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SEC awards $3 million in whistleblower awards
On June 14, the SEC announced whistleblower awards to two individuals totaling an initial combined payment of approximately $3 million for information and assistance provided in a successful enforcement action. According to the redacted order, the SEC awarded the first whistleblower for providing assistance early in the investigation and helping enforcement staff focus its resources and theories. The second whistleblower was rewarded for helping to uncover misappropriated funds and fraudulent transfers. The SEC noted that both whistleblowers provided ongoing assistance in the investigation, including participating in interviews and providing helpful documents involved in the investigations.
The SEC has awarded approximately $932 million to 172 individuals since issuing its first award in 2012.
5th Circuit holds global payment services company is not a “bank”
On June 1, the U.S. Court of Appeals for the Fifth Circuit determined that a “global payment services company” does not qualify as a bank under U.S. tax code, 26 U.S.C. § 581. According to the opinion, the company described its activities to the IRS in 2008 as “banking” while referring to its products as “financial services” despite making no meaningful changes to its business from prior years when it described itself as a “nondepository credit intermediation” business and its services as “money/wire transfers.” Because companies who claim bank status receive certain significant tax benefits, the company—which had invested billions of dollars in asset-backed securities, including mortgage-backed securities—deducted losses it incurred during the Great Recession against ordinary income. However, according to the opinion, nonbanks are only permitted “to deduct losses on securities to the extent they offset capital gains, which [the company] did not have during the relevant years.” The IRS disagreed with the company’s deductions, determined it was not a bank, and assessed tens of millions of dollars in tax deficiencies. The company unsuccessfully challenged the IRS in tax court, and, following a first appeal resulting in a remand, the tax court again concluded that the company was not a bank “because it neither accepts deposits nor makes loans.”
On appeal, the 5th Circuit affirmed the tax court’s decision, stating that it only needed to address the “deposit” requirement and holding that because customers do not deposit money with the company for safekeeping “the most basic feature of a bank is missing.” The appellate court explained that therefore, under the tax code, the company was not entitled to deduct from its taxes “large losses it incurred in writing off mortgage-backed securities during the Great Recession.”
SEC awards $27 million in whistleblower awards
On June 2, the SEC announced whistleblower awards to two individuals totaling nearly $23 million for information and assistance provided in multiple successful enforcement actions. According to the redacted order, the SEC awarded the first whistleblower nearly $13 million for submitting a whistleblower tip that led to the initiation of the investigations. The second whistleblower received approximately $10 million for submitting a tip that contributed to the investigation, but according to the SEC, the whistleblower “unreasonably delayed by waiting several years to report the conduct.” The SEC noted that both whistleblowers provided substantial voluntary assistance in the investigation, including participating in interviews and identifying key individuals and systems involved in the investigations.
Earlier on May 27, the SEC announced that it awarded a whistleblower more than $4 million for voluntarily providing information that prompted the SEC to open an investigation leading to a successful enforcement action. According to the redacted order, the whistleblower provided substantial information to SEC investigative staff, identified key players, provided helpful information and documents, and cooperated with investigative staff. The SEC, however, determined a second claimant to be ineligible for an award, concluding, among other things, that the claimant “provided no information that was used in or otherwise contributed to the Covered Action” nor any “unique information or insight,” which would have led to the success of the enforcement action.
The SEC has awarded more than $928 million to 166 individuals since issuing its first award in 2012.
SEC issues $59 million in whistleblower awards
On May 19, the SEC announced that it awarded a whistleblower more than $28 million for providing information that, according to the redacted order, prompted the SEC and another agency to open investigations that resulted in significant enforcement actions. The SEC notes that under its whistleblower program, individuals who provide information to other agencies “may be eligible for an award in the related action if they are also eligible for an award in the underlying SEC action.”
Earlier, on May 17, the SEC announced whistleblower awards to four individuals totaling nearly $31 million for information provided in two different enforcement actions. According to the first redacted order, the SEC jointly awarded nearly $27 million to two claimants who voluntarily provided new information and ongoing assistance throughout an investigation that led to successful enforcement actions. In the second redacted order, the SEC awarded two other whistleblowers a total of approximately $3.8 million. The first whistleblower received a roughly $3.75 million award for voluntarily providing “original information to the Commission that contributed to an existing investigation” that led to a successful enforcement action. The second whistleblower received approximately $750,000 for providing “information that the staff previously lacked and that was useful in negotiating a settlement of one of the proceedings.” Though both whistleblowers independently provided information that was relevant in the ongoing investigation, the whistleblower who received the larger award supplied information and assistance that was more significant to the enforcement action.
The SEC has awarded approximately $901 million to 163 individuals since issuing its first whistleblower award in 2012.
Broker-dealer settles with SEC for failing to file SARs
On May 12, the SEC announced a settlement with a broker-dealer for allegedly violating the Securities and Exchange Act by failing to consistently implement its anti-money laundering (AML) program and file Suspicious Activity Reports (SARs) despite knowing individuals were attempting to gain unauthorized access to retirement accounts. According to the SEC’s order, from September 2015 through October 2018, the broker-dealer allegedly knew that individuals were attempting to gain access, or had gained access, to plan participants’ retirement accounts through the use of improperly obtained personal identifying information. The SEC alleged that, despite this knowledge, the broker-dealer failed to file approximately 130 SARs in cases where it had detected the suspicious activity and, in the roughly 297 SARs that it did file, failed to include certain required information linked to the bad actors, such as URL addresses, IP addresses, and other electronic identifying information. The order requires the broker-dealer, who has neither admitted nor denied the SEC’s allegations, to cease and desist from future violations and pay a $1.5 million penalty. The SEC acknowledged the broker-dealer’s significant cooperation in the investigation and subsequent remedial efforts.
SEC issues more than $25.6 million in whistleblower awards
On May 12, the SEC announced a whistleblower award totaling around $3.6 million in connection with a successful enforcement action. According to the redacted order, the whistleblower provided new information that lead to the initial charges as well as “ongoing assistance as the Commission’s investigation progressed.”
Earlier on May 10, the SEC also announced whistleblower awards totaling approximately $22 million in connection with a successful enforcement action. According to the redacted order, the SEC awarded a whistleblower approximately $18 million for providing (i) information that led to the opening of the investigation brought against a financial services firm, and (ii) ongoing assistance during the investigation. The second whistleblower received a $4 million award for submitting information after the investigation began. The SEC noted that both whistleblowers provided information and cooperation that “allowed the Commission to better understand complex transactions related to the matters under investigation.”
The SEC has awarded approximately $842 million to 157 individuals since issuing its first award in 2012.
District Court dismisses shareholder sales-compensation suit
On April 27, the U.S. District Court for the District of Illinois granted an Ohio-based bank’s motion to dismiss a consolidated shareholder suit, ruling that investors “failed to allege facts that give rise to a strong inference of scienter” concerning whether bank executives intended to deceive them by not immediately disclosing a federal investigation into unauthorized account openings. The investors claimed, among other things, that bank executives made misleading statements and material omissions in the bank’s securities filings for 2016, 2017, and 2018 by failing to disclose a 2016 CFPB investigation into the bank’s sales practices. After the bank disclosed the investigation in its 2019 filings, the investors alleged the stock price dropped. The Bureau later filed a complaint in 2020 (covered by InfoBytes here) charging that the bank knew that sales employees “engag[ed] in misconduct in order to meet goals or earn additional compensation,” but purportedly “took insufficient steps to properly implement and monitor its program, detect and stop misconduct, and identify and remediate harmed consumers.” The investors claimed that bank executives’ assurances about the bank’s robust risk management and compliance practices “served to conceal [its] faulty reporting structure and their knowledge of its problems,” and that the CFPB’s ongoing litigation against the bank supported an inference of scienter because, among other things, bank executives were allegedly motivated to hide the Bureau’s investigation and underlying account issues because of a pending acquisition.
The court disagreed, ruling that the investors failed to allege any specific facts showing that bank executives knew of reporting structure deficiencies or that they “had personal knowledge of any problematic practices at the time when they made the statements at issue.” The court pointedly stated that it “does not find it appropriate to infer scienter from conclusory statements made in another litigation.” Moreover, with regards to whether bank executives concealed the Bureau’s investigation to make the company appear profitable, the court stated that “the general desire to keep stock prices high to make the company appear profitable or to close a deal” is not enough on its own to “allow a strong inference of scienter.”
SEC issues over $3 million in whistleblower awards
On April 23, the SEC announced whistleblower awards totaling more than $3 million in two separate enforcement actions. According to the first redacted order, the SEC awarded a whistleblower approximately $3.2 million for alerting enforcement staff to violations, identifying key issues for staff to focus on, and providing a “roadmap” for staff that conserved resources. However, the SEC noted that the whistleblower “unreasonably delayed” reporting the information to the Commission—it was submitted approximately four years after the date on which the whistleblower first noticed the misconduct—during which “investors continued to suffer harm.”
In the second redacted order, the SEC awarded a whistleblower more than $100,000 for providing information (of which “there was substantial law enforcement interest”) that assisted the Commission’s investigation and “was one of the underlying sources that formed the basis for the charges in the Covered Action.” The SEC noted that the whistleblower provided helpful assistance and suffered personal and professional hardships as a result.
SEC awards $50 million to whistleblower
On April 15, the SEC announced an award of more than $50 million to joint whistleblowers in connection with violations that involved highly complex transactions that would have been difficult to detect without their information. According to the redacted order, the joint whistleblowers “assistance was critical to staff’s ability to identify and investigate the unlawful securities violations,” including meeting with staff numerous times and providing voluminous detailed documents, which led to the return of tens of millions of dollars to harmed investors.
The SEC has now awarded approximately $812 million to 151 individuals since it issued its first award in 2012.
SEC commissioner updates cryptocurrency safe harbor proposal
On April 13, SEC Commissioner Hester M. Pierce released an updated version of her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. As previously covered by InfoBytes, last year Pierce suggested that not only would the rule provide regulatory flexibility “that allows innovation to flourish,” but it would also protect investors by “requiring disclosures tailored to their needs” while still maintaining anti-fraud safeguards, allowing investors to participate in token networks of their choice. The three-year grace period for qualifying companies, Pierce suggested, would allow time for the development of decentralized or functional networks, adding that at the end of the three years, a successful network’s tokens would not be regulated as securities.
The updates to the proposal reflect feedback from the cryptocurrency community, securities lawyers, and the pubic, and include, among other things:
- A requirement for companies to provide semi-annual updates to the plan of development disclosure and a block explorer;
- An exit report requirement, which would include either (i) an outside counsel analysis explaining why the network is decentralized or functional; or (ii) an announcement that the company will register the tokens under the Securities Exchange Act; and
- Enhancements to the exit report requirement to address what the outside counsel’s analysis should address when explaining why a network is decentralized.
The public is encouraged to provide feedback on the updated proposal.