Ponzi Schemes and the SEC Whistleblower Program

Ten years have passed since the collapse of Bernard Madoff’s multibillion-dollar Ponzi scheme, which played a major role in prompting Congress to enact a whistleblower program at the Securities and Exchange Commission (“SEC” or “Commission”). Specifically, a whistleblower named Harry Markopolos had attempted to report the Ponzi scheme to the SEC for nearly a decade, however, his warnings were largely ignored. In order to avoid this misstep in the future, the Dodd-Frank Act created the SEC Whistleblower Program to incentivize future whistleblowers with specific, timely and credible information about federal securities laws violations (e.g., multibillion-dollar Ponzi schemes) to report to the SEC. Since the inception of the program in 2011, the SEC has received more than 28,000 whistleblower tips, some of which have enabled the SEC to recover more than $1.7 billion in financial remedies from wrongdoers. In exchange for these valuable tips, the SEC’s Office of the Whistleblower has paid more than $326 million in awards to whistleblowers to date.

SEC Whistleblower Program

Under the SEC Whistleblower Program, the SEC will issue awards to whistleblowers who provide original information, including information about Ponzi schemes, that leads to successful enforcement actions with total monetary sanctions in excess of $1 million. A whistleblower may receive an award of between 10 to 30 percent of the total monetary sanctions collected. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.

In its short history, the SEC Whistleblower Program has had a tremendous impact on securities enforcement and has been replicated by other domestic and foreign regulators. In fiscal year 2018, the SEC received over 5,2000 whistleblower tips, representing a 76% increase since fiscal year 2012. Further, the SEC issued its three largest SEC whistleblower awards to date in fiscal year 2018, totaling more than $122 million. The uptick in received tips, paired with the sizeable awards given to whistleblowers, reflects the growth and continued success of the whistleblower program.

Whistleblowers Aid the SEC in Identifying and Halting Ponzi Schemes

According to a speech by the former Director of the SEC’s Division of Enforcement, whistleblower tips have greatly aided the SEC in identifying and halting Ponzi schemes. For the past three fiscal years, the SEC Office of the Whistleblower has received an increased number of tips related to offering frauds, such as Ponzi, or Ponzi-like, schemes:

• Fiscal Year 2016: 15% of whistleblower tips

• Fiscal Year 2017: 18% of whistleblower tips

• Fiscal Year 2018: 20% of whistleblower tips

As noted in the SEC’s speech, these schemes can be difficult to detect until it is too late. As such, whistleblower tips have proven to be a valuable resource for the SEC in its efforts to combat Ponzi schemes and protect investors, especially retail investors who are often the largest class of victimized investors in these schemes.

Red Flags for Identifying Ponzi Schemes 

Ponzi schemes frequently share underlying traits. When seeking to identify a potential Ponzi scheme, whistleblowers should consider the following red flags:

• Promises of high investment returns with little or no risk

• Regular, positive returns regardless of market conditions

• Investments that are not registered with the SEC or an appropriate state regulator

• Unlicensed individuals or unregistered firms

• Secretive or complex strategies for which investors cannot get complete information

• Lack of paperwork; inaccessibility to information about an investment in writing

• Difficulty receiving payment; promises of “rolling over” investments and promises for higher returns in the future, on the amount rolled over

Report a Ponzi Scheme and Earn an SEC Whistleblower Award

To report a Ponzi scheme and qualify for an award under the SEC Whistleblower Program, the SEC requires that whistleblowers or their attorneys report the tip online through the SEC’s Tip, Complaint or Referral Portal or mail/fax a Form TCR to the SEC Office of the Whistleblower. Prior to submitting a tip, whistleblowers should consult with an experienced whistleblower attorney and review the SEC whistleblower rules to, among other things, understand eligibility rules and consider the factors that can significantly increase or decrease the size of a future whistleblower award.

SEC Targets Ponzi Schemes in Fiscal Year 2018

The recent increase in whistleblower tips related to Ponzi schemes, combined with the SEC’s focus on protecting retail investors, has led to the SEC bringing charges against several large Ponzi schemes in fiscal year 2018, including:

• A Ponzi scheme that raised more than $1.2 billion from thousands of retail investors.

• A Ponzi scheme that raised more than $345 million from over 230 investors across the U.S.

• A Ponzi scheme that raised more than $102 million from 600 U.S. investors.

• A Ponzi scheme that raised more than $85 million from at least 150 investors .

Diana Alsabe contributed to this post.