Articles Posted in Whistleblower Issues

The Securities and Exchange Commission (SEC) announced on February 16, 2016 a settlement with Massachusetts-based PTC, Inc. involving alleged violations of the Foreign Corrupt Practices Act (FCPA).  In total, PTC was reported to agree to pay approximately $28 million, including nearly $12 million in disgorgement and more than $14 million in a non-prosecution agreement with the United States Department of Justice in a parallel action.

According to the SEC Order, PTC’s China-based subsidiaries made payments to China officials in an effort to win business, including:

  • Provided improper travel, gifts, and entertainment totaling nearly $1.5 million to Chinese government officials who were employed by state-owned entities that were PTC customers.

According to an article by Rob Lenihan of Thomson Reuters, published in August 2014, Sean McKessey, head of the SEC’s whistleblower program, was quoted by the Wall Street Journal as saying that the numbers [of whistleblower complaints] will soon grow and “we’re getting close to the sweet spot.” Malecki Law had reported on this Wall Street Journal article and examined the state of Dodd-Frank Whistleblower program, as it existed then, in this blog post. A year into it, let’s examine where we are at with the growing numbers.

During the 2014 fiscal year, the number of whistleblower tips and complaints received by the Commission grew 10.1 % from the year before to 3,620. The Dodd- Frank Whistleblower program, which promises cash rewards for those whose tips lead to a successful investigation by the SEC, has witnessed many milestones in past four years. In a recent development, SEC paid a handsome $3 million to a company insider in July 2015, who helped crack a complex fraud case.

According to Andrew Ceresney, Director of the SEC’s Division of Enforcement. “Insiders may hold the key to helping our investigators unlock intricate fraudulent schemes,” and “by providing significant financial incentives for people to come forward, the SEC’s whistleblower program continues to be profoundly effective in helping us protect investors and hold wrongdoers accountable.” The SEC’s whistleblower program has already paid more than $50 million to 18 whistleblowers, since its inception in 2011, including $30 million in awards in 2014, more than doubling the $14 million rewards it paid in 2013. Let’s hope the trend continues!

In only three years, the Dodd-Frank whistleblower program, which promises cash rewards for those whose tips lead to a successful investigation by the SEC, has yielded more than 6,500 tips according to a recent article in the Wall Street Journal. Though traditionally thought of as insiders, tipsters do not just come from only inside the companies targeted. Rather, whistleblowers are coming forward from all walks of life, including investors and retirees, in addition to insiders and the family of insiders according to the article. businessman-with-the-notebook-1-1362246-m.jpg

The rate at which individuals are submitting tips also seems to be rising. As a firm that represents whistleblowers, Malecki Law has also seen a growth in calls from prospective whistleblowers seeking legal counsel to file a tip with the SEC. Just recently Jenice Malecki, Esq. was interviewed by Rob Lenihan of Thomson Reuters: “‘I can tell you that whistleblowers as potential clients have increased over the last year — substantially,’ Malecki said. ‘There’s definitely an increase, and everybody who is somehow involved in the securities industry either as a customer or otherwise feels like they have some information they could tip on.'”

Although some individuals may have initially been reluctant to come forward for fear of retaliation, a recent push to protect the rights of whistleblowers has helped to alleviate many of those concerns. Such a positive development coupled with the mechanisms in place that allows whistleblowers to report securities laws violations anonymously has allowed tipsters to come forward without unnecessary fear of retribution.

Keith Edwards, a former J.P. Morgan employee is due to receive a nearly $64 million payment from the U.S. government for the tips he provided as a whistleblower. Mr. Edwards provided information that led to a payment by J.P. Morgan to the government in the amount of $614 million stemming from insurance on home loans.

whistle-257897-m.jpgAllegedly, J.P. Morgan had been falsifying certifications for Federal Housing Administration and Department of Veterans Affairs loans, going back as far as 2002. As a result, the agencies reportedly suffered substantial losses.

It was reported that the $614 million was paid by J.P. Morgan to settle the charges levied against it as a result of Mr. Edwards’ tips. In settling, J.P. Morgan reportedly admitted to approving thousands of FHA and hundreds of VA loans that did not pass normal underwriting requirements.

clooney.jpgApparently, you do not need to be George Clooney to enjoy whistleblower protections.

Employees of private contractors and subcontractors who provide services to publicly traded companies including mutual funds are protected by the whistleblower provisions of Sarbanes-Oxley Act of 2002 (“Act”), the United States Supreme Court held in its decision dated March 4, 2014. See 18 U.S.C. § 1514A; Lawson v. FMR LLC, — S. Ct. —, 2014 WL 813701, *7, 2014 U.S. LEXIS 1783 (2014). The majority decision, written by Justice Ginsburg, relied on the language of the Act, applying “their ordinary meaning.” Lawson, *7.

The case involved two employees who formerly worked for “privately held companies that provide advisory and management services to” Fidelity funds. Id. at *6. One of the employees worked for Fidelity Brokerage Services, LLC, a subsidiary of the Respondents, for 14 years. Id. This employee alleged that she suffered a series of adverse employment actions, eventually being constructively discharged, after raising concerns about certain cost accounting methodologies that may have overstated expenses associated with operating the mutual funds. Id. The second employee worked for Fidelity Management & Research Co. and later by a different subsidiary, FMR, Co., Inc. for eight years, and alleged he was fired after raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds. Id.

Jenice Malecki of Malecki Law will be appearing on Fox Business News at 12pm today, speaking with Dennis Kneale about whether or not banks, such as JP Morgan, should be getting amnesty from regulators.

In the fallout from the financial crisis, banks, such as JP Morgan have seen their legal fees related to defending complaints from both customers and the SEC, along with other regulators, rise substantially. JP Morgan shocked many in the marketplace when it recently revealed that its “litigation reserve” was $23 billion, and that it had paid out roughly $8 billion in recent settlements and judgments.

In light of this revelation, some have called for amnesty to be provided to large banks, in an effort to relieve them of these substantial legal burdens and jumpstart the markets by freeing up large reserves of capital.

The SEC announced on October 1, 2013 that it awarded a whistleblower over $14 million for original information that led to the recovery of “substantial investor funds.” The whistleblower program was established after the enactment of the Dodd-Frank Act, which rewards individuals who provide original information that leads to sanctions exceeding $1 million. The SEC has the authority to award from 10 to 30 percent of the money collected in a case.

One of the most important things about information provided by a whistleblower is that such information is “original.” This means that the information must be derived from the whistleblower’s original knowledge or analysis, that it is not known by the SEC from some other source, and that it is not derived solely from a publicly available source, including allegations made in a different judicial setting.

The size of the current award appears to indicate two things: first, the quality of information and extent of cooperation provided by the whistleblower to the SEC, whose identity remains confidential; and second, the SEC’s eagerness to grow and benefit from the whistleblower program. Without disclosing the size of the award, in its Order, the SEC noted that the size of the award was based on the significance of the information provided by the whistleblower and the assistance the whistleblower provided to the SEC in the action, in part. The SEC, under its new Chairperson Mary Jo White, has shown a desire to become more aggressive in pursuing individuals and to get companies to admit to wrongdoing. It is no surprise then, that the SEC appears to be providing increasingly larger awards to whistleblowers, to provide individuals the incentive to waive red flags about wrongdoing at a time when the SEC may be able to recover and/or safeguard investor funds.

morganstanley.jpgAn intriguing new instance of whistleblowing has emerged from Clifford Jagodzinski, an ex-employee of Morgan Stanley Smith Barney LLC who claims that at least one highly successful broker for the firm was churning preferred securities in 2011. Churning in this case would violate not only state law, but also rules in place under the Dodd-Frank Act. For a further definition of churning, visit the Investors section of our company website. The Whistleblowers section of the site additionally identifies the nature of such cases and the firm’s unique interest in them.

The accused broker, wealth manager Harvey Kadden, was allegedly making tens of thousands of dollars in commissions despite supposedly taking actions which created minimal advances or even losses for his clients. Mr. Jagodzinski claims these moves “were obviously designed to bilk customers”. Mr. Kadden is said to have been recruited from Bank of America/Merrill Lynch, where he had worked for 30 years to great success, often appearing in Barron’s list of the Top 100 Financial Advisors.

Jagodzinski claims he was told to stop investigating Kadden by higher-ups within Morgan Stanley. Kadden is reported to have run a team of four brokers who had brought $14 million in profits to the company within the last 12 months, while managing a total of over $1 billion in customer portfolios.

insidertrading.jpgA headline of the New York Times’ Sunday Business section published May 19th, Gretchen Morgenson asks “Is Insider Trading Part of the Fabric?“, raising a potentially distressing question for regulators and market analysts alike. Morgenson profiles the woes of one Ted Parmigiani, a Lehman Brothers investment analyst whose career was apparently placed in peril in 2004, when his research was allegedly leaked by a colleague in his research department. Parmigiani was then planning to raise his assessment of computer chip producers Amkor Technology. The leak was apparently discovered by Parmigiani on the planned date of his announcement, when Amkor’s price quickly shot up that morning, an hour before his new assessment was to be broadcast. Such are the dangers those working in investment too often face, and therein lies the potential for such figures to become brave whistleblowers. Visit the Practice Areas section of Malecki Law’s website to learn more about the firm’s work in aiding whistleblowers of fraud and further financial corruption.

Parmigiani responded by spending years providing information to the Securities and Exchange Commission (SEC) about the trading and research climate at Lehman, where suspicious trades were all too common, and sales reps and analysts illegally shared both office space and data. As part of 1.4 billion collective settlement paid by Lehman and nine other firms following an Eliot Spitzer-induced inquiry into insider trading, Lehman agreed to separate analysts from sales teams. Parmigiani says he was asked to ignore this supposed divide, write praise for investment banks whether it was merited or not, and explicitly told not to make negative comments about Lehman-favored companies and executives.

Parmigiani alleged that Lehman traders were often advised of changes to analysts’ company ratings before the revisions were publicly announced, and that traders were tipped off by analysts so that they would make hedge bets with Lehman’s own money. According to reports, announcement of Parmigiani’s recommendations were delayed by sales management for days at a time for no justified reason. In the Times article Parmigiani compares his actions to his time in the U.S. military, where the duty to disobey unlawful orders was instilled. Following his outrage over the Amkor incident, Parmigiani was fired from Lehman and found himself unable to find work at comparable Wall Street firms.

12234_corporate_blur.jpgToday, the SEC‘s new whistleblower program under the Dodd-Frank Act becomes effective, and is on the minds of many New York securities lawyers. These new rules were devised in such a way to provide an incentive for would-be whistleblowers to come forward and assist the SEC with investigations of possible securities law violations. Under these new rules, if an individual provides the SEC with original information about possible federal securities laws violations, and that information leads to a recovery by the SEC of $1 million or more, that individual would be entitled to receive up to 30% of the sanctions received by the SEC.

Under the new rules, internal reporting is encouraged, but it is not required. Individuals may instead go directly to the SEC. However, the value of internal compliance programs is addressed in the release, and there are incentives in place in the new rules to urge whistleblowers to report internally first.

There are also a few groups of individual who, for public policy reasons, are excluded from participation under the new rules. These include: compliance and internal audit personnel; officers, directors, trustees and partners who only discover the violations as a result of internal compliance procedures; public auditors who learn of the violations in the course of an engagement. However, these people may be eligible under certain circumstances, such as: they reasonably believe that disclosure is necessary to prevent the company from causing substantial injury to the property or financial interests of the company or investors; they reasonably believe that the company is impeding an investigation of the misconduct; or at least 120 days have passed since the initial internal report. Attorneys are also excluded, provided that they learned of the violations directly from attorney-client communications.