Whistleblower Lawyer Blog

Could a meaningful SEC "whistleblower" program prevent the next Madoff or Stanford debacle? The SEC and legislators are now seriously considering that question. That Madoff managed to defraud investors for so long proves that the current system is inadequate.

Past experience proves that incentives to whistleblowers to report illegal acts work. The nation's primary "anti-fraud" statute that protects federal funds, the False Claims Act, has been extremely successful in encouraging whistleblowers to come forward by allowing them to share in the government's recovery.

As we have written about extensively on this whistleblower lawyer blog, based on the successes of the False Claims Act in fighting and deterring fraud, Congress has encouraged states to enact their own similar state false claims acts with incentives for whistleblowers to expose fraud (and almost half of the states now have such laws).

Likewise, in December 2006 Congress created the first meaningful IRS Whistleblower Program, which we regularly follow here. At present, the IRS Whistleblower Program created in December 2006 may help ferret out some SEC violations when the violator also has significant tax liability to the IRS.

Hedge fund abuses with tax consequences are already the subject of some IRS Whistleblower claims, and more will follow as the IRS Whistleblower Program gains notoriety. Based on our dealings with the IRS in pursuing these claims, this IRS Whistleblower Program has great promise.

But the IRS provisions simply do not cover all of the wrongdoing that goes on. Thus, the SEC desperately needs its own "whistleblower" program, with meaningful incentives to encourage citizens who report wrongdoing.

The SEC's existing "whistleblower" provisions are too limited to be effective. 15 U.S.C. § 78U-1(e) authorizes a "bounty" to whistleblowers of what is effectively 0-10% of civil penalties paid in insider trading cases. (See full text here.) Thus, the SEC's existing incentives are limited to insider trading cases, and do not address any other securities laws violations.

Like the "old" IRS Whistleblower rewards, very few awards have been made by the SEC, even in insider trading cases. Moreover, there is no "right" to a reward even if the whistleblower's information causes the government to recover money from wrongdoers. A system of small, discretionary, and infrequent payments is simply ineffective to cause whistleblowers to come forward.

We understand that the SEC has been looking to correct this gap in protecting investors. This week, Rep.Paul E. Kanjorski (D-PA), the Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, released a letter from U.S. Securities and Exchange Commission (SEC) Inspector General H. David Kotz. The IG seems to understand the need to modernize the SEC's incentives to whistleblowers, in his recommendations below:

Continue reading "New SEC Whistleblower Program & Hedge Fund Investor Protections On Way, to Supplement IRS Whistleblower Program? Congress & SEC Consider Changes After Madoff, Stanford Schemes " »

The statute authorizing the SEC in insider trading cases to pay whistleblowers "bounties" of up to 10% of civil penalties is below. (See our separate post discussing why the SEC needs a new, meaningful whistleblower program to help stop the next Madoff scheme.)

Continue reading "SEC "Bounties" for Whistleblowers--The Statute" »

Today was a monentous day for those who believe in integrity in how taxpayer funds are treated.

President Obama signed into law today the Fraud Enforcement and Recovery Act of 2009, which makes important amendments to the country's most important tool for fighting fraud, the False Claims Act.

Also important today, the Obama administration announced an expansion of DOJ's health-care strike forces, which are designed to combat fraud in Medicare and Medicaid programs. Attorney General Eric H. Holder Jr. and Health and Human Services Secretary Kathleen Sebelius announced the initiative.

The new Fraud Enforcement and Recovery Act of 2009 protects the hundreds of billions being spent on government programs, as we have written about previously.

We will discuss in future posts how the new amendments will affect anti-fraud efforts . We congratulate all taxpayers on having Congress and the President take their interests to heart through these amendments.

Last Fall, and again in March 2009, whistleblower lawyer blog co-author Michael A. Sullivan had the pleasure of sitting down with IRS Whistleblower Office Director Steve Whitlock, for an in-depth interview on the "best practices" for lawyers in pursuing IRS Whistleblower claims for their whistleblower clients.

The interview has just been published in the April 2009 False Claims Act & Qui Tam Quarterly Review. It includes some of the important points made by Director Whitlock at the IRS Whistleblower Boot Camp sponsored by Taxpayers Against Fraud in March, 2009, about which we have written previously.

The interview covers the progress of the IRS Whistleblower Office since it was established in early 2007, how the IRS process differs from pursuing qui tam cases under the False Claims Act, and the “best practices” for attorneys who pursue IRS Whistleblower claims.

We appreciate how generous Mr. Whitlock has been with his time in helping educate lawyers who wish to bring IRS Whistleblowers claims, which was the reason for the IRS Whistleblower Boot Camp in March.

IRS Whistleblower Office Director Steve Whitlock (right) participates in a panel discussion moderated by Whistleblower Lawyer Blog Co-Author Michael A. Sullivan (left) at the IRS Whistleblower Boot Camp.

Some excerpts from the interview are below (more will follow later), and the entire interview should be available through Taxpayers Against Fraud on a subscription basis:

Michael Sullivan: Steve Whitlock, thank you for agreeing to speak with me for the TAF Quarterly to discuss the “Best Practices for Lawyers in Pursuing IRS Whistleblower Claims.”

Fundamentally if there is serious tax noncompliance, if there’s evidence that there is real money involved in it, the Service is going to be interested. If it is below the $2 million threshold in the statute, we still have the backup of the pre-amendment rule, subsection (a) of the statute. We still pay, we still accept, we still process those claims.

Continue reading "Interview with IRS Whistleblower Office Director Steve Whitlock on "Best Practices in Pursuing IRS Whistleblower Claims" Is Released" »

Today is an historic day--the House of Representatives has passed the Fraud Enforcement and Recovery Act of 2009 by a vote of 367-59. The Act includes long-needed amendments to the nation's primary anti-fraud law, the False Claims Act, about which we have written often.

The amendments are designed to protect the hundreds of billions in taxpayer funds now being spent from fraud affecting TARP, other "stimulus" measures, Medicare and Medicaid, national defense including the Iraq and Afghanistan wars and reconstruction efforts, and countless other government programs.

The Senate approved the Act by a vote of 92-4 on April 28th. A conference committee now will consider reconciling differences in the versions of the bill.

The new law closes a series of "loopholes" that allowed dishonest contractors to cheat the American public, and is intended to restore the False Claims Act to its original intent.

Our whistleblower lawyer blog has provided previously a detailed explanation of how the False Claims Act works by allowing private citizen "whistleblowers" (also known as qui tam "relators") to report fraud and share in the government's recovery. The False Claims Act also protects whistleblowers from retaliation.

Much will be written about the new amendments, which will greatly strengthen the Act's effectiveness in combating fraud. We congratulate those in Congress with the wisdom to pass the amendments, as well as all involved in this effort!

Continue reading "Major Whistleblower Law Development--False Claims Act Amendments Pass House of Representatives, As Part of the "Fraud Enforcement and Recovery Act of 2009" " »

We have written previously how the "bailout" measures such as TARP--the Troubled Assets Relief Program--and other "stimulus" measures must have effective oversight,disclosure, and anti-fraud provisions to protect those funds from those who look to commit fraud. The speed at which the government has acted to address the faltering economy will only increase the opportunities for fraud. Already, TARP whistleblowers have begun to come forward with reports of misuse of billions in TARP funds.

This week, Neal Barofsky, the Special Inspector General for the Troubled Assets Relief Program reiterated those points in his Quarterly Report to Congress. The IG described TARP as "inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering."

Barofsky's unit, known in government lingo as "SIGTARP," has opened twenty investigations that include suspected securities fraud, tax law violations, insider trading and mortgage modification fraud. We expect that his staff is working closely with the Internal Revenue Service Criminal Investigation division (“IRS-CI”), the Securities and Exchange Commission (“SEC”), and other government agencies.

The audits being conducted by Barofsky's unit address, among other things, how TARP funds are being used; compliance with executive compensation provisions; Treasury's decisions about funding the first TARP recipients and its decisions relating to Bank of America’s acquisition of Merrill Lynch; AIG and its bonuses; and the AIG counterparties that received TARP funds. These lists will only grow.

According to Barofsky, "You don't need an entirely corrupt institution to pull one of these schemes off," he said. "You only need a few corrupt managers whose compensation may be tied to the performance of these assets in order to effectively pull off collusion or a kickback scheme."

Just since last Fall, the TARP program has grown in "scope, scale, and complexity" from the original program intended to purchase up to $700 billion in “toxic” assets such as troubled mortgages and mortgage-backed securities (“MBS”). Now, TARP funds are going to twelve separate programs and could reach $3 trillion, according to this week's Report.

As a practical matter, we have found that TARP funds are at greater risk of abuse in the absence of clear restrictions on use of the funds. This glaring oversight in how TARP was originally established must be remedied immediately for anti-fraud measures such as the False Claims Act to be effective in protecting the funds. Clear restrictions and limitations on TARP funds would also allow the IRS Whistleblower Program to be used by whistleblowers who report TARP abuse and fraud.

Here is the link to the Quarterly Report to Congress by the Special Inspector General for the Troubled Assets Relief Program. The Executive Summary is reprinted below:

Continue reading "Fraud Against TARP Funds A Real Threat, Warns Special Inspector General for TARP" »

New legislation to combat financial institution fraud, securities fraud, mortgage fraud, and other fraud and abuse is gaining momentum, and brings closer long-needed amendments to restore to its intended strength the nation's major "whistleblower" law, the False Claims Act.

The Fraud Enforcement and Recovery Act of 2009 (S. 386) received support yesterday in a statement from the Administration:

The Administration strongly supports enactment of S. 386. Its provisions would provide Federal investigators and prosecutors with significant new criminal and civil tools and resources that would assist in holding accountable those who have committed financial fraud.

Specifically, the legislative enhancements would help the Department of Justice to combat mortgage fraud, securities and commodities fraud, money laundering and related offenses, and to protect taxpayer money that has been expended on recent economic stimulus and rescue packages. Further, the legislation would amend the False Claims Act (FCA) in several important respects so that the FCA remains a potent and useful weapon against the misuse of taxpayer funds. In general, this legislation would benefit U.S. taxpayers by both addressing existing fraud and deterring waste, fraud, and abuse of public funds. Moreover, S. 386 would provide needed resources to strained law enforcement agencies and prosecutors that would enable the Department and its partners to advance the pace and reach of the enforcement response to the current economic crisis. These additional resources will provide a return on investment through additional fines, penalties, restitution, damages, and forfeitures. With the tools and resources that S. 386 provides, the Department of Justice and others would be better equipped to address the challenges that face this Nation in difficult economic times and to do their part to help the Nation respond to this challenge.

We have written previously about the amendments to restore the False Claims Act to full strength, by clarifying various provisions that led some courts to weaken this important anti-fraud law.

The abuses now being exposed in the financial industry join the list of many other types of fraud designed to steal taxpayer funds--health care fraud,defense procurement fraud (especially in Iraq and Afghanistan), Hurricane Katrina fraud, and many other species of fraud and false claims.

With hundreds on billions of new federal spending underway in the TARP program and other "bailout" and "stimulus" efforts, the need is urgent to protect these funds with the most effective anti-fraud measures. That protection begins with the amendments to the False Claims Act, and we applaud this bipartisan effort to restore that critical law to its original intent.

A frequent question in our IRS Whistleblower cases is how IRS Whistleblower claims are affected by the statute of limitations. In long-running violations of the tax laws, that question can determine how much of past tax liability the IRS may be able to recover.

Yesterday, the Tax Court issued a decision that illustrates what happens when the taxpayer has engaged in fraud. (Joseph B. Williams III v. Commissioner, 2009 TNT 72-11). Because the court found that fraud was established by the taxpayer's plea to tax evasion, the court ruled that the IRS could recover for liability dating back to 1993-2000, more than six years before the IRS' notice of deficiency to the taxpayer.

The taxpayer in question, Joseph Bryan Williams, III, was an oil trader for Mobil Oil. In 1993, the taxpayer opened two Swiss bank accounts in the name of a British Virgin Islands corporation. From 1993-2000, the taxpayer had more than $7 million in deposits in these Swiss accounts, which earned more than $800,000 in interest. None of the income was included on the taxpayer's U.S. tax returns over that eight-year period, the last of which was filed in 2001.

After an IRS investigation, the taxpayer was charged criminally, and he ultimately pleaded guilty to (1) one count of conspiracy to defraud the IRS, in violation of 18 U.S.C. section 371 and (2) one count of criminal tax evasion with respect to each of the eight tax years (1993-2000), in violation of section 7201 of the Internal Revenue Code. In October 2007, more than six years after the last return was filed in 2001, the IRS issued a statutory notice of deficiency for all eight years.

The Tax Court rejected any suggestion that the statute of limitations prevented the IRS from recovering for tax years 1993-2000, since "fraud" was established:

Mr. Williams's fraud is the threshold issue in this case, not only because his liability for the fraud penalty depends on it, but also because fraud affects the period of limitations for assessment of his liability for the tax deficiencies. Generally, the IRS must assess a deficiency within 3 years of the date on which the tax return that relates to such deficiency was filed. Sec. 6501(a). For the tax years 1993 through 2000, Mr. Williams's latest-filed return (for 2000) was filed May 15, 2001. However, it was not until more than 6 years later -- on October 29, 2007 -- that the IRS issued to Mr. Williams a notice of deficiency, which is the first step in the process of assessing a deficiency. If the general rule of section 6501(a) applied, then the IRS would have failed to assess the deficiency within the period of limitations and would be barred from assessing and collecting any of the deficiencies or additions to tax for the 8 tax years at issue. However, if the deficiency was determined "[i]n the case of a false or fraudulent return with the intent to evade tax," then the IRS may assess such deficiency "at any time." Sec. 6501(c)(1). Thus, we decide as a threshold matter whether Mr. Williams is liable for fraud under section 6663. (Emphasis supplied).

Because fraud was established, no statute of limitations applied, since "'[i]n the case of a false or fraudulent return with the intent to evade tax,' then the IRS may assess such deficiency 'at any time.'"

In addition, as IRS Whistleblower Office Director Steve Whitlock pointed out in our recent "IRS Whistleblower Boot Camp," it will not be apparent to whistleblowers that, especially in large cases, the taxpayer may have agreed with the IRS to allow the statute of limitations to be extended. There also may be open audit years that allow the IRS to reach back far more than three years.

In short, there are various reasons why the IRS may be able to recover past tax liability well beyond three years.

In our March 7, 2009 "IRS Whistleblower Boot Camp," IRS Whistleblower Office Director Steve Whitlock mentioned that the IRS's priorities include the "Dirty Dozen"--a list of tax scams that is updated yearly.

The IRS has just issued its 2009 "Dirty Dozen" list, which should be of interest to potential IRS whistleblowers. It is reprinted below:

Beware of IRS’ 2009 “Dirty Dozen” Tax Scams

WASHINGTON — The Internal Revenue Service today issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.

Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.

Continue reading "IRS Announces New List of "Dirty Dozen" Tax Scams" »

In a major victory today for whistleblowers reporting fraud in the Iraq reconstruction effort, the Fourth Circuit Court of Appeals reversed a trial court's decision that took away a jury verdict from the whistleblowers or relators in this qui tam case under the False Claims Act.

The Custer Battles case has been a hard-fought one, which until this decision had produced one of the odder results found.

With hundreds of billions of U.S. dollars spent on the Iraq War and Iraq reconstruction, and with the False Claims Act supposedly protecting U.S. taxpayer funds from fraud, the whistleblowers filed a qui tam case under the False Claims Act that alleged fraud in certain contracts that addressed, among other things, replacing Iraqi currency in the Iraq reconstruction effort.

After the jury awarded a verdict to the whistleblowers, the trial court overturned it. The trial court did not view claims presented to the Coalition Provisional Authority (“CPA”) that was created and funded by the United States as the same as claims presented to the U.S. Government, even though the CPA officials were U.S. Government employees, and U.S. dollars were lost. Today's decision by the Court of Appeals reversed the trial court's decision and corrected that odd result.

This is a very positive development for whistleblowers reporting fraud in Iraq and elsewhere, as it corrects a strained interpretation of the law that has allowed fraud to go unaddressed. We congratulate everyone associated with this effort.

The Court's conclusion from the decision today is quoted below:

Continue reading "Major False Claims Act Victory for Whistleblowers in Iraq Fraud Case: Fourth Circuit Reverses Custer Battles Decision " »

Whistleblowers reporting fraud by contractors in Iraq reconstruction are coming forward, reports Stuart Bowen, the Special Inspector General for Iraq Reconstruction. The relatively calmer conditions in Iraq apparently are a factor in more whistleblowers coming forward, he believes.

From the $21 billion Iraq Relief and Reconstruction Fund, billions have been lost, according to Bowen.

“Thirty-two billion dollars later, we don't know a whole lot about what's happened to that money,” Bowen said.

"The actual reconstruction money, I estimate 15 to 20 percent has been wasted. Roughly $3-$4 billion," he said. Many projects have been plagued by waste and poor design.

"Millions [have been] wasted at the Baghdad police college because of extremely shoddy construction," Bowen said.

Iraq reconstruction whistleblowers may receive rewards of 15-30% of the fraud or false claims reported by using the False Claims Act, the major whistleblower law that we have written about often. They may also potentially use the IRS Whistleblower Program to obtain rewards, since illegal activity often results in tax violations.

In this age when fraud and abuse are depleting taxpayer funds, any whistleblower who steps forward to report fraud or other impropriety in the Iraq reconstruction is to be commended.

Continue reading "Iraq Whistleblowers Coming Forward, as Special Inspector General for Iraq Reconstruction Estimates Billions in Fraud and Waste" »

The facts about how the AIG Financial Products unit took down AIG begin to emerge more clearly, as AIG whistleblowers begin to speak.

Former AIG auditor Joseph St. Denis described his concerns about AIG's Financial Products unit--and how AIGFP's Joseph Cassano refused to let him investigate:

"Mr. Cassano shouted at me for several minutes, and then said, as previously noted: 'I have deliberately excluded you from the valuation of the Super Seniors because I was concerned that you would pollute the process."

More to come about whistleblowers at AIG, many of whom will be able to use the False Claims Act and IRS Whistleblower Program.