In 2010, the Securities and Exchange Commission (SEC) introduced a whistleblower program targeting violations of federal securities law that may defraud investors. Though similar to the False Claims Act (FCA) whistleblower program, the SEC program has some important differences.
When a claim is filed under the False Claims Act, the damages are limited to the money the government has lost as a result of the fraud. If a company is found liable for violating securities law, the company may have to disgorge profits related to its fraud or repay investors for losses incurred because of the fraud.
For a SEC whistleblower to receive a share of a settlement or judgment in an SEC case, the amount recovered by the SEC must exceed $1 million. SEC violations include:
Mail or Wire Fraud
Using the U.S. postal service, the telephone system, or the Internet to commit or conspire to commit fraud is a federal offense.
Material Misrepresentations in Stock or Debt Offering
When publicly traded companies withhold significant financial information from the public, investors may believe that a company’s stock is worth more; companies may withhold financial information that would cause the company’s stock price to decrease.
Failure to Disclose Material Risks in Conduct of Business
Financial advisors and publically traded companies are required to tell the public of all of the potential risks and liabilities of a course of action so that stockholders can make an informed decision whether to invest. By failing to do so, companies can artificially inflate the value of their stock; when these risks are revealed, investors can incur substantial losses for which the company may be held liable.