Whistleblower Lawyer Blog

This week in a rare occurrence, the heads of the IRS and SEC Whistleblower programs and federal and state False Clams Act officials participated in one conference to discuss prosecuting and defending whistleblower cases.

Our firm has organized this "Whistleblower Law Symposium" since 2007 to explore developments in the growing number of federal and state whistleblower laws that seek to stop fraud against taxpayer funds.

"Sequestration" threatened to keep some major speakers from participating because of travel restrictions. The solution was "beaming in" Sean McKessey, Director of the SEC's Office of the Whistleblower, and Steve Whitlock, Director of the IRS Whistleblower Office, to join our panelists by videoconference.

The conference began with an overview I provided of the country's major whistleblower law, the False Claims Act. Its successes since 1986 inspired Congress to create both the new IRS Whistleblower Program in 2006, and the new SEC Whistleblower Program in the 2010 Dodd-Frank Act.

An excellent discussion of the False Claims Act in health care followed, led by Rick Shackelford of King & Spalding, LLP. Rick was joined by my former partner John E. Floyd of Bondurant, Mixson & Elmore, LLP; Daniel P. Griffin of Miller & Martin, PLLC; and Marlon Wilbanks of Wilbanks & Bridges, LLP.

Another panel then analyzed Georgia’s New 2012 “Taxpayer Protection False Claims Act, a 2012 state False Claims Act that I helped draft. This law encompasses all spending by state, county, municipal, and other local governments in Georgia. Nels Peterson, who as Georgia's Solicitor General is charged with overseeing the implementation of the new statute, explained the framework of the law.

Because the new state FCA applies to fraud against local governments as well, we also heard how the Act might be used by cities and counties. Mary Carole Cooney, former Atlanta Deputy City Attorney, and Bill Linkous, former Dekalb County Attorney, provided their perspectives on how the new whistleblower law might expose fraud in various areas of local government spending.

SEC Whistleblower Chief Sean McKessey then joined us electronically to discuss the most pressing issues in bringing (and defending) SEC Whistleblower claims.

Continue reading "IRS & SEC Whistleblower Directors Join False Claims Act Officials for Conference on Whistleblower Issues" »

Each December, some of the nation's top health care lawyers gather to discuss developments in prosecuting and defending health care fraud cases at the Health Care Fraud Institute in Atlanta. Because the qui tam law--the False Claims Act- is the government's primary civil tool to combat fraud and false claims, the False Claims Act developments are a highlight of the discussion.

This year, I was honored again to be invited to participate as part of the False Claims Act panel with Rick Shackelford, an accomplished defense lawyer at King & Spalding, LLP; Marlan Wilbanks, my colleague; and our excellent moderator, Jim Breen.

One of the major developments we focused on was the increasing number of cases in which the Justice Department relies on private attorneys representing whistleblowers ("relators") to litigate cases, since the government has limited resources.

This practice allows the government to leverage its resources in the "public-private partnership" model that Congress intended to make the law more successful. governmentrmment either works alongside private counsel, or has private attorneys take the lead in cases that the government declines initially. When private counsel is successful, the government often intervenes later to conclude the case.

Joe Whitley of Greenburg Traurig and Paul Murphy of King and Spalding organized the program, which also included insights from government counsel.

The SEC Whistleblower Program authorized in 2010's Dodd-Frank law has greater significance because the SEC and the Justice Department share jurisdiction over Foreign Corrupt Practices Act cases.

Today, SEC Director of Enforcement Robert Khuzami and Assistant Attorney General Lanny Breuer released the "Resource Guide to the U.S. Foreign Corrupt Practices Act." They describe the Guide as "a unprecedented undertaking by DOJ and SEC to provide the public with detailed information about our FCPA enforcement approach and priorities."

FCPA investigations have increased significantly in the past few years, and the dollar amount of these cases is often quite large. FCPA cases brought by SEC whistleblowers will only add to amount of FCPA violations uncovered.

The Guide is a primer on the FCPA. The SEC and DOJ have attempted to summarize "who and what is covered by the FCPA’s anti-bribery and accounting provisions; the definition of a 'foreign official'; what constitute proper and improper gifts, travel and entertainment expenses; the nature of facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context."

Chapter 3 describes the accounting provisions over which the SEC has authority. When a defendant pays commercial bribes to foreign officials, the offending companies often disguise the payments through false accounting entries. The FCPA creates civil liability for such violations of the Act's “books and records” provision.

The FCPA's “internal controls” provision is also important, as it requires that issuers devise and maintain a system of internal accounting controls to assure management’s control,authority, and responsibility over the firm’s assets.

Continue reading "SEC and Justice Department Issue "Resource Guide to the U.S. Foreign Corrupt Practices Act"" »

Today marks the end of IRS Commissioner Doug Shulman's tenure, just as President Obama and Congressional leaders shift to addressing the looming "fiscal cliff." Rather than disrupt the process of narrowing the deficit, Shulman's departure could actually assist it--in an important way that does not depend on raising tax rates.

The timing is perfect for a new IRS leader to back fully a bipartisan effort long advocated by Republican Sen. Chuck Grassley (R-Iowa) to tackle the "tax gap"--the more than $300 billion owed but not paid by tax cheats each year. Grassley seeks to expand the IRS Whistleblower Program to fulfill the promise of changes to the tax whistleblower law that Grassley sponsored almost six years ago.

Grassley should enlist as a ready ally President Obama, whose Justice Department is about to announce a record year of fraud recoveries in False Claims Act cases brought by whistleblowers. Grassley also has been the driving force behind that highly successful law since at least 1986.

Although the IRS has assembled highly skilled professionals to staff its Whistleblower Office led by Director Steve Whitlock, Grassley's efforts have been stymied by bureaucratic resistance among others in the IRS. Those naysayers create endless obstacles to attracting whistleblowers--even though the Treasury Inspector General has determined that whistleblower information is essentially twice as effective as other sources for uncovering tax violations.

The Justice Department has learned over the past quarter century that working closely with "insider" whistleblowers and their counsel is the key to unravelling significant fraud schemes. In contrast, too many in the IRS refuse to learn from the DOJ's experience and to heed Congress' directive to expand the use of whistleblowers. For example, after convincing Grassley's staff in 2006 that they could and would work closely with whistleblowers, the IRS Chief Counsel's Office over almost six years has refused to approve even a single agreement with a whistleblower to allow that cooperation.

Continue reading "As IRS Commissioner Steps Down Today, How the Next IRS Commissioner Can Immediately Help Address the "Fiscal Cliff" by Expanding the IRS Whistleblower Program" »

Each Fall, the Justice Department tallies its recoveries of taxpayer dollars that have been pilfered through fraud directed at federal programs. A year ago, DOJ proudly announced $3 billion in recoveries in False Claims Act cases, and a record $8.7 billion recovered in the three years starting in 2009.

Late this year, DOJ will announce that its fraud recoveries tripled from $3 million in FY 2011 to more than $9 million in FY 2012. This trend of increasingly large recoveries of stolen taxpayer funds proves once again the effectiveness of laws like the False Claims Act, which incentivize whistleblowers to expose fraud through its qui tam provisions.

Although health care cases account for the vast majority of FCA recoveries, growing areas include banking, mortgage, and pension fraud cases involving fraudulently obtained taxpayer dollars, as my colleagues at Taxpayers Against Fraud point out. States are also using their own false claims laws to recover stolen taxpayer funds.

In qui tam cases, private citizen whistleblowers (known as "relators") file suit on the government's behalf to expose fraud against taxpayer funds. The whistleblowers can receive 15-25% of the government's recovery of stolen funds if the government prosecutes the case, and 25-30% if the government leaves it to the whistleblower to pursue the recovery.

Consider the history of False Claims Act recoveries that have totalled more than $39 billion since 1986, when Congress authorized meaningful rewards to whistleblowers:

Continue reading "Another Record Year--False Claims Act Recoveries Triple in FY 2012" »

Recently, I was asked to explain the newly enacted "Georgia Taxpayer Protection False Claims Act" to some 200 city and county attorneys in Georgia. Although our firm has qui tam False Claims Act cases pending around the country, I take particular interest in making successful this law that I helped draft.

Since then, I have had many calls from attorneys about the new state False Claims Act, which includes qui tam provisions allowing whistleblowers to file suit and share in the recovery. Thus, I am summarizing here some major points about the law:

The Georgia Taxpayer Protection False Claims Act is a state version of the extremely successful federal False Claims Act (FCA). The FCA is the federal government’s primary civil tool for combating fraud directed at taxpayer funds. The majority of states already have such a law designed to stop and deter fraud against state government.

Background: The FCA originally was enacted during the Civil War. In 1986, President Ronald Reagan signed into law an amended version of the FCA, which has since generated more than $30 billion in recoveries from those who have defrauded the government. The FCA also helps deter fraud by those who do business with the government.

State False Claims Acts: As noted, based on the federal FCA’s great successes since 1986, Sen. Charles Grassley has helped lead efforts to encourage states to pass their own versions of the FCA. Congress established financial incentives for states that enact their own versions of the FCA that closely follow the FCA’s terms, through the Deficit Reduction Act of 2005. (Those states receive an extra 10% of Medicaid fraud recoveries.) Congress amended the federal FCA in 2009-2010 to increase the FCA’s effectiveness.

At least twenty-eight other states now have enacted their own False Claims Acts, which are also based on the federal FCA. The majority of these states’ laws protect all state spending of any nature.

On May 24, 2007, Georgia’s “State False Medicaid Claims Act” became law. It is based on the 2007 federal FCA, but protects only Medicaid spending. The new 2012 Georgia Taxpayer Protection False Claims Act now protects all state and local government spending.

In sum, the new Georgia Taxpayer Protection False Claims Act (1) protects all state and local government spending from fraud, and not simply Medicaid spending; and (2) amends the State False Medicaid Claims Act to conform to the 2009-2010 federal FCA amendments. All states are required to conform to those amendments by 2013, or lose the federal incentive of an additional 10% of Medicaid fraud recoveries.

Continue reading "Executive Summary of “Georgia Taxpayer Protection False Claims Act”" »

This morning's announcement that the SEC has made its first award to a whistleblower under its new SEC Whistleblower Program established by Dodd-Frank leaves some clues about the message the SEC intends to send.

Speed: The SEC wasted no time--the award came barely two years after Dodd-Frank's passage, and a little more than a year after the SEC finalized its SEC whistleblower rules. SEC Office of the Whistleblower Sean McKessy had seemed eager to have the SEC move quickly to utilize whistleblower information, and he upheld his end of the bargain in making a prompt award.

Modesty of amount: The first award was $50,000, which was 30% of the amount collected by the SEC--the maximum percentage permitted. I was surprised that the SEC did not select a larger dollar case for its first award, in order to attract further attention to the program. It may be that this case was the first one mature enough to conclude. If so, I applaud Sean McKessy for simply making the awards as soon as they can reasonably be made.

Encouraging percentage: Director McKessy did make a strong statement in awarding 30% of the SEC's recovery to date in this first award. As additional sums are collected, the whistleblower will continue to receive 30% of those collections.

Harm prevented: The SEC wisely emphasized how the whistleblower's actions cut off the scheme before more victims lost money. The Commission described how the whistleblower "provided documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims." It is hard to argue with stopping fraud before it victimizing others.

One whistleblower denied: As if to show he is no pushover, Director McKessy simultaneously denied a claim by another whistleblower. The SEC explained it was denying another whistleblower a share of the same recovery "because the information provided did not lead to or significantly contribute to the SEC’s enforcement action."

The stature of this long-needed whistleblower program will only grow so long as the SEC leadership keeps up the momentum in using and rewarding whistleblowers to stop fraud against investors.

In presenting programs on how to protect whistleblowers from criminal and civil liability, we have watched in amazement as UBS whistleblower Bradley Birkenfeld got himself incarcerated for a felony conviction--despite apparently being one of the most valuable IRS whistleblowers ever.

Today's announcement of Birkenfeld's release after serving almost 30 months of a 40 month prison sentence--reportedly based on "good time" credits accrued, not some change of heart by the Justice Department lawyers who prosecuted him--comes amidst blistering criticism by Sen. Chuck Grassley of impediments that some IRS officials have created to the functioning of the IRS Whistleblower program. Grassley was so frustrated that he refused to allow nominations of two persons for Assistant Secretary of the Treasury positions to proceed until July 30, after his arm-twisting for information about the tax whistleblower program had made some headway.

Now that Birkenfeld has been released, attention will shift to his claim to receive what he contends is his lawful percentage of the huge sums that the IRS is reaping based on his disclosures about UBS and US taxpayers. Based on my discussions with IRS criminal agents, they will howl if Birkenfeld receives any reward of significance.

Some believe that Birkenfeld's "holding back" cost the IRS dearly in its investigation of a former Birkenfeld/UBS client. They will argue, "Why reward a convicted felon?"

On the opposite extreme, some persons who advocate for whistleblowers have loudly condemned the entire prosecution of Birkenfeld. Those arguments have struck me as short-sighted. They ignore the principle that there is a rule of law that must apply to all of us, including whistleblowers.

Based on our review of available Birkenfeld court filings and transcripts, he apparently violated the cardinal rule that a whistleblower cannot "hold back" information about his own alleged misdeeds in his "cooperation" with the government. This is not a novel theory, but a long-settled principle.

To obtain a "pass" for one's own felonious conduct, one must tell it all. (Read Birkenfeld's sentencing transcript to see how he failed to dispute then the essential facts relied on by the government). Rather than frighten potential whistleblowers, whistleblower attorneys should encourage them to learn the facts by pointing out Birkenfeld's apparent errors--and show how easily those errors can usually be avoided.

Except for those who have a financial interest in representing Birkenfeld, I do not see how whistleblower advocates would fail to appreciate how failing to prosecute Birkenfeld under these circumstances would have been even more damaging to the cause of whistleblowers generally.

Given that he apparently flouted this cardinal rule and thus allegedly misled prosecutors, his serious misconduct cannot be ignored. Opponents of compensating whistleblowers for revealing fraud would use an unchastened and unprosecuted Birkenfeld as "red meat" to try to undermine--if not repeal--the IRS whistleblower law.

Continue reading "Release of Incarcerated UBS Whistleblower Birkenfeld Shifts IRS Whistleblower Debate to New Round of Issues" »

When the SEC debated in 2011 requiring "internal" reporting within companies as a prerequisite to filing an SEC Whistleblower claim under Dodd-Frank, business interests howled that any other rule would "destroy" compliance programs.

Never mind that the vast majority of whistleblowers have always raised concerns about illegal conduct internally before reporting to the government. Whistleblower lawyers already knew that fact from twenty-five years of experience with the False Claims Act--the nation's major qui tam whistleblower law that inspired the new SEC Whistleblower Program. The availability of rewards had not dissuaded whistleblowers from reporting their concerns internally for a quarter century.

When I met in 2011 with SEC Chairman Mary Schapiro and the other SEC Commissioners with other whistleblower advocates to discuss the proposed SEC Whistleblower rules, it was apparent--and shocking--that this false argument was being considered seriously. We urged the SEC to rely on these years of experience with the False Claims Act and to reject any such requirement.

A report just issued by the Ethics Resource Center confirms that the SEC wisely saw through this argument in not mandating internal reporting, but instead it treating it as a "plus" factor in making awards.

As summarized in the Wall Street Journal blog, "in 2011 only 2% of employees solely went outside the company and never reported the wrongdoing they observed to their employers. For those deciding whether or not to go outside the company, a potential monetary award was not a major driving factor—82% said they’d report externally if it was a big enough crime, but only 43% said they’d do so for a reward."

When internal reporting fails to correct the illegality, or is futile because the fraud is directed from the top of the organization, only then do most whistleblowers consider reporting to law enforcement. The report confirms these basic facts, and demonstrates the wisdom of the SEC's approach to its whistleblower rules.

The nation's newest state False Claims Act was signed into law today by Georgia Governor Nathan Deal, after passing unanimously in both houses of the legislature.

The "Georgia Taxpayer Protection False Claims Act" protects all taxpayer dollars spent not only by the State, but also by counties, municipalities, school districts, hospital authorities, and other local public bodies or entities.

Like the federal False Claims Act, this Act combats fraud and false claims against taxpayer funds by imposing "treble" damages and civil penalties of $5,500 to $11,000 for each false or fraudulent claim. It also provides rewards to whistleblowers.

Because I was asked to provide input on this bill and to testify at each legislative hearing, I was invited to today's signing. Also participating were Rep. Edward Lindsey, the chief legislative sponsor, and Rep. Matt Ramsey.

Participating in today's signing ceremony with Governor Nathan Deal are (from left) Rep. Matt Ramsey, Rep. Edward Lindsey, and Michael A. Sullivan of Finch McCranie, LLP.

Georgia Attorney General Sam Olens and his staff reportedly canvassed other state Attorneys General to discuss "best practices" in formulating such laws that protect against fraud. The Attorney General will have the authority to investigate violations and pursue these cases, and can delegate that authority to district attorneys or other local government lawyers to pursue violations that affect local government bodies.

The majority of states have enacted a state version of the False Claims Act, the nation's major "whistleblower" law. Until now, Georgia's State False Medicaid Claims Act applied only to Medicaid spending. (This bill, HR 822, also updated the State False Medicaid Claims Act to make it consistent with the federal False Claims Act after its 2009-2010 amendments.)

Compared to other states that have successfully recovered hundreds of millions of dollars under their state versions of the False Claims Act, to date Georgia has devoted far fewer resources to that effort. Because these laws add far more to state revenues than they cost in dollars to implement, Georgia's citizens will be best served if the Attorney General is provided substantial resources to stop those who would steal taxpayer funds, and to recover damages from those who commit fraud.

I commend Rep. Lindsey and the other legislative sponsors of the Georgia Taxpayer Protection False Claims Act. Now, it is up to both citizens and government officials to see that the law is used to stop and redress any significant fraud against taxpayers.

A critical issue in qui tam cases under the False Claims Act is how government lawyers and whistleblower attorneys prove damages caused by the fraud and false claims involved.

This whistleblowerlawyerblog's co-author MIchael A. Sullivan has been asked to moderate a panel discussion on "Recent Developments on Damages and Penalties" at a leading American Bar Association conference on the False Claims Act, the 2012 ABA National Institute on the Civil False Claims Act and Qui Tam Enforcement, on June 6-8, 2012 in Washington.

Joining me for this discussion of damages and penalties under the False Claims Act are Sara McLean, Assistant Director of the Commercial Litigation Branch of the Department of Justice; Paul Kaufman, Assistant United States Attorney for the Eastern District of New York; Jamie Bennett of Ashcraft & Gerel, LLP; Robert S. Salcido of Akin Gump Strauss Hauer & Feld LLP; and Katherine Lauer of Latham & Watkins LLP.

Our focus will be on calculating and proving FCA damages, especially in cases where the damages are not easily ascertainable, and the assessment of civil penalties. The FCA authorizes recovery of "treble" damages (three times actual damages) and penalties of $5,500 to $11,000 for each false or fraudulent claim.

For more information on the False Claims Act, please click here for our article that explains the Act in greater detail.

In a controversial decision today, the IRS squandered an opportunity to help close the tax gap by attracting more whistleblowers with significant information about large tax schemes. The public will suffer as a result.

Stubbornly, the IRS rejected calls for a common sense approach to rewarding tax whistleblowers, as it refused to modify a proposed rule that narrowly defines the categories of cases that should justify awards to whistleblowers.

At issue is what Congress meant by the term "collected proceeds"--an undefined phrase in the 2006 tax whistleblower law. This law unquestionably sought to expand the number and variety of whistleblower claims presented to the IRS.

As my colleague Richard Rubin and I pointed out in comments to the IRS, Senator Grassley modeled changes to this tax whistleblower law on the dramatically successful False Claims Act, the nation's major whistleblower law. That law has returned some $30 billion to the Treasury by rewarding whistleblowers who help unearth fraud against taxpayers, and helps deter future fraud.

Today, Senator Grassley saw that some in the IRS want to undermine his efforts and ignore Congress's plain intent--essentially supplanting Congress's role as lawmaker. The IRS announcement has insisted on a narrow reading of that phrase. It rejected the commonsense notion that any whistleblower who can help provide a "net benefit to the Treasury" should be rewarded.

To illustrate, although the IRS' own past guidance reveals that it formerly paid rewards based on criminal fines, it now has declared criminal fines off-limits from whistleblower rewards. The IRS also has refused to recognize all benefits provided in preventing improper use of net operating losses (NOLs), as well as a variety of other future benefits to the Treasury.

When Congress in 1986 amended the nation's major whistleblower law that helped inspire the new IRS Whistleblower Program, the False Claims Act, it took a few years before the Department of Justice realized just how essential encouraging and rewarding whistleblowers is to enforcement of the law.

We wish a speedy learning curve for the IRS. With a tax gap of more than $350 billion annually in owed but unpaid U.S. taxes, the public needs the IRS to heed Senator Grassley's words--that whistleblowers are to be welcomed--because the public sorely needs them.