Front running is a form of securities fraud that distorts markets and betrays the public trust. If your employer is engaged in front running, it could jeopardize your business and, ultimately, your job. Hard-working employees shouldn’t have to suffer because their bosses and others in their company are greedy. The Securities and Exchange Commission (SEC) takes allegations of front running seriously, but it needs the public’s help in exposing it. That’s where the whistleblower program comes in.
Newman & Shapiro wants to help employees recognize and take action against front running. Doing so can make you eligible for a substantial whistleblower reward, and we can work with you to negotiate a fair amount. Call us today if you have evidence that this form of fraud is happening in your company.
What Is Front Running?
Front running happens when an investor or other individual executes a trade based on confidential knowledge about a pending transaction that will have a substantial effect on the price of the stock. It can also occur when a broker purchases or sells shares for their own account prior to their firm making a buy or sell suggestion to their clients. For this reason, front running is considered a form of market manipulation and insider trading.
For example, a broker may know that a transaction or group of transactions for a client is going to affect the value of the security in some way. This often happens when large institutional investors make significant investments in the stock of certain companies and this ultimately increases the price of those stocks. It also happens with high-speed trading. If the broker believes that the pending transaction will raise the price of the stock, he or she may purchase some for him- or herself first. Then when the price goes up, they sell for a profit. Conversely, he or she may think the transaction will decrease the price of the shares and sell them off before carrying out the order.
As another example, say that a firm is going to release a negative report about that will have a detrimental effect on a company and, therefore, its stock prices. An analyst working at the firm could learn about this report and short-sell the stock in anticipation of the bad news being released. The analyst then covers their position and rakes in a profit.
The key is that the information acted upon is not public. If the broker, analyst, or other individual executed their own trade once the transaction was made public, it would not be illegal. It also doesn’t matter whether the front runner benefited from their action; trading on the basis of this inside information is still illegal. Front running happens a lot but is hard to detect, especially with high speed trading.
Why The SEC Goes After Front Running
Front running gives an unfair advantage to someone who has special, confidential knowledge about the value (or potential value) of a stock. Let’s say a broker receives a request for a massive purchase of shares, but delays executing it to buy some of those shares first. The broker finally completes the purchase, and the value of the stock goes up due to the size of the transaction. Because of the action the broker took before his client’s transaction was made, he or she realizes an instant profit. Similar to insider trading, this is unethical – and illegal – conduct that wrongly rewards those who are privy to non-public information.
A Case Study
In 2013, the SEC announced fraud charges against Daniel Bergin, a senior equity trader at Cushing MLP Asset Management. Bergin secretly executed numerous trades through his wife’s accounts earlier in the same day he executed much larger orders for the same securities on behalf of his firm’s clients. He failed to disclose his wife’s accounts to the firm, failed to acquire pre-clearance of his trades in those accounts, and then attempted to hide his wife’s accounts from SEC examiners. Bergin pocketed upwards of $520,000 through this scheme.
Bergin’s case had all the classic earmarks of front running fraud:
- Took market action before a non-public, pending transaction was made
- Put his own trades, and therefore his own interests, before those of his clients
- Attempted to hide his personal transactions through another individual’s accounts
- Failed to disclose said accounts to his firm
- Failed to have his personal transactions cleared
- Attempted to mislead the SEC
Individuals like Bergin are known as fiduciaries. A fiduciary is someone who holds a position of trust with respect to another person (the beneficiary), and is therefore expected to act with utmost care. Being entrusted with someone’s money and other assets imposes serious responsibility on the fiduciary. When that relationship of trust is violated, not only is the beneficiary hurt, but the public’s confidence in the institution – in this case, the financial markets – is weakened.
The Challenges In Exposing Front Running
To put it bluntly, it is not easy to prove someone is front running. The broker or other individual is often the only one with access to the non-public information. Establishing that the person knew about the pending transaction or news, purposely delayed it, and executed his or her own trades in the meantime, is no simple task.
The Bergin case also demonstrates the extent to which people go to cover up their wrongdoing. Bergin used his wife’s accounts to realize profits from 2011 to 2012, using a series of apparently routine purchases (totaling about 132). This was not a massive transaction made right before his clients’ orders were completed. They were calculated and spread out over a period of time.
The important thing is to act fast if you know or suspect that your boss or someone else in your company is engaging in front running. If you have evidence this activity is taking place, you can speak with Newman & Shapiro confidentially. We can discuss the information you have and determine whether you would be a good candidate for the SEC whistleblower program.
How To Become A Front Running Whistleblower
As discussed above, brokers, analysts, and other individuals who attempt to manipulate the markets through front running will often go to great lengths to cover it up. Individuals who work with, or for, front runners and are aware of their activities can play a vital role in exposing it by becoming a whistleblower.
The SEC can’t be everywhere at once, and has limited resources. That’s why the agency wants people with this kind of information to step forward. It has created an incentive to do so through its whistleblower program. There are a few requirements, however, if you wish to participate:
The information you have must be original and non-public. In other words, the SEC cannot already be investigating someone for the issue you complain about. The information must come from your independent knowledge or analysis. Also, if another whistleblower comes forward before you do, you won’t get to participate. The SEC rewards those who report first.
The information must be provided voluntarily. Whatever you provide to the government cannot be the product of a request or demand. If you are subpoenaed or ordered by a court to testify about front running, you cannot be a whistleblower. The information also cannot be submitted in the course of a legal or contractual duty owed to the government.
The SEC must take enforcement action. Another way of putting this is that the information has to be actionable. Your reward comes from the SEC’s enforcement actions and its recovery of sanctions against the wrongful party. The SEC’s enforcement must be the direct result of what you provide them.
Sanctions must exceed $1 million. Before you can claim a reward, the amount recovered has to meet this threshold. Your award will be a percentage of this.
How Much Will My Award Be?
If you meet the above threshold and become a whistleblower, your potential reward could be up to 30% of the sanctions recovered by the government. Depending on the amount of the sanctions, that could be a significant amount of money.
The exact amount of your reward will depend on several different factors:
- How helpful was your information? In other words, how vital was your role in the SEC’s ability to carry out its enforcement action? Any assistance you offer during the course of the agency’s investigation – and not just at the outset of reporting it – could improve your chances of a higher reward. For example, you may be able to interpret complicated data for the SEC and thereby help them prove their case.
- Did you try to report the front running internally? Companies have internal compliance systems in place to allow employees with evidence of fraud to report it. Of course, supervisors and others up the chain may not take action, and that’s where you would need to blow the whistle. But the SEC does not want to weaken internal compliance systems by encouraging whistleblowers to go around them, so your failure to report the matter internally could reduce your overall reward.
- Were you cooperative during the investigation? The SEC often needs to follow up with whistleblowers, sometimes several times, to learn more about what happened. The best way to maximize your reward is to be helpful to the investigators who are trying to do their jobs. Refusal to assist will make the SEC’s investigation more difficult and could delay its enforcement action, which will therefore reduce your reward.
- Were you involved with the fraudulent activity? Participating in the front running scheme could affect – but not necessarily negate – your reward. You may also see a lower percentage if you unreasonably delay coming forward. It is therefore important that you share this information with your attorney.
I’m Worried About Workplace Retaliation; What Should I Do?
Employees who blow the whistle on their bosses are doing the right thing by uncovering wrongdoing. But they often rightly worry that doing so will have negative repercussions. The individual who is exposed could turn around and punish them for doing so. This punishment can take many forms:
- Other adverse actions
But the retaliation doesn’t end there. In some cases, front runners try to turn the tables on the whistleblowers by accusing them of participating in the wrongdoing. Indeed, this can lead to attempts to blackmail or otherwise pressure the whistleblower to back down.
Fortunately, the same laws that allow whistleblowers to report front running also provide strong anti-retaliation protections. If your employer punishes or attempts to punish you for being a whistleblower, you could be eligible for reinstatement, back pay, and compensation for the legal fees incurred to hold your employer accountable.
At Newman & Shapiro, we work closely with our whistleblower clients and we do not tolerate attempts to retaliate against them. We will fight to make sure your rights are protected and that you are not harmed in your employment for doing the right thing. We will also work to protect your identity. The SEC will eventually need to know who you are, especially when it comes time to pay your reward. But we will guide you through this.
How Long Do These Cases Take?
Due to the limited resources of the SEC, your front running whistleblower claim could take a significant amount of time. The SEC has to do its job in fully investigating the wrongdoing and building a case, and this is a process. Also, the evidence involved tends to be highly technical and complex, which means more time must be spent.
To expedite your case, it’s essential to build a compelling argument for why the front running needs to be investigated. The better your claim is, the more likely you will have a faster turnaround time from the SEC. Having a knowledgeable attorney like Jeffrey Newman helps develop your whistleblower complaint into a persuasive call to action.
What Can Newman & Shapiro Do For Me?
Our firm’s practice is dedicated to a variety of whistleblower cases involving the financial markets. Whistleblower cases are unlike others in that they cover complex, highly specified areas of the law. They also involve technical subjects related to securities markets, financial transactions, data analysis, and much more. When we take on a client, we go to work to build an effective, evidence-based case that will grab the government’s attention.
To that end, we not only understand the relevant laws, statutes, and regulations, we know what it takes to put together a compelling claim. Most whistleblower cases are not pursued by the government due to resource limits. There are simply more cases than the government can handle, so it has to be picky in which ones it will go after. With respect to front running, the SEC has to be diligent in how it spends its time. We bring our considerable experience to the table by building SEC whistleblower claims that will prompt enforcement actions.
Newman & Shapiro also knows how to negotiate the maximum reward for our whistleblower clients. As mentioned above, there are several criteria the SEC will evaluate when deciding how much of a reward to offer. We ensure our clients are cooperative, that the information they provide is useful, and that all protocols and requirements are met before we approach the government. When it comes time to discuss your reward, we will argue for the highest amount allowed under law.
We fight for the rights of whistleblowers by protecting them from workplace retaliation. There’s a lot on the line when you decide to come forward and expose front running. We believe whistleblowers should be rewarded, not punished, for their courage. To that end, we will help protect you from retaliation and take legal action to stop it. Newman & Shapiro will also maintain your anonymity to the greatest extent possible when dealing with the SEC.
Finally, we want you to understand the process and what you can expect as a whistleblower. Our firm will take the time to outline how your case may proceed and what sort of timetable you can expect moving forward. We will also explain your legal rights as a whistleblower and answer any questions or concerns you have. Whistleblower claims can take a significant amount of time to complete, so we stay connected with you through the process and keep you updated on any updates we receive.
Contact Our Front Running Whistleblower Attorney Today
It’s important to stress that the law rewards those whistleblowers who step forward first. If you are aware that your boss or someone else in your company is engaged in front running, it’s vital that you act fast. There’s a good chance you are not the only one who knows about it, so someone else may already be in the process of becoming a whistleblower. There are also internal compliance steps that you may need to follow before making a whistleblower claim, so we will walk you through those.
Front running fraud doesn’t just hurt financial markets and the investing public. It also harms honest employees who watch as others in their organization exploit their positions for personal benefit and tarnish the reputations of their companies. Newman & Shapiro is dedicated to empowering these hard workers by helping them blow the whistle on front running fraud.
If you have evidence of front running or other corporate wrongdoing, give our firm a call today to schedule a confidential consultation.