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


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.

Red Flags Galore: The SEC Sues Roger Bliss of Bountiful Utah for Fraud

There is a relatively new SEC case that definitely needs to be added to my growing list of Utah affinity fraud schemes.  On February 11, 2015, the Salt Lake City office of the U.S. Securities and Exchange Commission filed a lawsuit and obtained a temporary restraining order against Roger S. Bliss of Bountiful Utah.

This case has all of the hallmarks of a fraudulent scheme, but unfortunately a number of Bountiful residents (probably many were his ward members) lost their retirement savings because they failed to see – or worse ignored – all the red flags.

The SEC Complaint alleges that Mr. Bliss operated an “investment club” out of his large Bountiful home.  Members of the “club” would contribute funds for Bliss to day-trade Apple (AAPL) stock for what he represented to be huge profits.

Bliss allegedly told his friends and neighbors that he had an excellent trading record and had never lost money in the last six years [red flag]. Bliss told interested investors that he had achieved annual returns of between 100 to 300% [red flag], and claimed to be managing in excess of$300 million, $260 of which was his own money. Bliss also claimed there is no risk for investors [red flag], and guaranteed they would not lose their principal investment [red flag].

He told people that he taught investment seminars and traded for his own account for about a year until he felt comfortable enough with his proficiency and results to trade with his friends’ money.  And what a great friend he turned out to be…

He called his scheme an investment club (purportedly after consulting with an attorney) because he wanted to avoid being registered as a stock broker or investment advisor.  This is a big red flag — anyone who claims he or she can buy and sell securities on your behalf without being licensed and regulated by FINRA or the SEC is clearly violating the law.

According to the complaint, Bliss represented to investors and potential investors that when he traded their money he would take “50% of the upside” so that earnings on their investment are split.   The remaining 50% of profits were to be shared among investment club members, based on their percentage of equity in the club.  So even after the 50% split, Bliss promised investors would earn at least a 100% return on their investment because Bliss he was actually earning a 200% to 600% total annual return on his trading activities [huge red flag].  He told investors that his average profits were about $920,000 per day, and that he was averaging profits of over $2 million per day during 2015 in his investment club. [red flag]

Of course none of this was true.  According to brokerage records obtained by the SEC, Bliss lost $3,299,689 over the last three years of trading, and much of the money he received from his “club members” never even made it to his brokerage account.  The ending balance on his December 31, 2014 brokerage statement was just $32,362 — far less than the $300 million he told people he was managing in the “investment pool.”

Of course he could not show people the real trading records, so the SEC alleges that he created fake trading records and account statements that showed successful trading.  Bliss provided a fake account statement to one investor that showed a balance of over $85 million in the account. The statement showed a profit of over $4.9 million for the first 5 trading days of 2015.

So the question is WHY.  Why would so many good trusting people give this man their hard-earned money when the claims he was making were so obviously too good to be true?  Why did these people fail to consult with authorities such as the Utah Division of Securities or the SEC to find out whether his scheme was a scam?

I think the answer is simple: Greed.  People get so excited about the prospect of outrageous profits like the ones promised by the ironically named Mr. Bliss that they jump in head first without researching the investment opportunity.  And people in this state are far too trusting.  Just because someone shares your religion does NOT mean they can be trusted with your money.  Research the investment opportunity carefully and remember that if it seems to good to be true (such as 200% to 600% annual returns) it almost always is.

If you are a victim of Mr. Bliss’s scam please feel free to share your story anonymously in the comments below.

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

The SEC says Utah investors are too trusting

This article by Caleb Larkin appeared in the Ogden Standard Examiner on June 8, 2015:

SALT LAKE CITY – The Securities and Exchange Commission (SEC) in Salt Lake City reports Utahns tend to invest in Ponzi and other financial fraud schemes at a higher rate than most states.

The SEC has 12 office locations nationwide that cover multiple states. Most offices appear in financial centers and cover a huge population. So why does Utah get its own dedicated office?

Karen Martinez, the regional director for the Salt Lake City SEC office, explained it may have to do with the historical significance of the site. “Salt Lake used to have an exchange, as a mining and railroad capital. That’s when the SEC office was created,” Martinez said.

However she also noted other offices have become obsolete, such as Seattle. Utah’s office may still be operating because of a higher need in the area.

The SEC enforcement office in Salt Lake City most often handles investor fraud cases. “Primarily our goal is investor protection,” Martinez said.

She acknowledged Utah has a large number of fraud cases they handle, specifically affinity fraud. Affinity fraud refers to investment scams that take advantage of specific social groups, religious affiliations, races, or ethnicities. One example of affinity fraud in Utah involved a deaf scammer who targeted deaf investors.

“Utahns tend to be a close-knit community,” Martinez said. “Unfortunately we tend to be very trusting of those who share common traits with us.”The Salt Lake office even handles out of state affinity fraud cases because of their experience as well as the fact that investors can live all over the country.

money-4Cheryl Mori, Martinez’s senior advisor, highlighted Roger Bliss’ case filed in February. Bliss, from Bountiful, told investors he was making a 600 percent increase each year trading Apple stock. He offered investors 50 percent on the profit returns. Members of his “investment club” simply looked at his affluent standing, his nice car, his family, and his church attendance to make a judgment.

“You know if that the little voice inside your head says this is too good to be true, it is almost always right!” Martinez said. Bliss lost more than $3 million trading. He retained almost nothing for investors to reclaim by the time they brought the case to the SEC.

Martinez explained they try to move quickly on large cases to freeze assets and save investors’ funds. However most fraudulent investment advisors burn through funds before the case reaches the SEC. The SEC’s Office of Investor Education creates public awareness on different investor topics to protect Utahns before they succumb to such schemes.

The SEC in Salt Lake City files between 20 and 25 cases each year. Most claims average $25 million in fraudulent damages. Martinez explained many of the tips from investors will lead to quick resolutions from a simply phone call. Most long-term cases the Salt Lake office deals with focus on bribery investigations. A common issue is US companies bribing foreign government officials for a favorable business standing in their country. The SEC, however, also handles many ongoing, non-public, cases.

“We are getting more and more focused on investment advice for retirees,” Martinez said.

She explained the increased focus on retirement funds leads to bad advisement on retirement investments. One specific example she noted is with military and government employees. Brokers often offer bad investment advice to this group or fail to give full disclosure.

Charges range from interface fraud, as the most severe, to technical violations such as failing to register a security. A security in financial terms refers to a mutually beneficial agreement to trade financial assets. Some charges require proof of “intent to deceive.” Others are negligence based charges that come about when a broker fails to make all materials known or didn’t perform their due diligence.

Utah’s trusting culture puts investors at a disadvantage. Martinez believes “Utahns need to be vigilant. They need to do their homework. They need to research the individuals who offer investment advice.”

Boston Man Claimed Day Trading Strategy Was Inspired By The Holy Spirit

350-prosperity-gospelThis is not a Utah case, but I thought the parallels to other cases I have written about here were striking.  This is a repost of an article that appeared in the Boston Globe today:

Charles L. Erickson has been charged with running a Ponzi scheme and raising funds from people at his church by claiming his investment strategy was divinely inspired.

The Massachusetts Secretary of State’s office said Tuesday it filed civil charges against Erickson seeking compensation for investors and a ban from the securities industry. According to the Secretary of State’s office, Erickson started collecting money in 2010 and his scheme fell apart in 2014.

“Erickson believed that the ‘Holy Spirit’ had given him a proprietary system for day trading a particularly volatile type of futures contract,’’ the complaint filed by Galvin’s office said. “Erickson pooled investor funds into online brokerage accounts and began trading pursuant to his purportedly divine system.”

According to Galvin’s office, Erickson began investing in E-Mini Russell 2000 futures contracts in 2008 to supplement his retirement income. In 2010, he started taking money from others at his unnamed Ashland church, but did not invest all of it; about half was kept in his checking accounts to pay the returns he promised.

By late 2014, he told investors that he had “lost everything.” Around seven of the at least 25 investors were fellow church members. Some of his investors, Erickson allegedly told investigators, were living “hand to mouth.”

“Ponzi schemes are insidious tricks on investors because they seem to work, but inevitably collapse,” Secretary of State William Galvin said in a statement. “It is especially distressing when it occurs in the context of affinity fraud where investors are victimized by misplaced trust.”

A spokesman for the secretary of state’s office said Erickson didn’t have an attorney. He could not immediately be reached for comment, but according to the complaint, said it was “my shame and my sin” that he recruited people from his church.

Shane Baldwin of Layton, Utah Has Finally Been Criminally Indicted

BaldwinWhen you practice law in the area of investment fraud you tend to get a lot of calls about some cases and individuals — especially once the payments stop coming in.  I can honestly say that I have received more calls regarding Layton, Utah resident Dwight Shane Baldwin over the past six or seven years than any other individual.  I previously wrote about Baldwin in a post titled “Silverleaf Fraud Filing” in March of 2010, when the initial civil charges were filed.  He later entered into a Stipulation and Consent order in June of 2010 with the Utah Division of Securities. Well, these cases move slowly but I am pleased to report that three sets of criminal charges have now been filed against Baldwin.

As reported by Tom Harvey at the Salt Lake Tribune, last month prosecutors filed criminal charges for the third time in less than a month.  The latest allegations are that he cheated investors out of more than $14 million.  Baldwin faces fourteen second-degree felonies, including Securities Fraud, Communications Fraud, Theft, Unlawful Dealing with Property by a Fiduciary, and engaging in a Pattern of Unlawful Activity..

The Affidavit of Probable Cause filed by the Utah Attorney General’s Office alleges that Baldwin, as founder and manager of Silverleaf Financial, told investors that he would use their money to purchase distressed debt that was purportedly secured by real property. As usual, investors were promised abnormally large returns in exchange for their investment — always a red flag.

However, as is often the case, an investigation by the Utah Division of Securities and the Federal Bureau of Investigations revealed Baldwin engaged in numerous deceptions while trying to obtain investor funds, including misrepresenting expected investment returns. He is alleged to have told one investor he was investing $2 million in an asset purchase but never actually invested the money. In another transaction he told multiple investors he had a buyer ready to purchase an asset and none of the investors were repaid any of their initial investment. It is also alleged that Baldwin used $1 million of investor money on personal expenses.

In a news release, Utah Attorney General Sean Reyes stated that “people should verify the legitimacy of a deal or offering, before ever trusting anyone, even close friends and family, with money to invest.”

I couldn’t agree more.

Copyright © 2015 by Mark W. Pugsley

The SEC’s New Whistleblower Program Has Proven to be a Game Changer

The_Office_of_the_Whistleblower(SEC)_SymbolSEC Chair Mary Jo White gave a speech at the Northwestern University School of Law on April 30, 2015 on the SEC’s new Whistleblower Program.  She called it a “game changer.”  She said that despite criticism, whistleblowers provide “an invaluable public service” the SEC increasingly sees itself as the “whistleblower’s advocate.”

Whistleblower Statistics

After just four years the SEC’s program has seen significant successes:

  • The number of tips they have received is high and has increased by more than 20 percent.
  • In 2014, the SEC received over 3,600 tips (about ten a day), which is up from about 3,200 tips in 2013.
  • In the first quarter of this year, they have seen the numbers increase by more than 20 percent over the same quarter last year.
  • Tips have come from whistleblowers from all fifty states and sixty foreign countries.
  • The tips span the full spectrum of federal securities law violations.

The program is still fairly new, but so far a total of seventeen whistleblowers have received awards.  Payouts have totaled nearly $50 million and the SEC has made individual awards in excess of $1 million three times.  The highest award to date is over $30 million.  In the last fiscal year, the Commission issued more awards to more people for more money than in any previous year – and that trend is expected to accelerate.


Chairman White also stated that the SEC is “very focused” on cracking down on retaliation against whistleblowers and wants whistleblowers and their employers to know that employees are free to come forward without fear of reprisals.  The statute provides that employers cannot “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” to provide information or assistance to the SEC.

If they suffer retaliation whistleblowers can sue the company directly, and the SEC may also bring an action for retaliation against an employer.  The SEC believes that strong enforcement of the anti-retaliation protections is critical to the success of the SEC’s whistleblower program and bringing retaliation cases will continue to be a high priority.

The Bottom Line

The SEC’s Whistleblower program is intended to create powerful financial incentives for individuals to provide real evidence of fraud or any wrongdoing that harms investors to the SEC.  She stated that the ultimate goal of the whistleblower program is to deter further wrongdoing.  She admitted that it is “too early to draw conclusions about whether the program has altered corporate behavior and reduced wrongdoing.  But we certainly hope it has and will continue to do so.”

Ray Quinney & Nebeker has one of the largest and most experienced whistleblower and false claims act practices in the region, including a former United States Attorney, two former attorneys with the U.S. Department of Justice, and several attorneys who were investigators with the Utah Division of Securities.  Together we have many years of experience assisting clients with the investigation of these cases, navigating the complex statutory framework relating to these cases, maintaining confidentiality, protecting against retaliation and, where appropriate, filing lawsuits.  We have recovered millions of dollars for our clients in these cases and have the resources, experience, and expertise to investigate these cases and to represent our clients from the claims process through trial.

If you have information about securities fraud or government fraud you may be entitled to a substantial reward.  For more information or to schedule a confidential consultation, contact me at mpugsley@rqn.com online or call 801-323-3380.

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

Receiverships: Recovery Can Be More than Pennies on the Dollar

http://www.dreamstime.com/stock-image-pennies-dollar-image3195441By Jared N. Parrish

 “Once a receiver takes over you won’t see a dime.”

“The lawyers for the receiver will just take all the money and leave nothing for investors.”

“Don’t file a claim because there won’t be any money available anyway.”

These are some of the most common statements I hear from investors who put money into a financial fraud that is later placed in receivership. The modern lexicon of Ponzi schemes and financial fraud cases is wrought with pessimism and a seeming presumption that no money will flow from a judicially-created receivership estate to the defrauded investors. This is a dangerous misconception which is not borne out in practice. However, the misconception continues to lead many victims of financial fraud to the conclusion they should not pursue their claim against the receivership estate.

Recently, two major Utah receivership cases have returned 100% of losses to the investors who filed claims. Most recently in the Securities and Exchange Commission’s enforcement action against Management Solutions, Inc., U.S. District Court Judge Bruce Jenkins approved a distribution plan which will repay all investor claimants all of their principal losses. In his address to the Court during the distribution plan hearing, Daniel Wadley, the lead trial counsel for the Securities and Exchange Commission, noted that the biggest fear he had heard from investors early in the case was that the receivership was going to suck up all the money in legal and other professional fees. Over 400 claims were filed in that receivership.

In another example, U.S. District Court Judge David Nuffer approved a distribution plan in the Securities and Exchange Commission’s action against Impact Payment Systems and John Scott Clark which also returned 100% of principal losses to all claimants. Impact Payment Systems was a payday lending operation based in Logan, Utah which was operated as a Ponzi scheme. The Receiver, Gil A. Miller of Rocky Mountain Advisory, has disbursed over $18 million to investors.

A receiver’s principal duty is to marshal and protect the assets of the companies under his or her control, and to determine whether those companies can continue to operate lawfully after the principals have been removed. Receivers are uniquely suited to recover money and other assets that have been transferred by the principals of a financial fraud to others, so that those assets can be distributed to the defrauded investors. Federal and state laws protect receivers from traditional legal challenges which face other types of parties in litigation and in the administration of companies in receivership, making the path to recovery of assets easier.

The investor, not the receiver, bears the duty to pursue their claim in a receivership. This means it is the responsibility of the investor to keep informed about the receivership, to file a claim form, and to prosecute that claim if they disagree with the receiver’s distribution plan.  A receiver will not simply look to a company’s internal records to find investors and send money to them. If an investor who has lost money in a financial fraud does not file a claim in the case they will receive nothing. I have spoken with dozens of investors who failed to file claims in receivership cases and are rendered ineligible for a distribution. The excuses range from, “I didn’t think there would be any money” to “my investment adviser told me not to file.” An investor who does not file a claim form, but subsequently wishes to receive a distribution, must file a motion with the receivership court and demonstrate “excusable neglect” for their failure to file. The rationale, “I didn’t think there would be any money,” is not excusable neglect.

The perception that investors will receive nothing once their investment is placed in receivership is generally wrong, and acts as a deterrent to filing a claim. Equity receivers work very hard to generate the highest possible return to as many investors and other claimants in a receivership as possible. Failing to timely file a claim with a receiver is a mistake which can cost defrauded investors a return of much, if not most, of their principal losses.

While an investor typically does not need the assistance of counsel to file a claim in a receivership, it is very helpful to have an experienced lawyer who can keep better apprised through the Court’s notification system regarding the status of the case and who can analyze the distribution plan and claim classification decisions by the Receiver.

Jared N. Parrish is a member of the firm’s Receivership and Securities Litigation practice groups. His practice is devoted to matters involving securities litigation, federal equity receiverships, compliance, state and federal regulatory investigations and enforcement actions. He has represented equity receivers and claimants in some of Utah’s largest financial fraud cases.


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.


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.

Four tips to avoid getting fleeced by your broker

The-Wolf-Of-Wall-Street-Stockbroker-665x385This is a brief but helpful article from the Associated Press that appeared in the Salt Lake Tribune today.  I would add that although the majority of stock brokers are honest and straightforward, there are some out there who are not so it pays to do your homework online before you hire someone to manage your accounts.  And always make sure you understand what fees and commissions you will be paying when you purchase of financial products and services.

-Mark Pugsley


Can your broker or adviser be trusted? There is no way to be 100 percent certain, but far too many investors don’t even take a few simple steps to protect themselves. Start by asking questions. Here are four key ones, and tips for finding the answers.

• WHO’S PAYING YOU? If a broker or adviser is pushing a specific investment, maybe it’s because they’re getting paid to do so. Many mutual funds charge one-time “sales loads” or annual “12b-1” fees that come out of your pocket and go into theirs. Cheaper, equally good funds may be available, but they may not tell you.

Make sure to also ask about commissions, markups or hidden fees they may get for selling stocks, bonds and insurance products.

• ARE YOU A FIDUCIARY? You’re in safer hands if the broker or adviser is held to a fiduciary standard. That requires them to put your interest ahead of their own, so they must tell you about cheaper alternatives. They also must monitor your investment.

That’s not the case for many brokers now. They are required only to limit recommendations to products that are “suitable” based on your financial situation, age and appetite for risk, which critics say gives too much room for foul play.

• WHAT DO THOSE LETTERS MEAN?: The number of professional designations and acronyms has jumped in recent years, but don’t be fooled. Regulators say some reflect higher standards than others. If you’re confused, best to insist that your adviser has a well-known one, like certified financial planner, which has strict requirements and carries the weight of the fiduciary standard.

• WHAT’S ON YOUR RAP SHEET?: Client complaints and regulatory action against brokers can be found at a database maintained at industry regulator FINRA. Type in the name of the broker at BrokerCheck. But the site isn’t foolproof. Much of the information depends on brokers updating information themselves, and older complaints are purged regularly.

You may also want to check out your broker or adviser’s so-called ADV form filed with the SEC at adviserinfo.sec.gov. It may help to Google the broker, too.