The Financial Fraud Blog

On June 9, 2011, the SEC issued an investor bulletin warning of the risks associated with investing in reverse merger companies. Reverse mergers permit private companies, including those located outside the United States, to access American investors and markets by merging with an existing public shell company. The SEC’s bulletin warns that many reverse merger companies lack adequate funding to survive post-merger and that many reverse merger investments involve a risk of fraud and other abuse. The bulletin further advises investors of the SEC’s recent enforcement actions involving reverse merger companies. Most notably, the SEC has suspended trading in a number of reverse merger entities, citing a lack of current, accurate information about these firms and their finances. The SEC has also revoked the securities registration of several reverse merger companies due to their failure to comply with SEC filing requirements.

By: Chris Gadoury and Stephanie Gutheinz

The SEC’s whistleblower program was implemented under Section 922 of the Dodd-Frank Act and is primarily intended to reward individuals who provide original information to the SEC that leads to a successful enforcement action.  Dodd-Frank also prohibits retaliation by employers against individuals who provide the SEC with information about possible securities violations.

In passing the Dodd-Frank Act, Congress substantially expanded the agency’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to the Act, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected in the action.  Under Dodd-Frank, awards can now be up to 30 percent of the monetary sanctions or recovery obtained by the SEC.

In order to be considered for an award under the SEC whistleblower program, a whistleblower must: (1) voluntarily provide the SEC, (2) with original information that (3) leads to the successful enforcement by the SEC of a federal court or administrative action, (4) in which the SEC obtains monetary sanctions totaling more than $1 million.

Certain people generally will not be considered for whistleblower awards under the final rules, including:

• People who have a pre-existing legal or contractual duty to report their information to the Commission;
• Attorneys (including in-house counsel) who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules);
• People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law;
• Foreign government officials;
• Officers, directors, trustees or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law (such as through the company hotline).
• Compliance and internal audit personnel; and
• Public accountants working on SEC engagements, if the information relates to violations by the engagement client.

Other individuals, such as employees of certain agencies and people who are criminally convicted in connection with the conduct, are already excluded by Dodd-Frank.

Under certain circumstances, however, compliance and internal audit personnel, as well as public accountants, can become whistleblowers when:

1. the whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors;
2. the whistleblower believes that the entity is engaging in conduct that will impede an investigation; or
3. at least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer—or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.

Regarding the increased anti-retaliation provisions, a whistleblower who provides information to the SEC is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement.

Although the rules do not require that employee whistleblowers report violations internally in order to qualify for an award, the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to use their own company’s internal compliance programs when appropriate to do so. For example, the rules make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations.  In addition, an employee is considered a whistleblower under the SEC program as of the date that the employee reports the information internally — as long as the employee provides the same information to the SEC within 120 days. Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC.  More importantly, the rules provide that a whistleblower’s voluntary participation in a company’s internal compliance program is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.

The Department of Justice reported on May 26, 2011 that Bank of America and Saxon Mortgage have agreed to pay more than $22 million to settle allegations that they wrongfully foreclosed on active duty servicemembers in violation of the Servicemembers Civil Relief Act (SCRA), which prohibits lenders from foreclosing or seizing a servicemember’s property during the servicemember’s active duty military service and certain post-service grace periods without a court order—if the property was purchased before the servicemember entered military service.  BAC Home Loans Servicing LP (formerly known as Countrywide Home Loans Servicing LP), a subsidiary of Bank of America, will pay $20 million to resolve a lawsuit filed in the Central District of California alleging that Countrywide wrongfully foreclosed on approximately 160 servicemembers without court orders.  Saxon Mortgage Services Inc., a subsidiary of Morgan Stanley, will pay approximately $2.3 million to settle a similar lawsuit filed in the Northern District of Texas alleging that Saxon wrongfully foreclosed on approximately 17 servicemembers without court orders.

In addition to compensating the affected servicemembers, Countrywide and Saxon will repair any negative credit entries relating to the wrongful foreclosures and will not pursue any remaining amounts owed under the mortgages at issue.

In a press release regarding the settlements, Assistant Attorney General Thomas E. Perez discussed the consequences of allowing lenders to violate the SCRA’s foreclosure provisions, and affirmed the Justice Department’s commitment to protecting all homeowners from unlawful lending practices and other financial crimes.

The Dodd-Frank Wall Street Reform and Consumer Protection Act encourages whistleblowers to step forward in response to fraud within the U.S. Financial Sector. The recently amended bill creates significant incentives including assurances of confidentiality and employment protections for those who provide information about violations to the Securities and Exchange Commission (SEC).

Any whistleblower who supplies relevant information to the SEC which results in any monetary sanction exceeding $1,000,000 will be awarded between 10 and 30 percent of the amount received by the agency. The award would be paid out of a newly created Investor Protection Fund, made up of monetary penalties collected by the SEC. While the exact percentage of the award is left to the discretion of the agency, the law does provide several factors for the SEC to take into consideration such as…

• the importance of the information provided by the whistleblower


• the assistance provided by the whistleblower and his or her attorneys


• the degree to which the award may prevent future fraud

Additionally, the information provided by the whistleblower must be previously unknown in the public domain unless the whistleblower was the original source of the information. Lastly, the whistleblower must not be convicted of any criminal violations related to the exposed fraud, nor have learned of the information through his or her governmental duties, nor through an audit required under current securities regulations. The SEC will not provide an award to a whistleblower who intentionally provides false information.

You should be aware that qui tam and financial fraud claims are subject to Statutes of Limitations. The area of limitations periods is complex. There are also first to file rules, public disclosure bars, original source issues, and varying limitations in pursuing retaliation claims. If you wish to pursue your claims, you should promptly seek the opinion of an attorney regarding the merits of your qui tam or financial fraud claim and the applicable statute of limitations.

The Securities and Exchange Commission held an open meeting on November 3rd on the implementation of whistleblower provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the provisions of the act, the SEC is now authorized to pay an award to any whistleblower who supplies relevant information to the agency which results in any monetary sanction exceeding $1,000,000. Businesses are worried that the potentially lucrative program will encourage employees to go directly to the commission instead of utilizing internal reporting programs.

At the meeting, SEC Chairman Mary L. Shapiro said the agency took this concern into consideration when drafting this program including other concerns such as how individuals would report financial fraud and how the SEC would revaluate claims. She went on to say that the SEC was mindful to “reduce the chance that employees unnecessarily bypass internal compliance programs that their own companies may have established” and the “goal is not to, in any way, reduce the effectiveness of a company’s existing compliance, legal, audit and similar internal processes.”

Commissioner Troy A. Paredes chimed in and said he was concerned that the proposed rules might not go far enough in encouraging potential whistleblowers to first pursue internal corporate compliance programs thus inundating the SEC with allegations of fraud.

“Internal mechanisms for reporting are not comforting to many employees”, says Qui Tam Attorney, Joel Androphy. “They fear the potential for retaliation. Some employees will still follow internal reporting guidelines, but this gives others the option. The bottom line is the necessity for gathering information from whatever source.”

Since Congress has handed broader powers and more money to the U.S. Securities and Exchange Commission, corporate executives are more likely to end up in court for their employees’ misconduct.

Since the start of the financial crisis the SEC has received a lot of criticism from lawmakers, investors and judges for giving bosses a pass while accusing companies of wrongdoing. The Dodd-Frank regulatory act lowers the bar for filing fraud lawsuits against individuals and authorizes the SEC to double its spending within five years.

Under Dodd-Frank, which was signed into law in July, the SEC can sue an individual who “recklessly” aids a fraud even if the person isn’t aware of the wrongdoing. Previously, lawyers had to show the person knowingly assisted the misconduct. The law also allows the agency to sue senior officers, directors or other people directly or indirectly accountable for the fraud.

"This is a great opportunity for the public to report fraud without risking disclosure of one’s identity," says Joel Androphy, partner and qui tam attorney at Berg and Androphy. “Unlike qui tam cases that remain under seal only until resolved, the SEC whistleblower’s complaint always remains under seal with the government agency.”

The Troubled Asset Relief Program (TARP) is a government program that sought to purchase “troubled assets” in an attempt to stabilize the U.S. economy.

Since its inception in 2008, the program has grown to include banks, insurance companies, mutual fund and investment companies, and automakers and their related enterprises. The selection criteria is largely unknown, but likely involves some evaluation by the Treasury as to a company’s likelihood of survival, or what impact a company’s failure would have on the economy. There seems to be a high risk of fraud as the selection criteria are unclear, the goals of the program are vague, and federal oversight is limited.

If you have knowledge that a company or financial institution has fraudulently obtained TARP money, or used the money contrary to the rules and regulations, you may have a Qui Tam claim that would allow you to recoup money for the taxpayers, and a financial reward for your information. Contact Qui Tam Attorneys Berg & Androphy.

As a response to the Financial Crisis, the United States has turned a critical eye towards finding and punishing fraud arising from the financial sector, either from the misuse of TARP funds, or violations of the SEC or the CFTC regulations. To accomplish this, the government has offered substantial rewards and protections as an incentive for individuals with knowledge of financial fraud.

In return for information possibly leading to enforcement proceedings and monetary sanctions, the government provides whistleblowers with substantial financial rewards, confidentiality, and protections against employer retaliation.

The qui tam attorneys at Berg and Androphy handle the following types of financial fraud qui tam cases:

TARP Financial Fraud Qui Tam Cases
SEC Financial Fraud Cases
Commodity Futures Financial Fraud Cases
Derivative Financial Fraud Cases