Posted On: May 27, 2011

SEC Implements Whistleblower Award Program

On July 21, 2010, the President signed into law the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (the "Act"). Among other things, the Act establishes a whistleblower program that enables the Securities and Exchange Commission (SEC) to pay a substantial award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistleblowers who voluntarily provide the SEC original information about a violation of the federal securities laws that leads to the successful enforcement or related action resulting in monetary sanctions exceeding $1 million.

On May 25, 2011, the SEC adopted the final rules to implement the Dodd-Frank whistleblower program. These rules explain the procedures whistleblowers must follow to be eligible and to file a claim for an award.

Pursuant to the conditions of the regulations, whistleblowers are entitled to 10%-30% of the SEC's monetary recovery in successful actions. Awards are to paid out of the statutorily-created Investor Protection Fund, which currently has a balance in excess of $450 million.

The most contentious issue raised during the rule’s comment period was whether the financial incentive for employees to complain to the SEC would undermine companies’ internal compliance and reporting programs. A plethora of companies urged the SEC to require whistleblowers to report to the company first before reporting the misconduct to the SEC in order to be a eligible for the award. In its final rules, the SEC did not adopt a mandatory internal reporting requirement. However, the SEC struck a balance of concerns from both sides and added incentives for employees to comply with internal procedures.

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Posted On: May 25, 2011

FTC Shuts Down American Precious Metals, LLC, a Precious Metals Boiler Room Based out of Deerfield Beach, Florida that Preyed on Seniors

At the Federal Trade Commission’s (FTC) request, a federal judge this week has halted a telemarketing operation that allegedly conned senior citizens into buying precious metals on credit without clearly disclosing significant costs and risks, including the likelihood that consumers would have to pay more money or lose their investment. According to papers filed with the court, the scheme has taken in more than $37 million from consumers. The court has ordered a stop to the defendants’ allegedly deceptive practices pending a trial, and has frozen their assets and appointed a receiver to oversee the business.

According to the FTC’s complaint, the defendants promised consumers they could earn large profits quickly by investing in precious metals such as silver, gold, platinum, and palladium. Using high-pressure sales tactics, telemarketers led consumers to believe that they were offering low-risk investments that would double or triple in value in a short time. The company’s sales pitches and marketing materials claimed precious metals are low-risk investments because they are tangible, physical assets – bars, bullion and coins – but in fact the defendants did not use consumers’ money to buy precious metals. Instead, after taking fees and commissions that were not clearly disclosed to consumers, they deposited consumers’ money in the account of a clearinghouse that recorded the investments but did not buy or handle metals.

The FTC further alleged that consumers were often not told their investments were leveraged, that is, that they were agreeing to take out a loan and pay interest for up to 80 percent of the purchase price of the metal investment. In addition, consumers did not know that their leveraged investments were subject to equity calls that might require them to pay more money to prevent their investments from being liquidated. Because consumers’ leveraged investments were opened with low equity levels and incurred hefty interest charges, the investments were vulnerable to equity calls even if prices remained constant.

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Posted On: May 12, 2011

SEC Charges Subprime Auto Loan Lender and Executives With Fraud

On April 14, 2011, the Securities and Exchange Commission (SEC) announced that it filed a civil injunctive action in federal district court in Massachusetts charging Massachusetts-based subprime auto loan provider Inofin Inc. and three company executives with misleading investors about their lending activities and diverting millions of dollars in investor funds for their personal benefit. The SEC also charged two sales agents with illegally offering to sell company securities without being registered with the SEC as broker-dealers.

The SEC's Allegations

The SEC alleges that Inofin executives Michael Cuomo of Plymouth, Mass., Kevin Mann of Marshfield, Mass., and Melissa George of Duxbury, Mass., illegally raised at least $110 million from hundreds of investors in 25 states and the District of Columbia through the sale of unregistered notes. Investors in the notes were told that Inofin would use the money for the sole purpose of funding subprime auto loans. As part of the pitch, Inofin and its executives told investors that they could expect to receive returns of 9 to 15 percent because Inofin loaned investor money to its subprime borrowers at an average rate of 20 percent. But unbeknownst to investors, and starting in 2004, approximately one-third of investor money raised was instead used by Cuomo and Mann to open four used car dealerships and begin multiple real estate property developments for their own benefit.

Inofin is and was not registered with the SEC to offer securities to investors.

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