Fraudulent Securities Offerings

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Under the SEC Whistleblower Program, whistleblowers may receive a reward for providing the SEC with original information about securities fraud, including fraudulent securities offerings and Ponzi schemes. If the SEC uses a whistleblower’s information to bring a successful enforcement action, the whistleblower is eligible to receive between 10% and 30% of the collected monetary sanctions as an award.

According to a speech by former SEC Enforcement Director Andrew Ceresney, fraudulent securities offerings and Ponzi schemes are the types of securities fraud cases where whistleblowers’ assistance is especially valued. The Director noted that whistleblowers have helped the SEC identify false and misleading statements in offering memoranda and marketing materials, which enables the agency to act quickly and prevent investment frauds from luring more investors. The SEC has issued an investor alert about these fraudulent securities schemes.

Fraudulent Investment Offerings

The SEC targets investment offerings that contain false or misleading statements as well as fraudulent investment offerings, such as Ponzi or Ponzi-like schemes (see the SEC’s list of red flags that an offering may be a scam). This type of fraud continues to be a focus of SEC enforcement. According to the SEC Whistleblower Office’s 2020 Annual Report to Congress, offering fraud was the second most common complaint reported by whistleblowers (16%). The most common tip related to corporate disclosures and financials (25%).

SEC Enforcement Actions Against False or Misleading Investment Offerings

  • On October 13, 2015, UBS agreed to pay $19.5 million to settle charges that it misled U.S. investors about its structured-notes trading strategy. According to the SEC’s press release, UBS falsely stated that the investment relied on a “transparent” and “systematic” currency-trading system that used “market prices” to calculate the financial instruments underlying the index. In reality, UBS failed to disclose hedging trades that reduced the index price by about 5%. As a result of the reduced index price, investors lost roughly $5.5 million.
  • On March 9, 2016, the SEC charged California’s largest agricultural water district with misleading investors about its financial condition as it issued a $77 million bond offering. The water district represented to investors that it met or exceeded a 1.25 debt service coverage ratio, which it was required to maintain pursuant to a previous bond offering. In order to meet this ratio, the water district used misleading accounting to record additional revenue by reclassifying funds from reserve accounts. The general manager of the water district jokingly referred to these transactions as “a little Enron accounting.” The actual coverage ratio was only .11, instead of the 1.25 reported to investors.
  • On August 15, 2018, the SEC filed an emergency action against Equitybuild, Inc. and Equitybuild Finance, LLC, charging them with operating a $135 million offering fraud involving real estate. According to the SEC’s complaint, the defendants raised these funds by falsely promising safe investments fully secured by income-producing real estate. Thereafter, the defendants took 15-30% of investors’ funds as undisclosed fees, hiding the fees by reporting inflated acquisition costs, and contrary to defendants’ representations, the real estate did not earn enough to pay the double-digit returns promised to investors. As a result, the defendants could only pay earlier investors by raising funds from unwitting new investors in a Ponzi-like fashion.

For more information about offering fraud, see the SEC’s Investor Alert: 10 Red Flags That an Unregistered Offering May Be a Scam.