States Expand Whistle-blower Laws to Fight Securities Fraud

August 2016

IN THIS ISSUE

— States Follow Federal Lead in Rewarding Whistle-blowers for Securities Fraud Tips
— Trust But Verify: Evaluating Sources and Their Motives

GREETINGS!

Welcome to the August edition of our newsletter! In this issue, we’ll examine steps various state governments are taking to increase the effectiveness of whistle-blowers in combating securities fraud on the state level.

STATES FOLLOW FEDERAL LEAD IN REWARDING WHISTLE-BLOWERS FOR SECURITIES FRAUD TIPS

Much has been written about the federal law enforcement system’s use of whistle-blowers for tips on everything from medicare billing fraud to penny stock scams. In recent years, two states – Indiana and Utah — have instituted programs to reward whistle-blowers for such tips, giving relatively lightly-staffed securities regulators another weapon in their securities fraud arsenal.

Some of the reported recipients of awards from the two programs thus far have been an employee at a company accused of fraud when it steered clients to affiliated fund groups without disclosing the affiliation; and an investment adviser who evaluated an elderly client’s portfolio which had been managed by another adviser, and alerted regulators to suspect transactions.

TRUST BUT VERIFY: EVALUATING SOURCES AND THEIR MOTIVES

While whistle-blowers can provide an invaluable perspective, often from the inside of a company or industry, they must also be scrutinized thoroughly Just as we have argued that federal “qui tam” relators’ backgrounds must be examined to determine if they have any other agenda or conflict of interest, so too must sources relied upon by state agencies, or private parties, in the midst of complex financial investigations. Have they had any other prior dealings with the party about whom they’re complaining? Could they benefit in other ways, beyond a whistle-blower’s reward, if the investigation leads to prosecution?

Human intelligence is a key part of the investigative process, and using public records and interviews to gauge the risks that may come with relying upon a whistle-blower can help determine if the benefit provided by their information and insight will outweigh any downside risks.