by T. GormanPosted on Posted in SECActions

A critical component of the SEC’s whistleblower program is the anti-retaliatory provisions of Exchange Act Section 21F, added to the statute by the Dodd-Frank Act. To implement that provision the Commission promulgated two rules. The first, Exchange Act Rule 21F-2(b)(2) provides that the agency has the authority to bring an enforcement action against employers who violate the anti-retaliation provisions. The second, Exchange Act rule 21F-2(b)(1) states that the protections of the anti-retaliation provisions extend to any employee who engages in any of the whistleblowing activities specified in the statute regardless of whether that person separately reports the information to the Commission.

An amicus brief filed by the SEC in Berman v. Neo@Ogivy LCC, No. 14-4626 (2nd Cir. Brief filed Feb. 6, 2015) addresses rule 21F-2(b)(1) and the scope of the anti-retaliation provisions. Specifically, the issue presented by the case is whether the “Commission’s rule [21F-2(b)(1)] interpreted the anti-retaliation protections to extend to any individual who engages in the whistleblowing activities described in Section 21F(h)(1)(A), irrespective of whether the individual makes a separate report to the Commission . . .” is entitled to deference under Chevron, U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). Previously, the Fifth Circuit answered the question in the negative. Asadi v. G.E. Energy (U.S.A.) L.L.C., 720 F. 3d 620 (5th Cir. 2013)(holding that the SEC’s construction of the Dodd-Frank provisions is inconsistent with the language of the statute and would effectively render the SOX whistleblower provisions moot).

The Commission’s brief begins by noting that the securities laws recognize that internal company reporting is important for deterring unlawful conduct. Building on this theme, the SEC traces the history of the whistleblower provisions through the Sarbanes-Oxley Act and into Dodd-Frank along with its own rule writing activities. Those rules, under Section 21F were “carefully calibrated . . to ensure that individuals were not dis-incentivized from first reporting internally . . .” according to the Commission.

The brief then argues two key points in support of the Commission’s claim that its rule is entitled to deference. First, the agency acontends that in the language of the Section “Congress did not unambiguously limit the employment an anti-retaliation protections in Section 21F(h)(1) to only those individuals who provide the Commission with information relating to a securities law violation. Rather, there is ambiguity on this issue given the considerable tension between clause (iii) of Section 21F(h)(1)(A), which . . . lists a broad array of whistleblowing activities to entities and provisions other than just the Commission, and Section 21F(a)(6), which defines ‘whistleblower.’” Specifically, Section 21F(a)(6) prohibits the discharge of any whistleblower for (i) “providing information to the Commission . . . (ii) initiating, testifying in, or assisting in any investigation or judicial or administrative action of the Commission based upon or related to such information; or (iii) in making disclosure that are required or protected under the Sarbanes-Oxley Act . . . and any other law, rule, or regulation subject to the jurisdiction of the Commission.” The term whistleblower is defined as “any individual who provides . . .information relating to a violation of the securities laws to the Commission . . .” The broad range of activities inherent in subsections (i) to (iii) compared to the limited definition of the term whistleblower “demonstrates, at a minimum, considerable tension and inconsistency within the text, thus revealing that Congress did not unambiguously express an intent to limit the employment anti-retaliation protections . . .” to only those individuals who report securities law violations to the Commission the brief states.

Second, in view of the ambiguity here “Section 21F(1)(A) is best read as an implied exception to the definition of whistleblower in Section 21F(a)(6),” according to the SEC, citing a series of district court decisions. Not only is the adopted interpretation here reasonable, and consistent with the statutory scheme the agency told the Court, but it “enhances the Commission’s ability to bring enforcement actions when employers take adverse employment actions against employees for reporting securities law violations internally.” It also serves an important law enforcement function by protecting those who first report securities law violations to the U.S. Department of Justice or self-regulatory organizations. Accordingly, the Court should defer to the SEC’s interpretation of the statute the brief argues.

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by T. GormanPosted on Posted in SECActions

The SEC teamed last week with the New York AG to halt an on-going investment fund fraud run by a Pakistani citizen residing in New York. The SEC obtained a freeze order. The NY AG filed criminal charges and arrested the claimed fraudster. SEC v. Malik, Civil Action No. 15-1025 (S.D.N.Y. Filed February 13, 2015).

Defendant Mozzam Malik, who registered with FINRA as a stock broker trainee in 2007, was formerly a waiter, NYPD traffic agent and security guard who attended high school in Pakistan. His company, defendant American Bridge Investment Group, LLC, has not had a physical office since 2011. It has had several names including Wall Street Creative Partners, LP and Seven Sages Capital, LP. Presently the company is doing business as Wolf Hedge LLC.

Since at least May 2011 Mr. Malik has solicited investors for his hedge fund. Many of the solicitations were made by unpaid staff who cold called potential investors. Potential investors were promised a partnership interest in Mr. Malik’s hedge funds. Those funds, investors were told, held a multi-million dollar portfolio of investments in various high profile IPOs and secured bond transactions. At times an offering memoranda was used which claimed the fund had a valuation of over $100 million. At other times e-mail was used to solicit investors. For example, one e-mail contained a screen shot showing the value of the fund at $56 million. The promised returns were represented as being very high. The profits came from a proprietary, quantitative approach to investing combined with sophisticated risk-control techniques. All of this was supposedly supervised by Mr. Malik who, according to the website, had over a decade of Wall Street experience and had lead teams which managed over $5 billion.

When investors complained they were contacted by Amanda Ebert, Investor Relations for the fund. The e-mail contained a photograph of Ms. Ebert. Account statements for the investor were attached which depicted significant investment returns.

The claims were false, according to the SEC and the NY AG. While about $840,774 was raised from investors, the fund never held much more than $90,000. The balance of the investor funds were misappropriated by Mr. Malik, according to the court papers. Ms. Ebert does not exist, although the photograph was of a real person. The lady in the photograph had no knowledge of Mr. Malik or his operation.

The Commission’s complaint alleges violations of Securities Act Sections 5(a) and 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), (2) and (4). See Lit. Rel. No. 23197 (February 13, 2015). The case is pending.

NY indictment charges two counts of grand larceny in the second degree, three counts of grand larceny in the third degree, seventeen counts of forgery in the second degree, five counts of securities fraud under the Martin Act and one count of scheme to defraud in the first degree. Mr. Malik was arraigned on Friday, February 13, 2015. He is being held on a $ 1 million bond over $1 million cash bail.

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