legal

The SEC Wants More Whistleblowers

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By Will Atkinson

$22,437,800. That’s the compensation recently awarded to a whistleblower for alerting the SEC to fraudulent financial practices at agrochemical and agricultural biotech company Monsanto. The whistleblower award was part of the $80 million penalty the U.S. Securities and Exchange Commission levied against Monsanto for deceptive accounting practices.

In a statement, the Monsanto whistleblower stated that the SEC “performed an invaluable public service in creating its whistleblower program – my hope is that others will stand up for investors by doing the right thing and bring forward information related to corporate wrongdoing.” By working with an attorney, the Monsanto whistleblower has remained anonymous. In addition to the $80 million penalty, Monsanto has agreed to reform its accounting controls and will retain an independent compliance officer to monitor accounting procedures.

The SEC’s whistleblower program has been gaining traction since it was created in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act. With the recent Monsanto recovery, the program has now awarded more than $107 million who whistleblowers who reported securities law violations. Dodd-Frank also contains important anti-retaliatory measures designed to protect whistleblowers from reprisals for reporting wrongdoing.

While the SEC Office of the Whistleblower is interested in learning about all violations of federal securities law, the director of the SEC’s Enforcement Division said in recent public statements that certain types of cases align with SEC enforcement priorities. In a Sept. 14, 2016 speech, Director of the SEC’s Enforcement Division Andrew Ceresney said whistleblower assistance is “particularly invaluable” for three categories of cases: (1) issuer reporting and disclosure; (2) offering frauds and Ponzi schemes; and (3) Foreign Corrupt Practices Act cases.

Issuer Reporting and Disclosure Cases

Issuer reporting and disclosure abuses remains a top enforcement priority for the SEC. This broad category of cases includes a wide array of misconduct, but usually involves some form of improper accounting. Common schemes include fabricating sales numbers, fraudulent restatements of revenue, and otherwise falsifying financial statements in order to meet or exceed investor expectations. False revenue recognition, untimely recording of asset impairment values, and mischaracterization of expenses are also typical methods of defrauding investors.

Publicly-traded companies are often under extreme pressure to meet investor expectations. This trend and an overly-myopic focus on income performance at the expense of long-term vision have been catalysts for many accounting misconduct, according to Ceresney. Other factors include lax oversight and negative company cultures.

Because this class of cases often involves large numbers of documents and complex financial procedures, whistleblowers who provide insight into this type of misconduct can save the SEC large amounts of time and money. In 2015, almost one-fifth of all SEC whistleblower complaints were related to issuer reporting and disclosure. Whistleblowers who come forward and report issuer reporting and disclosure fraud may be eligible for significant compensation awards.

 

Offering Frauds and Ponzi Schemes

Ceresney pointed to offering frauds and Ponzi schemes as another enforcement priority where whistleblowers proved invaluable. This form of fraud more often strikes larger institutional investors rather than individuals. But this fraudulent activity still hurts the pocketbooks of everyday Americans. Institutional investors often manage large retirement plans that affect millions of working citizens. Like issuer reporting and disclosure fraud, this form of deception is difficult for the outsider to detect and the SEC has stated whistleblower tips about offering frauds and Ponzi schemes align with its enforcement priorities.

Whistleblowers have helped federal securities law enforcement officials detect misleading and deceptive statements in corporate offering documents and marketing materials. Approximately 16% of whistleblower tips in 2015 were related to offering frauds and Ponzi schemes.

 

Foreign Corrupt Practices Act

Foreign Corrupt Practices Act cases invariably involve fraudulent activity in foreign countries, where the SEC is less able to access evidence and enforcement is more challenging. Accordingly, Ceresney said whistleblower tips about FCPA cases are particularly valued.

The SEC’s Office of the Whistleblower has compensated eight whistleblowers for reporting financial fraud. The largest SEC whistleblower award – $30 million – was paid to a foreign whistleblower who provided critical information about a fraudulent scheme that would otherwise have been difficult to detect. Under the law, foreign whistleblowers who provide original information about financial fraud are eligible for compensation.

 

SEC Whistleblower Program

Anyone who provides the SEC with information regarding a potential violation of federal securities law qualifies as a whistleblower under Dodd-Frank. But in order to qualify for a compensation award, the whistleblower must comply with the law’s legal procedures, which is why many whistleblowers choose to work with an attorney.

A whistleblower’s tip does not need to initiate a new case either. Tips that save enforcement time and resources in an ongoing investigation are sought out by the SEC. In May, a whistleblower whose tip bolstered an already-existing investigation was awarded $3.5 million. The tip strengthened the case and gave the Commission additional bargaining power during settlement negotiations.

The SEC wants information about securities violations that leads to a successful enforcement action. This information can come from executives, insiders, and former employees who were positioned to witness the fraud and can provide powerful firsthand information. The information can also come from outsiders, such as market experts who use data analysis techniques to detect fraud. Compliance and audit professionals are eligible under the SEC whistleblower program provided they comply with the law’s statutory requirements. Even those who participated in the fraud are eligible for a whistleblower award.

If you have information regarding federal securities fraud, talk to an SEC whistleblower lawyer and discuss your legal options. Because the SEC considers delay in reporting when calculating compensation awards, whistleblowers are well-advised to make haste.

 

About Will Atkinson

Will Atkinson is a trial and whistleblower lawyer. He represents individuals who report waste, fraud, and abuse of government-funded programs and federal securities violations. Atkinson is an associate attorney with the Washington, D.C. law firm Chaikin, Sherman, Cammarata, & Siegel, P.C.