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Thursday, February 27, 2014

Current and former employees of financial institutions can anonymously file Whistleblower claims and may be entitled to rewards.

The Wall Street Journal reported today about a record breaking $14 Million Whistleblower award.  The SEC paid the tipster the $14 Million reward for providing information that eventually uncovered a Chicago-based scheme to defraud foreign investors seeking U.S. residency.  According to the Wall Street Journal:


The case that led to the $14 million-plus payment centers on allegations last year that about 250 investors, mostly Chinese, were "duped" by 30-year-old Anshoo R. Sethi and his two Chicago, Ill.-based companies into paying a total of more than $155 million for a supposed plan to build a hotel and conference center, said the people familiar with the matter. The SEC said the investors were led to believe they were boosting their chances of green cards, because the scheme was designed to qualify for an immigration program that offers U.S. residency for job-creating investments.

In fact, the agency alleged, Mr. Sethi and his companies lacked the necessary building permits, their claims to have the support of major hotel chains were false and the documentation they gave to the immigration authorities was "phony."
Tipsters who provide information that leads to a successful SEC sanction of more than $1 Million, can receive as much as 30% of the money collected. The $14 Million reward was the largest ever paid by the SEC.

However, the SEC's program is just one of the many government whistleblower programs designed to reward those tho provide information that leads to convictions/enforcement actions. The IRS paid $104 Million in 2012 to a former UBS AG banker for providing prosecutors with evidence about the firm's efforts to promote tax evasion. This is believed to be the largest reward ever paid under these programs.

What is important to remember for those still working in the financial services industry is that tipsters can be current or former employees of the financial institutions. The program also provides strong tools to protect the tipster's anonymity, prevents retaliation from employers and can reward the tipster with a significant monetary award. However, some recent court decisions do call into question the extent of the protection if proper procedures are not followed.

This program is a great way to help regulators ferret out fraud and protect the public. Of course, tipsters can be investors as well.

If you know of fraud at your current or former firm and want to discuss filing a #Whistleblower tip, please do not hesitate to contact me to discuss.

Thursday, February 13, 2014

FINRA approves new expungement rule.

Now the proposed rule will be submitted to the Securities and Exchange Commission for review, public comment, and approval.  See FINRA's press release here.

Friday, February 7, 2014

FINRA to Prohibit Practice of Conditioning Settlements on Investor’s Agreement not to Oppose Expungement




According to the Wall Street Journal, next week FINRA's Board of Governors will be working on rule changes that will prohibit the practice of conditioning settlements on an investor's agreement not to oppose expungement.

FINRA is focusing again on the expungement issue as a reaction to the Public Investors Arbitration Bar Association's (PIABA) scathing study released last fall and at the recent urging of two United States Senators. 

The PIABA study found that in cases resolved by settlements or stipulated awards, expungements were granted an astounding:
  • 89% of the time from June 1, 2007 through mid-May 2009, and
  • 96.9% of the time from mid-May 2009 through the end of 2011.
FINRA initially downplayed the study’s conclusions noting "[w]hile still significant, the number of arbitrator-recommended expungements executed by FINRA following a court order during the five-year period (838 orders) covered by the study is less than 5 percent of the total number of customer disputes filed (17,635)."  However, FINRA also promised to review "its rules and interpretations and consider changes to provide more clarity as to what actions in connection with conditions on settlements violate conduct rules." 

As you can imagine, the PIABA Study raised more than a few eyebrows and was widely reported by the press. Reuters, Wall Street Journal and others media outlets.  Eventually it got the attention of United States Senators Jack Reed (D - RI) and Chuck Grassley (R - Iowa) who sent a joint letter to FINRA on December 16th demanding it address the issues raised in the PIABA Study explaining:


We believe that meaningful investor protection includes the disclosure of whether a customer dispute was settled. Not just for transparency sake, but also to help prospective investors make informed decisions about which individuals or firms with whom to do business.


On January 6th, FINRA responded to the Senators in a nine page letter in which they acknowledged that there was a serious problem: 


We remain extremely concerned over the inordinately high percentage of expungement relief granted by arbitrators in settled cases.

In its comprehensive response, FINRA addressed the competing policy concerns and detailed the expungement framework including explaining how FINRA responds to expungement requests and how BrokerCheck works.  FINRA also discussed its continuing efforts to educate arbitrators and monitor expungement awards and other issues.

Significantly, as a result of the PIABA study, FINRA confirmed that it was working on a rule that would prevent respondents from conditioning settlement on an agreement by claimants to not oppose engagement:

We are presently developing rule changes that would prohibit the practice of conditioning settlements on an investor's agreement not to oppose expungement. While the suggestion to include such conditions in exchange for additional settlement compensation does not always originate with the brokerage firm or broker, this practice may interfere with the arbitrators' ability to independently determine the appropriateness of expungement and make the requisite affirmative finding.

Interestingly, FINRA also flat out rejected a proposal from the PIABA study that would have invited FINRA and a designee of the state securities commissioner to appear at the hearing on the motion for expungement relief and to oppose expungement relief when such opposition was appropriate.  FINRA reasoned that allowing third parties, like state regulators or even FINRA itself, to insert themselves into a private contractual arbitration proceeding was problematic, impractical and could threaten the ability of FINRA Dispute Resolution to operate a neutral arbitration forum. 

That being said, FINRA did say it would continue its practice of opposing expungements in court to protect the integrity of the CRD system and BrokerCheck and to establish and maintain precedents that support FINRA's legal arguments.

It will be interesting to see what the final rule proposal looks like.  Although FINRA will seek the approval of its Board to file the rule proposal during its February Board meeting, it is unclear how long it will take FINRA to file the rule proposal with the SEC.  Until then, it seems there is nothing preventing firms from continuing to bargain for cooperation in expungement requests.