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The One that Got Away: The Need for Whistleblowers to Help Defrauded Investors

Posted  March 6, 2017

By the C|C Whistleblower Lawyer Team

On Friday March 3rd the SEC announced a settlement with Mexican homebuilding company Desarrolladora Homex S.A.B. de C.V. (“Homex”) on charges of reporting fake sales of more than 10,000 homes during a three-year period. Homex inflated the number of homes it sold by 317% and overstated its revenue by 355%, totaling approximately $3.3 billion. Homex declared bankruptcy in 2014. The settlement enjoins the company from violating the antifraud, reporting, and books and records provisions of federal securities law. Additionally, the settlement prohibits Homex from offering securities in the U.S. market for a minimum of five years.

This type of settlement illustrates the need for whistleblowers to bring a modicum of justice to defrauded investors who unknowingly relied on false financial results. The lack of a whistleblower here meant that the SEC investigation came too late for a monetary penalty because Homex declared bankruptcy in 2014. Had a whistleblower come forward in the early stages, the investing public potentially could have been vindicated by an SEC monetary penalty against a company committing an audacious fraud. The SEC’s investigation used newer technology like analysis software and satellite imagery but no technology replaces the value of a whistleblower in exposing a fraud.

The investing public will benefit from Homex being barred from trading securities in the U.S. market and an injunction from violating existing securities law. However, settlements like these that do not fully reassure the investing public that these types of fraud will result in financial penalties may deter future frauds. Whistleblowers have the unique ability to bring forward claims of fraud as they happen and as a result create a greater deterrent to fraud. There is no guarantee that a whistleblower bringing these claims to light earlier would have resulted in a financial penalty. However, the timing of the investigation by the SEC was necessarily slowed because it had to obtain all the information itself over an extended period of time. Time will tell if more whistleblowers will come forward in light of these types of “lighter” settlements against companies committing fraud.

Tagged in: Accounting Fraud, Securities Fraud,