New York Securities Lawyers Blog

Today, 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.

The new rules also provide substantial protection for individuals who do come forward, in order to prevent retaliation from their employer. Even if a whistleblower's tip only relates to possible violations and the SEC investigation is unsuccessful, that individual is now protected from retaliation by a new express private right of action. Whistleblowers may sue their employer and seek remedies including two times their back pay and reinstatement. However, this protection is only for individuals who go directly to the SEC, not for those who report only internally.

Given these new rules, it is now much safer for individuals who have information about suspected federal securities law violations to come forward, and whistleblowers now have the opportunity to be compensated for their efforts in aiding the SEC. Yet it is important for potential whistleblowers to ensure that they proceed through the appropriate channels. For that reason, individuals who wish to contact the SEC to report securities violations should consult with an attorney before doing so to ensure that their rights are protected.

Continue reading "New SEC Whistleblower Rules Become Effective" »

The Wall Street Journal reported over the weekend about how one New York resident investor who lost his small stake in Washington Mutual once it was seized by the United States government in 2008 played a pivotal role in protecting the rights of similarly places investors. New York securities and whistleblower lawyers know there too be all too many investors in the same boat.

Nate Thoma, a self-taught trader who was wiped out when the U.S. government intervened in WaMu, discovered that he could recoup his losses by investing in trust preferred securities, which he bought through online trading account when they became available. The trust preferred securities essentially places the holder in the front of the line for any money distributed from WaMu's estate once it emerged from bankruptcy. The Wall Street Journal reported that Mr. Thoma suspected hedge funds were buying substantially more blocks of these trust preferred shares while also owning the bank's bonds.

And in December 2010, Mr. Thoma explained his theory to the Delaware bankruptcy court judge in the case In re Washington Mutual, Inc.: since the hedge funds were both bond holders in settlement talks, and owners of substantial swaths of trust preferred shares, were the hedge funds acting in the trust preferred holders' best interest when they negotiated on their behalf?

Mr. Thoma's argument, who was unrepresented for his objection and has no formal legal training, factored into the judge's resulting decision to disallow settlement of the case, and led to a settlement between the hedge funds and individual investors.

Such individual investor intervention in bankruptcy proceedings is rare. However, Mr. Thoma's intervention is instructive. It is important to keep a watchful eye over your investments. If you suspect that your wishes are not being considered by your broker, or your suspect that foul play is occurring in your account, you are best served to investigate the matter immediately.

The Wall Street Journal article can be found here.

The Delaware Bankruptcy Court's decision can be found here.

On Wednesday May 25, 2011, the SEC approved new rules to flesh out a provision of the Dodd-Frank Act which provides for large cash rewards for employees who report suspected securities fraud through internal compliance programs or directly to the SEC. Under the new law, employees who report securities fraud either directly to the SEC or internally may be eligible, provided the firm passes on the information to the agency. The provision is thought by many a victory for New York whistleblowers and whistleblower attorneys alike.

Many firms were concerned that direct reporting to the SEC would make the large compliance programs these firms put in place in response to Sarbanes-Oxley essentially obsolete. In response, the SEC agreed to consider an employee's participation in her company's internal compliance program as a factor that could increase the amount of the reward. Under these new rules, some rewards can be as high as 30% of the penalty paid.

To be eligible for the reward, an individual must be a whistleblower. To be treated as a whistleblower from the date they report violations internally, an employee must also report the information to the SEC within 120 days.

SEC Chairman Mary Schapiro properly recognized that these new rules "strike the correct balance" in giving the whistleblower the choice to report her suspicions internally or directly to the SEC.

While choosing to be a whistleblower can be a difficult decision to make, in many cases, it is the only way to effectively stop widespread fraud and wrongdoing. Therefore, by providing financial incentives to encourage people with knowledge to come forward, the SEC has made a large step in combating the fraud that compromises the integrity of our markets and hurts investors.