Securities fraud is a type of white-collar crime in which a person or a business provides false or misleading information used in purchasing or selling investments. It can also be committed by individuals who engage in insider trading. Often complex and multifaceted, securities fraud schemes are most commonly designed to provide misinformation in the name of increasing profits. It is estimated that civil securities fraud costs as much as $40 billion annually.
Those involved in securities fraud can be corporations, stockbrokers, brokerage firms, investment banks, stock analysts or private investors. Corporate officers and/or board members may commit securities fraud by making misstatements on financial reports or in Securities and Exchange Commission (SEC) filings, engage in insider trading, falsely represent themselves to corporate auditors or manipulate stock prices.
Securities fraud can have a devastating impact on the financial markets and the world economy. Fraudulent mortgage backed securities, in which multiple home loans are bundled together and sold as a security, played a major role in the 2008 financial crisis. All of the nation’s top investment banks (Goldman Sachs, Morgan Stanley, JP Morgan, Bank of America, Citigroup) sold mortgage backed securities or related financial products whose performance depended on these securities without warning investors of the considerable risk involved. Some of the most egregious offenders paid billions of dollars in fines and penalties for their deceptive practices.
At Wisner Baum, our whistleblower attorneys can represent you in securities fraud claims. We serve clients in California and nationwide.
Types of Securities Fraud
Securities fraud encompasses a wide range of fraudulent activity carried out by individuals and companies alike. The following are common forms of SEC fraud:
Ponzi Schemes
A fraudulent investment fund that pays investors with their own money or money that is obtained from other investors rather than profits made through investments. Bernie Madoff was the operator of a Ponzi scheme that cost investors an estimated $64.8 billion in losses.
Accounting Fraud
This type of financial fraud occurs when accounting firms do not identify falsified financial records. This misinformation can impact financial markets in a number of different ways. In some cases, accountants assist their customers in falsifying their books and records using improper investment deductions or secreting income in a variety of ways. Many of the nation’s largest accounting firms have admitted to or have been charged with negligence or willful misconduct due to their failure to disclose false information related to their client companies’ financial standing. Accounting fraud results in billions of dollars of lost tax revenue, as well as losses to individuals who were deceived about a company’s financial strength. “Cooking the books,” as it is often called, may be used to artificially boost a company’s stock price. In two notable examples, AgFeed Industries, an animal feed and hog production company, created fake invoices to inflate its revenue, Diamond Foods, a snack food company, lied about walnut costs so it could report higher earnings. In both cases, the goal was to make the company look more attractive to investors.
Insider Trading
The trading of a company’s stock, bonds or other securities by company insiders or related parties using information that is not accessible to the public. If a company issues non-public information to any person, the SEC Fair Disclosure regulations requires the company to make that information available to the public.
Securities Fraud Whistleblowers
Whistleblowers report securities fraud directly to the SEC, a federal enforcement and regulatory agency. Anyone with original information pertaining to a violation of securities law can be a whistleblower, provided they are not members, officers or employees of regulatory agencies, law enforcement agencies, the U.S. Department of Justice or the Public Company Accounting Oversight Board.
Individuals who file SEC whistleblower complaints may do so anonymously. The confidentiality provided to SEC whistleblowers is considered the strongest of all federal whistleblower programs. While all whistleblowers are advised to be represented by a skilled whistleblower attorney, those that choose to file anonymously are required to be represented by counsel.
SEC whistleblowers are eligible to receive between 10 and 30 percent of any money recovered from successful enforcement actions exceeding $1 million in sanctions. Whistleblowers are also protected from corporate retaliation, including termination, harassment, suspension, demotion or any kind of threats. Whistleblowers can file a civil suit to seek damages for any retaliatory action taken against them. If successful, compensation may include two times the whistleblower’s actual lost pay, reinstatement and payment of any legal fees.
Awards for Securities and Commodities Whistleblowers
The laws for securities and commodities whistleblowers share some similarities with the False Claims Act. Securities and commodities whistleblowers who provide original information to the SEC or the CFTC that enables the government to collect more than $1 million in an enforcement action are entitled to a reward of at least 10 percent, and potentially up to 30 percent, of the amount recovered.
SEC and CFTC whistleblower rewards are determined by the following:
- The importance of the whistleblower’s information to the success of the recovery action.
- The “degree of assistance” provided by the whistleblower and his or her attorneys.
- The “programmatic interest of the Commission in deterring violations of the securities laws.”
Both the SEC and the CFTC further clarified the meaning of programmatic interest in final rules explaining how their whistleblower programs would be implemented.
In deciding programmatic interest, both commissions consider:
- The degree to which the award enhances the Commission’s ability to enforce securities laws and protects investors.
- The degree to which the award encourages other whistleblowers to come forward with high quality information.
- The severity and wide spread nature of the violations exposed and the potential harm they posed to investors.
Other factors the Commissions consider in determining the size of an award are the timeliness of the whistleblower’s report and any “unique hardships” experienced by the whistleblowers as a result of their reporting and assistance.
To qualify for an award, securities and commodities whistleblowers must provide the SEC or CFTC with “original information,” which is defined in the law as information that “is derived from the independent knowledge or analysis” of the whistleblower and “is not known to the Commission from any other source, unless the whistleblower is the original source of the information.”
A number of other conditions explained in SEC and CFTC rules determine whether information will be considered original. For example, information obtained by an “officer, director, trustee, or partner of an entity… in connection with the entity’s processes for identifying, reporting, and addressing possible violations of law” would not be considered original.
If you have personal knowledge of federal securities law violations and would like to learn more about your options, please contact us.
