Financial Fraud and Whistleblowers

Financial Fraud
After the sub-prime mortgage scandal in 2008, which crippled our nation and caused the recession we are in, Congress passed a law to regulate the banks so the same thing wouldn’t happen again. That law called the Dodd-Frank Act, has strong whistleblower provisions in order to reveal financial fraud in publicly traded corporations. It gives the Securities & Exchange Commission new powers of investigation and whistleblowers can recover up to 30% of what the government recovers.

“Until recently, financial institutions including banks, hedge funds, mortgage brokers and others have escaped the whistleblower laws. No longer.”

Cases taken under this law have been brought against banks for submitting fraudulent appraisals to Uncle Sam in government backed real estate loans. In addition, it has been used against banks where they have foreclosed on residential real estate using fraudulent foreclosure forms. The law also covers fraud in the investment field and allows the SEC to go after foreign corporations as long as they are traded on a U.S. stock exchange. Financial fraud also relates to the Foreign Corrupt Practices Act which prohibits bribes to officials of foreign countries or their families or agents, in order to gain a business advantage in that nation.

 Different Kinds of Financial Fraud

Financial Statement Fraud

Financial Fraud takes many forms and depending on what kind of fraud it is, may allow a whistleblower to be able to choose between different whistleblower laws, some allowing for greater whistleblower recovery, others allowing for anonymity.  Financial statement fraud occurs when companies misrepresent financial information communicated to the investing public. Publicly traded companies report major events to the public through press releases on line and also through Form 8-K which is filed with the Securities and Exchange Commission.

It is not uncommon that financial statements contain fraudulent information including “improper revenue recognition.”  Some filings may exclude incurred liabilities and yet others fail to disclose contingent liabilities including major lawsuits.

*Overstatement of revenue through revenue recognition schemes

This frequently involves recording fictitious revenues, such as the creation of false invoices or billing customers for items they did not order. It makes the company look more profitable and may help to spike sales of company stock on the stock market.

*Revenue timing schemes

Involves purposefully recording revenue in the wrong accounting period. Often, this helps the company to meet analyst estimates or control tax payments to the IRS and as such it could be an IRS whistleblower case.

*Unrecorded Liabilities

Unrecorded liabilities fraud involves purposefully omitting a material liability from a financial statement and books of a company. Unrecorded liabilities include unpaid obligations for goods or services received and also contingent obligations such as pending litigation.

Filing fraudulent financial statements with the SEC and investors violates a number of laws and would allow a whistleblower with primary and previously undisclosed information to report as a whistleblower under a number of existing laws including the Dodd Frank Act enacted in 2010 as a result of the mortgage backed fraud scandal of 2008.

Whistleblower Laws and Financial Fraud

Understanding the new whistleblower laws

Dodd-Frank Act Whistleblower Provisions

When fraud is committed against private securities investors, the newest whistleblower law that applies is the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) which was signed into law in 2010 as a result of the mortgage backed securities scandal which rocked the economy of this country and the world. In this law there are special provisions to protect individuals who come forward to provide inside information on such fraud to the Securities and Exchange Commission (SEC). Like The False Claims Act (FCA), which deals with fraud on the government, the Dodd Frank Act authorizes financial rewards for whistleblowers who report original information about securities or financial fraud to the SEC which the government did not already know about.  The whistleblower is eligible if the enforcement action leads to a penalty over one million dollars. The whistleblower can receive up to 30% of whatever is recovered by the government. There is an unusual protection built into this law in that whistleblowers can report the fraud through counsel remaining anonymous. This helps to protect from retaliation like termination. The second unique aspect of the law is that while the law requires whistleblowers to render information not publicly known, it does reward whistleblower providing unique information based solely on public information such as deciphering fraud through the use of statistics that are public. The law is a first come first serve law, meaning the first person to file is entitled to the award.

In one case handled by Jeff Newman, a Financial Planning company was engaged in rendering false information to its customers concerning the probable financial yields on their accounts. This was done by creating false models of results purportedly obtained before by the company customers. Based on a statement of prior yields in excess of 20-25%, customers allowed the company financial planners to invest in aggressive investment vehicles which did not yield anywhere near the results promised. An employee of the company came forward as a whistleblower and agreed to provide the SEC with details about the fraud. The SEC investigated and found wrongdoing, rendering a significant monetary sanction against the company and requiring it to place the findings on its web site, notify clients of the determination and to undergo oversight for several years.

To learn more about whistleblower laws and protections relating to financial fraud, contact Jeffrey Newman at 1-800-682-7157 or email him at Jeffrey.Newman1@gmail.com