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.

SEC Warns Investors to Check the Credentials of Their Stock Broker

The SEC’s Office of Investor Education and Advocacy recently issued this Investor Alert reminding people to thoroughly check the background of thei investment professional.  The Alert cautions investors not to “trust someone with your investment money just because he or she claims to have impressive credentials or experience, or manages to create a ‘buzz of success.’”    Investors can conduct background checks of financial professionals to ensure they are properly licensed or registered with the SEC, Financial Industry Regulatory Authority, or a state regulatory authority by visiting the “Ask and Check” section of the SEC’s Investor.gov website.

This alert was prompted by two enforcement cases against investment advisers who made false claims about their experience and industry awards in an effort to gain the trust and confidence of investors.

The first case was against  Michael G. Thomas of Oil City, Pa., touted that he was named a “Top 25 Rising Business Star” by Fortune Magazine as he solicited investors through blast e-mails and the Internet for a private fund named Michael G. Investments LLC.  The problem is Fortune Magazine doesn’t actually have a recognition for “Top 25 Rising Business Star.”  The SEC found that Thomas greatly exaggerated his own past investment performance, misrepresented that certain industry professionals would co-manage and advise the fund, and inflated the fund’s projected performance.  To settle the SEC’s charges, Thomas agreed to pay a $25,000 penalty and consented to an order requiring him not to participate in the issuance, offer, or sale of certain securities for five years.  He also is barred from associating with any broker, dealer, or investment adviser for at least five years.

The second SEC investigation found that Todd M. Schoenberger of Lewes, Delaware, misrepresented that he had a college degree from the University of Maryland and touted his appearances on cable news programs while soliciting investors to purchase promissory notes issued by his unregistered investment advisory firm LandColt Capital LP.  Schoenberger falsely told prospective investors that LandColt would repay the notes through fees earned from managing a private fund.  Schoenberger never actually launched the fund, never had the commitments of capital to the fund that he claimed, and never paid investors the returns he promised.  To settle the SEC’s charges, Schoenberger agreed to pay $65,000 in disgorgement of ill-gotten gains plus interest.  He consented to an order barring him from associating with any broker, dealer, or investment adviser and from serving as an officer or director of a public company.


 

Investor Alert: Beware of False or Exaggerated Credentials

06/03/2015

The SEC’s Office of Investor Education and Advocacy (OIEA) is issuing this Investor Alert to warn investors that fraudsters may misrepresent their backgrounds and experience to lure investors into investment schemes.  Before investing, investors should verify that any person who tries to sell them an investment product or service is properly licensed or registered and should not make investment decisions based solely on assertions regarding the person’s credentials or professional experience, including claims found on the Internet or in traditional media sources.

In order to attract unsuspecting investors and gain their trust, fraudsters may boast about credentials they do not have.  They may fabricate, exaggerate, or hide facts about their backgrounds to portray themselves as successful professionals and to make you believe that the investments they offer are legitimate.  Others may repeat these misrepresentations and contribute – perhaps unintentionally – to a fraudster’s false reputation of success and professional accomplishment.  Do not trust someone with your investment money just because he or she claims to have impressive credentials or experience, or manages to create a “buzz of success” around himself or herself.

Look out for unlicensed or unregistered sellers.  Many fraudulent investment schemes involve persons who are not licensed or registered.  Use the SEC’s Investment Adviser Public Disclosure (IAPD) website and the Financial Industry Regulatory Authority (FINRA)’s BrokerCheck website to determine whether a person recommending or selling an investment is licensed or registered and if so, to check out the person’s background including any disciplinary history.  Contact your state securities regulator to see whether the person is licensed with your state securities regulator to do business with you.

Fraudsters may misrepresent their education.  In SEC v. Colangelo, the defendant allegedly defrauded investors, and made misrepresentations regarding the investments he offered as well as his professional and educational background.  The SEC alleges that the defendant emailed potential and existing investors a link to his LinkedIn profile in which he represented that he had studied finance at Nyack College when he never attended Nyack College and had not even graduated from high school.  In SEC v. Hicks, the SEC alleges that the defendant falsely represented in the offering memorandum for a fictitious hedge fund that he had earned undergraduate and graduate degrees from Harvard University when he had only enrolled there for a few semesters.

Fraudsters may lie about having been awarded honors that they have not received or that do not even exist.  In In the Matter of Michael G. Thomas, the respondent allegedly solicited investors for a private fund by misrepresenting that he was named a “Top 25 Rising Business Star” by Fortune Magazine when no such distinction exists.  To gain credibility, he also allegedly lied to potential investors about the persons who would be associated with his fund, the profitability of his past investments, and the expected profitability of the fund’s proposed investment.

Fraudsters may pretend to hold certain professional titles to suggest that they have certain expertise or qualifications.  In SEC v. Nickles, the defendant allegedly solicited investors through advertisements in prominent newspapers.  The SEC alleges that he falsely promised that the investments he offered were insured or U.S. Government guaranteed, and he held himself out as a certified financial planner (CFP) when he had no such credentials or certification.  The website of the Certified Financial Planner Board of Standards allows visitors to search for CFP professionals to verify CFP certification.  For more information regarding professional titles used by financial professionals, read our Investor Bulletin, Making Sense of Financial Professional Titles.

Fraudsters may appear as a guest commentator on financial television shows.  In In the Matter of Todd M. Schoenberger, the respondent allegedly made misrepresentations in soliciting investors to invest in short-term promissory notes and used the majority of money he received from investors for his own personal expenses.  The respondent allegedly touted his appearances as an investment and stock market commentator on television business news programs in soliciting investors.  He also allegedly gave prospective investors marketing materials stating that he had received a degree from the University of Maryland (when he had not) and that he previously worked for a broker-dealer registered with the SEC (without disclosing that the broker-dealer terminated him for misuse of company assets).

Fraudsters may use traditional media sources, the Internet, or social media to develop a public profile that gives them a false air of legitimacy.  In In the Matter of Keiko Kawamura, the respondent allegedly conducted an investment scheme involving a self-described hedge fund and another scheme involving a subscription service for investment advice, fraudulently using investors’ money for her own living expenses and luxury trips.  The respondent allegedly posed as an investment banker with nearly 10 years of experience and solicited investors through Twitter, Facebook, and other social media.

Fraudsters may pretend that they have a certain position or title at a company.  In SEC v Homepals, the SEC alleges that the defendants sold unsecured notes as part of a Ponzi scheme.  When meeting with prospective and actual investors, two of the defendants allegedly misrepresented that they were the company’s secretary and the company’s attorney when they never held any official positions at the company.

Fraudsters may inflate their professional experience.  In SEC v. Helms, the defendants allegedly raised nearly $18 million for supposed purchases of oil-and-gas royalty interests through a company they controlled and used most of investors’ money to make Ponzi payments and to cover various personal and business expenses.  The defendants allegedly misled investors about the defendants’ experience in the oil and gas industry.  As another example, in SEC v. Della Penna, the defendant allegedly misrepresented his trading track record as a private fund manager and then lost almost all of investors’ money by making unsuccessful investments, paying his own personal expenses, and using later investors’ money to pay fake “returns” to prior investors.

As you can see from these examples, you cannot believe everything you hear about a person’s educational and professional background.  Ask for details and be particularly skeptical if you do not receive direct and specific answers to your questions.  Be cautious if you encounter discrepancies regarding someone’s background such as conflicting information or dates that do not add up.  Independently verify claims with reliable sources, including IAPD, BrokerCheck, and state securities regulators.  If someone falsely depicts his or her background and tries to sell you an investment, do not trade with the person, do not give the person any money, and do not share your personal information with the person.  Submit a complaint and report the misrepresentations to the SEC.

Additional Resources

Investor Alert: Check out Your Financial Professional

Investor Bulletin: Top Tips for Selecting a Financial Professional

Visit Investor.gov, the SEC’s website for individual investors.

How an Employment Agreement Can Get you In Hot Water With the SEC

filling out employment agreementI don’t usually give employment advice, but the SEC this week announced a settlement with KBR, Inc. that should prompt every company to check its employee agreements.

Even fairly innocuous confidentiality language that might seem unobjectionable to some could lead to an SEC enforcement action under the SEC’s interpretation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”).

Congress enacted Dodd Frank on July 21, 2010 and Section 21F of the new law established the Office of the Whistleblower. In the relatively short time that these whistleblower provisions have been implemented they have proven to be quite successful; the SEC recently paid out a record $30 million award to a whistleblower, and even bigger awards are expected as enforcement proceedings prompted by whistleblowers work their way through the system.

Why Confidentiality Agreements Could be a Problem

When it promulgated rules to manage the new whistleblower program those rules included Rule 21F-17, which was enacted to prevent retaliation by companies against whistleblowers.  This Rule provides, in relevant part, as follows:

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

 According to the press release issued by the SEC with respect to the KBR case, the company was sanctioned for “requir[ing] witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.”

Apparently the company was in the process of conducting an internal investigation into possible securities law violations. As part of its interview process it required all interviewees to sign a confidentiality agreement, which was a standard form KBR had used for several years before the SEC adopted Rule 21F-17, and had not been changed after the Rule was enacted.  This agreement contained  the following provision:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC interpreted this language as a violation of Rule 21F-17 because “any company’s blanket prohibition against witnesses discussing the substance of the interview has a potential chilling effect on whistleblowers’ willingness to report illegal conduct to the SEC.”

Interestingly, the SEC did not identify any instance where KBR actually sought to prevent employees from communicating with the SEC.  Rather, once it discovered the language the SEC concluded that the mere existence of those provisions could chill a potential whistleblower’s willingness to report illegal conduct to the SEC, and that was enough to trigger an independent enforcement action.

KBR agreed to pay a $130,000 penalty to settle the SEC’s charges and the company voluntarily amended its confidentiality statement by adding the following language:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

In a press release issued in connection with this settlement Andrew J. Ceresney, Director of the SEC’s Division of Enforcement stated that “By requiring its employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us.  SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.  We will vigorously enforce this provision.”

What Companies Should do in Response to The KBR Action

It is now clear that confidentiality provisions in employee agreements, codes of conduct, employment manuals, forms and handbooks, if overly restrictive, can be the basis for an independent SEC enforcement action.   Companies should therefore review their confidentiality agreements to ensure that they do not “in word or deed stop their employees from reporting potential violations to the SEC.”  The new language quoted above provides a good example of what the SEC will accept.


UPDATE

In a recent speech SEC Chair Mary Jo White clarified that the KBR enforcement action is not intended to be “a sweeping prohibition on the use of confidentiality agreements.  Companies conducting internal investigations can still give the standard Upjohn warnings that explain the scope of the attorney-client privilege in that setting.  Companies may continue to protect their trade secrets or other confidential information through the use of properly drawn confidentiality and severance agreements.”

The bottom line is that a company needs to make sure that employees understand that it is always permissible to report possible securities laws violations to the SEC.

Copyright 2015 by Mark W. Pugsley.  All rights reserved.

TOP TEN WAYS TO AVOID LOSING MONEY IN A FINANCIAL SCAM*

130911175808-financial-scam-620xaEvery week Utah residents lose money by investing with friends, family or neighbors – people they knew and trusted. Investment fraud is a big problem here in Utah, largely because our close-knit communities are a prime target for “affinity fraud.”  Our state has a long history of financial scams and Ponzi schemes, many of which have been perpetrated by members of the LDS church on members of their ward or stake.  It’s heartbreaking.

I have seen people who borrowed money against their homes or liquidated retirement accounts in order to fund risky investments based on pitch by someone they trusted.  Unfortunately by the time they call me, the money is long gone – and so is the person who took the money. Because I specialize in helping people recover losses in investment fraud cases I often get asked for advice on how to avoid needing me.  So, at the risk of all my work drying up, here is my TOP TEN ways to avoid investing in a financial scam:

10. Slow down.  According to the Insider Monkey blog, many people invest after only hearing the pitch; watch out for promoters who try to commit you on the spot.  Don’t do it!  Take your time, do your research, ask lots of questions, search the internet, review their financials, visit the company, kick the tires before you buy.  Be very wary of aggressive sales pitches and deadlines.  Ask the hard questions before you hand over your money, not after.

9.  Do your homework.  Run a simple Google search on the company and its managers, or the individual.  If it involves a company, ask for a private placement memorandum and company financials.  Hire an attorney to evaluate the investment and help you perform due diligence.  Attorneys have access to court databases to look for lawsuits and bankruptcies.  Contact federal and state securities regulators see if actions have previously been taken against the company or individuals involved.

8. Hire an attorney.  Attorneys can be expensive, but it is much cheaper to hire an attorney to document the transaction properly on the front end than to sue the bad guys when it all blows up.  A good lawyer can help you perform due diligence on the company and individuals, and can determine whether the investment is properly structured as a private offering and complies with state and federal statutes.  Your lawyer can review the offering materials and help you understand what the risks are.  Hiring a good attorney up front is an investment in your investment.

7.  Get it in writing.  I am amazed how often people will give hundreds of thousands of dollars to someone on nothing more than a handshake.  Don’t do it!  If things go bad later, proper documentation will be critical to me in my efforts to get your money back.  The terms of your deal should always be put in writing, and those terms should be reviewed by the competent attorney you hired.  (See number 8.) In any private investment opportunity you should receive a detailed lengthy disclosure document called a private placement memorandum (PPM).  Take the time to review it before you invest.  It contains detailed information about all aspects of the business including the business model, financial history, risk factors, biographical information on the managers, civil lawsuits, and the terms and conditions of the investment, among other things.  If the company soliciting your money has not prepared a PPM, that should be the end of your discussions with them.

6.  Beware of guarantees.  If anyone tells you that your investment is “guaranteed” that should cause some you concern.  All investments carry risk, and personal guarantees (especially oral ones) are rarely a means to get your money back. Even if you are approached to loan money and get a promissory note that is usually still considered to be an investment, and such loans can be very risky if not properly secured.  If you are told that the loan or investment is “secured” hire an attorney to document the security interest and verify the collateral.  (See Number 8.)

5.  Beware of secret trading strategies, offshore investments, commodity or currency (FOREX) trading, futures, options and minerals.  This could be an article all by itself.  Generally, avoid anyone who credits a highly complex or secretive investing technique or touts unusual success.  Legitimate professionals should be able to explain clearly what they are doing and how they make money.  And if the individual is really making as much money with their strategy as they say they are, they shouldn’t need yours.  These types of “alternative” investments nearly always involve extremely high risk, despite what you are told.

4.  Work through licensed stock brokers or investment advisors.  Even when investing in a private (unregistered) opportunity ask whether the promoter is licensed to sell you the investment, which regulator issued that license and whether the license has ever been revoked or suspended.  A legitimate securities salesperson must be properly licensed under most circumstances.  If you have any questions contact the Utah Division of Securities at (801) 530-6600.

3.  Don’t invest with friends and neighbors.  It may seem like doing business with someone you know and trust would be safer, but that is simply not true.  All investing involves risk, and just because you trust the individual soliciting the investment does not mean that the investment itself is good.  Trust but verify; and if things go badly do not hesitate to aggressively protect your interests.

2.  Keep church out of investing.  If someone pitching you an investment casually mentions that they used to be the bishop or in some other church position, watch out!  Church callings and temple worthiness are not relevant to investment decisions, so beware of those who bring these issues up in an investment pitch.

1.  If it sounds too good to be true it probably is.  If you are thinking about putting money into an alternative, unregistered, or unregulated investment that promises abnormally high returns, watch out.  The fact that others may have been getting their promised returns does not mean you will.  All Ponzi Schemes eventually implode, and you may be left holding the bag.

Note:  I wrote this article for The Enterprise  and it was published in their July 2014 issue.  Because their content is only available to subscribers I am posting it here.

Copyright 2014 by Mark W. Pugsley.  All rights reserved.


*This article is intended to address private investments, not those made through a licensed stock broker or registered investment advisor.