Investors depend on, and have a right to, accurate information so that they can make informed investment decisions, and false or misleading statements by companies can devastate individual investors and harm the market as a whole. Both state and federal securities law provide penalties for companies who make false or misleading statements in their financial filings to the Securities and Exchange Commission.
Federal law requires companies to file annual reports 10-K, quarterly reports, and current reports about certain significant developments (e.g. change of control in the company or an important acquisition or disposition of assets). False or misleading statements on any of these can subject companies to enforcement actions and financial penalties.
The Dodd-Frank Act directs the SEC to make monetary awards to eligible individuals who voluntarily provide original information that leads to successful Commission enforcement actions resulting in monetary sanctions over $1 million. These include enforcement actions based on a company’s false and misleading statements in their financial filings.
In recent years, the SEC has brought enforcement actions against companies for false or misleading statements in a wide range of settings, and involving a wide range of dollar amounts, from under $1 million to many hundreds of millions.
- In January 2016, the SEC settled charges against executives and board member of Superior Bank for their involvement in various schemes—including straw borrowers, bogus appraisals, and insider deals—designed to conceal the extent of loan losses in the wake of the financial crisis. The schemes enabled Superior to overstate its net income in public filings by 99% for 2009 and 50% for 2010. In addition to fines totaling at least $2.8 million, the settling defendants were permanently barred from serving as officers or directors of a public company.
- In March 2016, the SEC alleged the CEO of a microcap company, RVPlus Inc., falsely claimed a lucrative relationship with the United Nations and billions of dollars in clean energy contracts with foreign governments. The SEC charged that the CEO made bogus claims in the company’s public filings and in statements to private investors.
- In May 2016, the SEC obtained a court order to freeze the profits of a trader in Pakistan for manipulating a technology stock through false company filings. The SEC alleged that the trader filed a form with the SEC falsely stating that his group of investors had purchased a 5.1% beneficial ownership of Silicon Valley-based Integrated Device Technology. The market reacted quickly to the filing and IDT’s stock price increased by more than 25% in less than 10 minutes, enabling the trader to realize a quick profit. As explained by the Director of the SEC Enforcement Division, the trader “tried to fool the markets from a computer in Pakistan to make an easy profit, but we made sure he didn’t cash in. Market manipulation doesn’t pay, no matter the method or how distant the perpetrator.”
To find out more about whether a particular type of fraud is actionable under Dodd-Frank, contact us today.