We hear about securities fraud when a big case comes along. Hollywood often mythologizes the topic in movies like The Wolf of Wall Street. But these headline-grabbing stories don’t tell the full story. Companies are often under immense pressure to meet market expectations.
On the Bloomberg Law podcast, UCLA Law School professor James Park recently discussed his new book “The Valuation Treadmill: How Securities Fraud Threatens the Integrity of Public Companies.” The book covers the pressures that U.S. companies face to commit securities fraud.
The Valuation Treadmill For SEC Reporting Requirements
In his book, Park starts with the story of the company Under Armour, a maker of sportswear and athletic shoes. For twenty-six consecutive quarters, the company increased its revenue by an average of more than 20%. But the company feared that admitting such growth was unsustainable, and with slowing revenue increases, their stock price would go down. So, when faced with a failure to meet projected revenue growth, the company asked customers to accept delivery of merchandise Under Armour wasn’t scheduled to deliver until the next quarter. It pulled millions of dollars in sales forward without disclosing this maneuver in its public filings. After investors paid too much for Under Armour stock, the SEC sanctioned the company.
The pressure to meet market expectations, even if unrealistic or unsustainable, encourages companies to exaggerate their expected growth or issue misleading reports. As a result, securities fraud is now a main focus of regulations for public companies. Investors continue to closely scrutinize public companies to predict future performance, which increases the pressure on these companies to deliver short-term results to meet market expectations. As long as these pressures continue, companies will continue to skirt the law.
Company Insiders Frequently Act As SEC Whistleblowers
While the desire to report positive returns and short term gains can be compelling and can improve the companies stock price in the short term, the long term effects of these actions can be devastating on the company and the investors who purchased the company stock. In many circumstances, company insiders are bullied or threatened by senior management to cut corners or report false data. In these circumstances, insiders cannot expect the company to change because the malfeasance comes from the top. The SEC whistleblower program allows insiders to report fraud anonymously and, if the company believes someone is a whistleblower prohibits the company from retaliating against the employee.
Representing SEC Whistleblowers
Before becoming an SEC whistleblower, you need legal advice. The SEC is most likely to investigate your claims if you provide credible, detailed information indicating a covered entity has broken the law. To help maximize the chance of an investigation, you need an attorney with experience guiding and advising SEC whistleblowers. At Silver Law Group and the Law Firm of David R. Chase, our team has the skill and knowledge to help you explore your options. Give us a call today at (800) 975-4345, or email us to set up a free consultation.