SEC Whistleblower Office's Stand Against "Silencing" Employees Through "Confidentiality" Agreements

May 28, 2015

Sean McKessy of the SEC Whistleblower Program is right to continue his mission against muzzling whistleblowers through "confidentiality" agreements, for one simple reason:

Intimidating witnesses from reporting fraud is a form of obstruction of justice.

Although "confidentiality" agreements may appear innocent on their face, a company's suggesting in any way that its employees refrain from reporting fraud or other violations of securities laws crosses the line. Too often, that is often the effect of these agreements--if not the intent as well.

The SEC took action last month in filing and settling charges against KBR Inc. It announced this "first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process."

The SEC said that, in internal investigations, KBR required witnesses to sign confidentiality statements warning that they could face discipline and be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department. The SEC found that KBR violated SEC Rule 21F-17, which bars firms from impeding whistleblowers from reporting possible securities violations to the SEC.

As Mr. McKessy observed, “KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us.” He warned that “[o]ther employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”

Bloomberg BNA contacted me recently to comment on the prevalence of such misuse of confidentiality agreements, in a piece reprinted here in part:

“More and more we see firms attempt to conceal fraud by using ‘confidentiality agreements' to intimidate witnesses from reporting wrongdoing to authorities,” said Michael Sullivan, a partner at Finch McCranie LLP, Atlanta, who represents SEC whistle-blowers.

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FATCA - Foreign Bank Account Headaches

May 18, 2015

FATCA is being implemented in a number of countries outside the U.S., with the result that U.S. individuals who hold foreign bank or financial accounts and have not disclosed these accounts in the U.S., are about to be reported to the IRS.

(This post is by Richard Rubin of Rubin Law (, a tax attorney with significant experience in U.S. cross-border matters, including FATCA and U.S. international compliance.)

Bank accounts in countries outside the U.S. can cause headaches when owned by U.S. taxpayers. While owning foreign accounts has always entailed a reporting headache for U.S. taxpayers, the problem has recently heightened as a result of the FATCA legislation that is being implemented in a number of countries outside the U.S.

FATCA is a set of U.S. tax reporting rules that impact U.S. citizens, Green Card holders and other U.S. tax resident individuals who have accounts with non-U.S. banks or financial institutions.

An acronym for the Foreign Account Transactions Compliance Act, FATCA requires banks and financial institutions in countries outside the provide the IRS with details of accounts that are owned by U.S. taxpayers. Although the mechanism varies slightly by country, in most countries where FATCA has been implemented banks and financial institutions are required to report these details to the Revenue Authority of that country, and the Revenue Authority is required to pass this information along to the IRS.

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Qui Tam, IRS, CFTC, and SEC Whistleblower Claims Update: Today's Whistleblower Law Symposium A Success

March 18, 2015

Since 2007, top officials from federal and state agencies and many of the country's experts in whistleblower cases have gathered in Atlanta to discuss and debate anti-fraud efforts at the Whistleblower Law Symposium.

Today I was excited to chair our Whistleblower Law Symposium once again, as these experts explored the latest developments in qui tam cases under the False Claims Act, and SEC whistleblower, CFTC whistleblower and IRS whistleblower claims. The breadth of expertise of today's speakers was unusual.

First, top enforcement officials from California, Georgia and Texas shared their approaches and priorities under their state False Claims Acts. We were honored to hear from Britt Grant, Solicitor General of Georgia, about Georgia Attorney General Sam Olens' impressive new efforts to stop the theft of taxpayer funds.

Joining Britt Grant were California's Nicholas Paul, Texas' Ray Winter, and Georgia's Van Pearlberg, who described how their offices battle Medicaid fraud that is brought to light in state False Claims Act cases. A special thanks goes to Jim Breen for moderating this discussion and sharing his own experiences in working with the states in pursuing large health care fraud cases.

At today's Whistleblower Law Symposium, Jim Breen joined me in presenting former Rep. Edward Lindsey with the "Integrity in State Government Award" from the Taxpayers Against Fraud Education Fund.

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Today's SEC Whistleblower Award to Former Officer of Company Shows Flexibility of SEC Whistleblower Rules

March 2, 2015

The SEC announced today its first SEC Whistleblower award to a former company officer. The award of a half-million dollars was for "original, high-quality information about a securities fraud," which resulted in an SEC enforcement action with sanctions of more than $1 million.

Typically, corporate officers, directors and other corporate fiduciaries are not eligible for SEC Whistleblower awards when they learn of fraud through employee reports. The SEC built in flexibility in its rules, however, when the officer waits "more than 120 days after other responsible compliance personnel possessed the information and failed to adequately address the issue." Otherwise, frauds that a dishonest company refuses to address might otherwise go unreported.

We have followed the new SEC Whistleblower Program since the Senate staff consulted us in its drafting of the SEC whistleblower provisions of the 2010 Dodd-Frank law. We represent SEC and CFTC whistleblowers in claims that concern frauds sometimes as large as $1 billion.

This is the fifteenth whistleblower compensated by the SEC, with awards now approaching $50 million.

Congratulations to the SEC's Sean McKessy for continuing to develop this important SEC Whistleblower Program.

The SEC's press prelease can be found here.

SEC Welcomes SEC Whistleblowers Who Are Foreign Citizens Living Abroad

September 23, 2014

Yesterday's record award to an SEC whistleblower has far-reaching consequences because the SEC made clear it will reward foreign citizens living abroad who meet its criteria for a whistleblower award.

This decision rejects any suggestion that the SEC Whistleblower Program's reach ends at the nation's borders. The SEC recognized that a leading federal appeals court imposed such a limitation on the anti-retaliation provisions of the Dodd-Frank law, which authorized the SEC Whistleblower Program, but announced it is taking a different approach to whistleblower awards:

"[A]lthough we recognize that the Court of Appeals for the Second Circuit recently held that there was an insufficient territorial nexus for the anti-retaliation protections of Section 21F(h) to apply to a foreign whistleblower who experienced employment retaliation overseas after making certain reports about his foreign employer, Liu v. Siemens, __ F.3d __, 2014 WL 3953672 (2d Cir. Aug. 14, 2014), we do not find that decision controlling here; the whistleblower award provisions have a different Congressional focus than the anti-retaliation provisions, which are generally focused on preventing retaliatory employment actions and protecting the employment relationship."

The SEC's forward-thinking approach is exactly what a successful whistleblower program needs. U.S. investors receive the greatest protection when fraud is reported by anyone, regardless of their location or citizenship.

SEC Whistleblower Receives Record Award of $30 Million

September 22, 2014

Today the SEC Office of the Whistleblower announced the largest-ever award to an SEC whistleblower: $30 million to a whistleblower living abroad.

The size of the award reflects the SEC's seriousness about utilizing whistleblowers' information to expose major securities violations. The SEC described this as “ongoing fraud that would have been very difficult to detect” without the whistleblower, according to the Director of the SEC’s Division of Enforcement, Andrew Ceresney.

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, added that this award demonstrates the "international breadth" of the SEC whistleblower program.

We have followed the SEC Whistleblower Program from its birth in the 2010 Dodd-Frank legislation, when we were consulted by Senate staff on what would make it successful. When we met with each SEC Commissioner in 2011 to provide input on the Rules for the new whistleblower program, we were encouraged that the SEC would make effective use of this important new tool for protecting investors.

Since 2010, the SEC has added to its ranks industry specialists with backgrounds that better enable the SEC to work cases brought by whistleblowers with "inside" knowledge of the financial industry.

The $30 million award should only attract more persons with knowledge of significant securities fraud and other violations. We applaud Sean McKessy and his staff for this groundbreaking award.

The SEC's decision may be found here.

What the Just-Released 2013 IRS Whistleblower Office Annual Report Means for Future Tax Whistleblowers

April 6, 2014

The just-released FY 2013 IRS Whistleblower Office Annual Report reveals clues to what the future holds for tax whistleblowers.

Steve Whitlock, Director of the IRS Whistleblower Office, gave a preview last Fall. Listening to an audience react enthusiastically to his SEC counterpart Sean McKessy discuss awarding more than $14 million to a whistleblower, Whitlock wryly observed that the IRS had "only" awarded $50 million to whistleblowers in FY 2013.

To those who follow the IRS Whistleblower Program closely, Whitlock's comment was a rare moment to take a bow of sorts. It was a brutal year in which Whitlock's boss, Acting Commissioner Steve Miller, lost his job as the IRS faced attacks that it had politicized reviews of organizations claiming tax-exempt status. Although the Whistleblower Office played no role in that controversy, Sen. Grassley and others also scorned the IRS and Treasury for obstructing Congress' mandate to establish a robust whistleblower program.

The 2013 Whistleblower Office Report has provoked similar criticism, in part because the $50 million paid to whistleblowers in 2013 was less than half the amount paid in 2012. Yet, in 2012, $104 million went to a single whistleblower, former UBS banker Bradley Birkenfeld, in an historic claim that produced a massive recovery for the IRS.

IRS agents who worked the UBS case long ago told me they abhorred the idea of paying Birkenfeld an award because of his misdeeds that led to his felony conviction, and yet Whitlock refused to succumb to great pressure to deny Birkenfeld an award. Instead, he applied the law as written by Congress--which is evidence that Whitlock is not the problem.

The Report reveals that the IRS has paid only nine claims under the "new" whistleblower statute enacted in December 2006. The IRS can do much better, as Sen. Grassley regularly reminds the Service. Obstruction and delay by persons outside the Whistleblower Office appear the reasons more whistleblower awards have not yet been paid.

The danger for future tax whistleblowers--at which the 2013 Report hints--is that new IRS regulations to be released in 2014 will effectively contradict and undermine the tax whistleblower statute. As we have testified before the IRS, it appears that some within Treasury, Chief Counsel, and the IRS have already sought to impede development of the whistleblower program that Sen. Grassley believed Congress was creating in 2006. The Report mentions in passing earlier examples such as refusing to pay awards on criminal fines, and adding a two year delay to essentially every claim..

I remain optimistic that, with someone like Director Whitlock who has shown the backbone and principle to follow the law in difficult decisions, the IRS Whistleblower Program will be successful. To overcome the obstructionists, that success may yet require Congress to act decisively to ensure that IRS Whistleblower Program is allowed to follow the tried and true path of the False Claims Act.

The False Claims Act, the nation's leading whistleblower law long championed by Sen. Grassley, has been immensely effective in combatting fraud through encouraging and rewarding whistleblowers. The new IRS Whistleblower regulations to be announced will likely sound the alarm to Sen. Grassley once more to take action.

New York False Claims Act Case Against Sprint Nextel Takes Giant Step Forward

February 27, 2014

In a momentous decision that will impact many future cases, New York Attorney General Eric Schneiderman has just won a major victory in his pioneering tax fraud case against Sprint Nextel Corp.

The Appellate Division unanimously affirmed the trial court's 2013 ruling (background discussed here) to allow Schneiderman's first tax enforcement case under the New York False Claims Act to proceed.

The Complaint alleges that Sprint unlawfully failed to collect and pay $130 million in New York sales taxes on a portion of its revenue from fixed monthly access charges. Like the federal False Claims Act, the New York False Claims Act provides for recovery of three times the amount of damages incurred--"treble damages."

A major aspect of Schneiderman's victory was that it makes Sprint potentially liable under the New York False Claims Act for tax fraud that preceded the Act's 2010 amendments to include tax violations. In fact, the court affirmed the trial court's decision allowing the case to proceed in all respects:

The court properly denied the motion to dismiss the complaint in its entirety. Plaintiffs' complaint adequately alleges that defendants violated New York's False Claims Act (State Finance Law § 189[1][g]), Executive Law § 63(12) and Article 28 of the Tax Law by knowingly making false statements material to an obligation to pay sales tax pursuant to Tax Law § 1105(b)(2). Contrary to defendants' interpretation, the Tax Law provision is not preempted by the Federal Mobile Telecommunications Sourcing Act (4 USC 116 et seq.).

The court also properly rejected defendants' argument that the New York False Claims Act with respect to statements made under the Tax Law should not be given its stated retroactive [*2]effect. Defendants fail to show that the Act's sanction of civil penalties, including treble damages, is so punitive in nature and effect as to have its retroactive effect barred by the Ex Post Facto Clause (US Const, art I, § 10).

We once again applaud the efforts of Attorney General Schneiderman and his office to protect the public's purse though the New York False Claims Act. The case shows the value that tax whistleblowers can bring to stop those who refuse to pay their fair share of the tax burden.

The Attorney General's announcement is linked here.

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First Large SEC Whistleblower Award Is Encouraging, As SEC's "Loss" in Mark Cuban Case May Be

October 21, 2013

"Government shutdown" month (October 2013) has brought encouraging news from the SEC--including some good news you might not realize.

On October 1, the SEC announced its first SEC whistleblower award of more than $1 million. The Commission's Office of the Whistleblowerer led by Sean McKessy awarded more than $14 million to a whistleblower who remains confidential. According to the SEC, the whistleblower's information "led to an SEC enforcement action that recovered substantial investor funds."

Two weeks later, a Texas jury found against the SEC in its insider trading case against Dallas Mavericks owner Mark Cuban. Although some see the verdict as a setback for the SEC, the Commission needs to bring cases that it believes have merit.

An ugly secret is that law enforcement officials too often don't bring cases because they are afraid to lose. We should prefer a law enforcement agency that is not afraid of losing. As the trial lawyer adage goes, if you never lose a trial, you are not trying very many.

The SEC showed it was not afraid of losing. The New York Times' Peter J. Henning has also observed that, while criticisms abound over the decision to go to trial, the case has a silver lining: "The S.E.C. lost the battle with Mr. Cuban, but preserved its ability to pursue cases that do not fit the usual paradigm of a corporate insider trading or tipping."

The False Claims Act and the New Georgia "Taxpayer Protection False Claims Act'

August 7, 2013

After I helped draft Georgia's new False Claims Act enacted last year, the "Taxpayer Protection False Claims Act," I have been asked many questions about this new whistleblower law. Like the federal False Claims Act, its "qui tam" provisions allow private citizens to report fraud against public funds and receive a share of the recovery.

What many people may not know is that Georgia's two False Claims Acts now apply to all spending by the state, and all spending by local governments.

The 2012 Act can be used by a wide array of “local government” bodies, and by citizens who know about fraud against those entities. The Act defines “local government” broadly to include “any Georgia county, municipal corporation, consolidated government, authority, board of education or other local public board, body, or commission, town, school district, board of cooperative educational services, local public benefit corporation, hospital authority, taxing authority, or other political subdivision of the state or of such local government, including MARTA.”

To answer many questions, we have uploaded here our summary of these laws, titled "The False Claims Act and the New Georgia 'TaxProtectionection False Claims Act,'" which you may download here.

Please feel free to contact us with any questions about the False Claims Act or the new Georgia Taxpayer Protection False Claims Act.

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Liechtenstein Bank Secrecy Gives Way in $23.8 Million IRS Settlement That Exposes US Tax Evaders

July 30, 2013

Another shoe dropped for offshore tax evaders today, in an encouraging sign for the IRS Whistleblower Office.

A Liechtenstein bank avoided prosecution by agreeing to turn over files on 200 U.S. customers and to pay $23.8 million for assisting U.S. taxpayers in opening and maintaining undeclared bank accounts from 2001 through 2011.

Liechtensteinische Landesbank AG (LLB-Vaduz) helped a significant number of U.S. taxpayers hide these offshore accounts, evade U.S. taxes, and file false tax returns with the IRS, according to today's announcement.

The Justice Department praised the bank's cooperation including its support for a 2012 change to Liechtenstein law that allowed DOJ to obtain the bank's files of non-compliant U.S. taxpayers.

The government's press release may be found here.

Offshore bank secrecy is giving way slowly, but surely--as long as the U.S enforcement effort continues. Although the government's announcement does not state whether a tax whistleblower was involved, whistleblowers are uniquely able to ferret out such tax evasion.

This case--like the UBS case--shows the just-being-tapped promise of the IRS Whistleblower Program.

CFTC Whistleblower Program Taps SEC Enforcement Lawyer As New Director

July 17, 2013

In January, the Commodity Futures Trading Commission (CFTC) lost to the SEC the first director of the new CFTC Whistleblower Office, Vincente Martinez. CFTC Chairman Gary Gensler has announced that he has recruited from the SEC Enforcement Division Christopher Ehrman to lead the CFTC Whistleblower Office's efforts to attract whistleblowers in the swaps and futures markets.

Mr. Ehrman most recently had been Assistant Director of the SEC's Office of Market Intelligence. His experience there should serve him well since he "oversaw the processing, review and assignment of all tips, complaints and referrals received by the SEC, " according to the CFTC's announcement.

He also served as the Co-National Coordinator for the Microcap Fraud Working Group, which sought to develop "novel ways to detect, disrupt and prosecute fraud relating to securities quoted on the OTC Market."

As we have written about during the evolution of Dodd-Frank, the CFTC Whistleblower Program was created to reward persons who report violations of the Commodity Exchange Act.

Unlike the SEC, the CFTC has yet to announce a payment to a whistleblower under the new program. The greater number of tips received by the SEC, and perhaps the complexity of the violations reported, may be a factor.

We wish Mr. Ehrman great success in making the new CFTC Whistleblower Program a reality.