David J. Marshall Comments on SEC Insider Trading Settlement

The Securities and Exchange Commission (“SEC”) issued a press release earlier this week announcing that it had agreed to a settlement with a multi-billion dollar hedge fund advisory firm to settle insider-trading charges, just days after the SEC brought suit against the firm.  Diamondback Capital Management LLC has agreed to pay more than $9 million as part of the settlement, including giving up more than $6 million of allegedly ill-gotten gains and paying a $3 million civil penalty.

George S. Canellos, Director of the SEC’s New York Regional Office, noted in the press release that the company itself had investigated the allegations of fraud.  Canellos remarked, “If approved by the court, we believe that the proposed settlement appropriately sanctions the misconduct while giving due credit to Diamondback for its substantial assistance in the government’s investigation and the pending actions against former employees and their co-defendants.”

Commenting on the SEC action, whistleblower attorney David J. Marshall explained, “This settlement demonstrates the extent to which the SEC continues to rely on companies to conduct their own investigations of alleged securities violations and report the results to the SEC.”  Marshall, who represents whistleblowers before the SEC, added that “the SEC’s reliance on company investigations means that employees who are thinking about submitting information about securities violations to the SEC should give careful consideration to first reporting their concerns internally through their company’s compliance or whistleblower programs.”  Marshall continued, “While doing so might open the employee up to retaliation, it can also allow the employee to benefit from whatever information the company submits to the SEC as part of any investigation prompted by the employee’s disclosures.”

As Marshall explains in “Doing Well by Doing the Right Thing,” his primer for would-be SEC whistleblowers and their lawyers, the SEC whistleblower program incentivizes internal reporting in a number of ways.  In particular, the SEC gives credit to the whistleblower for information that his employer “self-reports” to the SEC following an investigation that is prompted by the whistleblower’s internal reporting.  Because the whistleblower can get credit even for information he may not have possessed or provided to the SEC, he needs to consider the pro’s and con’s of reporting internally before providing a tip to the SEC Whistleblower Office.  According to Marshall, “This is not an easy decision, but it is very important in light of the possible benefits of internal reporting.  When representing an SEC whistleblower who is still employed by a company, I make sure that we do a careful analysis together of all the factors that weigh in favor of and against first reporting alleged violations through the company’s whistleblower hotline or other avenues.”