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Messrs. Jones and Smith Go to the SEC: How Anonymity Protections Led Two Outside Analysts to Report Fraud

  • September 1, 2020

On September 1, 2020, two clients of Labaton Sucharow were awarded $2.5 million for reporting misconduct at Orthofix International N.V.

The case is an important one for a number of reasons. First, it challenges the common–and dangerous–myth that a whistleblower is a disgruntled and vindictive employee. Here, the whistleblowers were outsiders with no connection whatsoever to the company. In the course of their work, they happened upon irregularities in the medical device manufacturer’s reporting. The clients’ sophisticated analysis was later corroborated by the firm’s investigative team, which had worked to locate and interview former Orthofix employees.

As reported in a Reuters story on the case, “one former employee they [Labaton] found revealed in an interview that in order for them to “make their numbers,” the company sent large orders to distributors, only to have them returned and then reshipped to other customers.”

The SEC agreed, finding that the company had engaged in “channel stuffing,” which allowed the company to inflate its earning by improperly recognizing revenue. As a result of the whistleblowers’ efforts, Orthofix and three of its former executives settled with the SEC for $8.37 million, to be distributed to harmed investors.

Another important aspect of this case is that the outside analysts were granted 30% of the monetary sanctions collected, the maximum amount permitted under the SEC’s program. In its announcement, the SEC noted that the whistleblowers’ “highly probative independent analysis of a public company’s filings led to several successful enforcement actions.  In addition to their tip, the whistleblowers provided helpful assistance early in the investigation, which helped save Commission time and resources.”

Resources:

Read more about the SEC Whistleblower Program
Read more about requirements and eligibility for the whistleblower program.
For more information about bounties, visit our whistleblower awards page.

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