Types Of SEC Whistleblower Cases:  Public Statement Fraud

A Public Statement Fraud is a general description of a type of SEC whistleblower case that involves fraudulent statements made to the public by publicly traded companies, financial institutions, investment banks, broker-dealers, or their officers, directors, or employees.

public statement fraudPublic statement frauds can be broadly thought of as advertising and marketing frauds.  The SEC actively investigates such false and misleading statements made to the public.

False Statements

Public statement fraud is a general term that describes misconduct that violates §10(b) of the Securities Exchange Act and SEC Rule 10b-5, which govern the use of manipulative and deceptive practices.  In general terms, a “material” fact is a fact that an ordinary reasonable investor would want to know in deciding whether to buy or sell a stock, when to buy or sell it, and at what price.  Any untrue statement of a material fact can potentially give rise to a public statement fraud.

For example, assume that a company posts a press release saying that it has entered into a new contract to sell a large amount of its products to a particular customer, which will result in greatly increased revenue for the company.  If the company has only had a preliminary discussion with the potential customer, but has not yet signed any contract, that could be a material false statement giving rise to an SEC whistleblower case for public statement fraud.

Material Omissions As Public Statement Frauds

Likewise, the omission or failure to state a material fact can also give rise to a public statement fraud.

For example, a CEO speaking at a public shareholders’ meeting might enthusiastically tell the audience that his company has been increasing revenues every quarter for the past two years, and expects that trend to continue.  But if most of the company’s revenue comes from a single customer who has already informed the CEO that it will be switching to a different vendor and will no longer be doing business with the CEO’s company, the failure to tell that to the audience could be a material omission giving rise to an SEC whistleblower case for public statement fraud.

Public Statement Fraud In Advertising Materials

Companies, especially those engaged in financial services or seeking investments from the general public, cannot make false or misleading statements in advertisements.  It does not matter whether the advertising is in print, on the television or radio, on the Internet, or in other forms of media.  If the material false statement or omission in the advertisement has to do with the company’s stocks, financial performance, business prospects, or other business indicators, it could lead to an SEC whistleblower case for public statement fraud.

Forward-Looking Statements

When discussing business transactions, companies and their representatives are not allowed to make forward-looking statements that imply guaranteed outcomes based upon hypothetical scenarios.  A company can only state the known facts about a transaction and must refrain from making either unsubstantiated claims as to the anticipated results or implying that certain results are guaranteed to occur.  Additionally, a company cannot provide selective facts about a situation that would suggest one potential outcome, while leaving out other facts that might predict a different, and possibly adverse, outcome.

Additional Information

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