On January 29, the U.S. Securities and Exchange Commission (SEC) Office of the Whistleblower posted fourteen new Notices of Covered Actions (NCAs). Each NCA relates to a specific SEC enforcement action and signals that individuals may now submit whistleblower award claims for these actions.
The enforcement actions covered by the newly posted NCAs include a $65 million settlement with Robinhood Financial over charges of misleading customers about revenue sources. Qualified whistleblowers who provided information that led to these charges against Robinhood are entitled to awards ranging from $6.5 million to $19.5 million. At a time when many are calling for Robinhood employees to disclose insider information, this NCA serves as a reminder that, unlike the media, the SEC can protect and reward stock market whistleblowers.
According to the SEC, over the course of several years, Robinhood “made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money.” The SEC alleges that Robinhood’s largest revenue source were payments from trading firms made in exchange for Robinhood sending its customers’ orders to those firms for execution. Robinhood relies on larger trading firms to help process the transactions which occur on its site. The compensation Robinhood receives for routing trades to certain firms for trade execution is known as a “payment for order flow.” The SEC requires brokerage firms to disclose “payments for order flow” to customers as they can cause conflicts of interest.
Furthermore, the SEC charged Robinhood with “failing to satisfy its duty to seek the best reasonably available terms to execute customer orders.” The SEC alleges that, “due in large part to its unusually high payment for order flow rate,” Robinhood executed its customers’ orders at prices inferior to those of other brokers despite not charging commission fees. According to the SEC, “Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million.” In December, Robinhood agreed to pay the SEC $65 million to settle the charges.
“Robinhood provided misleading information to customers about the true costs of choosing to trade with the firm,” said Stephanie Avakian, Director of the SEC’s Enforcement Division. “Brokerage firms cannot mislead customers about order execution quality.”
The rest of the newly posted NCAs cover enforcement actions dealing with a wide variety of corporate fraud and misconduct. The covered action with the largest monetary sanction (and thus the largest potential whistleblower award) involves charges against General Electric Co. (GE). In December, GE agreed to pay the SEC a $200 million penalty to settle charges of disclosure violations. According to the SEC, GE misled investors by failing to disclose that a large portion of GE Power’s reported profits were the result of reductions in prior cost estimates. Other NCAs involve a $137.5 million settlement with SCANA Corp and a $170 million settlement with UK-based investment adviser BlueCrest Capital.
An NCA is posted for every SEC enforcement action that results in over $1 million in sanctions. Whistleblowers have until April 29, 2021 to apply for an award for these newly posted NCAs by submitting a completed Form WB-APP to the Office of the Whistleblower.
Through the SEC Whistleblower Program, qualified whistleblowers, individuals who voluntarily provide the SEC original information that leads to a successful enforcement action, are entitled to a monetary award of 10-30% of funds recovered by the government. According to the SEC, “all payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators.” The SEC Whistleblower Program also provides anti-retaliation protections to whistleblowers, including confidentiality.
The SEC Whistleblower Program is in the midst of a record fiscal year. On October 22, 2020, the SEC issued a whistleblower award of over $114 million, the largest award in the history of the program. In total, the SEC has awarded over $176 million to 28 individuals since the 2021 fiscal year began on October 1, 2020. This is the largest total dollar amount awarded to whistleblowers in a fiscal year.
The Notices of Covered Actions
SEC Charges Robinhood Financial With Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution
Unlike Media, SEC Can Protect and Reward Stock Market Whistleblowers