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SEC's Newest Whistleblower Charges Spotlight Investors as Potential Tipsters

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Jane Norberg Jane Norberg, the SEC’s whistleblower chief. (Photo: Diego M. Radzinschi/ALM)

The U.S. Securities and Exchange Commission on Monday charged a company and its chief executive with unlawfully trying to stop investors from reporting misconduct to federal regulators, an enforcement action that expands on whistleblower protection efforts that have been largely centered on employees.

In an amended complaint, filed in Manhattan federal district court, the SEC tacked on charges against the online auction portal Collectors Cafe and its CEO Mykalai Kontilai, who had been accused of making a fraudulent securities offering and misappropriating investors’ money. The SEC alleged that Collectors Cafe conditioned the return of money to investors who signed agreements that they would not report potential misconduct to the commission or other government agencies.

“In one of these instances,” the SEC said in the amended lawsuit, “Collectors Café and Kontilai even went so far as to file a lawsuit claiming that the victims breached the confidentiality provision by communicating with SEC staff about possible securities law violations.”

Kontiliai’s defense lawyer, Hughes Hubbard & Reed senior counsel Edward Little, declined to comment Monday. Collectors Cafe is represented by Gage Spencer & Fleming partner William Fleming, who also declined to comment on the new charges.

The new charges mark the first time in more than two years that the SEC has taken an enforcement action over alleged attempts to stymie communication with the commission. Previous enforcement actions centered on severance agreements, struck between companies and outgoing employees, with language the commission viewed as having a chilling effect on those employees coming forward with information about their former employers.

“The SEC’s whistleblower protections broadly protect not just employees, but anyone who seeks to report potential securities law violations to the commission,” said Jane Norberg, the chief of the SEC’s whistleblower office.

The SEC’s whistleblower office was created as part of the Dodd-Frank reforms that followed the financial crisis. Under the rules of the program, whistleblowers can receive between 10% and 30% of monetary sanctions received in an enforcement action. Since 2012, the SEC has awarded 66 tipsters, doling out nearly $400 million in whistleblower awards.

The SEC last brought a whistleblower-related enforcement action in January 2017, when the commission reached a $500,000 settlement with Home Street Inc. resolving claims that the financial services company used improper accounting methods and took steps to prevent whistleblowing.

According to the SEC, the company required former employees to sign agreements requiring them to waive their ability to receive a whistleblower award or risk losing their severance payments and other post-employment benefits.

In another notable settlement, Anheuser-Busch InBev agreed in 2016 to pay $6 million to resolve claims that it paid illegal bribes to build business in India and entered into a separation agreement that stopped an employee from continuing to voluntarily cooperate with the SEC’s investigation.

Speaking at a recent conference in Washington, Norberg said companies appear to have learned from the settlements and removed language from separation agreements that could be read as deterring employees from contacting the SEC.

“I really do think everyone did a good job in taking a hard look at these agreements and figuring out what was the appropriate language,” she said.

“That said, we do still see some, and we are still looking at them.”