Whistleblowers

CTFC Issues Its First Whistleblower Award

Published on: May 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The Commodity Futures Trading Commission has given its first whistleblower award in the wake of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and its bounty program. The regulator awarded $240,000 to a person who voluntarily gave information that allowed the CFTC to file an enforcement action resulting in sanctions and a judgment of more than $1 million.

Under the Dodd-Frank bounty program, whistleblowers of successful claims may be entitled to 10-30% of what is recovered. Prior to this whistleblower award, the CFTC had denied 25 award claims because: the persons provided the original data prior to Dodd-Frank’s passage; they failed to submit necessary paperwork, they gave over the information because the CFTC asked for it and not voluntarily; or the information they provided did not compel the regulator to open or widen a probe or contribute much to any successful Commission matter.

According to business writer William D. Cohan in his article on Wall Street whistleblowers in FT Magazine, whistleblowing—especially on Wall Street—requires great courage. Many find that traders, bankers and executives who raise questions about securities fraud end up losing their job or find themselves the victim of some other type of retaliation.

US Supreme Courts Broadens SOX Whistleblower Protections

Published on: April 4, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In Lawson v. FMR LLC, the US Supreme Court held that the Sarbanes-Oxley Act does extend its whistleblower protections to include employees of privately held contractors that do work for public companies. The Supreme Court case was filed by two ex-employees of privately held companies engaged in mutual funds investments.

The plaintiffs contend that their employers acted against them for bringing up issues they had related to mutual funds. Meantime, their former employers tried to have the lawsuits dismissed, contending that because the plaintiffs had been employees of privately held companies, they could not avail of the whistleblower protections under the SOX Act. Such protections prohibit retaliation against an employee by any officer, contractor, employee, agent, or subcontractor of a public company.

Although previous to Lawson, other federal district courts had made the same assertion, in this latest case, the district court said that the whistleblower provision does in fact protect the employees of any related entity of a public company. This protection would therefore apply to the Lawson plaintiffs.

Securities Whistleblower Roundup: Retaliation Lawsuit Against Thompson Reuters Gets Go Ahead & SEC Issues Its Sixth Bounty Award

Published on: November 14, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has rejected Thomson Reuters (Markets) LLC’s motion to have a whistleblower retaliation case dismissed. Instead, Judge Shira A. Scheindlin agreed with the Securities and Exchange Commission’s rule that a whistleblower doesn’t have to tell the regulator to be able to qualify for Dodd-Frank Wall Street Reform and Consumer Protection Act. The judge, however, did throw out the plaintiff’s claim for punitive damages, which he says Dodd-Frank doesn’t allow.

The plaintiff, Mark Rosenblum, is an ex-redistribution specialist who was allegedly let go from his job after he suggested that changing up the distribution time for certain consumer survey data to certain customers was tantamount to insider trading. Rather than telling the SEC he reported his worries internally and to the FBI.

Rosenblum believes he was fired because of what he reported and he says this is unlawful. Thomson Reuters tried to get the lawsuit tossed out claiming that because Rosenblum didn’t tell the SEC and the company, he therefore wasn’t protected under Dodd-Frank. Thomson Reuters cited the Fifth Circuit’s ruling in Asadi v. GE Energy USA, LLC that determined that Dodd-Frank only gives whistleblower protection to those who notify the SEC. That said, the appeals court also admitted that its interpretation wasn’t in line with the SEC or of other courts .

Financial Firm Roundup: Citigroup Settles $3.5B MBS Lawsuit with FHFA, JPMorgan Unit Fined $4.64M, Court Won’t Dismiss USB Whistleblower’s Action, & Ex-Goldman Sachs Executive to Pay $100K Over Pay-To-Play Scam

Published on: June 8, 2013 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup (C) Settle $3.5B securities lawsuit Over MBS Sold to Freddie Mac, Fannie Mae

Citigroup has settled the $3.5 billion mortgage-backed securities filed with the Federal Housing Finance Agency. The MBS were sold to Freddie Mac and Fannie Mae and both sustained resulting losses. This is the second of 18 securities fraud cases involving FHFA suing banks last year over more than $200B in MBS losses by Fannie and Freddie. The lawsuit is FHFA v. Citigroup.

J.P. Morgan International Bank Ltd. Slapped with $4.64M Fine by UK Regulator

SEC Whistleblower Office Will Place More Emphasis on Anti-Retaliation Provisions and Publicity This Year

Published on: January 29, 2013 | by Shepherd Smith Edwards & Kantas, LLP

According to Securities and Exchange Commission Office of the Whistleblower Chief Sean McKessy, the unit will take a more aggressive approach to publicizing its activities and figuring out how to better enforce the anti-retaliation provisions of its bounty program. McKessy spoke at the DC Bar organized enforcement conference earlier this month and noted that his views were his own and not necessarily that of the SEC.

McKessy said that despite the Commission’s efforts to offer whistleblower provisions that incentivize internal reporting, some corporations have still not told employees about the bounty program. Per the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC can now offer 10-30% of a monetary penalty greater than $1 million that is collected because of “original information” voluntarily offered up by an informant.

Also, per the statute, the SEC has the authority to enforce its anti-retaliation provisions, which protects whistleblowers that provide this information, or commit certain other lawful acts, from retaliatory actions—particularly from employers. McKessy, however, noted that it is too soon to know whether the agency will incorporate an anti-retaliation action to its whistleblower program.

Institutional Investor Fraud Roundup: 3,001 Whistleblower Tips Sent to SEC in ’12, CFTC Contends with ‘Regulatory Cliff,’ and Private Placement Failures Prompt Insurers to More Closely Examine Alternative Investments

Published on: November 17, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to the SEC’s Whistleblower Office, during fiscal year 2012 it received 3,001 tips. The categories that received the most complaints involved the areas related to manipulation, offering fraud, and corporate disclosures and financials. Although complaints came from every state, the states with the most complaints were California, with 435 whistleblower tips, 246 from New York, while 202 tips came from Florida. Tips also were sent in from 49 countries.

During this past fiscal year, there were 143 notices of covered enforcement actions that resulted in sanctions of over $1 million—the minimum amount that needs to be collected for a whistleblower to obtain a reward. (A quality, original tip may entitle a whistleblower to 10-30% of what the government recovers). The SEC said that its Investor Protection Fund, which pays these rewards to qualifying whistleblowers, is fully funded and at the end of FY 2012 contained over $435 million. In August, the SEC paid its first whistleblower reward of $50,000 under the program.

In other securities regulator news, Scott O’Malia the CFTC commissioner announced that the agency will have to contend with a “regulatory cliff” next month when the temporary no-action relief stemming from new swaps rules expires. The regulator had put out 18 no-action letters and other guidance on October 12, providing a lot of swap market participants with a brief reprieve from rules that were scheduled to go into effect the next day. The relief for most expires on the last day of the year, and O’Malia wants the agency to take action to resolve this situation. He made his comments at the DC conference sponsored by George Mason University’s Mercatus Center.

SEC Enforcement Roundup: Commission to Make Closer Examination of Revenue-Sharing Between Brokers and Investment Advisers, NYSE to Pay $5M For Alleged Compliance Issues, and Enforcement Director Khuzami Praises His Division’s Performance

Published on: September 18, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission is ramping up its examination of revenue-sharing arrangements between brokers and investment advisers. It made this announcement in a related administrative order involving advisory firms Focus Point Solutions Inc. and H Group Inc. and their owner Christopher Keil Hicks, who have consented to pay $1.1 million to settle charges that they did not disclose to their clients certain revenue-sharing payments that posed possible conflicts of interests.

Hicks and Focus Point Solutions are accused of not telling clients that in return for specific services, they were getting a portion of the revenues from a brokerage firm that managed mutual funds, which were being recommended to investors. Hicks’ other firm, H Group Inc., allegedly improperly voted on its clients’ behalf to make Focus Point a sub-adviser to one mutual fund (most of that fund’s shareholders were clients of H Group.)

Meantime the New York Stock Exchange has consented to pay $5 million to settle compliance failure charges that allegedly gave some customers an advantage over certain trading information. The Securities and Exchange Commission announced the charges, which are the first of its kind, on September 14. This is also the first financial penalty for an exchange.

According to the Commission, under Regulation NMS, market data cannot be sent to proprietary customers before the same information has been sent out in consolidated feeds, which give quote and trade information to the public. Yet, starting in 2008, the NYSE allegedly violated this regulation over a certain time period when it sent the data through its proprietary feeds first. NYSE also allegedly failed to ensure proper compliance when it did not correctly monitor the proprietary feeds’ speed compared to the speed of the consolidated feeds. According to SEC Enforcement Director Robert Khuzami, even just “milliseconds” of a head start in terms of access to market data “disproportionately disadvantages retail and long-term investors.”

Although the NYSE is settling, it is not denying or admitting to wrongdoing. It and parent NYSE Euronext Inc. (NYX), however, have consented to having an independent party examine their market data delivery systems. On its website NYSE said that the SEC did not accuse it of taking part in any intentional misbehavior or that the data delays had hurt any investors.

Khuzami also recently spoke about the SEC’s other enforcement efforts. At a Practicing Law Institute conference, he said that the Division of Enforcement is doing well. He partially credits its performance to an organizational restructuring that took place in 2010, the agency’s whistleblower program, and stronger investigative work. Khuzami noted that the restructuring generated five specialized units, which has let SEC staff become experts in certain enforcement areas, and, with the help of data-driven analytics, allowed the Commission to look into violations.

Khuzami said that contrary to the idea that his division has not been investigating purported violations that allegedly took place during the 2008 economic crisis, these investigations have been taking place and that 75% of them have gone to litigation. Also, he noted that the SEC has begun a number of initiatives to try to identify additional violations, such as private fund analysis for zombie-funds and looking at whether hedge fund performances are aberrational compared to a certain strategy’s benchmark.

Khuzami also spoke about the SEC whistleblower program that was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, saying that it has already been “successful.” In just one year, August 2011 – 2012, the program has received about 2,870 tips—about 8 a day—with financial fraud, disclosure, market manipulation, and offering fraud among the most common alleged violations named. Khuzami said most tips in the US have from Texas, Florida, New York, and California. Whistleblower fraud tips have also come from abroad.

In re Focus Point Solutions Inc., SEC, Admin. Proc. File No. 3-15011 (PDF)

NYSE fined after some clients got early look at data, Reuters/Yahoo News, September 14, 2012

Division of Enforcement, SEC

More Blog Posts:
SEC Commissioners Paredes and Gallagher ‘Dismayed’ Over Chairman Schapiro’s Announcement Regarding Failed Money Market Mutual Fund Industry Overhaul Proposal, Institutional Investor Securities Blog, September 7, 2012

Institutional Investor Securities Roundup: FHFA Can Start Discovery in MBS Litigation Against Banks, SEC Sues Puerto Rico Man Over Alleged $7M Scam, and Assets of Two Colorado Men are Temporarily Frozen Over Alleged Promissory Note Ponzi Scheme, Institutional Investor Securities Blog, August 31, 2012

SEC Study Reports that Many Retail Investors Are Financially Illiterate, Stockbroker Fraud Blog, September 5, 2012

SEC Securities Law Roundup: First Whistleblower Award Under New Program is Announced, Internet-Based Investment Adviser Seeks Regulator’s Recognition, & the Commission Stops Alleged $600M Online Ponzi Scheme

Published on: August 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has made its first award to a whistleblower under its new program created under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Informants who give the commission “original information” leading to action resulting in $1 million or greater in penalties are entitled to receive 10-30% of whatever sanctions the regulator collects.

The SEC announced that it would pay $50,000 to this particular tipster for assistance provided in stopping a “multi-million dollar fraud.” This person gave “significant information” and documents, which helped speed up the agency’s probe. Now, the defendants in the securities case must pay about $1 million in penalties, of which the Commission has collected about $150,000. The $50,000 is about 30% of that amount. If a final judgment is issued against other defendants, the whistleblower could receive a larger amount.

In other SEC-related news, Larry Eiben the co-founder of Moxy Vote, an investment web site, wants the Commission to put into effect rules that recognize a new investment adviser category. He wants investors to be able to use a “neutral Internet voting platform” to get information about investments, as well as be able to not just vote shares during corporate meetings, but also “designate as the recipient of proxy materials” for transmission by companies with SEC-registered stock.

Eiben believes the rule changes is necessary because under existing regulations, retail investors cannot use the Internet to vote their shares or collect and get information through means that they might find most helpful when determining how to vote. He says the change will tackle what he considers an ongoing issue: “low participation by retail investors in voting shares of their portfolio companies.”

Unfortunately, the Internet continues to prove an effective tool for perpetuating financial fraud. Earlier this month, the SEC obtained an emergency asset freeze order stopping an alleged $600 million Ponzi scam that was about to collapse. The defendants are Rex Venture Group and its owner Paul Burkes, who is an online marketer.

Per the Commission, the two of them raised money from over one million clients on the Internet using ZeekRewards.com. They allegedly gave customers several options for earning money through a rewards program. Two of them involved the purchase of investment contracts. However, none of these securities were SEC registered, which they are required to be under federal securities laws. Meantime, investors were promised up to half of the company’s daily net profits via a profit sharing system. Also, despite the defendants’ allegedly giving them the impression that the company was profitable, investors received payouts that were unrelated to such profits, and instead, in typical Ponzi scam fashion, the money paid to them came from the newer investors.

The SEC said its order to freeze assets will allow the Ponzi scam victims to recoup more of their money so whatever is left of what they invested with ZeekRewards can be used as payouts to them. Burkes has agreed to settle the Commission’s allegations without denying or admitting to wrongdoing. He will, however, pay a $4 million penalty.

Whistleblower Program, SEC

S.E.C. Pays Out First Whistle-Blower Reward, The New York Times, August 21, 2012

Read Eiben’s Petition to the SEC (PDF)

MoxyVote (PDF)

Read the SEC complaint in its case against Rex Venture Group (PDF)

More Blog Posts:
Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers, Stockbroker Fraud Blog, August 27, 2012

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk, Institutional Investor Securities Blog, August 25, 2012 Continue Reading ›

Plaintiff Says Morgan Stanley Fired Him for Calling out Investment Adviser Who Was Churning Accounts and Bilking Investors

Published on: August 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Clifford Jagodzinski has filed a lawsuit against Morgan Stanley & Co. (MS), Morgan Stanley Smith Barney, and Citigroup (C). He claims that he was fired from his job at Morgan Stanley as a complex risk officer because he reported that an investment adviser was churning accounts and earning tens of thousands of dollars while defrauding clients. Jagodzinski filed his case in federal court.

He contends that even though he always received excellent job evaluations during the six years he worked for Morgan Stanley, he was terminated as an employee 10 days after he told supervisors that unless the financial firm started reporting unauthorized trades it would be violating SEC regulations. Jagodzinski said that the financial firm told him to sign a confidentiality agreement with a non-disparagement clause and then proceeded to hurt his career by claiming that he was let go because of poor performance. He wants reinstatement and punitive and compensatory damages of over $1 million for whistleblower violations.

Jagodzinski believes that his trouble started after he told his supervisors, Ben Firestein and David Turetzky, that Harvey Kadden, one of the firm’s new wealth managers, was allegedly flipping preferred securities so that he could make tens of thousands of dollars in commissions, while causing his clients to sustain financial losses or make little gains as he exposed them to risks that could have been avoided. Jagodzinski said that while he was initially praised for identifying the alleged misconduct, his supervisors told him not to look into the matter further. He believes this is because Morgan Stanley had given Kadden a $25 million guarantee, and due to their high expectations of him, they didn’t want to hurt his book of business.

Jagodzinski said that he encountered similar resistance when he notified the financial firm of other violations, including those involving Bill Siegel, another financial adviser that he accused of making unauthorized trades. Once again, he says he was told not to investigate or report the alleged violations further-even though (he says) Siegel admitted to making 80 unauthorized trades for one client and other ones for other clients. Although Turetsky allegedly told him that this was because he didn’t want Siegel fired, Jagodzinski suspects that his supervisor was more concerned that the defendants would have to pay penalties and fines. He also said that when he reported his concerns that yet another financial adviser was not just engaging in improper treasury trades but also abusing drugs, his worries were again brushed aside.

An employee who gets fired for blowing the whistle on a company or a coworker can have grounds for filing a wrongful termination lawsuit. If the wronged employee is a whistleblower, he is entitled to certain protections, which include being shielded from retaliation on the job for stepping forward and doing what is right.

Worker Says He Caught Morgan Stanley in the Act, Courthouse News Service, August 3, 2012

Ex-Morgan Stanley Risk Officer Sues Bank Over Firing, Bloomberg, August 1, 2012

More Blog Posts:
Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court, Stockbroker Fraud Blog, July 21, 2012

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

District Court Denies UBS Summary Judgment in Sarbanes-Oxley Whistleblower Lawsuit, Stockbroker Fraud Blog, June 27, 2012 Continue Reading ›

Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court

Published on: July 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has ruled that a Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amendment to Section 806 of the Sarbanes-Oxley Act of 2002 must be applied retroactively to clarify congressional intent. The amendment specifies that public company subsidiary employees, and not just parent company employees, are protected under the whistleblower statute. The court, however, did not reach merits of the plaintiff’s claim regarding his firing and told the parties to turn in a joint letter about what steps will need to happen to get the matter ready for trial.

The lawsuit, Leshinsky v. Telvent GIT SA, involves whistleblower claims made by plaintiff Phillip Leshinsky. He contends that Telvent GIT SA (TLVT), Telvent Caseta Inc., Telvent Farradyne Inc., and a number of individuals wrongly fired him while violating Sarbanes-Oxley’s whistleblower provisions. Leshinsky, who was employed by nonpublic subsidiaries of the publicly traded Telvent GIT, contends that he was let go when he expressed opposition to using allegedly fraudulent information to secure a contract with the New York Metropolitan Transit Authority. His claims pertain to a period prior to the 2010 Dodd-Frank amendment.

The court noted that while before the Dodd-Frank amendment, Sarbanes-Oxley only protected employees who worked for publicly traded companies from retaliation when they blew the whistle, the 2010 revision does apply retroactively “as a clarification of the statute.” Leshinsky is therefore covered under Section 806.