Articles Posted in Securities and Exchange Commission

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rakoff

Published on: November 9, 2011 | by Shepherd Smith Edwards & Kantas, LLP

In Federal District Court today, Judge Jed S. Rakoff expressed concerns about the $285M securities settlement that Citigroup had reached with the Securities Exchange Commission. The financial firm was accused selling $1B in high-risk mortgage-linked collateralized debt obligation that it allegedly knew were at risk of failing. A federal judge must approve the settlement.

Rakoff is the same judge that wouldn’t approve Bank of America’s $33M securities settlement with the SEC for allegedly misleading investors. He later approved a revised settlement of $150 million.

At today’s hearing over the Citigroup deal, Rakoff said the settlement raises issues of concerns about the SEC’s enforcement practices. Approving the agreement would close the case on regulators’ claims that the financial firm.

While Rakoff has not yet made a decision about whether he will approve the settlement, he did question whether the SEC had any genuine desire to find out exactly what happened rather than just settling up. The SEC allows parties to settle without denying or admitting to any wrongdoing. Rakoff also raised concerns about the banks often break the promise they make when settling that they won’t violate securities laws in the future. This is the fifth time that Citigroup has settled securities claims with the SEC over alleged civil fraud. Rakoff also raised questions about why the bank’s settlement involves just a $95 million penalty when investors’ are estimated to have lost $700 million on the CDO.

Even though Citigroup didn’t jump into subprime mortgage loan packaging, it got involved in the housing boom just as that was reaching its heights As the market collapsed, Citigroup sustained over $30 billion in losses, and the government had to bail the bank out twice.

Last year, the financial firm consented to pay $75 million over allegations that it intentionally didn’t notify investors that their investment in the subprime mortgage market were declining in value when the financial crisis hit. Citigroup has since reorganized its risk management function

Citigroup’s $285M Settlement
The SEC claims Citigroup misled clients over a $1 billion derivatives deal involving Class V Funding III, which is a collateralized debt obligation. Not only did the financial firm select the portfolio but it also bet against it. Investors were not told of Citigroup’s conflicting allegiances and they sustained huge losses. Meantime, Citigroup made $126 million from taking a short position against the CDO’s assets, as well as another $34 million in fees.

Judge in Citigroup Mortgage Settlement Criticizes S.E.C.’s Enforcement, NY Times, November 9, 2011

Judge Dredd may scotch $285M Citi settlement: Attorney, Investment News, November 8, 2011

More Blog Posts:
Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal, Institutional Investor Securities Blog, October 20, 2011

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

Bank of America and Countrywide Financial Sued by Allstate over $700M in Bad Mortgaged-Backed Securities, Stockbroker Fraud Blog, December 29, 2010

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements

Published on: November 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Without denying or admitting to wrongdoing, Banco Espirito Santo S.A. a banking conglomerate based in Portugal, has consented to pay nearly $7M in disgorgement, prejudgment interest, and civil penalties to settle Securities and Exchange Commission allegations that it violated securities transaction, investment adviser, and broker-dealer registration requirements. The bank has also agreed to a bar from future violations, as well as an undertaking that it pay a minimum interest rate to US clients on securities bought through BES.

According to the SEC, between 2004 and 2009 and while not registered as an investment adviser or broker-dealer in the US, BES offered investment advice and brokerage services to about 3,800 US resident clients and customers. Most of them were immigrants from Portugal. Also, allegedly the securities transactions were not registered even though they did not qualify for a registration exemption.

The SEC says that by acting as an unregistered investment adviser and broker-dealer BES violated sections of the Exchange Act and the Advisers Act. The bank violated the Securities Act when it allegedly sold and offered securities in this country without registration or the exemption.

The SEC says BES used its Department of Marketing, Communications, and Customer Research in Portugal to send out marketing materials to clients outside the country. Customers in the US ended up getting materials not specifically designed for US residents. BES also worked with a customer service call center to service its US customers. Via phone, these clients were offered securities and other financial products. The representatives were not registered as SEC broker-dealers and had no US securities licenses even though they serviced US clients. US Customers were also offered brokerage services through ESCLINC, which is a money transmitter service in Rhode Island, Connecticut, and New Jersey. ESCLINC acted as a contact point for the investment and banking activities of BES’s US clients.

Registration Provisions
The SEC has set registration provisions in place to help preserve the securities markets’ integrity as well as that of the financial institutions that serve as “gatekeepers,” said SEC New York regional office director George S. Canellos. He accused BES of “brazenly” disregarding these provisions.

State securities laws and US mandate that investment advisers, brokers, and their financial firms be registered or licensed. You should definitely check to make sure that whoever you are investing with or seeking investment advice from his properly registered. It is also important for you to know that doing business with a financial firm or a securities broker that is not registered can make it hard for you to recover your losses if that entity were to go out of business and even if the case is decided in your favor (whether in arbitration or through the courts.)

More Blog Posts:

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011

Citigroup to Pay $285M to Settle SEC Lawsuit Alleging Securities Fraud in $1B Derivatives Deal

Published on: October 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Citigroup has consented to pay $285 million to settle a Securities and Exchange Commission complaint accusing the bank of misleading investors in a $1 billion derivatives deal—a collateralized debt obligation called Class V Funding III. It was Citigroup that chose the assets for the portfolio that it then bet against. Investors were not told that Citigroup’s interests were contrary to theirs. The $285 million will go to the deal’s investors.

According to the SEC, Citigroup had significant influence over the $500 million of portfolio assets that were selected. It then took a short position against the assets, standing to profit if they dropped in value. All 15 investors were not made aware of any of this and practically all of their investments (in the hundreds of millions of dollars) were lost when the CDO defaulted in under 9 months after it closed on February 28, 2007. Credit ratings agencies had downgraded over 80% of the portfolio.

Financial instrument insurer Ambac, which was the deal’s biggest investor and had taken on the role of assuming the credit risk, was forced to pay those who bet against the bonds. In 2009, Ambac sought bankruptcy protection.

Meantime, Citigroup made about $126 million in profits from the short position and earned about $34 million in fees. S.E.C.’s division of enforcement director Robert Khuzami says that under the law, Citigroup was required to give these CDO investors “more care and candor.”

Per the SEC’s civil action, Citigroup employee Brian Stoker is the one that mainly put the deal together, while Credit Suisse portfolio manager Samir H. Bhatt was primarily in charge of the transaction. Credit Suisse was the CDO transaction’s collateral manager.

Stoker is fighting the SEC’s case against him. Meantime, Bhatt has settled the SEC’s charges by agreeing to pay $50,000. He has also been suspended from associating with any investment adviser for six months. Credit Suisse Group AG settled for $2.5 million.

As part of this settlement, Citigroup will pay a $95 million fine. It was just last year that the financial firm agreed to pay $75 million over federal claims that it purposely didn’t let investor know that their subprime mortgage investments were losing value during the financial crisis. Citigroup has said that since then, it has revamped its risk management function and gone back to banking basics.

Last year, Goldman Sachs Group Inc. agreed to settle for $550 million allegations that it did tell investors that the hedge fund that helped choose a CDO’s assets also was betting against it. JPMorgan Chase & Co. settled similar allegations earlier this year for $153.6 million.

Citigroup to Pay Millions to Close Fraud Complaint, NY Times, October 19, 2011

Related Blog Resources:
Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

JPMorgan Chase to Pay $211M to Settle Charges It Rigged Municipal Bond Transaction Bidding Competitions, Stockbroker Fraud Blog, July 9, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam

Published on: October 13, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has received an emergency order to stop a Ponzi scam that bilked victims of about $26 million. Investors in PermaPave Companies were promised significant returns if they would place their money behind water-filtering natural stone pavers. According to the SEC, which has filed a securities complaint, Eric Aronson, a convicted felon, is the mastermind behind the scheme.

Aronson, who pleaded guilty to fraud in another case more than 10 years ago, is now accused of persuading about 140 people to buy promissory notes from PermaPave Companies and promising up to 33% in returns. Between 2006 and 2010, Aronson and company executives Robert Kondratick and Vincent Buonauro Jr., allegedly used new investor money to pay older clients while spending some of the Ponzi funds on gambling trips to Las Vegas, jewelry, and expensive cars. He also allegedly misappropriated about $2.6 million to repay victims of the earlier securities scam to which he entered a guilty plea.

Some of the investors’ funds that went into the Ponzi scam were also allegedly used to buy Interlink-US-Network, Ltd., which was a publicly traded company. Interlink later put out a Form 8-K falsely stating that LED Capital Corp. had said it would put $6 million into it. LED Capital did not have the money and never made such an agreement.

The SEC says that when investors began demanding that they be paid the money they were owed, Aronson accused them of committing a felony because they lent PermaPave Companies money at interest rates that were exorbitant—even though he was the one who promised them such high percentages. The Commission is accusing both Aronson and attorney Frederic Aaron of making false statements to get investors to change their securities into ones that would defer payments owed for several years.

U.S. District Court Judge Jed S. Rakoff is granting the SEC’s request that the defendants and relief defendants’ assets be frozen. Meantime, the Commission wants to bar Aronson, Buonauro, and Kondratick from being able to work as directors and officers of public companies and keep them from taking part in penny-stock offerings. The SEC also wants permanent and preliminary injunctions against the defendants, the return of illicit profits plus prejudgment interest, and civil monetary penalties.

Aronson, Kondratick, and Buonauro have been arrested in connection with the Ponzi scam.

Ponzi Scams
To succeed, Ponzi schemes need to bring in new clients so that their money that they invest can be used to pay older clients their promised returns. Unfortunately, with hardly any legitimate earnings, Ponzi scams can fall apart when it becomes a challenge to recruit new investors or too many investors ask to cash out.

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme, SEC.gov, October 6, 2011

SEC Claims Author Used Ponzi Scheme to Repay Prior Fraud Victims, Bloomberg Businessweek, October 6, 2011

More Blog Posts:
SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation, Institutional Investor Securities Blog, September 23, 2011

Merrill Lynch Faces $1M FINRA Fine Over Texas Ponzi Scam by Former Registered Representative, Stockbroker Fraud Blog, October 10, 2011

Some of the SEC Charges Against Investment Adviser Over Alleged Involvement In J.P. Morgan Securities LLC Collateralized Debt Obligation Are Dismissed

Published on: September 24, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York has thrown out some of the Securities and Exchange Commission charges against GSCP (NJ) managing director Edward Steffelin for his alleged involvement in a JP Morgan Securities LLC collateralized debt obligation deal. GSCP (NJ) was the collateral manager for the CDO transaction.

While JP Morgan Securities settled for $153.6 million the SEC’s allegations that it misled investors about the CDO deal by agreeing to pay $153.6 million, Steffelin opted to fight the charges. He claimed that there was no reason for him to think that the CDO offering documents were problematic. He argued that nothing had been left out and nobody was “defrauded.”

In district court, Judge Miriam Goldman Cedarbaum granted Steffelin’s motion to dismiss the SEC’s 1933 Securities Act Section 17(a)(3) claims against him. Per the Act, any person involved in the sale or offer of securities is prevented from taking part in any transaction or practice that would deceive or be an act of fraud against the buyer. Cedarbaum said it would be a “big stretch” to conclude that Steffelin owed the investors that bought the CDO a fiduciary duty. However, she decided not to throw out the SEC’s securities claims related to the 1940 Investment Advisers Act, which has sections that make it unlawful to sell or offer securities to get property or money as a result of an omission or material misstatement. The act also prevents investment advisers from taking part in a transaction or practice that performs a deception or fraud on a client.

The SEC’s charges revolved around a JPM-structured CDO called Squared CDO 2007-1. It mainly included credit default swaps that referred to other CDOs linked to the housing market. Per the Squared CDO’s marketing collaterals, GSCP was noted as the one choosing the portfolio’s deals. What wasn’t included in the disclosure was the fact that Magnetar Capital LLC, a hedge fund, played a key part in choosing the CDOs and had a short position in over 50% of the assets. This meant that Magneta Capital stood to gain financially if the CDO portfolio failed.

JP Morgan Securities is JP Morgan Chase affiliate. Under the terms of its $153.6 million settlement, the financial firm agreed to fully pay back all monies that investors lost. By agreeing to settle, JP Morgan Securities did not admit to or deny wrongdoing. Other large financial firms that have settled SEC securities fraud cases related to CDOs in the last 16 months include Citigroup, which recently reached a $250 million settlement and Goldman Sachs, which settled its case with the SEC last year for $550 million.

More Blog Posts:
Citigroup’s $285M Mortgage-Related CDO Settlement with Raises Concerns About SEC’s Enforcement Practices for Judge Rackoff, Institutional Investor Securities Blog, November 9, 2011

Retirement Fund’s CDO Lawsuit Against Morgan Stanley is Dismissed by District Court, Institutional Investor Securities Blog, October 27, 2011

Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

***This post has been backdated.

SEC Proposes Restricting Financial Firms From Betting Against Financial Products Sold to Investors

Published on: September 20, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The SEC has taken steps to prevent financial firms from betting against their packaged financial products that they sell to investors. Its proposal, introduced this week, also seeks to prevent the types of conflict witnessed in last year’s civil lawsuit against Goldman Sachs through a ban on third parties being able to set up an asset-backed pool allowing them to make money from losses sustained by investors.

The proposal comes following a report by US Senate investigators accusing Goldman of setting itself up to make money from investor losses sustained from complex securities that the financial firm packaged and sold. It would place into effect a provision from the Dodd-Frank Wall Reform Consumer and Protection Act, which requires that the commission ban for one year placement agents, underwriters, sponsors, and initial buyers of an asset-backed security from shorting the pool’s assets and establishing material conflict. Restrictions, however, wouldn’t apply when a firm is playing the role of market-maker or engaged in risk hedging. The SEC also wants the industry to examine how the proposal would work along with the “Volcker rule,” which would place restrictions on proprietary trading at banks and other affiliates.

SEC’s Securities Case Against Goldman
The SEC accused Goldman of creating and marketing the ABACUS 2007-AC1, a collateralized debt obligation, without letting clients know that Paulson & Co. helped pick the underlying securities that the latter then went on to bet against. Last year, Goldman settled the securities case with the SEC for $550 million.

In settlement papers, Goldman admitted that it did issue marketing materials that lacked full information for its ABACUS 2007-AC1. The financial firm said it made a mistake when it stated that ACA Management LLC “selected” the reference portfolio and did not note the role that Paulson & Co. played or that the latter’s “economic interests” were not in line with that of investors. The $550 million fine was the largest penalty that the SEC has ever imposed on a financial services firm. $250 million of the fine was designated to go to a Fair Fund distribution to pay back investors.

Volcker Rule
Named after former Federal Reserve Chairman Paul Volcker, the proposed rule is designed to limit the kinds of high-risk investments that helped contribute to the recent financial crisis. It would also restrict the financial firms’ use of their own money to trade. Bloomberg.com reports that overseas firms with businesses in the US may also be subject to these limits on proprietary trading. Per Dodd-Frank, October 18 is the deadline to establish rules to execute the provision.

Volcker Rule May Be Extended to Overseas Banks With Operations in the U.S., Bloomberg, September 16, 2011

SEC moves to limit firms’ bets against clients, Reuters, September 19, 2011

Volcker Rule Delay Is Likely, Wall Street Journal, September 12, 2011

More Blog Posts:

Goldman Sachs Ordered by FINRA to Pay $650K Fine For Not Disclosing that Broker Responsible for CDO ABACUS 2007-ACI Was Target of SEC Investigation, Stockbroker Fraud Blog, November 12, 2010

SEC Spent $100K More Than Necessary By Failing to Follow Office of Personnel Management Guidelines In Director’s Hiring

Published on: September 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to the Office of the Inspector General, by failing to abide by its own practices when hiring Henry Hu as Division of Risk director, as well as the guidelines provided by the Office of Personnel Management, the Securities and Exchange Commission unnecessarily spent $100,000. Details of these findings were provided in a report released by the SEC late last month.

The “unprecedented arrangement” with Hu covered his living expenses in DC when he worked as an SEC division director between 9/09 through 1/11. He is now back at work as a professor at the University of Texas Law School.

Specifically faulted over this matter was ex-SEC Executive Director Diego Ruiz, who the Office of Personnel Management said was the person mainly responsible for the offer to cover Hu’s living costs while he worked for the Commission. Ruiz, who has resigned from the agency, was also allegedly involved in the SEC’s misuses of its independent leasing authority. Because Ruiz is no longer with the agency, no disciplinary action will be taken against him.

SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts

Published on: August 10, 2011 | by Shepherd Smith Edwards & Kantas, LLP

Three years after five Wisconsin school districts filed their securities fraud lawsuit against Stifel, Nicolaus & Company and the Royal Bank of Canada, the Securities and Exchange Commission has filed charges against the brokerage firm and former Stifel Senior Vice President David W. Noack over the same allegations. The charges stem from losses related to the sale of $200 million in high-risk synthetic collateralized debt obligations (CDOs) to the Wisconsin school districts of West Allis-West Milwaukee School District, the School District of Whitefish Bay, the Kimberly Area School District, the School District of Waukesha, and the Kenosha Unified School District No. 1.

The SEC says that not only were the CDOs inappropriate for the school districts that would not have been able to afford it if the investments failed, but also the brokerage firm did not disclose certain material facts or the risks involved. The school districts are pleased that the SEC has decided to file securities charges.

Robert Kantas, partner of Shepherd Smith Edwards & Kantas LTD LLP, is one of the attorneys representing the school districts in their civil case against Stifel and RBC. Attorneys for the school districts issued the following statement:

“It is our belief that the five Wisconsin school districts and the trusts established to make these investments were defrauded by Stifel, Royal Bank of Canada and the other defendants. Contrary to the way they were represented, the $200 million CDOs that were devised, solicited, and sold by the defendants to our clients in 2006 were volatile, complex, extremely high risk, and totally inappropriate for them. To protect residents and taxpayers, the districts later hired lawyers and others to investigate the investments and their fraud risk. Unfortunately, the failure of the investments did result in losses for the school districts, which in 2008 filed their Wisconsin securities fraud complaint in Milwaukee County Circuit Court. The school districts’ goal was to obtain full recovery of the monies lost in this scheme, while protecting and maintaining the districts’ valuable credit ratings. The districts’ lawyers have already examined three million pages of documents regarding in this matter. Meantime, the districts have taken the proper steps to report to the SEC the nature and extent of the wrongdoing uncovered. In the past year, the districts have given the SEC volumes of documents and information for its investigation.”

The school districts had invested the $200 million ($162.7 million was borrowed) in notes that were tied to the performance of synthetic CDOs. This was supposed to help them fund retiree benefits. According the SEC, however, Stifel and Noack set up a proprietary program to facilitate all of this even though they knew that they were selling products that were inappropriate for the school districts and their investment needs.

Stifel and Noack allegedly told the school districts it would take “15 Enrons” for the investments to fail, while misrepresenting that 30 of the 105 companies in the portfolio would have to default and that 100 of the world’s leading 800 companies would have to fail for the school districts to lose their principal. The SEC claims that the synthetic CDOs and the heavy use of leverage actually exposed the school districts to a high risk of catastrophic loss.

By 2010, the school districts’ second and third investments were totally lost and the lender took all of the trusts’ assets. In addition to losing everything they’d invested, the school districts experienced downgrades in their credit ratings because they didn’t put more money in the funds that they had set up. Meantime, despite the fact that the investments failed completely, Stifel and Noack still earned significant fees.

The SEC is alleging that Noack and Stifel violated the:
• The Securities Act of 1933 (Section 17(a))
• Securities Exchange Act of 1934 (Section (10b))
• The Securities Act of 1934 (Section 15(c)(1)(A))

The Commission wishes to seek disgorgement of ill-gotten gains along with prejudgment interest, permanent injunctions, and financial penalties.

Related Web Resources:
SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School Districts, SEC.gov, August 10, 2011

SEC Sues Stifel Over Wisconsin School Losses Tied to $200 Million of CDOs, Bloomberg, August 10, 2011

Read the SEC Complaint

School Lawsuit Facts

More Blog Posts:
Stifel, Nicolaus & Co. and Former Executive Faces SEC Charges Over Sale of CDOs to Five Wisconsin School Districts, Stockbroker Fraud Blog, August 10, 2011

JP Morgan Settles for $153.6M SEC Charges Over Its Marketing of Synthetic Collateralized Debt Obligation, Institutional Investor Securities Blog, June 18, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2, Institutional Investor Securities Blog, April 7, 2011

Whistleblowers to Be Awarded from $453 Million SEC Fund

Published on: July 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

According to Sean McKessy, the head of Securities and Exchange Commission’s Whistleblower Office, the agency has a $453 million fund from which to award bounties under its new whistleblower program. Kessey recently spoke during a BNA webinar.

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act requires that certain whistleblowers receive 10-30% of an award in a successful prosecution or action. The percentage of the award will depend on the how significant the information the whistleblower provided was to the outcome of the action, how much help he/she gave, and the SEC’s degree of interest in stopping certain kinds of misconduct, such as insider trading. The percentage awarded remains at the SEC’s discretion.

As our securities fraud lawyers mentioned in a recent blog post, there have been mixed reactions over whether someone who decides to turn whistleblower should go to an employer first before going to the SEC. House Republicans have even introduced a new bill that would mandate that a whistleblower have reported its information internally in order to qualify for part of the whistleblower bounty. For now, however, while the new program offers incentives for a whistleblower to go inside the corporation with his/her information first, the SEC doesn’t require it. ( As noted by McKessey, that the final rules left on this requirement “evidence a determination that doing so could be detrimental to the program and inconsistent with the statute.”) For example, if an employee were to report an issue to internal compliance, which then resulted in the company launching a probe and discovering additional violations, under the SEC’s incentive program, the whistleblower to be eligible for a bounty amount that would factor in all violations and not just the one that he/she initially reported.