Labaton Sucharow Whistleblower Tips SEC in Groundbreaking Enforcement Action

Jordan Thomas -

Today, the SEC announced that two J.P. Morgan wealth management subsidiaries agreed to pay $267 million to settle charges in an enforcement action initiated by information brought to the SEC by a Labaton Sucharow client, a J.P. Morgan executive. The enforcement is one of the largest and highest profile actions initiated by an SEC whistleblower since the establishment of the program.

The SEC’s investigation uncovered that J.P. Morgan’s investment advisory business and its nationally chartered bank were steering clients to more expensive in-house investments without proper disclosures of conflicts of interests. The troubling actions in this case occurred over several years, and deprived JPMorgan's clients of necessary information to make informed investment decisions.

This case powerfully demonstrates the vast potential of the SEC Whistleblower Program to find and eradicate wrongdoing early and often. Because of the unique protections and incentives of the program, our client chose to report the securities violations at J.P. Morgan to the SEC. In doing so, the individual was able to protect J.P. Morgan clients and improve the sales culture of the organization, while avoiding retaliation and blacklisting.

And as awareness of the SEC Whistleblower Program grows, so does the likelihood that more individuals will step forward to reveal violations. The program’s broad international reach and ability to report anonymously provide enormous opportunities to uncover misconduct wherever it occurs. In designing this innovative program, the SEC understood that employees represent a critical first line of defense against wrongdoing. To learn more about the SEC Whistleblower Program, please see here.

Recent Whistleblower Award: Timing Matters

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The SEC just announced another whistleblower award, granting more than $325,000 to a former investment firm employee whose tips led to a successful enforcement action. This award, like the $30 million award granted to a whistleblower last year, came with a caveat: the whistleblower could have received a larger award, if not for a delay in reporting. While the whistleblower waited to report the misconduct until after leaving the firm, whistleblowers are provided significant employment protections to encourage the timely reporting of misconduct. Speaking to this, Enforcement Division chief Andrew Ceresney noted that the program encourages tipsters to come forward in order to "prevent misconduct from continuing unabated while investors suffer more harm.”

While deciding to blow the whistle is a complex decision, timing matters. Sometimes, a cursory submission, followed by a more lengthy and detailed submission, may be in a whistleblower’s best interest. And, whistleblowers who fear retaliation may wish to consult an attorney to explore the anonymity protections afforded by Dodd-Frank’s program when individuals work with a whistleblower advocate.

SEC Issues Whistleblower Award to Former Company Officer

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In a landmark action that demonstrated the strength and reach of the SEC whistleblower program, the agency announced a sizable bounty to a former company officer, a Labaton Sucharow client, who provided law enforcement with key information about a securities fraud that resulted in a successful enforcement action. What makes this matter so unique is the fact that corporate officers are typically ineligible for awards. Typically. Among other exceptions, if a company had knowledge of a possible securities violation and compliance or other responsible parties failed to act within 120 days of learning of the misconduct, a company officer may come forward. This marks the first time the SEC issued an award in such a matter. Most importantly, this matter shows the remarkable power of the program to embolden high-level insiders to come forward and take a stand against corporate wrongdoing.

Location, Location, Location: The Geography of an SEC Whistleblower

Jordan Thomas -
In the SEC’s report to Congress, just released today, the agency documented the tremendous success of its revolutionary investor protection initiative. As we peel back the layers of the report, we note some startling findings with respect to the origin of whistleblower submissions. First and foremost, the program’s international reach is inarguable. This year’s largest award — more than $30 million! — came from a foreign tipster. And, of all 14 awards issued by the SEC to date, four were awarded to whistleblowers outside the U.S. This year, the agency received tips from 60 different international jurisdictions, with the UK, India, Canada, China, and Australia chief among these. Within the U.S., submissions came from every state in the union. The busiest states for whistleblowers in FY2014? California, Florida, Texas, and New York. How this stacks up to 2013 submissions is particularly interesting: submissions from California jumped by 48%; Florida by 41%; Texas by 54%; and New York, which fell from 2nd to 4th place, actually recorded a 5% drop in submissions. To view the SEC report in its entirety, please see here.

Historic Year for Whistleblowers, Report Confirms

Jordan Thomas -
The SEC Office of the Whistleblower has just released its report to Congress chronicling the program’s success over the last year. The data is extremely encouraging, serving as an apt reminder that a quiet revolution in law enforcement is underway, powered by whistleblowers who dare to speak out against misconduct. Highlights from this year’s report include 3,620 whistleblower tips - an increase of more than 20% in the number of tips in just two years. The SEC made 9 whistleblower awards in FY2014, the largest of which exceeded $30 million. The balance of the Investor Protection Fund at the close of the fiscal year was an astonishing $437 million! Tips came in from every state in the union and 60 countries, including a significant number of submissions from the UK, India, Canada and China. The report also highlighted the Agency’s new muscle, flexed in its case against Paradigm Capital (where I represented the whistleblower), in which the SEC used its new authority to bring anti-retaliation cases against entities seeking to undermine whistleblowers.

Gearing Up for Annual Report, White Touts Whistleblower Program’s Success

Jordan Thomas -
As we await the Annual Report of the SEC Office of the Whistleblower—expected in mid-November—Mary Jo White categorically praised the program, citing its 'enormous success’ in generating information about significant securities violations. (See the FY 2013 Annual Report here.) In her address last week to the Ontario Securities Commission, which is considering the implementation of an incentive-based whistleblower program, White remarked that there was “no question” the US agency had achieved more with the program than it could have without it.

In FY 2014, the SEC awarded some $35 million to 9 whistleblowers, including the largest award to date, more than $30 million paid to a whistleblower living in a foreign country. Notably, that award represented less than the 30% maximum allowed under the program—because the whistleblower delayed coming forward to the SEC.

So while we share the agency’s enthusiasm, and salute a record-setting year, we are mindful that our work to educate whistleblowers continues. For more information on who can be a whistleblower and why timing matters in reports to the SEC, please feel free to see this video or to reach out to us directly.

By Jordan A. Thomas and Jennifer D. Larson

SEC Settles $2.2 Million Enforcement Action Following Whistleblower Complaint by Labaton Sucharow Client

Jordan Thomas -
Today, the SEC charged the Albany-based investment advisory firm Paradigm Capital and its owner,  Candace Weir, with violating the federal securities laws by engaging in prohibited and undisclosed principal transactions on at least 83 separate occasions, among other charges. Paradigm and Weir agreed to pay total sanctions of approximately $2.2 million to settle the charges. The SEC began investigating Paradigm after a Labaton Sucharow client – who has chosen to remain anonymous – reported possible misconduct at the firm to the SEC.

According to the SEC’s order, Paradigm, at the direction of Weir, engaged in a series of transactions with a broker-dealer called C.L. King when trading on behalf of a hedge fund client. C.L. King is also controlled and majority-owned by Weir, meaning that affiliated entities stood on both sides of these transactions. Under Section 206(3) of the Investment Advisers Act, an adviser like Paradigm must disclose such principal transactions to their client – here, the hedge fund – and obtain client consent before proceeding. Paradigm failed to satisfy these important disclosure and consent obligations, which are designed to ensure that clients are protected from self-dealing and possible conflicts of interest.

Additionally, Paradigm failed to disclose in its Form ADV that a “conflicts committee” – which it had ostensibly established for the purpose of mitigating possible conflicts like those posed by the principal transactions – was itself conflicted. According to Julie Riewe, the co-chief of the SEC Enforcement Division’s Asset Management Unit, “Paradigm’s use of a conflict committee denied its hedge fund client the effective disclosure and consent to which it was entitled. Advisors to pooled investment vehicles need to ensure that any mechanism developed to address conflicts in principal transactions actually mitigates those conflicts.”

We’re very pleased that this case resulted in a successful settlement for the SEC: it’s one of a growing number of signs that the SEC Whistleblower Program is effectively helping the SEC detect, investigate and prosecute securities violations that might otherwise have remained under the radar. The process of being an SEC whistleblower isn’t often easy, but, as this settlement shows, coming forward can make a difference both for the SEC and for investors.

By Jordan Thomas and Vanessa De Simone

SEC Announces New Whistleblower Award

Jordan Thomas -
The SEC announced yesterday that it will pay two whistleblowers an award of $875,000 for their reporting of original information that led to a successful SEC enforcement action. The total award, which will be split equally between the two whistleblowers, represents 30% of the sanctions collected by the SEC in the case – the maximum percentage award allowed under the SEC Whistleblower Program. In keeping with the program’s emphasis on protecting the anonymity and confidentiality of whistleblowers, the SEC did not disclose the names of the whistleblowers or provide identifying information about the underlying enforcement action.

This latest award suggests the SEC is beginning to complete investigations sparked or aided by the first wave of whistleblower tips received after the implementation of the SEC Whistleblower Program rules in August 2011. Given that SEC investigations typically take two to four years to complete – with larger and more complex cases often falling on the far end of that range – we expect to see an increasing number of significant awards in the coming months, as more cases work their way through the investigative pipeline. We applaud the whistleblowers in this case for coming forward and making a difference, and look forward to hearing more positive news from the SEC.

By Jordan Thomas and Vanessa De Simone

Is it a Crime? What Happens When Whistleblowers Report Potentially Criminal Misconduct to the SEC

Jordan Thomas -
The SEC, although it wields enormous power in the securities markets, has a built-in limitation on its authority: it’s a civil law enforcement agency, meaning that it can charge and penalize wrongdoers for civil violations of the securities laws, but it can’t prosecute them for crimes or put them in jail.

However, as SEC Chair Mary Jo White highlighted in a recent speech, that doesn’t mean the SEC has no role in criminal enforcement: instead, because nearly every violation of the securities laws can be a crime if done willfully (a higher standard than what is required for civil liability), the fraud investigated by the SEC often has the potential to be both a crime and a civil violation. The same holds true for investigations prompted by whistleblowers: when a whistleblower comes forward to report insider trading, FCPA violations, accounting fraud or other potential wrongdoing, there is often a good chance that significant misconduct will give rise to both criminal and civil claims.

So, what happens in this situation? The SEC would typically alert the appropriate criminal law enforcement agency – usually the Department of Justice and/or FBI – and collaborate with it to conduct parallel investigations. In our experience, that means that the whistleblower’s information would likely be shared (on a strictly confidential basis) with the DOJ, and the DOJ might participate in any interviews or briefings the whistleblower chooses to provide.

Such coordination can be enormously beneficial to law enforcement agencies because it allows them to share and save resources, use a broader range of enforcement tools, and ensure that wrongdoers are prosecuted to the greatest extent the law allows. Parallel proceedings by the SEC and other agencies also benefit whistleblowers, since these investigations may lead to two sets of monetary sanctions being obtained from the defendant.

For example, in the notorious Raj Rajaratnam insider trading prosecution, the SEC obtained a $92.8 million penalty against Rajaratnam in its civil case, and Rajaratnam was then fined $10 million in his criminal case (he’s also serving a lengthy prison sentence). According to the rules of the SEC Whistleblower Program, whistleblowers involved in such parallel actions may be eligible to receive a monetary award based on both the SEC action and the “related action” by the DOJ or other regulator, provided that certain criteria are met, including that “the same original information that the whistleblower gave to the Commission also led to the successful enforcement of the related action….”

This rule recognizes that whistleblowers can make contributions to law enforcement actions beyond just those prosecuted by the SEC, and should benefit when they do so. Look for this rule to take on increasing importance in the years ahead, as coordination between the SEC and criminal authorities continues to grow.

By Jordan Thomas and Vanessa De Simone

Financial Whistleblowing on the Rise in Europe

Jordan Thomas -
As we’ve noted in previous posts, the SEC Whistleblower Program has resulted in a sharp increase in the amount of actionable information provided to the agency, with more than 3000 whistleblower tips received in 2013 alone. Now, reports from the Europe and the United Kingdom – which have experienced their own rash of financial scandals in recent years – indicate that financial fraud whistleblowing is also gaining traction overseas. The Financial Conduct Authority ( or FCA), which regulates financial services firms in the U.K., reported last week that the number of tips received from whistleblowers had increased by approximately two-thirds in 2013. A second U.K. financial services regulator, the Serious Fraud Office, received approximately 4,400 tips to its “SFO Confidential” whistleblowing program between January 2012 and June 2013 alone. Europeans with knowledge of fraud affecting U.S. companies are also reporting those potential violations to the SEC – with the U.K. being the leading source of SEC whistleblower tips outside the U.S. in 2013.

At the same time, British and European regulators are showing increased interest in adopting many of the features of the SEC Whistleblower Program, including heightened anonymity protections and the potential for monetary awards. I witnessed this effort firsthand when I was invited by M.P. Gisela Stuart to speak at the House of Commons about how the key components of the SEC Whistleblower Program could be used to enhance financial fraud enforcement in the U.K. Now, at the direction of the Parliamentary Banking Commission, the FCA is considering adding a monetary incentive to its whistleblower program to encourage additional reports. Likewise, European lawmakers have introduced a proposal to create a whistleblower program within the European Securities and Markets Authority (“ESMA”) – the  authority responsible for safeguarding the EU’s securities markets – which would allow whistleblowers to report potential abuses to ESMA without disclosing their identities. While it’s not clear that these proposals will be accepted, it’s encouraging to see that regulators around the world are thinking seriously about whistleblowing, and willing to learn from each other in the effort to prevent fraud and protect investors.