Second Dodd-Frank Whistleblower Award Announced in Hedge Fund Scheme

After assuring citizens they would soon see additional whistleblower rewards from the Securities and Exchange Commission (SEC), officials were proud to announce the issuance of a substantial Dodd-Frank whistleblower award. This second-ever Dodd-Frank whistleblower award results from a district court ruling that ordered Locust Offshore Management and its CEO, Andrey C. Hicks, to pay $7.5 million in fines and disgorgement.

According to official court documentation, in October 2012, the SEC charged both Andrey C. Hicks and his firm, Locust Offshore Management, with orchestrating an elaborate hedge fund scheme. Hicks was able to trick investors into pouring millions of dollars into a fictitious British Virgin Islands hedge fund aptly known as “the Locust Offshore Fund.” According to the SEC, however, the hedge fund never existed.

According to the allegations, Hicks went to great lengths getting Locust Offshore Management’s hedge fund scheme off the ground. He claimed that the Locust Offshore Fund was being audited by Ernst and Young, which was, in fact, a blatant lie. In addition, Hicks lied to investors about the hedge fund’s prime broker and custodian, claiming that Credit Suisse was broker and custodian of the offshore account. In order to make the fraudulent scheme look legitimate, Hicks also created detailed fake offering documents and maintained an active website for the non-existent hedge fund. Once the operation was up and running, Hicks opened separate checking and savings accounts for his business with the obvious intent of defrauding unsuspecting investors.

As a selling tactic, Hicks told prospective investors that Locust Offshore Management had grown its portfolio assets from $100 million to almost $1 billion in a period of just six months. Hicks also told his investors that the firm’s massive growth was possible due to its ability to raise capital and obtain extremely high returns on investments. After convincing investors to purchase shares in the bogus hedge fund, Hicks allegedly transferred the funds into private bank accounts.

 Hicks was eventually detained by authorities at the Canadian border as he attempted to get to an airport and hop  a flight to Switzerland. In addition to the $7.5 million fine imposed, Hicks plead guilty to criminal securities fraud charges in the hedge fund scheme and was sentenced to 40 years in prison.

Despite the web of lies and red flags associated with the hedge fund, Hicks was able to not only attract investors, but convince them to sink millions into the scheme. In fact, one of the defrauded investors included celebrity basketball player Kris Humphries.

The Dodd-Frank Whistleblowers

The fraud in this case was reported by three relators using the SEC whistleblower web site. After receiving the tips and conducting an investigation, the SEC determined all three whistleblowers were eligible to share in the government’s monetary recovery, as each had “voluntarily provided original information” that eventually “led to the successful enforcement” of both Locust Offshore Management and Hicks. The case marks only the second award for a Dodd-Frank whistleblower bounty.

The SEC order issued on June 12 stated that each of the whistleblowers will receive a 5 percent share of the forthcoming $7.5 million in fines. Once the SEC collects on these sanctions, each of the Dodd-Frank whistleblowers will receive their relator’s share. In addition to the shared 15 percent, the SEC also revealed that the Dodd-Frank whistleblowers will qualify to collect a portion of approximately $800,000 that has been seized from Hicks and Locust Offshore Management to date, along with real estate property located in the DC Metro Area which will seized and sold for an estimated $160,000.

The SEC Whistleblower Program

In its first full year of operation, the SEC whistleblower program obtained a total of 3,001 tips from all 50 US states and 50 countries. Information related to corporate disclosure and financial fraud accounted for 18.2 percent of all tips, while offering fraud accounted for 15.5 percent. Under the rules of the SEC whistleblower program, which was created as part of the Dodd-Frank Act, whistleblowers may be eligible to collect between 10 and 30 percent of enforcement actions over $1 million. Until the Commission’s recent announcement, only one other whistleblower award has been issued under the program.

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By | 2018-09-24T14:51:36+00:00 June 18th, 2013|SEC Fraud|