Ponzi schemes are the most popular ways fraudsters separate people from their money. Promises of “no risk, high/guaranteed returns” are just some of the hallmarks of the Ponzi scheme since its invention by Charles Ponzi in the 1920s. Other hallmarks include a missing business plan, vague explanations for how it operates, and lack of accountability.
Ponzi Schemes Always End
Although operators of the Ponzi scheme have explanations for everything, cracks appear in the façade over time. At first, initial investors may receive “dividends” from the incoming new investor funds. Later, investors receive excuses, or nothing at all. Many receive “account statements” that are nothing more than falsified documents to look like their investments are doing well.
To continue, the Ponzi scheme must regularly obtain new money from new investors to pay the previous investors their “dividends” and keep up the illusion of profitability. Eventually, the new money stops, investors begin withdrawing their funds, and the scheme disintegrates.
Reporting irregularities and “red flags” to the SEC is vital to stopping the Ponzi scheme. The SEC reviews and investigates irregularities for misconduct and fraud but doesn’t always find them before investor funds go missing. Whistleblowers who alert the SEC to Ponzi schemes and other securities frauds help accelerate the process and stop fraudsters from continuing to harm people.
Why Ponzi Scheme Whistleblowing Is Important
The SEC works to ensure that the US securities market is run fairly and is safe for all investors. Ponzi schemes and other frauds take advantage of investors interested in participating.
Whistleblowers are individuals with critical, material inside information on Ponzi schemes. Whether it’s a small, locally run scheme that involves affinity groups (churches, alumni groups, ethnic group associations, etc.) or a global operation like Charles Ponzi himself, the Stanford International Bank, or the notorious Bernie Madoff, chances are there is someone who knows enough to and can put a stop to the fraud.
Ponzi schemes can be difficult to detect and uncover. Sometimes the SEC doesn’t discover fraud until it’s too late and investors have lost everything. Whistleblowers can alert the SEC earlier by providing inside information that may not be readily available to regulators. By submitting this information to the SEC and other regulators, they can help stop the fraud much earlier than waiting until the scheme collapses.
Retail investors are usually the ones most harmed most by Ponzi schemes. So it’s important that the SEC quickly acts to prevent asset depletion. Whistleblowers can significantly reduce the impact of Ponzi schemes on investors.
You can read more about how the SEC investigates cases in the SEC’s enforcement manual.
SEC Whistleblower Program Overview
To encourage and facilitate whistleblower activity, the SEC’s Whistleblower Program offers individuals with this information the opportunity to come forward, anonymously if they wish, to report what they know. They can submit their information through the SEC’s website, by fax, or by mail, without fear of reprisal if they are not taking part.
Employees, contract workers, investors, vendors, industry insiders, and vendors are just some people who can submit information as whistleblowers. Even members of the public with the knowledge and information to recognize a Ponzi scheme can submit information to the SEC if they believe they’ve uncovered a Ponzi scheme in the making or operating.
Becoming a whistleblower can also include a monetary award if the information leads to a successful enforcement operation. In some cases, more than one regulatory agency may be involved, such as law enforcement, leading to additional awards.
Ponzi Schemes Whistleblowing: Reporting A Ponzi To The SEC
The SEC has a system for reporting tips and information on Ponzi schemes and other frauds.
A successful whistleblower claim causes the SEC to:
- Open an investigation
- Pursue a new line of inquiry in an existing investigation
- Re-open a closed investigation
If your information offers substantial contribution or assistance to SEC staff about the eventual enforcement action, you may be eligible to receive a monetary award.
Timing is everything. The SEC has limited resources to begin investigating. They are interested in seeing original, credible, and timely information that piques their interest in beginning an investigation or contributes significantly to one. You must also be the first individual to submit this information or add new information to what they already have, such as identifying key players in the Ponzi scheme.
Benefits Of Whistleblowing
For successful enforcement actions that bring in $1M in fines and other financial sanctions, whistleblowers may be awarded from 10% to 30% of that amount. In real numbers, that’s $100,000 to $300,000 for the whistleblower. This money is not taken from recovered investor funds, but from a Congressionally authorized fund collected from the financial sanctions imposed on the parties involved. Any investor funds recovered are returned to the investors, and not used for whistleblower bounties.
Financial incentives aren’t the only reason to step up and become a Ponzi scheme whistleblower. By helping the SEC uncover and stop Ponzi schemes, you can:
- Help protect investor interests and prevent additional investor harm by stopping the scheme’s operations, potentially saving investors from losing their life savings
- Protect the integrity of the financial markets. Whistleblowers help maintain trust and fairness in the investment environment when they report fraud.
- Assist law enforcement in prosecuting those involved in the operations of Ponzi schemes.
As more whistleblowers come forward, the opportunities to report and stop Ponzi schemes and other frauds increase.
Anonymous Reporting
But what if reporting the Ponzi scheme would cause you to lose your job? What if your whistleblowing activities impacted your career and reputation, making it difficult to find another job? Or worse, caused problems for your family?
You can report your information anonymously if you are represented by a securities attorney. The SEC’s process includes confidentiality throughout the process and treats all information as confidential.
An attorney will draft a TCR form with your information and submit it, along with the information and the required attorney certification. The attorney works as an intermediary on your behalf to handle all negotiations and protect your rights and your confidentiality. The SEC will assign a unique TCR number to your submission and communicate with your attorney through the entire process.
If after submitting a request for an award the SEC does select you, disclosure of your identity will become necessary. Fortunately, your attorney will also handle this part of the process and work to keep your identifying information confidential.
SEC Whistleblower Protection
Even if you choose not to submit anonymously, there are other legal protections for whistleblowers:
- Retaliation. The Dodd-Frank Act prohibits employers from retaliating against whistleblowers. This includes protection from being discharged, demoted, suspended, harassed, or discriminated against for reporting possible securities law violations both internally and to the SEC.
- Prohibition of reporting. SEC Rule 21F-17(a) prohibits any person from taking action to impede an individual from communicating directly with the SEC about possible securities law violations. This includes clauses in employment contracts, discharge papers, exit paperwork, and other employment-related documents.
- The right to sue. Should your employer take retaliatory action against you after reporting a Ponzi scheme or other misconduct, you can sue in federal court to recover lost wages with interest, reinstatement, and lawsuit costs including attorney fees. This is in addition to a possible monetary award from the SEC or other agencies.
In addition to anonymous submissions and confidentiality, the Dodd-Frank Act includes these provisions to encourage whistleblowers to notify the SEC about Ponzi schemes and other violations of securities laws with safeguards from possible negative consequences.
Frequently Asked Questions (FAQ)
- Do I need to be an insider to report a Ponzi scheme? While many whistleblowers are insiders, it’s not a requirement. You can also provide an original analysis of publicly available information that leads to a successful enforcement action.
- What kind of information should I provide when reporting a Ponzi scheme? You should provide specific, credible, and timely information or analysis. Examples include identifying individuals involved, providing examples of fraudulent transactions, or pointing to non-public materials evidencing the fraud.
- What does it mean to provide “original information?”
- Can victims of Ponzi schemes also be whistleblowers? Yes, victims of Ponzi schemes can submit whistleblower tips to the SEC.
If you have information and are ready to talk to the SEC, talk to our SEC whistleblower attorneys first. We’ll discuss your case and help you decide how to proceed.
Retaining Experienced SEC Whistleblower Attorneys
Whistleblowers help everyone by notifying the SEC of conduct that harms the investing public, while also earning financial compensation for themselves. Hiring experienced SEC counsel may greatly increase the probability that the SEC will initiate an investigation based on your information. If you wish to remain anonymous, you must be represented by an attorney, who will submit everything on your behalf.
Silver Law Group and the Law Firm of David R. Chase have formed a strategic alliance of experienced SEC whistleblower lawyers, including a former SEC Enforcement attorney on the team, so you will always have guidance throughout the process. Our SEC whistleblower attorneys can help you if you have information regarding securities or investment fraud, violations of federal securities laws, false filings, market manipulation, or other misconduct. You must provide timely, credible, and original information or analysis to be eligible.
Contact us through our online form or at (800) 975-4345 for a consultation. Our attorneys work on a contingency fee basis. This means that it costs you nothing to hire us, and we collect our fees only if you receive an SEC bounty. Because we get paid when you do, we have the incentive to help you collect the maximum award available.