Coronavirus misconduct crackdown by SEC fueled by whistleblower tips
Agency has fielded about 4,000 complaints from mid-March to mid-May
Commodity Futures Trading Commission Chairman and Chief Executive Heath Tarbert discusses the markets and gives details on ‘bad actors’ who are peddling false coronavirus cures or products.
WASHINGTON - The novel coronavirus outbreak and economic fallout is proving to be a bonanza for whistleblower lawyers as the U.S. securities regulator cracks down on a range of related misconduct from companies touting sham cures to misuse of federal aid.
The Securities and Exchange Commission (SEC) fielded about 4,000 complaints from mid-March to mid-May, a 35 percent increase compared to the period one year ago, Steven Peikin, the agency's co-head of enforcement, said this month as cases of COVID-19, the respiratory illness caused by the coronavirus, shot up.
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That is creating work for lawyers who help whistleblowers navigate the SEC's bounty program for tipsters whose information leads to penalties of more than $1 million for offenders. The agency is already working with some tipsters, lawyers said.
"Unfortunately, fraudsters often seek to exploit difficult situations like the ongoing pandemic for their own gain. The SEC frequently relies on the tips that we receive from the public," an SEC spokeswoman said.
Two factors appear to be driving the current surge in tips, according to lawyers: the sheer scale of the crisis has sparked a wave of misconduct across all areas of the SEC's remit, and mass unemployment has unleashed whistleblowers who may otherwise have feared retaliation by their employers.
Neil Getnick, managing partner of Getnick & Getnick, said his practice had seen a jump in whistleblower complaints.
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"I expect that is just the beginning. Typically about six months in we'll see that matters will begin to crystallize, and at that point I would expect an uptick in enforcement cases," he said.
Getnick said a broad range of misconduct related to the COVID-19 outbreak, such as loan fraud, price-gouging, counterfeit or substandard medical goods, or healthcare fraud, could potentially find their way into the SEC's remit, due to the breadth of U.S. securities law.
"Anything that in effect interferes with the free market operating freely, will potentially give rise to SEC liability."
The agency has created a new group to closely monitor the market and spot potential abuses. So far, that effort has led it to suspend trading in 31 so-called penny stocks for allegedly touting dubious COVID-19 cures, tests, treatments and medical supplies to investors.
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| GLP | GLOBAL PARTNERS LP | 52.66 | -0.35 | -0.66% |
The SEC this month charged two of those companies, Applied BioSciences Corp and Turbo Global Partners Inc, for allegedly publishing misleading information on the status of their COVID-19 screening offerings. The companies did not respond to multiple emails and calls for comment.
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The SEC has also begun scrutinizing companies that took emergency aid for potential disclosure issues. Lawyers also expect to see it bring charges against coronavirus-related insider trading, Ponzi schemes and "boiler room" stock scams.
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"We expect to see the SEC bring more actions as we continue to investigate suspected COVID-19 related scams," Peikin and his enforcement co-head, Stephanie Avakian, said in a statement.
Stephen Kohn, a partner at Kohn, Kohn and Colapinto, said his firm has seen "a slew of coronavirus-related tips." The SEC has heard from investors about scams related to a large number of small private companies as well as larger, listed "essential" firms like meat-packing houses, he said.
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He added that many tipsters have been recently laid off and are eager to help identify issues that have surfaced at their previous employers without fear of reprisals.
With so many tips, lawyers are being selective about which cases they take on. Sean McKessy, a partner at Phillips & Cohen who previously worked to set up the SEC whistleblower office, said he was on the lookout for misconduct the SEC tends to penalize most harshly, such as companies padding earnings or disclosure violations.
"While the SEC has so far penalized penny stock firms, the regulator is also quite vigilant about what larger companies are telling investors about how COVID-19 might impact them," he said.
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