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Continuing to award bounties to those who step up to report securities fraud, the SEC has recently awarded $5 million to a whistleblower for offering information and assistance. This information eventually led to a successful enforcement action where the SEC collected fines, sanctions, and other funds from the company. The whistleblower first reported their concerns internally, then reported them to the SEC. The press release indicated that the whistleblower’s information also helped the SEC with their investigation. This included the identification of witnesses and the creation of requests for information and documents. Creola Kelly, Chief of the SEC’s Office of the Whistleblower, stated, “­Th­­­­­­­­­e whistleblower in this case provided helpful information and substantial ongoing assistance, saving the SEC time and resources during its investigation."Continuing to award bounties to those who step up to report securities fraud, the SEC has recently awarded $5 million to a whistleblower for offering information and assistance. This information eventually led to a successful enforcement action where the SEC collected fines, sanctions, and other funds from the company. Continue reading

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Private placements are a specialized kind of securities offering generally open only to accredited investors—for the most part, high net-worth individuals and licensed brokers. Given the investors’ sophisticated understanding of securities transactions, private placements are not subject to the same rigorous disclosure requirements as public offerings. Because of this lower disclosure requirement, it’s sometimes easier with private placements for bad actors to commit fraud. If you’re working on a private placement, here are some of the red flags to watch out for: The offering company fails to provide even basic information. Companies offering a private placement aren’t required to disclose a great deal of information, but most will create a Private Placement Memorandum (PPM) outlining their financial situation in broad strokes. The absence of a PPM could be a sign the offering company has something to hide.Private placements are a specialized kind of securities offering generally open only to accredited investors—for the most part, high net-worth individuals and licensed brokers. Given the investors’ sophisticated understanding of securities transactions, private placements are not subject to the same rigorous disclosure requirements as public offerings. Because of this lower disclosure requirement, it’s sometimes easier with private placements for bad actors to commit fraud. Continue reading

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We often hear about accounting fraud when a big case hits the news. For example: Xerox falsified its financial records for five years, inflating its earnings by $1.5 billion;  Lehman Brothers failed to disclose an accounting loophole that reported short-term loans as sales; and  Haliburton improperly overbooked cost overruns? When the SEC announces large accounting fraud cases, we take notice. After all, many of these fraud cases involve companies with household names. The amounts in cases that hit the news often run into the billions. However, even though many accounting fraud cases aren't as notorious, fraud can still be just as damaging to shareholders in smaller cases. Sound financial practices and accurate accounting is a foundation of our securities markets.  Companies frequently cook their books to make their companies more attractive to investors and driving the stock price up.  However, absent a whistleblower reporting false numbers, this type of fraud can be very difficult to detect. In some cases, companies inflate the valuations of their assets or hedge funds inflate the value of their investments. This can lead to exaggerated returns, excessive fees to the fund managers and, ultimately, significant losses for investors when assets are ultimately marked down. All of these actions can lead to a potential violation of the federal securities laws.We often hear about accounting fraud when a big case hits the news. For example:

  • Xerox falsified its financial records for five years, inflating its earnings by $1.5 billion;
  • Lehman Brothers failed to disclose an accounting loophole that reported short-term loans as sales; and
  • Haliburton improperly overbooked cost overruns.

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It's a well-known rule in "polite society." One simply should not discuss money. And when it comes to asking someone to divulge their salary, Miss Manners has admonished, "It is unequivocally impolite to ask anyone how much money they make. Even if he really wants to know." And so perhaps that helps unscrupulous investment advisers avoid disclosing their commissions, markups, or charges. But if you're aware of advisers who are hiding this information from clients, consider coming forward to become an SEC whistleblower. Because, as we'll discuss, it's not about politeness. Willful failure to disclose their compensation may mean they're failing to fulfill the fiduciary duties they owe their clients. It's been a long-standing requirement that investment advisers' fiduciary duty requires that they disclose any material facts relating to their position. Forms of compensation fall into the category of material facts, because compensation may create conflicts of interest between the adviser and the client. (For instance, conflict arises if advisers are paid for recommending particular mutual funds to their clients.)It’s a well-known rule in “polite society.” One simply should not discuss money. And when it comes to asking someone to divulge their salary, Miss Manners has admonished, “It is unequivocally impolite to ask anyone how much money they make. Even if he really wants to know.” And so perhaps that helps unscrupulous investment advisers avoid disclosing their commissions, markups, or charges. But if you’re aware of advisers who are hiding this information from clients, consider coming forward to become an SEC whistleblower. Because, as we’ll discuss, it’s not about politeness. Willful failure to disclose their compensation may mean they’re failing to fulfill the fiduciary duties they owe their clients. Continue reading

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In our last post, we were talking about how scammers are unfortunately robbing investors with claims that they can purchase pre-initial public offerings (IPOs). And how the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), the not-for-profit overseeing broker-dealers, both effectively warn that, if someone’s not already an accredited investor, they should stay away from pre-IPO investing. It’s probably a scam. While the SEC and FINRA websites include lists of red flags for investors, a case brought in 2020 against Mark Lisser gives us a helpful look into what those on the inside should be looking for if they are contemplating becoming an SEC whistleblower by contacting the SEC about a pre-IPO scam. For example, an unnamed “Salesperson 1” (likely a whistleblower who brought Lisser’s scam to the SEC’s attention) informed the SEC how Lisser misled both staff and customers. The company was unclear about how sales staff were paid and said they’d change accounting to avoid calling bonuses commissions. Lisser transferred the investment firm’s money to his personal bank accounts, and he paid salespeople with personal checks. He created a new LLC that he also used to transfer funds out of the company and to pay himself and a couple of staff members’ personal expenses.In our last post, we were talking about how scammers are unfortunately robbing investors with claims that they can purchase pre-initial public offerings (IPOs). And how the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), the not-for-profit overseeing broker-dealers, both effectively warn that, if someone’s not already an accredited investor, they should stay away from pre-IPO investing. It’s probably a scam. Continue reading

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In May 2022, the Securities and Exchange Commission (SEC) announced that it had filed an emergency action to freeze the assets of StraightPath Venture Partners and other defendants. The SEC alleged that the defendants were committing ongoing securities violations, having already racked up $410 million from 2,200 defrauded investors. The defendants are said to have been running a large network of unregistered broker-dealers who sold shares of a pre-initial public offering (IPO) that the defendants did not have to sell. Pre-IPO sales are ripe opportunities for fraudsters. By definition, the very premise is that investors are being sold shares before they’re available to the public. So those considering an investment may find it difficult, if not impossible, to find reliable information about the stock’s potential value. And the very pitch from fraudsters may include that the investors should not go asking anyone about their purchase because it’s a rare opportunity to get on the inside (perhaps even with a hint of insider trading info mixed in). In May 2022, the Securities and Exchange Commission (SEC) announced that it had filed an emergency action to freeze the assets of StraightPath Venture Partners and other defendants. The SEC alleged that the defendants were committing ongoing securities violations, having already racked up $410 million from 2,200 defrauded investors. The defendants are said to have been running a large network of unregistered broker-dealers who sold shares of a pre-initial public offering (pre-IPO) that the defendants did not have to sell. Continue reading

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Securities sales is a hard business on a good day. And the pressure to sell and hit a quota is often hanging over many agents’ heads. That’s even more true when there’s a downturned market filled with skittish investors. But “boiler rooms” are another thing entirely. Typically run out of call centers filled with unregistered sales agents, boiler room scams convince unwitting investors into pouring money into worthless investments. And while boiler rooms are an old con, they’ve been getting recent technology updates that have law enforcement around the world taking notice. In fact, fraudsters don’t even need an actual boiler room. They work remotely, just as many of us do. In March 2022, the Securities and Exchange Commission and Financial Industry Regulatory Authority (FINRA) worked with the Argentinian, Mexican, Panamanian, Colombia, Singaporean, Swiss, and other nations’ governments to bring down a boiler room operating out of Medellin, Colombia. Even the Royal Canadian Mounted Police were on the case.Securities sales is a hard business on a good day. And the pressure to sell and hit a quota is often hanging over many agents’ heads. That’s even more true when there’s a downturned market filled with skittish investors. But “boiler rooms” are another thing entirely. Typically run out of call centers filled with unregistered sales agents, boiler room scams convince unwitting investors into pouring money into worthless investments. And while boiler rooms are an old con, they’ve been getting recent technology updates that have law enforcement around the world taking notice. Continue reading

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Financial fraud is a serious crime with heavy financial penalties and jail time. Yet people still try to mislead shareholders, bilking investors and destroying companies. Not every financial fraud case ends up on Netflix like biotech entrepreneur and Theranos founder Elizabeth Holmes. But many of the most notorious financial fraud cases are just as fascinating. Enron The Enron scandal is perhaps one of the best-known incidents of accounting fraud. Enron used accounting loopholes by using off-balance-sheet entities to hide billions in bad debt while simultaneously inflating its earnings. Shareholders lost more than $74 billion when its share price collapsed in the wake of the investigation. The CEO and former CEO were both sentenced to jail time, and the scandal led to Enron's bankruptcy and the dissolution of the accounting firm Arthur Andersen.Financial fraud is a serious crime with heavy financial penalties and jail time. Yet people still try to mislead shareholders, bilking investors and destroying companies. Not every financial fraud case ends up on Netflix like biotech entrepreneur and Theranos founder Elizabeth Holmes. But many of the most notorious financial fraud cases are just as fascinating. Continue reading

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People often believe that audits can help root out fraud in cases and that an audit is a magic wand bestowing financial stability upon a company. But an audit is simply an independent examination of a company's financial statements to ensure that its financial records are a fair and accurate assessment of its transactions. An audit is ultimately only as good as the information given to the auditors. Of course, an auditor's responsibilities do include providing reasonable assurance that a company's financial statements are free from material misrepresentations due to error or fraud. Auditors aren't infallible and can miss problems without outside information. But an audit is a good first step toward identifying red flags in a company's financial statements. People often believe that audits can help root out fraud in cases and that an audit is a magic wand bestowing financial stability upon a company. But an audit is simply an independent examination of a company’s financial statements to ensure that its financial records are a fair and accurate assessment of its transactions. An audit is ultimately only as good as the information given to the auditors. Continue reading

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