Last week the SEC amended a complaint it had previously filed against an online auction portal and its CEO to add additional claims against the defendants. In the amendment, the SEC alleges that the defendants violated SEC whistleblower laws by refusing to return investor funds unless the investor signed an agreement that prevented it from reporting potential securities law violations to law enforcement. The defendants even sued at least one such investor for violating this provision by responding to an SEC subpoena, although they later withdrew that lawsuit without prejudice.
I have no first-hand knowledge of the underlying securities violation or whether the SEC will ultimately be successful on that claim. However, it is clear that the actions taken by the defendants in dealing with disgruntled investors exposed them to additional and independent claims of securities law violations by the SEC. Just another reminder that it is critical for issuers and their counsel to consider the potential securities law ramifications of every decision they make, at every step of the process.
"We allege that the defendants attempted to cover up their fraud by holding investors' money hostage until the investors signed agreements preventing them from seeking law enforcement intervention," said Kurt L. Gottschall, Director of the SEC's Denver Regional Office. "Through the amended complaint, the Commission seeks to hold the defendants accountable for their fraudulent stock offerings as well as the separate claims for violations of the Commission's whistleblower protection laws."