Articles Posted in Whistleblower Issues

The Securities and Exchange Commission continues to make it clear that whistleblowers are among their most potent enforcement weapons in their law enforcement arsenal. In a press release on March 26, the SEC awarded a combined $50 million to two whistleblowers who provided info leading to a successful enforcement action against a major financial institution. Jane Norberg from the SEC’s Office of the Whistleblower referred to the involved whistleblowers and others who lead the enforcement as the “source of smoking gun evidence and indispensable assistance.” One whistleblower received $13 million, and the other won a $37 million award, which is the SEC’s third-highest whistleblower award as of yet. Our whistleblower attorneys view this particular case as another example of the SEC’s growing willingness to provide large sums of money to qualifying individuals.

The whistleblower is said to have provided information that helped the SEC and CTFC pursue action against JPMorgan Securities and JPMorgan Chase Bank.  While the SEC did not openly name any involved party, the law firm representing the whistleblowers that received the smaller award has come forward with information. The charges involve allegations that from 2008-2013 JP Morgan failed to provide certain disclosures that would have been pertinent to their wealthy investors. Allegedly, JP Morgan steered clients towards its own mutual funds and hedge funds, without providing the proper disclosures. All in all, the whistleblowers’ original information allegedly assisted the SEC and the Commodities Futures Trading Commission with securing a $307 million settlement with JP Morgan.

As this case, as well as others show, whistleblowers have a lot to gain besides just helping restore public order and market integrity. Clients represented by whistleblower attorneys know that being an asset to the SEC can pay off. The SEC’s whistleblower program launched in 2011 to incentivize people to come forward after the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act. As part of the program, whistleblowers with original, timely and credible information are eligible to receive a percentage of recovered funds. Whistleblowers qualify if their tip helps the agency to achieve a successful enforcement action recovering least $1 million. The award, which ranges between 10-30% of recovered funds comes from an investor recovery fund set up by Congress. The investor fund is from sanctions paid from federal securities law violations.  The Dodd-Frank Act also grants whistleblowers the right to anonymity and protection from employer retaliation.

Securities employees who decide to report covert unjust employer practices to other individuals are oftentimes taking a huge personal risk for public betterment. Without legal protection, these whistleblowers could end up facing termination, workplace harassment, and other retaliation. While various federal, state, and common laws exist to provide anonymity and other protections to whistleblowers, violations are not completely unprecedented. Perhaps unsurprisingly, some employers might still try to take illegal measures to find and persecute whistleblowers without regard for the rules. Fortunately, certain federal and state laws exist to also provide whistleblowers with justice because of the infringement of their rights.

Recently, New York state regulators ordered that Barclay PLC, as well as its New York branch, pay a $15 million fine for their “shortcomings in governance, controls and corporate culture” in handling a whistleblower matter. Barclay PLC’s chief executive officer, Jeff Staley allegedly tried to uncover the identity of an anonymous employee whistleblower. A New York Department of Financial Services probe uncovered that Barclay PLC’s handling of Staley’s situation potentially compromised its whistleblower program. As an additional caveat of the settlement, Barclays will submit a detailed written plan to ensure the implementation of the whistleblowing program as well as improve the board’s oversight going forward. Big banks, such as Barclay PLC are required to have a strong program in place to protect their employees.

The alleged violation ensued when Mr. Staley requested the head of Barclay PLC group security uncover the identity of the whistleblower author of two letters circling around the bank. The purported letters criticized Barclay PLC’s management, Mr. Staley and a newly hired employee, Tim Main. As repeated, Mr. Staley claims to have needed the identity of the letter writer to protect Tim Main from “personal attack”. The group chief compliance officer, general counsel and other bank officials had advised Mr. Staley to steer clear from his inquiries into the whistleblower. Yet, Mr. Staley claimed to have not been aware that unmasking a whistleblower was even against the law, according to news sources. Our whistleblowers find it puzzling how a highly ranked bank official could not understand nor respect the sanctity of whistleblower identity protections.

The Securities and Exchange Commission’s program to reward whistleblowers for coming forward has undoubtedly been an asset in recovering fraud for the regulatory agency. Useful tips from whistleblowers have helped the Securities and Exchange Commission recover over $1 billion in enforcement actions. The SEC whistleblower program offers financial incentives and anti-retaliatory protection for individuals who report qualifying information relating to federal securities law violations. Irrespective of the potential monetary awards, courageous whistleblowers often put a lot in jeopardy when choosing to come forward. Yet, the process for SEC whistleblowers to be rewarded with payouts is slow, according to a Wall Street Journal article.

The WSJ article notes that the time in which whistleblowers receive a response regarding a reward increased from a year in 2012 to over two years presently. Whistleblower attorneys informed the Wall Street Journal that occasionally clients wait years to receive an award even after being deemed eligible by the SEC. The Wall Street Journal attributes the SEC’s slower process to an oversaturation of reward seekers. The Securities and Exchange Commission receives an influx of tips, with many not being useful, according to the WSJ article. Officials reportedly referred to the process for vetting and allocating whistleblower rewards as “demanding”.

Our whistleblower attorneys believe that a quick and efficient claims review process should be a priority given associated risks for the whistleblowers. Additionally, the value whistleblowers have in fostering a less corrupt society are unquestionable. Whistleblowers are immensely beneficial for minimizing fraudulent activity and protecting investors in the securities industry. The Securities and Exchange Commission has even deemed the whistleblower rewards program as their “most powerful weapon” in enforcement. Informative whistleblower tips have helped the SEC with detecting as well as prosecuting securities law violations and enforcement action.

It takes a lot of courage to report illegal or fraudulent misconduct by one’s own employer.  This is because being a whistleblower carries significant risks.  Whistleblowers not only risk their current employment, but possible ongoing retaliation that can harm their industry reputation and ability to find work with employers in the future.  Reporting wrongdoing can also invite significant emotional hardship and threats to one’s personal safety.  So why would anybody want to be a whistleblower?

For most with a moral compass, often doing the right thing is reward enough.  But there are an increasing number of laws, which now provide additional incentives – both in terms of anonymity and financial remuneration.  Depending on where one lives in the United States, there are various state whistleblower laws that could apply.  Federal laws tend to provide the most financial incentive, and in particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which was signed into law in 2010, as a measure to address the 2008 collapse of the financial services market.

Dodd-Frank was a notable expansion on pre-existing federal whistleblower laws for several reasons.  The earlier Sarbanes-Oxley Act of 2002 (SOX), which was a measure in its own right to address the failings that led to the 2001 financial crisis, provides civil protections to employees (including officers or subcontractors) of a publicly traded company against any kind of retaliation by the employer.  While SOX has led to multi-million-dollar financial verdicts for the whistleblower, Dodd-Frank expanded eligibility of who could become a whistleblower, from employees under SOX, to anybody.  Section 78u-6(a)(6) of Dodd-Frank defines a whistleblower as follows:

Can I Sue My Brokerage Firm for Filing a False Form U5?

Financial firms that deal in securities do carry legal liability for filing a Form U5 with false information, and financial advisors can indeed sue their former firms for filing an inaccurate Form U5.

Whenever a brokerage firm terminates the employment of a broker or financial advisor, the firm must file a Form U5 – the Uniform Termination Notice for Securities Industry Registration – with the Financial Industry Regulatory Authority (FINRA) within thirty days of termination.  The Form U5 is differentiated from the Form U4 – the Uniform Application for Securities Industry Registration or Transfer – which is filed upon a broker’s registration with a firm, whereas the Form U5 is filed upon the broker’s termination. The Form U5 requires a firm to provide accurate answers to various questions, including the reason for a broker’s termination.

BlackRock has been charged by the SEC with removing whistleblower incentives in their separation agreements with employees, per the SEC. According to the Commission, BlackRock’s charges stemmed from allegations that the company forced employees to waive their ability to obtain whistleblower awards.

Provisions such as those in Dodd-Frank provide for monetary compensation to those who provide information to the SEC concerning securities law violations, provided certain criteria are met. Whistleblowers may also file anonymously.

Per the SEC, over 1,000 employees signed such agreements, in which the employee was forced to waive the right to monetary recovery as a condition for receiving separation payments from the company.

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.

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.

Allegedly, 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.