Jeffrey Mowen Has Been Released From Prison

I recently received an anonymous tip telling me that Jeffrey Lane Mowen, formerly of Lindon, Utah, has been released from prison.  I checked the Bureau of Prisons website and sure enough, he was released on January 12, 2018 and is now presumably at large in the community, so watch out Utah County!

Jeffrey Mowen

Mowen was sentenced to ten years, but it’s not unusual for white-collar prisoners to be released early to make room for violent prisoners.  Regardless, this is not someone who I would recommend doing business with.  If you would like to know more about this case and the criminal charges he pleaded guilty to you can read my prior posts about the case here.

The  press release and complaint the SEC filed against him in September of 2009 can be found here, and the Daily Herald’s article about his plea deal can be found here.

One of the more interesting things about this case is that rather than investing the victims’ money as represented, Mowen used about $6 million of investor monies to purchase over 200 antique, classic and muscle vehicles which he kept in a warehouse in Bountiful.  The collection included  cars, trucks, trailers, motorcycles and three-wheelers, most of which were auctioned off in 2010. You can see some photos of the totally random assortment of cars that they auctioned off in this article from the Deseret News.  As one observer told the paper, “It’s just a bizarre collection. There’s a lot of junk in there.”

Hopefully his taste in automobiles has improved during the time he spent in the federal penitentiary.

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.”

UPDATE: The Shocking Story of A Small Town Fraud

UPDATE: Yesterday United States District Judge David Sam rejected a plea deal that had been worked out between Thomas Andrews (the subject of the story below) and the U.S. Attorney’s Office.  According to a story in the Deseret News, Judge Sam rejected the plea deal because he believed it was too lenient.  Andrews withdrew his guilty plea and his attorney, Rebecca Skordas, told Judge David Sam that she would continue negotiations with prosecutors.

In rejecting the plea Judge Sam said he was very concerned about the statements he had received from victims, including one that said the financial loss reduced them to eating “eggs, pancakes and beans.” The judge said he couldn’t imagine someone taking advantage of their friends and neighbors “to just diminish them to point where they can’t hardly live day to day.”  “It’s absolutely unbelievable that someone would conduct themselves in that way,” Sam said.

Prosecutors had recommended that Andrews spend 48 to 60 months in prison after he agreed to plead guilty to securities fraud and mail fraud in June.  In rejecting that deal Judge Sam noted the sentence was below the federal guidelines, which was calculated as 78 to 97 months in prison.  Andrews’ accomplice Scott Christensen also pleaded guilty and was sentenced to a year and a day in prison.

Stay tuned for more details.

I typically write about lawsuits filed by the SEC, but this time I wanted to write about a civil case that was filed by a number of the victims of a Nephi man named Thomas E. Andrews.  The information in this story comes primarily from allegations that were made in a civil complaint by my friends over at Parr Brown, who filed their case in Juab County in November of 2015 (Civil Case No. 150600025).  I will be filing a separate lawsuit involving these same facts shortly as discussed at the bottom of this post.

NephiTom Andrews grew up in Juab County, Utah, and was known to most of the victims in the case since he was a small kid.  Most of the victims in this case are residents of Nephi, Utah and knew Andrews and his family through their community and their common membership in the LDS Church.

The victims are not sophisticated in financial matters, and so they had the utmost faith and confidence in Tom and his father, Earl Andrews, who was a respected CPA in the community.  Earl prepared tax returns for  the victims and assisted them with their financial matter for many years before he was sentenced to prison in approximately 2005 for an unrelated reason.  When his father went to prison Tom took over his father’s role as tax preparer for the victims and began preparing tax returns for them, although it turns out he was never licensed by the State of Utah to do so.

At about the same time he took over his father’s tax practice, Tom obtained his license to sell financial products and joined LPL Financial as a stock broker, and Gary York.  he then began to solicit investments from the people whose tax returns he was preparing.  Over time the victims began to rely on Tom for investment and retirement advice, as well as for their tax preparation.  They opened investment accounts with LPL through Tom Andrews and placed some or all of the their retirement funds into his hands.

But beginning in 2011 Tom Andrews began to make other plans for their money.

Andrews formed a fake trust named which he called the “Jackson Living Trust” and made himself as Trustee. Andrews then opened a bank account at Cyprus Credit Union under the name of the “Jackson” or the “The Jackson Living Trust.”  It is unclear what paperwork he presented to the credit union, but they nevertheless opened up an account for this fake trust and gave Tom the full signatory authority as the trustee.  This meant that he could cash or deposit checks that were made out to the “Jackson Trust.”

At about the same time, Tom began counseling his clients to invest in an annuity with Jackson National (which does actually exist).  He told them that this investment would pay a guaranteed rate of return between 5 percent and 8 percent annually.  Critically, he advised them to liquidate most or all of their investments held at LPL, or wherever else, and to put the money into this annuity.  This was terrible investment advice; it reduced their diversification and in some cases exposed them to early termination fees and/or tax penalties, but the victims trusted Tom and did what he advised.

Andrews provided real marketing materials from Jackson National Life and even used the company’s application forms.  The victims filled out the applications, and gave Andrews checks for their entire life savings made out to “Jackson Trust” which they believed would be invested in the Jackson National Life annuities.  But the money was never sent to Jackson National Life.

He deposited each of the checks into his fake account at the Cyprus Credit Union and then use the funds as he saw fit.  He basically stole the money.  How much money did he steal?  Over $9 million.

But the victims needed to continue to believe that their money was safe and secure in the annuity they thought they had purchased so Andrews generated fake quarterly statements for them.  He pulled a Jackson logo off the internet  and made up fake account statements that he mailed out to all of his clients. Of course the fake statements showed that their investment was safe and growing as Andrews had promised.

Discovery of the Fraud

In October of 2015, several of his clients became suspicious when they had a hard time withdrawing money from their accounts.  Several contacted Jackson National Life and learned that in fact they had no account with the firm, and the account statements they had received were fake.

Andrews apparently got wind of the problem and disappeared, but has now hired an attorney and is defending the case.  The location of the $9 million of investor money he took is unclear, but I wouldn’t be surprised if he used it to trade commodities, options, currencies or some other high-risk strategy thinking he could generate big returns and the investors would never know the difference.   Time will tell.

But if these allegations are true, there are several troubling aspects of this story.  First, unlike many of the stories I’ve written about, this one it appears to be a deliberate fraud from the outset.  Mr. Andrews set up the bank accounts and with a name that was deliberately similar to the name of a well-known annuity company.   He used marketing materials and account applications for a real investment, and his investors would not have known that their money was going into a personal bank account as opposed to a licensed, verifiable company.   Yes, he used church and family connections to gain their trust, but the investment itself appeared legitimate.

Another troubling aspect of this story is that there are a number of financial institutions who appear to have dropped the ball and did not implement oversight and compliance procedures that could have protected the interests of the victims in this case.  Banks, brokerage firms and others should be watching for red flags and alerting state and federal authorities when they see suspicious activity.  In this case that oversight never happened, and millions of dollars were lost as a result.

On February 12, 2106 FINRA barred Tom Andrews from associating with any brokerage firm in any capacity, and I suspect the SEC and/or DOJ will be filing cases against him soon.

The Juab County lawsuit  is currently pending.

Our firm has been retained by many of the victims in this case to pursue a case against Mr. Andrews’ brokerage firm, LPL Financial.  If you or someone you know was involved in this case in any way please contact me at 801-323-3380, or by email.   -Mark Pugsley

Copyright © 2016 by Mark W. Pugsley.  All rights reserved.

The Deseret News’ Three Part Series on Affinity Fraud in Utah

hotspotsMy friend Dennis Romboy is a great reporter over at the Deseret News who put together a very detailed two-part story on affinity fraud that was published over the weekend.

Part One of the series was called “Utah’s fraud ‘epidemic’: Victims share anger, embarrassment, hurt” and provided the details of how a number of Utahn’s have been victimized by individuals in their community.  Here are some interesting takeaways from the article:

  • FBI supervisory special agent Mike Pickett, who heads the white-collar unit in the Salt Lake field office, estimates the annual dollar amount of fraud in Utah now exceeds $2 billion.
  • Utah Attorney General said affinity fraud is “rampant” in Utah. He has also used the word “epidemic” to describe what’s happening in the state, and that is despite aggressive efforts to prosecute criminals and educate an unsuspecting public.
  • So far in 2016, federal criminal fraud cases have totaled $59.3 million in losses, according to the U.S. Attorney’s Office.
  • Utah is in the top five in terms of investigations, indictments, prosecutions and sentences for investment fraud.

A number of the individuals featured in this story are victims of the Thomas Andrews scam that was detailed in my prior post called “A Shocking Story of A Small Town Fraud.”  I applaud these individuals for their bravery in publicly talking about what happened to them in the hope that some people will read the story and avoid making the same mistakes.

Part Two of the series was about how to protect yourself from being defrauded.  The article lists a number of ways to protect yourself, including the following “Red flag warnings of fraud”:

  • If it sounds too good to be true, it is.
  • Guaranteed returns aren’t. Every investment carries some risk.
  • Beauty isn’t everything. Don’t be fooled by slick websites.
  • Pressure to send money RIGHT NOW.

The article quotes me a number of times, including “Pugsley has succinct advice for anyone who receives an offer that mentions religion. ‘If someone brings up the church in the context of an investment pitch, then that’s the end of the discussion and you leave the room because people try to conflate the two,’ Pugsley said. ‘There should be no connection between the church and investments. Period.'”

To round it all up the Editorial Board of the newspaper published an opinion on the need to “trust but verify” that I thought was worth reproducing here:

In our opinion: Utah must ‘be trusting but verify’ regarding affinity fraud

The bucolic land of eastern Ohio is home to sizable pockets of the Amish community. Known for their collective ethos, these tight-knit religious cooperatives thrive on high levels of trust and social cohesion. Yet, the same trust that produces a remarkable culture of burden sharing can be exploited to perpetrate fraud.

In 2012, Monroe L. Beachy, a trusted name within the Amish community, was sent to prison for orchestrating a scheme that defrauded some 2,700 investors, many of them friends and neighbors.

Of course, the Amish are hardly the only religious group that’s vulnerable. As the Deseret News reported in a two-part series this week on affinity fraud: “Bernie Maddoff’s $20 billion fraud targeted wealthy Jewish people in Florida and Israel. Allen Stanford went after Southern Baptists before his $7 billion empire fell.” And, according to the Economist, the state with the most affinity fraud per capita is thought to be Utah, where members of The Church of Jesus Christ of Latter-day Saints comprise some 60 percent of the population.

The common theme is communities with high levels of trust are particularly vulnerable to fraud. The solution then is a heightened scrutiny when mixing financial and religious relationship. Although there is unquestionably a role to play for government in preventing and punishing fraud, individual consumers must also take responsibility for how they spend their money.

As Utah Governor Gary Herbert told the Economist: “be trusting but verify.”

There are a variety of things consumers can do to fortify against potential affinity fraud. As noted, for starters individuals can exercise healthy dubiety, especially when an opportunity sounds too good to be true (spoiler: it probably is). Yet, this is easier said than done. The most effective schemes, for example, do not make extravagant claims. Bernie Maddoff was so successful because his “returns” were relatively modest, making his fraud more convincing.

As with Maddoff’s victims, in Utah there are many highly educated and discerning individuals who have been taken in. Thus, it’s important to look beyond the facade of an investment company to determine its validity, and be doubly cautious about mixing church and financial relationships. There is no substitute for doing your homework instead of relying on the word of someone you trust in other settings. Keeping these principles in mind can protect consumers from deceitful investment opportunities claimed by people they know.

There have always been those who seek gain at the cost of others. Yet, in a hyper-competitive economy with strong cultural status expectations, a heightened temptation may exist to cut corners and profit at the expense of others. In such an environment, it’s incumbent on individuals of sound mind — as well as governments and community leaders — to guard against fraud.

After all, without willing investors, affinity fraud is impossible.

Copyright © 2016 by Mark W. Pugsley.  All rights reserved.



Another Case Where Investors Should Have Googled Her Name

This is a story that appeared in the Salt Lake Tribune yesterday.  As I have said before, many of these fraudsters are serial offenders.  They get out of prison and quickly get back into the business of soliciting investments from innocent investors.  So please do your homework before giving anyone your hard earned money.  In this case, a quick Google search would have led you to this article in the Deseret News, and now the Utah White Collar Crime Registry contains this listing.  Google is your friend.

Utah woman sentenced gets prison for a second round of defrauding investors

First Published May 24 2016 10:48PM

A Logan woman will spend two to 30 years in prison after she misled investors and defrauded them of more than $1.7 million.  Lori Ann Anderson, 54, pleaded guilty to two counts of securities fraud and one count of pattern of unlawful activity, all second-degree felonies, on January 23, according to a news release from the Utah attorney general’s office. She was sentenced Tuesday.

“Anderson’s crime is especially egregious, as she has been previously convicted of fraud and she continued to prey on neighbors and friends,” said Eric Barnhart, FBI Salt Lake City special agent in charge, in the release.

Anderson spent time in prison in 1992 after defrauding insurance-policy holders of $140,000, the news release says.

Keith Woodwell, director of the Utah Division of Securities, described the case as a “grim repeat performance, deluding unsuspecting victims into handing over their trust and money in a church environment.”

He said in the news release that affinity fraud is the “most damaging white-collar crime, where fraudsters not only steal the nest eggs of Utah victims, but destroy their trusting nature as well.”

A joint investigation with the FBI, the Utah Division of Securities and the Utah attorney general’s office found that 46 people had lost more than $1.7 million as a result of Anderson’s actions, the release says.

More than 10 victims, some in tears, addressed the court at the sentencing hearing, expressing a feeling of betrayal, according to the release.

Anderson formed a trading club named S.M.T.S., which allowed her to pool the money of friends who invested with her for day trading in Apple stock, the news release says.

She misrepresented the business’ success to her investors, telling them she made returns of about 10 percent per year and never had a losing day trading, when she actually lost $300,000 trading between 2013 and 2015, according to the news release.

Despite these losses, Anderson sent investors false account statements that purported to show gains, the release says.

A search warrant for Anderson’s home was issued in July 2015, and during the search, she admitted to lying to investors, the news release says. By the time of the search warrant, Anderson claimed she only had about $40,000 of the original $1.7 million in investor funds remaining.

Anderson’s case demonstrates how easy it is for “any of us to fall victim to fraudsters with promises of high returns,” Attorney General Sean Reyes said in the release.

Reyes said he urges Utahns to check the White Collar Crime Offender Registry, call the Securities and Exchange Commission (801-524-5796) or contact the Utah Department of Commerce (801-530-6701).

UPDATE on the Fraud Case Against Roger Bliss of Bountiful, Utah

attorney-general-sealI previously wrote about the numerous red flags that were raised by the investment pitch given by Roger Bliss in Bountiful, Utah. That post has generated a significant number of comments and interest, so I thought an update would be appropriate.

This was a fairly unusual case involving  cooperation between multiple state and federal agencies.  The interrelated state and federal cases were investigated and prosecuted by the Office of the Attorney General’s Mortgage and Financial Fraud Unit, the Federal Bureau of Investigation, the U.S. Department of Justice and the U.S. Securities and Exchange Commission.

According to a press release from the U.S. Attorney’s office for the District of Utah, Bliss was charged with obstruction of justice and false declaration before a Court of the United States in an indictment returned in August 2015. Federal prosecutors sought the indictment after Judge Robert Shelby referred the case to their office.  Judge Shelby made the referral following an evidentiary hearing where prosecutors demonstrated that Bliss had violated his asset freeze order (not a good idea) and  had made false declarations to the Court to conceal his conduct.

Bliss pleaded guilty to both counts of the federal indictment in September of 2015.  As a part of his guilty plea, Bliss admitted that he understood that the Court had issued an ordering freezing all of his assets and that assets purchased with funds from any bank account in his name were subject to that order. He admitted that he transferred a sailboat to a third-party (to whom he owed money) so it could be sold to satisfy the debt.  The sailboat was subject to the asset freeze and therefore could not be transferred.  Bliss also admitted making a false statement while under oath.

Separate criminal fraud charges were brought against Bliss by the Utah Attorney General’s office.  He pleaded guilty on December 11, 2015, to four counts of Securities Fraud and one count of Pattern of Unlawful Activity, all of which are Second Degree felonies, and in February of this year Bliss was sentenced to four years in state prison.  The federal sentence will run consecutively with the sentence he received from the State of Utah.

Upon sentencing, Bliss was immediately taken into custody to begin serving his sentence.  The civil case filed by the SEC is still ongoing, but it is unclear whether the victims of Bliss’ scheme will ever get any of their money back.  Don’t hold your breath.

Copyright 2016 by Mark W. Pugsley.  All rights reserved.

The Steven B. Heinz Ponzi Scheme

Today I realized that I never posted about the case against Steven B. Heinz.  Please accept my apologies for this oversight, as this is a story that fits the purposes of this blog perfectly.  Heinz solicited his clients at his brokerage firm, Ogilvie Security Advisors Corporation, and used his membership in the Mormon Church to gain trust with investors, many of who were elderly and unsophisticated.  One investor, the recent widow who attended church with Heinz, invested after he volunteered to assist her with her finances and investments after her spouse died.  Her money is now gone.

Heinz “guaranteed” his investors a fixed rate of return from 6 percent to 120 percent a year, which garnered him nearly $4 million from more than fifteen former clients, family members, and friends.  He stated that this money was to be used for the purpose of day-trading futures contracts.  Heinz created the appearance of being a successful futures trader, but in reality he lost approximately $1.5 million.  Heinz also used investor money to pay “returns” to earlier investors using new investor funds (a classic Ponzi scheme).

On August 8, 2013, the Securities and Exchange Commission (“SEC”) filed a lawsuit against Mr. Heinz and obtained a temporary restraining order and an asset freeze.

Mr. Heinz eventually settled with the SEC and on April 28, 2014, the United States District Court for the District of Utah entered a final judgment against him.  Heinz consented to the issuance of the judgment and admitted to all of the material facts the SEC alleged in its Complaint.  Specifically, Heinz admitted the following allegations in the SEC’s complaint:

  1. Beginning in January 2012, Heinz offered and sold investment contracts to more than fifteen investors, raising approximately $4 million for the purported purpose of investing in futures contracts. (SEC Complaint at ¶ 14.)
  2. Heinz solicited investments from his Ogilvie Securities clients. (SEC Complaint at ¶¶ 14, 17.)
  3. Heinz told Claimants that his trading strategy was so successful with his personal funds that he was willing to them with their investments too. (SEC Complaint at ¶ 15.)
  4. Heinz advised Claimants to liquidate some or all of their securities holdings and invest the funds with him. (SEC Complaint at ¶ 16.)
  5. Heinz promised victims that they would earn tax-free income. (SEC Complaint at ¶ 18.)
  6. Heinz advised at least one couple  to liquidate their investment which caused them to incur $45,000 in penalties. (SEC Complaint at ¶ 20.)
  7. Heinz provided written investment contracts which specified a guaranteed rate of return. The investment contracts stated the amount invested and the guaranteed rate of return. (SEC Complaint at ¶ 21.)
  8. Heinz did not prepare a private placement memorandum or financial disclosures with respect to this purported investment. (SEC Complaint at ¶ 22.)
  9. While Heinz did use a portion of investor funds to purchase futures contracts, bank records show that he misappropriated approximately $1 million in investors’ funds for personal purposes, such as the payment of his personal credit cards in the amount of $331,000, household expenses, personal travel, to fund business opportunities for his children, and to repay a personal loan for $600,000. (SEC Complaint at ¶¶ 30, 31.)
  10. Heinz also used new investor funds to repay earlier investors their purported profits or return of principal in what is a classic Ponzi scheme. (SEC Complaint at ¶ 35.)

The judgment permanently enjoined Heinz from future violations of the securities laws and requires him to pay disgorgement and prejudgment interest of $3,656,675.84.  The judgment also bars Heinz from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in any offering of a penny stock.  Heinz consented to the issuance of the judgment as is currently working to pay off the huge disgorgement amount.  Mr. Heinz was also charged criminally by the U.S. Attorney’s office here in Utah and is currently serving weekends under house arrest.

Many of the victims are seeking compensation through a FINRA arbitration against Heinz’s brokerage firm, Ogilvie Security Advisors Corporation and a number of its principals for failing to supervise him appropriately.  Our firm is handling that case.

If you are a victim of this scam feel free to post your experiences in the comments below.

Another Utah Ponzi Scheme? The SEC’s lawsuit against Marquis Properties

Last month the Salt Lake Regional office of the US Securities and Exchange Commission filed a lawsuit and obtained an asset freeze against Marquis Properties, LLC, its CEO and President Chad R. Deucher, and the company’s Executive Vice President, Richard (“Rick”) Clatfelter.  In its complaint the SEC alleges that these men orchestrated a $28 million Ponzi scheme that defrauded more than 250 investors throughout the United States.  The complaint contains the following allegations:

  • That from March 2010, Marquis, through Deucher and Clatfelter, orchestrated a scheme to defraud unwitting investors by inducing them to invest in notes and investment contracts collateralized by real estate.
  • That Marquis represented that it would use investor funds to purchase real properties and that investors would receive guaranteed profits and return of principal upon sale of the properties. Marquis represented that investments were safe and low risk because the notes and investment contracts were 100% collateralized by valuable real property.
  • That Marquis failed to purchase properties with investor funds, however, and properties offered as collateral were often not owned by Marquis, were substantially encumbered, or were in uninhabitable or blighted condition.
  • That rather than using investor funds as represented, Marquis used investor funds to pay returns to earlier investors, in a classic Ponzi scheme. Marquis could not have paid returns to earlier investors without the influx of new investor money.
  • That Deucher caused Marquis to use investor funds to pay personal expenses of Deucher and directed Marquis to provide investor funds to his wife.

The SEC’s complaint charges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”). The complaint also charges Deucher and Clatfelter with violation of Section 15(a) of the Exchange Act, and names Jessica Deucher as a relief defendant. The SEC is seeking injunctive relief, disgorgement, prejudgement interest, and civil money penalties from Marquis, Deucher, and Clatfelter.

The SEC’s investigation has been conducted by Scott Frost and Cheryl Mori and supervised by Richard Best. The litigation will be led by Amy Oliver.

If you are a victim of the Marquis Properties fraud and have a story to tell about it, please do so in the comments below.

Mark Pugsley’s Recent Interview on Mormon Stories

I was recently interviewed by John Dehlin who runs the “Mormon Stories” Podcast about affinity fraud in Utah.  This episode is available in audio only through John’s podcast, or you can watch the video below.

Episode 606: Mormonism and the Culture of Fraud with Attorney Mark Pugsley

Ponzi-scheme-1In this episode we interview Utah attorney Mark Pugsley.  Mark is a commercial litigator at Ray Quinney & Nebeker, is the founder of the web site, and has handled civil disputes, investment fraud cases, securities arbitrations, whistleblower cases and regulatory investigations for over twenty years.

In this episode, Mark discusses the culture of financial fraud (e.g., ponzi schemes) within Utah Mormonism.

For those interested, a list of past Mormon-related cases will be assembled here.  Please feel free to share links to other stories in the comments below.

Fraud Cases discussed in the podcast:

    1. Val Southwick of Ogden, Utah (SEC Complaint was filed in February of 2008). Southwick left $180 million owing to investors when his company collapsed and was put into receivership.  This Ponzi scheme lasted over 20 years.
    2. Jeffrey Mowen of Lindon, Utah (SEC Complaint was filed in September of 2009). Raised approximately $41 million promising bank-backed CDs from a New Zealand bank that paid returns as much as 33% per month.
    3. Roger Bliss of Bountiful, Utah (SEC Complaint filed in February of 2015). Investors incurred losses of $3,299,689 relating to an “investment club” he ran out of his large Bountiful home. He told investors that he had achieved annual returns of between 100 to 300%.
    4. Dean Udy of Brigham City, Utah (Sued by State of Utah in August of 2012). Udy scammed approximately 1,500 investors who suffered a total  estimated loss of $20 million. He was a former stake president and regional representative in Brigham City, Utah.
    5. Travis Wright of Holladay, Utah (SEC Complaint was filed in 2010). He raised $145 million from 175 investors promising returns of 24% per year.
    6. John S. Dudley of Sandy, Utah. (US Attorney obtained a 17-count criminal indictment in May 2011) Investors suffered $6.8 million in losses, promised returns of 5-10% per month.
    7. Shawn Merriman of Denver Colorado (SEC Complaint filed in April of 2009). He was sentenced to 12½ years in federal prison for defrauding 67 victims out of $21 million.  Merriman was a Bishop in the LDS Church in Colorado and raised the money from friends, neighbors and fellow church members.  The government seized roughly $4 million in fine art, antique cars, sports memorabilia and animal trophies collected on his safari trips when they arrested him.
    8. Wendell Jacobsen of Fountain Green, Utah (SEC Complaint was filed in December of 2011, Utah AG’s office brought criminal charges earlier this year)  Allegedly raised $200 million from more than 400 investors promising returns of 12-15% per year returns by investing in apartment complexes.

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.