Articles Posted in Whistleblower Lawsuits

Whistleblower to Get Over $30M Award in SEC Case

In its largest whistleblower award yet, the U.S. Securities and Exchange Commission will pay a bounty of over $30 million to an informant. Seeing that a whistleblower may be entitled to 10-30% of the amount recovered under the Dodd-Frank program, if the quality, unique information the person provided led to an enforcement action resulting in sanctions of over $1 million, a huge sum was obviously recovered.

In this particular case, the whistleblower resides abroad. Andrew Ceresney, SEC Enforcement Division Director, said that the individual brought the agency information about a fraud that otherwise would have been very hard to detect. He stated that whistleblowers anywhere in the world should see this latest award as incentive to report possible violations involving U.S. securities fraud.

SEC Wants To Extend Temporary Rule Letting Dually-Registered Advisers Get Principal Trading Consent

For the third time in four years, The Securities and Exchange Commission wants to extend a temporary rule that makes it easier for investment advisers that are also registered as brokers to sell from the proprietary accounts of their firms. The regulator issued for comment its proposal that would move the interim’s rule expiration date to the end of 2016 instead of the end of 2014.

Under the temporary rule, dually registered advisers can either get verbal consent for principal trades on a transaction basis or give written prospective disclosure and authorization, in addition to yearly reports to the clients. With principal trades, a brokerage firm uses its own securities in the transaction.

The U.S. District Court for the Southern District of New York has rejected Thomson Reuters (Markets) LLC’s motion to have a whistleblower retaliation case dismissed. Instead, Judge Shira A. Scheindlin agreed with the Securities and Exchange Commission’s rule that a whistleblower doesn’t have to tell the regulator to be able to qualify for Dodd-Frank Wall Street Reform and Consumer Protection Act. The judge, however, did throw out the plaintiff’s claim for punitive damages, which he says Dodd-Frank doesn’t allow.

The plaintiff, Mark Rosenblum, is an ex-redistribution specialist who was allegedly let go from his job after he suggested that changing up the distribution time for certain consumer survey data to certain customers was tantamount to insider trading. Rather than telling the SEC he reported his worries internally and to the FBI.

Rosenblum believes he was fired because of what he reported and he says this is unlawful. Thomson Reuters tried to get the lawsuit tossed out claiming that because Rosenblum didn’t tell the SEC and the company, he therefore wasn’t protected under Dodd-Frank. Thomson Reuters cited the Fifth Circuit’s ruling in Asadi v. GE Energy USA, LLC that determined that Dodd-Frank only gives whistleblower protection to those who notify the SEC. That said, the appeals court also admitted that its interpretation wasn’t in line with the SEC or of other courts .

The Securities and Exchange Commission has made its first award to a whistleblower under its new program created under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Informants who give the commission “original information” leading to action resulting in $1 million or greater in penalties are entitled to receive 10-30% of whatever sanctions the regulator collects.

The SEC announced that it would pay $50,000 to this particular tipster for assistance provided in stopping a “multi-million dollar fraud.” This person gave “significant information” and documents, which helped speed up the agency’s probe. Now, the defendants in the securities case must pay about $1 million in penalties, of which the Commission has collected about $150,000. The $50,000 is about 30% of that amount. If a final judgment is issued against other defendants, the whistleblower could receive a larger amount.

In other SEC-related news, Larry Eiben the co-founder of Moxy Vote, an investment web site, wants the Commission to put into effect rules that recognize a new investment adviser category. He wants investors to be able to use a “neutral Internet voting platform” to get information about investments, as well as be able to not just vote shares during corporate meetings, but also “designate as the recipient of proxy materials” for transmission by companies with SEC-registered stock.

Eiben believes the rule changes is necessary because under existing regulations, retail investors cannot use the Internet to vote their shares or collect and get information through means that they might find most helpful when determining how to vote. He says the change will tackle what he considers an ongoing issue: “low participation by retail investors in voting shares of their portfolio companies.”

Unfortunately, the Internet continues to prove an effective tool for perpetuating financial fraud. Earlier this month, the SEC obtained an emergency asset freeze order stopping an alleged $600 million Ponzi scam that was about to collapse. The defendants are Rex Venture Group and its owner Paul Burkes, who is an online marketer.

Per the Commission, the two of them raised money from over one million clients on the Internet using They allegedly gave customers several options for earning money through a rewards program. Two of them involved the purchase of investment contracts. However, none of these securities were SEC registered, which they are required to be under federal securities laws. Meantime, investors were promised up to half of the company’s daily net profits via a profit sharing system. Also, despite the defendants’ allegedly giving them the impression that the company was profitable, investors received payouts that were unrelated to such profits, and instead, in typical Ponzi scam fashion, the money paid to them came from the newer investors.

The SEC said its order to freeze assets will allow the Ponzi scam victims to recoup more of their money so whatever is left of what they invested with ZeekRewards can be used as payouts to them. Burkes has agreed to settle the Commission’s allegations without denying or admitting to wrongdoing. He will, however, pay a $4 million penalty.

Whistleblower Program, SEC

S.E.C. Pays Out First Whistle-Blower Reward, The New York Times, August 21, 2012

Read Eiben’s Petition to the SEC (PDF)

MoxyVote (PDF)

Read the SEC complaint in its case against Rex Venture Group (PDF)

More Blog Posts:

Merrill Lynch Agrees to Pay $40M Proposed Deferred Compensation Class Action Settlement to Ex-Brokers, Stockbroker Fraud Blog, August 27, 2012

Majority of Non-Traded REITs Underperform Compared to Benchmarks, Reports New Study, Stockbroker Fraud Blog, August 25, 2012

Ex-Fannie Mae Executives Have to Defend Against SEC Lawsuit Over Their Alleged Involvement in Understating Mortgage Company’s Exposure Risk, Institutional Investor Securities Blog, August 25, 2012 Continue reading

Clifford Jagodzinski has filed a lawsuit against Morgan Stanley & Co. (MS), Morgan Stanley Smith Barney, and Citigroup (C). He claims that he was fired from his job at Morgan Stanley as a complex risk officer because he reported that an investment adviser was churning accounts and earning tens of thousands of dollars while defrauding clients. Jagodzinski filed his case in federal court.

He contends that even though he always received excellent job evaluations during the six years he worked for Morgan Stanley, he was terminated as an employee 10 days after he told supervisors that unless the financial firm started reporting unauthorized trades it would be violating SEC regulations. Jagodzinski said that the financial firm told him to sign a confidentiality agreement with a non-disparagement clause and then proceeded to hurt his career by claiming that he was let go because of poor performance. He wants reinstatement and punitive and compensatory damages of over $1 million for whistleblower violations.

Jagodzinski believes that his trouble started after he told his supervisors, Ben Firestein and David Turetzky, that Harvey Kadden, one of the firm’s new wealth managers, was allegedly flipping preferred securities so that he could make tens of thousands of dollars in commissions, while causing his clients to sustain financial losses or make little gains as he exposed them to risks that could have been avoided. Jagodzinski said that while he was initially praised for identifying the alleged misconduct, his supervisors told him not to look into the matter further. He believes this is because Morgan Stanley had given Kadden a $25 million guarantee, and due to their high expectations of him, they didn’t want to hurt his book of business.

Jagodzinski said that he encountered similar resistance when he notified the financial firm of other violations, including those involving Bill Siegel, another financial adviser that he accused of making unauthorized trades. Once again, he says he was told not to investigate or report the alleged violations further-even though (he says) Siegel admitted to making 80 unauthorized trades for one client and other ones for other clients. Although Turetsky allegedly told him that this was because he didn’t want Siegel fired, Jagodzinski suspects that his supervisor was more concerned that the defendants would have to pay penalties and fines. He also said that when he reported his concerns that yet another financial adviser was not just engaging in improper treasury trades but also abusing drugs, his worries were again brushed aside.

An employee who gets fired for blowing the whistle on a company or a coworker can have grounds for filing a wrongful termination lawsuit. If the wronged employee is a whistleblower, he is entitled to certain protections, which include being shielded from retaliation on the job for stepping forward and doing what is right.

Worker Says He Caught Morgan Stanley in the Act, Courthouse News Service, August 3, 2012

Ex-Morgan Stanley Risk Officer Sues Bank Over Firing, Bloomberg, August 1, 2012

More Blog Posts:

Dodd-Frank Whistleblower Protection Amendment Must Be Applied Retroactively, Said District Court, Stockbroker Fraud Blog, July 21, 2012

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012

District Court Denies UBS Summary Judgment in Sarbanes-Oxley Whistleblower Lawsuit, Stockbroker Fraud Blog, June 27, 2012 Continue reading

The U.S. District Court for the Southern District of New York has ruled that a Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 amendment to Section 806 of the Sarbanes-Oxley Act of 2002 must be applied retroactively to clarify congressional intent. The amendment specifies that public company subsidiary employees, and not just parent company employees, are protected under the whistleblower statute. The court, however, did not reach merits of the plaintiff’s claim regarding his firing and told the parties to turn in a joint letter about what steps will need to happen to get the matter ready for trial.

The lawsuit, Leshinsky v. Telvent GIT SA, involves whistleblower claims made by plaintiff Phillip Leshinsky. He contends that Telvent GIT SA (TLVT), Telvent Caseta Inc., Telvent Farradyne Inc., and a number of individuals wrongly fired him while violating Sarbanes-Oxley’s whistleblower provisions. Leshinsky, who was employed by nonpublic subsidiaries of the publicly traded Telvent GIT, contends that he was let go when he expressed opposition to using allegedly fraudulent information to secure a contract with the New York Metropolitan Transit Authority. His claims pertain to a period prior to the 2010 Dodd-Frank amendment.

The court noted that while before the Dodd-Frank amendment, Sarbanes-Oxley only protected employees who worked for publicly traded companies from retaliation when they blew the whistle, the 2010 revision does apply retroactively “as a clarification of the statute.” Leshinsky is therefore covered under Section 806.

In Dallas County Court, 11 investors are suing Morgan Stanley Smith Barney and its financial adviser Delsa Thomas for bilking them in an alleged Texas Ponzi scam. They say that Thomas “took advantage of their trust in her when she suggested that they invest in Tejas Eagle Financial LLC. (She gave them the choice of investing $250,000 or $125,000.) They invested hundreds of thousand dollars of their retirement money and savings.

The plaintiffs contend that the financial firm breached its duty of care to them by allowing Thomas to give them unsuitable financial advice that “would destroy their investments.” They are seeking damages for negligent misrepresentation, fraud, negligent supervision, and vicarious liability.

In other Texas securities news, ex-Stanford Financial group chief investment officer Laura Pendergest Holt has pled guilty to charges that she obstructed the SEC’s probe into Stanford International Bank, which was owned by Ponzi scammer Robert Allen Stanford. Holt, who testified before the Commission about SIB’s investment portfolio, now admits that she did so as a “stall tactic” to impede the agencies efforts to get key information. Stanford is behind bars for running a $7 billion Ponzi scam.

Whistleblower Rodolfo Michelon is suing the Federal Bureau of Investigation and the Securities and Exchange Commission in an effort to obtain records connected to the their probe into his employer, Sempra Energy (SRE). He believes that the SEC may have violated federal securities laws through the “outsourcing” of their investigation into Sempra’s alleged illegal activities to two law firms with “close ties” to the company.

Michelon had filed a whistleblower lawsuit with the Commission accusing Sempra of a number of record and books violations related to gas distribution clients in Mexico. Rather than conduct their own probes, he says that the two government agencies instead allowed the two law firms to investigate. After the firms found that Sempra did not violate securities laws, the FBI and the SEC ended their own investigations into the matter.

Michelon submitted Freedom of Information Act requests asking for certain documents and records related to the case last November and this January, and he says both agencies failed to satisfy his request. He is accusing the SEC of making its “Outsourcing Program” available to Fortune 500 companies,” the biggest financial institutions in the country, and their executives. Michelon contends that the program violates both mandates by Congress and public policy expressions “embodied the Securities Act of 1933,” as well as the Investment Company Act of 1940, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the regulations and rules that implement the acts that direct and give the SEC the authority to handle its own probes into those suspected of violating these rules, regulations, and acts. He claims that the SEC “effectively nullified” the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s whistleblower provisions with their handling of the Synergy case.

Michelon’s complaint was filed pursuant to the legal theory applied in Aguirre v. SEC. In that FOIA lawsuit, the U.S. District Court for the District of Columbia found that the Commission behaved improperly and public interest in disclosure was greater than the privacy interests of individuals named records related to the SEC’s probe of insider trading that allegedly occurred at Pequot Capital, a hedge fund. The court ordered the Commission to give Gary Aguirre, a former SEC enforcement lawyer, the investigative files sans redactions.

Aguirre had contended that he was let go from the SEC in 2005 as punishment for insisting that a high profile figure in the Pequot investigation be deposed. He later used the records that he obtained to make the SEC reopen its probe into Pequot. In 2010, Pequot, which is now defunct, had to pay $28 million to settle insider trading charges field against it by SEC.

Michelon v. SEC, Justia Docket, April 24, 2012

Whistleblower Sues SEC For ‘Outsourcing’ Bribery Investigation To Sempra Favorite
, KPBS, April 30, 2012

Aguirre v. SEC

Freedom of Information Act

More Blog Posts:
SEC Settles Wrongful Termination Lawsuit with Whistleblower Gary Aguirre for $755,000, Stockbroker Fraud Blog, July 15, 2010
ISS Probes Allegations that a Boston Employee Sold Shareholder Information, Stockbroker Fraud Blog, February 21, 2012

SEC’s Office of the Whistleblower In Early Phase of Evaluating Reward Claims, Institutional Investor Securities Blog, March 23, 2012 Continue reading

ISS, a shareholder advisory firm, has placed an employee on administrative leave following allegations that this person sold the confidential voting information of clients in exchange for gifts and cash. MCSI is the parent company of ISS, which advises large shareholders on how to vote their shares while helping them use ProxyExchange.

MSCI CEO Henry A. Fernandez says that the firm decided to conduct its own probe even though the Securities and Exchange Commission has not contacted them about this matter. In papers filed with the SEC, Fernandez noted that client information confidentiality is key to the business and is addressed not just in the ISS Regulatory Code of Ethics, but also is part of employee training.

It was on February 12 that the New York Post reported that a whistleblower complaint had been filed with the SEC accusing the Boston office employee of giving shareholder voting information to corporate boardrooms. The lawsuit claims that the employee provided the information to proxy-solicitation firms working for corporate boards that were seeking to influence the biggest shareholders on executive compensation and profitable mergers. The alleged tipster is accused of using his personal e-mail address to provide the solicitors with the confidential data up to weeks ahead of time. (For example, the Post said that for an upcoming meeting, the ISS employee provided information about upcoming votes from BlackRock and Vanguard. Both companies, however, have refused to confirm whether or not this is true due to a policy to keep voting confidential.)

A shareholder’s votes are supposed to remain private unless he/she chooses to make it known. One reason for this is that shareholders don’t want to experience retaliation in the event that they decide to vote against management. By gaining access to the votes in advance, companies can better strategize on how to get the outcome they want. Sometimes a decision can be so close that just a few votes in favor of/against can make a world of difference.

Shepherd Smith Edwards and Kantas LTD LLP Founder and Stockbroker Fraud Lawyer William Shepherd applauded the whistleblower complaint: “This is exactly how the new ‘Wall Street whistleblower’ law is supposed to work. Improper use of this information would almost certainly not have been reported without this law.”

According to the SEC’s Boston Regional Office, ever since new whistleblower rules were enacted last year, it has received close to seven tips a day. The office’s director, David Berger, noted that unlike in the past, these tips are “sworn… verified.” Financial statements, corporate disclosure, and market manipulation are the topics that have gotten the most tips. Although none of the whistleblowers have yet to receive their percentage of compensation from having stepped forward and notified the government of alleged wrongdoing, Berger says that this is just because not enough time has passed since the lawsuits were filed to allow for the requirements that have to be first fulfilled before the payments can go through.

Advisory firm employee leaking shareholder voting data, whistleblower claims, New York Post, February 12, 2012

Advisory firm probes charge that worker sold shareholder info, Boston Herald, February 17, 2012

More Blog Posts:
SEC’s Office of the Whistleblower Received 334 Tips During FY 2011, Stockbroker Fraud Blog, December 8, 2011

Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011

SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011

SEC Looking at Other Ways to Communicate with Whistleblowers, Institutional Investor Securities Blog, September 14, 2011 Continue reading

The Securities and Exchange Commission’s Office of the Whistleblower says it has already received 334 tips since becoming operational in August 12. The office issued its fiscal year 2011 report last month.

Per the report, between August 12 and September 30, which was when FYI 2011 ended, most of the complaints received by the office involved the areas of:
Market manipulation
Offering fraud
• Corporate disclosures and financial statements
The SEC’s whistleblower office received complaints from 37 states-the most, at 34, came from California-and a number of foreign countries, with the majority from China and the United Kingdom. Officials say that the quality of the tips they’ve been receiving has gotten better.

The SEC’s Office of the Whistleblower has not given out any awards yet. One reason for this is that the 90-day reward application period for applicable cases is not yet over. Eligible tipsters are those that provided information that led to securities cases resulting in monetary sanctions of over $1 million.

According to a survey conducted by one employment and labor law firm, S & P 500 senior executives and top officers at other organizations are worried about this bounty program and its monetary incentive that could convince the more reluctant whistleblowers to come forward. 73% of respondents said that they considered retaliation and whistleblowing to be emerging risk areas. Many said that even as the number of whistleblower tips will likely go up, their companies are only moderately prepared to deal with these claims.

Under Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 922, if the following circumstances apply, the SEC must pay 10-30% of any money the government to the whistleblower:

• The whistleblower voluntarily gave the insider information • The information is original, comes from the tipster’s independent analysis or knowledge, and didn’t come to the Commission from any other source • The information allows the SEC to bring a successful enforcement action
• Monetary sanctions are more than $1 million. Penalties, interest, disgorgement and any other monies are part of this consideration.

Meantime, the Government Accountability Office says in its new report that it found that the financial statements belonging to the SEC’s Investor Protection Fund for FY 2010 and 2011 were materially fair. Whistleblower bounties are paid from that fund.

The GAO also said that in FY 2011 the SEC made significant steps forward in terms of remediating material weaknesses in its internal control for financial reporting, information systems, and account processing. Although these issues are not material anymore, the GAO felt that they should still be addressed in its report. The four areas where the significant deficiencies existed were:

• Budgetary resources • Information security • Accounting processes and financial reporting • Filing fees and registrant deposits
The Securities and Exchange Commission’s Office of the Whistleblower FYI 2011 Report

Companies Anticipate Rise in Whistleblower Claims According to Littler Survey, 96 Percent of Senior Executives Reveal Growing Concern, Littler, November 14, 2011
Securities and Exchange Commission’s Financial Statements for Fiscal Years 2011 and 2010, GAO (PDF)

More Blog Posts:
Whistleblower Lawsuit Claims Taxpayers Were Defrauded When Federal Government Bailed Out Houston-Based American International Group in 2008, Stockbroker Fraud Blog, May 5, 2011
SEC Looking at Other Ways to Communicate with Whistleblowers, Institutional Investor Securities Blog, September 14, 2011
SEC is Finalizing Its Whistleblower Rules, Says Chairman Schapiro, Stockbroker Fraud Blog, April 28, 2011 Continue reading