SEC Rule 10b-5 Claims Comprise Fertile Ground for Whistleblower Tips

February 19, 2014

Cornerstone Research, in conjunction with Stanford Law School, recently published a study entitled Securities Class Action Filings – 2013 Year in Review.  The study found that federal class-action securities cases had increased by approximately nine percent in 2013.  Moreover, the study determined that claims brought under Rule 10b-5, which prohibits acts or omissions resulting in fraud or deceit in connection with the purchase or sale of any security, including insider trading, continued to comprise a significantly larger percentage of total securities claims than it did from 2009 to 2011.

The types of allegations brought under 10b-5 claims varied widely, although almost all (97 percent) contained claims of misrepresentations in financial documents.  Other allegations included false forward-looking statements (54 percent); generally accepted accounting principles (“GAAP”) violations (24 percent); internal control weaknesses (20 percent); insider trading (17 percent); announced restatement (11 percent); and announced internal control weaknesses (8 percent).

While this particular study reviewed securities class actions and not enforcement actions by the Securities and Exchange Commission (“SEC”), the study gives would-be whistleblowers some insight into the types of violations that spur shareholders to take action.  Rule 10b-5 violations such as these can also form the basis for a whistleblower tip to the SEC.  Under the Dodd-Frank Act of 2010, a new SEC Whistleblower Office was created that provides awards of 10 to 30 percent of the amount of sanctions and penalties the SEC imposes on wrongdoers as a result of a whistleblower’s original information.