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.