Tag Archives: Securities regulation

SEC Awards Whistleblower-Executive A Half-Million Dollars For “Reporting Out.”

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The SEC has doled out over $50 million in awards to 15 individuals since it inaugurated the Dodd-Frank mandated whistleblower program 3 years ago. That program permits whistleblower awards of 10% to 30% of the total money recovered from a securities law violator provided the sanctions exceed $1 million. Whistleblower awards are usually restricted to individuals who provide original information derived from their independent knowledge or analyses. Failure to be deemed an “original” source of information is ordinarily the end of a whistleblower claim.

On March 2, 2015, however, the SEC approved an award of $475,000 to $575,000 to an unnamed executive who merely passed along original information.[1] That award stemmed from a special carve-out designed to incentivize officers and directors to report out where the company fails to take corrective action. Specifically, an executive may be entitled to a whistleblower award if he or she reports information to the SEC 120 days after alerting upper management of the problem. Similarly, if upper management is already aware of the problem at the time the executive learns of it, the executive-whistleblower must wait 120 days before reporting to the SEC.

The rationale for the 120-day rule is two-fold. On the one hand, the SEC wants to protect companies that have robust compliance programs in place and a strong compliance tone from the top. After all, companies who invest in compliance programs and take potential violations seriously should be afforded a safe harbor whereby they are protected from individuals hoping to make a quick buck by passing information along before the 120-day period expires.

On the other hand, the SEC realizes that executives and directors are uniquely placed to take action when upper management will not remedy the problem. Executives regularly receive management and compliance reports and are often the first persons to whom an employee will turn to report an issue. The SEC wants to incentivize such executives to step forward when upper management refuses to take corrective action.

However, an executive considering becoming a whistleblower risks significant reputational and financial harm. Although the whistleblower process is anonymous, upper management at the company may be able to figure out who reported out and may take retaliatory action against that individual.   Or, the individual may have already resigned due to irreconcilable differences with the company. In either case, there is no guarantee of a whistleblower award. Accordingly, executives and directors thinking about “reporting out” should carefully consider the quality of the information they possess and the potential financial and reputational risks.

[1] https://www.sec.gov/news/pressrelease/2015-45.html#.VP79EIHF87M

Bitcoin is a “Security” According to Federal Judge

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On August 6, 2013, a federal magistrate judge in the Eastern District of Texas ruled that Bitcoin, the virtual online currency, is a security under the federal securities laws, thereby green lighting a suit by the SEC’s Enforcement Division against a defendant accused of running a Ponzi scheme using the digital currency.[1]  To the extent that other courts follow this decision, the road for SEC regulation and enforcement of Bitcoin markets is open.

Bitcoin is an electronic currency that is not backed by any real asset and is without specie, such as coin or precious metal.[2]  It is not regulated by a central bank or any other form of governmental authority; instead, the supply of Bitcoins is based on an algorithm, which structures a decentralized peer-to-peer transaction system.[3]  Bitcoin can be used to purchase items online, and some retail establishments have begun accepting Bitcoin in exchange for gift cards or other purchases.[4]

In the Texas case, the SEC alleges that defendant Trendon Shavers, the founder and operator of Bitcoin Savings and Trust, solicited investors to provide him with over 700,000 Bitcoin, worth as much as $4.6 million, in return for up to 7 percent weekly interest.  Shavers allegedly claimed that he could pay the interest based on certain Bitcoin arbitrage activities that he would conduct online.  The SEC claims that there was no such arbitrage activity; instead, Shavers paid interest to old investors with new investor Bitcoin and also converted some Bitcoin to U.S. currency for his own expenses.

Shavers argued that the SEC had no jurisdiction to bring the case against him because the subject matter – Bitcoin – is not money and is not part of anything regulated by the United States.  The Court disagreed, citing the definition of a “security” which includes “investment contracts.”[5]  Investment contracts involve the investment of money, in a common enterprise, with the expectation that profits will be derived from the efforts of a promoter or third party.  The Court had no problem concluding that Bitcoins involve money since they can be used to purchase goods and services and are exchangeable for currencies such as U.S. dollars.  The Court also found a common enterprise to profit where the investors relied in Shavers as a promoter and purportedly knowledgeable Bitcoin trader to make money for them.[6]

On a somewhat related note, Cameron and Tyler Winklevoss, the twins who became famous for alleging that Mark Zuckerberg stole their idea for Facebook, have applied for SEC approval to launch a Bitcoin-tracking exchange-traded product known as the Winklevoss Bitcoin Trust (“WBT”).[7]  As of April, 2013, the twins personally held approximately 1% of all outstanding Bitcoin valued at about $10 million.  They claim that through the proposed WBT shares they would be giving ordinary retail investors access to this meta-market and further legitimizing it in the mainstream world.[8]  Whether the SEC will approve this venture is unclear.  It is also unclear what Bitcoin true believers, many of whom use this meta-currency precisely to avoid “mainstream” currencies, think of the proposed WBT.

[1] SEC v. Shavers et al., 13-cv-00416, Dkt. No. 23 (E.D. Tex. Aug. 6, 2013).

[2] See id.

[3] See id.

[4] See id.

[5] See id. at 4-5.

[6] See id.

[8] See id.