

In September 2014, the largest award to date ($30 million) was given to a foreign national.  The Commission revealed that the information provided by this whistleblower allowed it to “discover a substantial and ongoing fraud that otherwise would have been very difficult to detect.”  Id. at 10.  The information led to not only a successful Commission enforcement action, but to successful related actions.  Apparently the award would have been even larger had the Commission not determined that the whistleblower’s delay in reporting the securities violation was unreasonably long.  The Commission did not reveal the length of the delay that it found unreasonable, only that during the delay “investors continued to suffer significant monetary injury that otherwise might have been avoided.”    Order Determining Whistleblower Award Claim, SEC Release No. 73174, File No. 2014-10 (September 22, 2014).

In August 2014, the Commission awarded more than $300,000 to a whistleblower who had compliance or internal audit responsibilities within the company.  Under the whistleblower rules, information provided by such a person is not considered to be “original information” unless an exception applies.  In this instance, the Commission applied an exception that allows a person occupying a compliance or internal audit position with the company to receive a whistleblower award if they reported the violations internally at least 120 days before providing the information to the Commission.  Report at 11.

In July 2014, the Commission awarded more than $400,000 to a whistleblower who “aggressively worked internally to bring the securities law violation to the attention of appropriate personnel in an effort to obtain corrective action.”  Id.  The Commission recognized the whistleblower’s persistence in reporting the information to the Commission after the company failed to address the issue on its own.

The Commission also made awards to groups of whistleblowers who reported on the same company.  In July 2014, the Commission awarded three whistleblowers 30% of monetary sanctions collected in the action.  One whistleblower received 15%, another 10%, and the third 5%, based on the level of assistance each provided to the Commission.  See Order Determining Whistleblower Award Claim, SEC Release No. 72652, File No. 2014-6 (July 22, 2014).  In June 2014, the Commission awarded a total of $875,000 to be divided equally between two whistleblowers who “acted in concert to voluntarily provide information and assistance that helped the SEC bring a successful enforcement action.”  Report at 12; See also Order Determining Whistleblower Award Claim, SEC Release No. 72301, File No. 2014-5 (June 3, 2014).

The Commission’s First Anti-retaliation Action.

On June 16, 2014, the Commission issued its very first administrative cease-and-desist proceeding under the authority of the anti-retaliation provisions of the Dodd-Frank Act.  As mentioned above, the anti-retaliation provisions not only provide a private right of action for individuals who experience retaliation from whistleblower activities, Rule 21F-2 gives the Commission the ability to enforce the anti-retaliation provisions as well.

The Commission’s first action charged hedge fund advisory firm Paradigm Capital Management, Inc. out of New York with retaliating against its head trader.  In the Matter of Paradigm Capital Mgmt., Inc. and Candace King Weir, Investment Advisers Act Release No. 3857 (June 16, 2014).  The head trader reported activity to the Commission that suggested Paradigm was engaging in prohibited principal transactions with an affiliated broker-dealer that were not disclosed to a hedge fund client.  When Paradigm was notified of the report by the head trader, it allegedly engaged in a series of retaliatory actions, including, but not limited to, removing the whistleblower from the head trader position, and stripping the whistleblower of supervisory responsibility.   The whistleblower was not terminated (although he or she resigned) and his or her compensation remained the same.

Without admitting or denying the Commission’s allegations, Paradigm agreed to settle the charges by payment of $2.1 million, comprised of disgorgement, prejudgment interest and a civil penalty.  See id. at 12.  The Commission’s order does not specify what portion of the penalty was attributable to the retaliation claims, and which portion was attributable to the alleged trading violations.

Whistleblowers Who Do Not Report to the Commission May Not be Protected by the Anti-Retaliation ProvisionsThe_Office_of_the_Whistleblower(SEC)_Symbol

As the number of whistleblower complaints increases, so do the number of anti-retaliation suits.  Employers facing private anti-retaliation actions by whistleblowing employees have had some success arguing that the employee does not qualify as a whistleblower, and therefore is not entitled to the protections of the anti-retaliation provisions.

A whistleblower is defined in the Dodd-Frank Act as,

any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.

15 U.S.C.A. § 78u-6(a)(6) (emphasis added).  Accordingly, you must report to the Commission to be considered a whistleblower.

The anti-retaliation provisions of the Act, however, are not so limited, and open the door to the possibility that a whistleblower may be someone who reports information to someone other than the Commission, such as an employer.  Specifically, section 78u-6(h)(1)(A) provides:

No employer may discharge, demote, suspend, threaten, harass, directly or indirectly, or in any other manner discriminate against, a whistleblower in the terms and conditions of employment because of any lawful act done by the whistleblower—

(i) in providing information to the Commission in accordance with this section;

(ii) in initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or

(iii) in making disclosures that are required or protected under the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201 et seq.), this chapter, including section 78j-1(m) of this title, section 1513(e) of Title 18, and any other law, rule, or regulation subject to the jurisdiction of the Commission.

78u-6(h)(1)(A) (emphasis added). The third category of protected activity does not require that the whistleblower “make disclosures” to the Commission, and has been successfully used to argue a more liberal interpretation of what it means to be a whistleblower under the anti-retaliation provisions. In fact, the majority of courts that have considered the conflicting sections of the Act have adopted the more liberal interpretation allowing the anti-retaliation protections to extend to individuals who complain internally alone.  See, e.g., Kramer v. Trans–Lux Corp., No. 3:11CV1424 (SRU), 2012 WL 4444820, at *4 (D. Conn. Sept. 25, 2012); Nollner v. S. Baptist Convention, Inc., 852 F.Supp.2d 986, 994 n. 9 (M.D. Tenn. 2012); Egan v. TradingScreen,

Inc., No. 10 Civ. 8202 (LBS), 2011 WL 1672066, at *4–5 (S.D.N.Y. May 4, 2011); but see, Asadi v. G.E. Energy LLC, 720 F.3d 620 (5th Cir. 2013), and Berman v. Neo@Oglivy LLC, No. 1:14-cv-523-GHW-SN, 2014 WL 6860583, at *2 (S.D.N.Y Dec. 5, 2014).

The Commission has made its opinion known, by rule and amicus brief, and is squarely in favor of the more liberal interpretation.  In Rule 21F-2(b)(1) the Commission clarified that it considers an individual to be a whistleblower “for purposes of the anti-retaliation provisions” if he or she provides information regarding a possible securities law violation in a manner described in § 78u-6(h)(1)(A).  See 17 C.F.R. § 240.21F-2(b)(1)(i-iii).  As discussed above, the third category of protected activity in § 78u-6(h)(1)(A) does not require that the information be provided to the Commission.  In several amicus briefs filed by the Commission arguing in favor of judicial deference to Rule 21F-2(b)(1) and thus in favor of a more liberal interpretation of whistleblower, the most recent of which was filed in February 2015, the Commission stated:

The Commission has a strong programmatic interest in demonstrating that [Rule 21F-2(b)(1)’s] reasonable interpretation of certain ambiguous statutory language was a valid exercise of the Commission’s broad rulemaking authority under Section 21F. . . .  First, the rule helps protect individuals who choose to report potential violations internally in the first instance (i.e., before reporting to the Commission), and thus is an important component of the overall design of the whistleblower program.  Second, if the rule were invalidated, the Commission’s authority to pursue enforcement actions against employers that retaliate against individuals who report internally would be substantially weakened.

Brief of the Securities and Exchange Commission as Amicus Curiae Supporting  Appellant at 4, Berman v. Neo@Ogilvy LLC et al., Case No. 14-4626, Docket No. 54, (2d Cir. Feb. 6, 2015) (hereinafter referred to as SEC’s Berman Amicus Curiae Brief).

Despite the Commission’s rule and case law in favor of a more liberal interpretation of “whistleblower”, a few courts, including the Fifth Circuit, have  applied a narrow interpretation, citing statutory construction and reliance on the intent of congress.

In Asadi v. G.E. Energy, 720 F.3d, 620 (5th Cir. 2013), Khaled Asadi filed a complaint against G.E. Energy alleging that it violated the anti-retaliation provisions of the Dodd-Frank Act when it terminated him after he made an internal report to his supervisor of a possible securities law violation.  Asadi was employed by G.E. Energy as its Iraq Country Executive, which required him to relocate to Amman, Jordan.  In 2010, while working in Jordan, Iraqi officials told Asadi that G.E. Energy had hired a woman who was close with a senior Iraqi official, and that they suspected GE Energy had done so to “curry favor” with that official in negotiating a joint venture agreement.  Id. at 621.  Asadi was concerned that this alleged conduct might violate the Foreign Corrupt Practices Act (“FCPA”),[iii] and he reported the issue to his supervisors.  Shortly thereafter, Asadi received a negative performance review and was pressured to step down from his position and accept a position with minimal responsibility.  Asadi refused and approximately one year after reporting his concern to supervisors, G.E. Energy fired him.  Asadi, 720 F.3d at 621.

G.E. Energy moved to dismiss under Rule 12(b)(6) arguing that Asadi did not qualify as a “whistleblower” and that the whistleblower provisions do not apply outside of the United States.  The district court granted G.E. Energy’s motion to dismiss with prejudice based on the latter argument regarding the extraterritorial reach of the protection, and as a result failed to decide whether Asadi qualified as a whistleblower.  Id.

Asadi argued on appeal that the protected activity included in the anti-retaliation provisions of the Act conflict with the Act’s definition of whistleblower. He acknowledged that he did not fit squarely within the definition of whistleblower under the Act, but argued that the anti-retaliation protections should be construed to protect individuals who take actions that fall within any category of protected activity in § 78u-6(h)(1)(A)(i-iii) (particularly category iii), even if they do not complain to the Commission.  Id. at 624.  Asadi had several district court decisions in his favor as well as an SEC rule.  Despite this, the Fifth Circuit disagreed.

The Fifth Circuit held that the Dodd-Frank Act does not contain conflicting definitions of whistleblower, but in fact contains a single clear and unambiguous definition in § 78u-6.  Id. at 627.  It also held that the definition in § 78u-6 does not render the language in the third-category of protected activity superfluous, because that category has effect “even when we construe the protection from retaliation under Dodd-Frank to apply only to individuals who qualify as ‘whistleblowers’ under the statutory definition of that term.”  Id.  To illustrate this point, the Court suggested that the intended application of the third-category of protected activity, would apply to protect an employee who, on the same day he discovered a securities violation, reports the violation to both his supervisor and to the Commission.  The supervisor, unaware that the employee also reported the violation to the Commission, terminates the employee.  The first and second category of protected activity would not protect the employee because the supervisor was not aware that the employee had reported the violation to the Commission.  Only the third category would protect this employee, which does not require that the retaliation result from the reporting of information to the Commission.  See id.

The Asadi Court would not defer to the Commission’s rule expanding the definition of whistleblower, because “the statute . . . clearly expresses Congress’s intention to require individuals to report information to the SEC to qualify as a whistleblower . . .”  Id. at 630.  The Court affirmed the district court’s dismissal of Asadi’s whistleblower-protection claim, finding that Asadi did not fall within the definition of a whistleblower under the Act.

In December 2014, the Southern District of New York followed Asadi and ruled that internal reporting was not protected under the Dodd-Frank Act.  See  Berman v. Neo@Oglivy LLC, No. 1:14–cv–523–GHW–SN, 2014 WL 6860583 (S.D.N.Y. Dec. 5, 2014).  That case is now on appeal before the Second Circuit, and the Commission has filed an amicus brief arguing that the Court should “defer to the Commission’s rule and hold that individuals are entitled to employment anti-retaliation protection if they make any of the disclosures identified in Section 21F(h)(1)(A)(iii) of the Exchange Act, irrespective of whether they separately report the information to the Commission.”  SEC’s Berman Amicus Curiae Brief at 37.  Oral argument before the Second Circuit is scheduled for June 17, 2015.

For now, the question of whether internal reporting is protected under Dodd-Frank is up in the air.  As a result of the indecision, a would-be whistleblower may decide to complain internally as well as to the Commission, just to be safe.  Alternatively, they may decide not to report at all.  From the employer’s perspective, a company would no-doubt be best served by implementing programs that encourage internal reporting before the employee runs to the Commission.


 

[i] The Office of the Whistleblower is a separate office within the Commission established to administer and enforce the Whistleblower Program.  The OWB includes a Chief of the Office, a Deputy Chief, in addition to nine staff attorneys and three paralegals.

[ii] While this article focuses on whistleblower claims for alleged violations of U.S. securities laws, the whistleblower provisions also cover tips regarding violations of the U.S. Commodity Exchange Act, which are submitted to the U.S. Commodity Futures Trading Commission (CFTC).

[iii] The Commission and the Department of Justice share FCPA enforcement authority.