by T. GormanPosted on Posted in SECActions

The SEC has been touting the large cash awards it has been handing out to whistleblowers. The agency views whistleblowers as a key source of potential information about wrong-doing which can give them tips and facilitate investigations. As part of these efforts the Commission has been advancing its view that to qualify as a whistleblower the person need not first report the information to the SEC. Compare Berman v. Neo@ogilvy LLC, No. 14-4626 (2nd Cir. Sept. 10, 2015)(deferring to SEC view that need not first report to agency to be a whistleblower where statute is vague) with Assade v. G.E. Energy (USA), 720 F. 3d 620 (5th Cir. 2013)(holding that must first report to SEC to be whistleblower).

A recent decision by the eighth circuit court of appeals now adds to the debate over who can qualify as a whistleblower. Beacon v. Oracle America, Inc., No. 15-1729 (8th Cir. Decided June 6, 2016). There the court concluded that one must “establish that a reasonable person in his [the whistleblower’s] position, with the same training and experience, would have believed . . .” that the conduct complained of violated the federal securities laws to be engaged in protected activity.

Vincent Beacom joined Oracle America, Inc. in February 2011 as the Vice President of Sales in the Americas Division for the Retail Global Business Unit. The unit, which was divided into three regions, comprised a very small portion of Oracle’s business, generating about 0.4% of its $31 billion in revenue. It was run General Manager Michael Webster.

Mr. Webster changed the forecasting process after assuming his position. Previously, the firm used a bottom-up process. Mr. Webster shifted the revenue projection process to a top-down model. During the first three quarters of 2012 the process over-projected revenues. Nevertheless, the unit was only a small amount of sales away from meeting projections.

Mr. Beacom claimed that as a result of the missed projections the General Manager directed that deals be recorded which did not meet the appropriate criteria. He also claimed to have repeatedly voiced concerns to Mr. Webster about the new projection method which forwarded information up the management chain that might be used in the process of giving guidance.

On March 5, 2012 Mr. Webster was fired. That followed a January trip by Messrs. Beacom and Webster during which Mr. Beacom challenged the projection practice as “intentionally forecasting false revenue” and a meeting he had with an HR Representative during which concern was expressed over the process. Following his termination Mr. Beacom filed an action against Oracle alleging violations of the whistleblower protection statute.

The circuit court reviewed the suit following a grant of summary judgment by the district court in favor of the company. SOX prohibits a publically traded company from discharging an employee in retaliation for providing information to a supervisor or another person at the company about “any conduct which the employee reasonably believes constitutes a violation of” certain Sections of the Act, the applicable SEC rules or any provision of federal law relating to fraud against shareholders. To assert a claim the employee must establish four points: 1) that he engaged in protected activity; 2) his employer knew he was engaged in such activity; 3) that he suffered an adverse employment action; and 4) the protected activity was a contributing factor in the adverse action. If those points are established the employer may prove by clear and convincing evidence that it would have taken the same action absent the protected activity.

To qualify as protected conduct the complaint must satisfy an objective standard demonstrating that a person in the same position viewing the facts would reasonably believe that the employer violated the federal securities laws. This fact intensive standard is typically not conducive to summary judgment. It has been adopted by the second, third and sixth circuits.

Applying the objective standard against the record in this case, it is clear that the district court’s decision should be affirmed, the court concluded. The conduct here centers on projections. The projections involved missed the mark by no more than $10 million. In a firm which generates billions of dollars in revenue this would be insufficient to establish securities fraud. According, the claimed protected conduct fails the objective test. Mr. Beacom was not a protected whistleblower.

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by T. GormanPosted on Posted in SECActions

Online dating services are popular and continue to proliferate. A quick Google search yields lists of numerous sites. Typically they promise more matches and more marriages quickly — and with little effort. The sites do not typically promise investment advice and highly profitable investments. That, however, was the byproduct of one site, according to the SEC. SEC v. Connerton, Civil Action No. 3:16-cv-00882 (D. Conn. Filed June 8, 2016).

Thomas Connerton is the founder and president of Defendant Safety Technologies, LLC, formed in 2006. The plan was to develop and market the invention of a chemical engineer Mr. Connerton met in 2005. The engineer was developing what was claimed to be a patent protected, highly durable, puncture and cut resistant material for surgical gloves and related uses. The under development glove was the firm’s only product.

The same year Safety Tech was founded it began selling securities to raise capital. Since that date the firm has taken-in about $2.3 million from 55 investors. Six of those investors are women Mr. Connerton met through an online dating service. An additional fourteen of the investors are family members and friends of the women he met through the dating service.

While Mr. Connerton used various pitches to solicit investors, typically he focused on several key points which included:

Better gloves: Safety Tech’s technology made surgical gloves more cut and puncture resistant and more durable;

Low cost: The technology was low cost;

Revolutionary: At times investors are told that the technology is “revolutionary,” and that it was a “patent pending polymer additive” and it “addresses a costly, unmet need;”

Company interest: Several firms have expressed an interest in the gloves according to the sale pitch; and

Returns: The investment will yield outsized returns.

Investors were variously shown documents supposedly depicting the returns which could run as high as 36.4 times the amount of the investment. Some investors were shown a private placement memorandum which included a series of representations about the product. There were two versions, one dated to 2006 and a second to 2008. Neither was updated; investors were not permitted to retain a copy. In some instances potential investors were shown a law firm opinion regarding a patent application.

What investors do not learn from the solicitations is that the chemical engineer who supposedly developed the technology pass away in 2008. While he left notes regarding his work, they are illegible according to Mr. Connerton’s testimony to the staff. He has no training in the area. Investors also do not learn that the firm keeps no books and records except tax returns. While Safety Tech filed three patent applications, the first two were rejected while the third was different from the earlier two.

Most of the investor money raised through the unregistered offerings was diverted to Mr. Connerton’s personal use. A portion, however, did tie back to the online dating service: Mr. Connerton spent $20,000 to purchase an engagement ring for one of the women he met through the service.

The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The court granted a freeze order at the time the complaint was filed. The case is pending. See Lit. Rel. No. 23565 (June 10, 2016).

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