Whistleblower Lawyer Blog

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

2009-07-03T16:33:50Z

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:

]]> Bounty programs are an effective tool to encourage whistleblowers to come forward and would provide necessary incentives for outside entities to bring complaints about possible illegal activity. There is some evidence that the bounty program implemented by the Department of Justice (DOJ) has played a role in the increase of civil recoveries obtained by the DOJ over a 10-year period. The Internal Revenue Service (IRS) also has a system in place where it provides a bounty to individuals who present the IRS with information leading to the collection of federal taxes.

Although the bounty system has been in place at the SEC for more than 20 years, there have been relatively few awards made. The SEC program is limited to insider trading cases, and the stated criteria for judging bounty applications are broad, somewhat vague and not subject to judicial review.

Currently, Section 21A(e) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 78u-l(e)] authorizes the SEC to award a bounty to a person who provides information leading to the recovery of a civil penalty from an insider trader, from a person who "tipped" information to an insider trader, or from a person who directly or indirectly controlled an insider trader. All bounty determinations, including whether, to whom, or in what amount to make payments, are within the sole discretion of the SEC, however, the total bounty may not currently exceed 10% of the amount "actually recovered" from a civil penalty pursuant to a court order.

We would recommend that the Exchange Act be amended to authorize the SEC to award a bounty for information leading to the recovery of a civil penalty from any violator of the federal securities laws, not simply insider trading violations. We would also suggest that the Exchange Act be amended to provide specific criteria for awarding bounties, including a provision that where a whistleblower relies upon public information, such reliance does not constitute an absolute bar to recovering a bounty. The statute should also require that the whistleblower be provided with status reports at certain milestones during the investigation or examination that was based on the tip.

We look forward to watching the development of new whistleblower incentives to make the next would-be Madoff think twice.
The full text of SEC Inspector General Kotz's letter to Chairman Kanjorski from June 30 follows:

Dear Chairman Kanjorski:

Thank you for your June 16, 2009 letter regarding the Securities and Exchange Commission (SEC) Office of Inspector General's (OIG) investigation into allegations regarding Bernard L. Madoff (Madoff) and Bernard L. Madoff Investment Securities, LLP and for meeting with me on June 23, 2009 at your offices to discuss our ongoing investigation.

I am glad that you are generally pleased with our progress in connection with our investigations and audits of these important and complex matters. As I indicated to you during our meeting, we are committed to producing, in an expeditious manner, thorough and comprehensive investigative and audit reports analyzing the reasons that the SEC did not uncover the Madoff Ponzi scheme notwithstanding examinations and investigations conducted over a period of nearly 20 years, as well as providing recommendations to improve the operations of the pertinent SEC divisions and offices. I appreciated the opportunity to brief you on developments in our investigation at your offices last week and am happy that you felt the meeting was productive.

While we have not yet completed the investigation, we are able to provide to you, at your request, several legislative suggestions that have arisen out of our Madoff investigatory work, which we believe will strengthen the ability of investors and the regulatory agencies to uncover frauds such as Ponzi schemes in the future. We understand that the SEC is also recommending to the Subcommittee the legislative suggestions numbered 1 and 4 below. These suggestions are as follows:

(1) Extend the regulatory jurisdiction of the Public Company Accounting Oversight Board (PCAOB) to audit reports prepared by a domestic registered or foreign public accounting firm regarding issuers, broker-dealers, investment advisers and any companies subject to U.S. securities laws. The PCAOB's current responsibilities include the following: (a) registering public accounting firms; (b) establishing auditing, quality control, ethics, independence, and other standards relating to public company audits; (c) conducting inspections, investigations, and disciplinary proceedings of registered accounting firms; and (d) enforcing compliance with the Sarbanes-Oxley Act of 2002. The PCAOB is able to address many auditing problems through a combination of inspections and standards-setting. The PCAOB's supervisory model uses several tools to improve audit quality, correct audit deficiencies, and promote compliance with applicable standards and laws. Where necessary, the PCAOB exercises its enforcement authority.

Extending the regulatory jurisdiction of the PCAOB would allow for increased oversight of these accounting firms and reduce the risks associated with unknown accounting firms that have been able to avoid scrutiny. We believe that H.R. 1212, as currently introduced, accomplishes many of these same goals, except that we would recommend that the legislation clarify that the PCAOB oversight be extended to audit reports prepared by a registered accounting firm which provides reports for investment advisers, investment companies and other registered entities, as well as registered broker dealers.

(2) Amending the Investment Advisers Act of 1940 (Investment Advisers Act) to require the use of independent custodians in a manner similar to Section 17(f) of the Investment Company Act of 1940 (Investment Company Act), which requires the use of an independent custodian by mutual funds. Section 17(f) of the Investment Company Act requires a registered management company to "place and maintain its securities and similar investments in the custody of" a bank or a dealer admitted to a national securities exchange, subject to such rules and regulations as the Commission may from time to time prescribe for the protection of investors. See 15 U.S.c. § 80a-17(f)(1). In addition, Rule 17f-2(b) of the Rules and Regulations promulgated under the Investment Company Act requires that all such securities and similar investments be deposited in the safekeeping of, or in a vault or other depository maintained by, a bank or other company whose functions and physical facilities are supervised by Federal or State authority. The Rule further provides that investments so deposited shall be physically segregated at all times from those of any other person and shall be withdrawn only in connection with transactions of the character described in the Rule. This custodian requirement essentially removes the ability of an investment adviser to fraudulently use the proceeds invested by new investors to make payments to old investors.

Hedge funds are currently exempt from the Investment Company Act and are not subject to the independent custodian requirement. In addition, investment advisers who are also registered broker-dealers are currently permitted to clear their trades through their own broker-dealer firm. Thus, both investment advisers and hedge funds should be required to use an independent custodian.

We are aware that the SEC is currently proposing amendments to its custody rule under the Investment Advisers Act to require a written report from an independent public accountant that includes an opinion regarding the custodian's controls relating to custody of client assets if the client accounts are not maintained by an independent qualified custodian. However, we believe that a more direct way to remedy this statutory loophole would be to amend the Investment Advisers Act in conformity with the Investment Company Act.

(3) The Sarbanes-Oxley Act of2002 requires ongoing certifications of certain reports by chief executive officers and chief financial officers of public reporting companies. Executives who knowingly file noncompliant reports face possible criminal prosecution including substantial fines and imprisonment.

Certifications have been determined to be effective controls to ensure compliance with particular requirements or guidelines. We would recommend imposing a requirement of certification by senior officers of registered investment advisers that shows they conducted adequate due diligence in connection with investments. This certification requirement should apply to all funds of hedge funds. The adequate level of due diligence required in accordance with the certification may be defined pursuant to a particular model of best practices, such as the Managed Fund Association (MFA) model or the Alternative Investment Management Association (AlMA) model, or could be developed by the SEC. Enforcing an adequate level of due diligence would ensure that investors have adequate information when investing through intermediaries.

(4) Bounty programs are an effective tool to encourage whistleblowers to come forward and would provide necessary incentives for outside entities to bring complaints about possible illegal activity. There is some evidence that the bounty program implemented by the Department of Justice (DOJ) has played a role in the increase of civil recoveries obtained by the DOJ over a 10-year period. The Internal Revenue Service (IRS) also has a system in place where it provides a bounty to individuals who present the IRS with information leading to the collection of federal taxes.

Although the bounty system has been in place at the SEC for more than 20 years, there have been relatively few awards made. The SEC program is limited to insider trading cases, and the stated criteria for judging bounty applications are broad, somewhat vague and not subject to judicial review.

Currently, Section 21A(e) of the Securities Exchange Act of 1934 (Exchange Act) [15 U.S.C. 78u-l(e)] authorizes the SEC to award a bounty to a person who provides information leading to the recovery of a civil penalty from an insider trader, from a person who "tipped" information to an insider trader, or from a person who directly or indirectly controlled an insider trader. All bounty determinations, including whether, to whom, or in what amount to make payments, are within the sole discretion of the SEC, however, the total bounty may not currently exceed 10% of the amount "actually recovered" from a civil penalty pursuant to a court order.

We would recommend that the Exchange Act be amended to authorize the SEC to award a bounty for information leading to the recovery of a civil penalty from any violator of the federal securities laws, not simply insider trading violations. We would also suggest that the Exchange Act be amended to provide specific criteria for awarding bounties, including a provision that where a whistleblower relies upon public information, such reliance does not constitute an absolute bar to recovering a bounty. The statute should also require that the whistleblower be provided with status reports at certain milestones during the investigation or examination that was based on the tip.

We would be happy to discuss any of the above legislative suggestions with you or the Subcommittee at your convenience. If, as we conclude our investigation, we determine that there are any further legislative recommendations that would be appropriate for your Subcommittee, we will share them with you at that time.

Thank you again for your continued interest in our work.

Sincerely,

H. David Kotz

Inspector General

cc: The Honorable Mary L. Schapiro

Chairman, Securities and Exchange Commission

SEC "Bounties" for Whistleblowers--The Statute

2009-07-03T12:45:54Z

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.)

]]> 15 U.S.C. § 78u-1

§ 78u-1. Civil penalties for insider trading

(a) Authority to impose civil penalties

(1) Judicial actions by Commission authorized

Whenever it shall appear to the Commission that any person has violated any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security or security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) while in possession of material, nonpublic information in, or has violated any such provision by communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products, the Commission--

(A) may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by the person who committed such violation; and

(B) may, subject to subsection (b)(1) of this section, bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by a person who, at the time of the violation, directly or indirectly controlled the person who committed such violation.

(2) Amount of penalty for person who committed violation

The amount of the penalty which may be imposed on the person who committed such violation shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gained or loss avoided as a result of such unlawful purchase, sale, or communication.

(3) Amount of penalty for controlling person

The amount of the penalty which may be imposed on any person who, at the time of the violation, directly or indirectly controlled the person who committed such violation, shall be determined by the court in light of the facts and circumstances, but shall not exceed the greater of $1,000,000, or three times the amount of the profit gained or loss avoided as a result of such controlled person's violation. If such controlled person's violation was a violation by communication, the profit gained or loss avoided as a result of the violation shall, for purposes of this paragraph only, be deemed to be limited to the profit gained or loss avoided by the person or persons to whom the controlled person directed such communication.

(b) Limitations on liability

(1) Liability of controlling persons

No controlling person shall be subject to a penalty under subsection (a)(1)(B) of this section unless the Commission establishes that--

(A) such controlling person knew or recklessly disregarded the fact that such controlled person was likely to engage in the act or acts constituting the violation and failed to take appropriate steps to prevent such act or acts before they occurred; or

(B) such controlling person knowingly or recklessly failed to establish, maintain, or enforce any policy or procedure required under section 78o(f) of this title or section 80b-4a of this title and such failure substantially contributed to or permitted the occurrence of the act or acts constituting the violation.

(2) Additional restrictions on liability

No person shall be subject to a penalty under subsection (a) of this section solely by reason of employing another person who is subject to a penalty under such subsection, unless such employing person is liable as a controlling person under paragraph (1) of this subsection. Section 78t(a) of this title shall not apply to actions under subsection (a) of this section.

The Commission, by such rules, regulations, and orders as it considers necessary or appropriate in the public interest or for the protection of investors, may exempt, in whole or in part, either unconditionally or upon specific terms and conditions, any person or transaction or class of persons or transactions from this section.

(d) Procedures for collection

(1) Payment of penalty to Treasury

A penalty imposed under this section shall (subject to subsection (e) of this section) be payable into the Treasury of the United States, except as otherwise provided in section 7246 of this title.

(2) Collection of penalties

If a person upon whom such a penalty is imposed shall fail to pay such penalty within the time prescribed in the court's order, the Commission may refer the matter to the Attorney General who shall recover such penalty by action in the appropriate United States district court.

(3) Remedy not exclusive

The actions authorized by this section may be brought in addition to any other actions that the Commission or the Attorney General are entitled to bring.

(4) Jurisdiction and venue

For purposes of section 78aa of this title, actions under this section shall be actions to enforce a liability or a duty created by this chapter.

(5) Statute of limitations

No action may be brought under this section more than 5 years after the date of the purchase or sale. This section shall not be construed to bar or limit in any manner any action by the Commission or the Attorney General under any other provision of this chapter, nor shall it bar or limit in any manner any action to recover penalties, or to seek any other order regarding penalties, imposed in an action commenced within 5 years of such transaction.

(e) Authority to award bounties to informants

Notwithstanding the provisions of subsection (d)(1) of this section, there shall be paid from amounts imposed as a penalty under this section and recovered by the Commission or the Attorney General, such sums, not to exceed 10 percent of such amounts, as the Commission deems appropriate, to the person or persons who provide information leading to the imposition of such penalty. Any determinations under this subsection, including whether, to whom, or in what amount to make payments, shall be in the sole discretion of the Commission, except that no such payment shall be made to any member, officer, or employee of any appropriate regulatory agency, the Department of Justice, or a self-regulatory organization. Any such determination shall be final and not subject to judicial review.

(f) Definition

For purposes of this section, “profit gained” or “loss avoided” is the difference between the purchase or sale price of the security and the value of that security as measured by the trading price of the security a reasonable period after public dissemination of the nonpublic information.

(g) Limitation

The authority of the Commission under this section with respect to security-based swap agreements (as defined in section 206B of the Gramm-Leach-Bliley Act) shall be subject to the restrictions and limitations of section 78c-1(b) of this title.

False Claims Act Amendments Become Law Today, and Justice Department Expands Health Care Fraud Task Force

2009-05-21T02:25:35Z

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.

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

2009-05-15T18:43:07Z

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.”

. . . For lawyers screening cases, are there particular types of cases that the IRS is interested in, or particular industries that are more attractive to the IRS?

Steve Whitlock: The IRS puts out an annual plan and has a strategic plan that reaches out five years, which is posted on www.irs.gov. We describe our enforcement priorities. We try to touch a little bit of everything in different ways because the tax system is that complex. We try to have some presence in every aspect of the tax law.

The largest corporations tend to be under audit nearly continuously. Issues on international tax noncompliance are getting more attention in recent years because of globalization of the economy. There have been some congressional hearings recently about those kinds of questions where large corporations –multinationals–have the ability to take advantage of the tax code and their business structure to reduce their tax liability. Sometimes that is permitted by the tax code, and sometimes it is not. That is an area of focus—to identify those areas where it is not permitted, but somebody is pushing the envelope.

Someone who is not filing and paying—that is always of interest to us. High-income non-filers are especially interesting to us. Define “high income” how you want to, but we generally look at six figures, $200,000, $250,000 in gross income.

We have concerns in the areas of “trust funds,” where a taxpayer is an employer and is withholding from their employees, in order to cover the employees’ personal tax liability. When you have someone who is acting in effect as a trustee for the federal government by withholding tax from employee wages, but then says “You know, I’m having a little trouble with the business. I’m going to pay my bills before I pay the tax bill.” That’s an area that has been an enforcement priority for many years.

We have a whole series of abusive transactions that are identified in our enforcement
priorities. CI, on their part of the website, will identify the “Dirty Dozen.” Some of those are at the retail level, and some of them are not. Some of them involve fairly sophisticated schemes. So, the Service is interested in a lot of different areas.

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.

]]> * * * *
Michael Sullivan: What should TAF’s lawyers look for in screening clients and screening cases?

Steve Whitlock: Documents are helpful. Having “been there” is helpful. The kinds of things that you would look at and say, “Do I believe this person? Can I prove this case? Is evidence going to be available to corroborate this?” Corroboration may not be available to the whistleblower, but the IRS may be able to obtain information directly from the taxpayer or from another source that can prove or disprove the issue raised. The issue raised needs to be something that we can get proof on.

Another thing is it needs to be “material.” The IRS has many more taxpayers than we have the resources to audit. We routinely make choices about which taxpayers to audit, knowing that some of those we choose not to audit might have understated their tax liability. So, one of the questions that I would want to understand from the whistleblower is, “Why should the IRS take this case? What is in it for the IRS?” Is it a substantial amount of money? Is this a topic that has a lot of abuse ramifications outside the particular company? Does this whistleblower give us some insight into the company that we wouldn’t otherwise have?

Sometimes we’ll go in and do an examination of a taxpayer and we’ll say, “We’re going to look in this particular aspect of the operation. We’re concerned about depreciation,
we’re concerned about executive compensation.” The whistleblower comes in and says, you really need to be concerned about their entertainment expenses in this division because that division has been really playing fast and loose, and here’s what’s going on. We might not have looked at that division, but for the information the whistleblower is able to provide us. Do we look at every entertainment item on a tax return? No, we can’t possibly, but if somebody can point us to one that really makes a difference, that is material, that’s something we take a look at.

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

2009-05-06T21:38:21Z

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!

]]> Since the late 1980s, our attorneys have worked with the nation's major whistleblower law, the False Claims Act. We have represented whistleblowers who reported fraud and false claims in many government programs, including contractor fraud in Iraq reconstruction, other military contracts, NASA programs, Hurricane Katrina and other disaster relief, and of course Medicare/Medicaid fraud.

In addition, False Claims Act cases may also involve IRS Whistleblower claims. Ever since the beginning of the new IRS Whistleblower Program, our whistleblower lawyers at Finch McCranie, LLP have represented whistleblowers in the new program. We have represented persons with IRS Whistleblower claims in the hedge fund industry, other financial services industries, real estate, manufacturing, and many other businesses, as tax fraud, tax evasion, and other tax noncompliance are not limited to one area.

For a free consultation about a possible whistleblower claim, please call us at 800-228-9159, or email us HERE.

Fraud Against TARP Funds A Real Threat, Warns Special Inspector General for TARP

2009-04-23T20:08:31Z

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:

]]> The Troubled Asset Relief Program (“TARP”) now includes 12 separate, but often interrelated,
programs involving Government and private funds of up to almost $3 trillion
— roughly the equivalent of last year’s entire Federal budget. From programs involving
large capital infusions into hundreds of banks and other financial institutions, to
a mortgage modification program designed to modify millions of mortgages, to public-private
partnerships purchasing “toxic” assets from banks using tremendous leverage
provided by Government loans or guarantees, TARP has evolved into a program of
unprecedented scope, scale, and complexity. Before the American people and their
representatives in Congress can meaningfully evaluate the effectiveness of this historic
program, that scope and scale must be placed into proper context, and the complexity
must be made understandable. That is what this report attempts to do.

In this report, the Office of the Special Inspector General for the Troubled
Asset Relief Program (“SIGTARP”) endeavors to (i) explain the various TARP
programs and how the Department of the Treasury (“Treasury”) has used those
programs through March 31, 2009, (ii) describe what SIGTARP has done since its
Initial Report to Congress, dated February 6, 2009 (the “Initial Report”), to oversee
this historic program with respect to both audits and investigations, and (iii) set
forth a series of recommendations for the operation of TARP.

TREMENDOUS EXPANSION IN THE SCOPE,
SCALE, AND COMPLEXITY OF TARP

TARP, as originally envisioned in the fall of 2008, would have involved the purchase,
management, and sale of up to $700 billion of “toxic” assets, primarily troubled mortgages
and mortgage-backed securities (“MBS”). That framework was soon abandoned,
however, and the program’s scope, size, and complexity have dramatically increased. As
of the writing of this report, TARP funds are being used, or have been announced to be
used, in connection with 12 separate programs that, as set forth in Table 1.1, involve
a total (including TARP funds, Federal Reserve loans, Federal Deposit Insurance
Corporation (“FDIC”) guarantees, and private money) that could reach nearly $3
trillion.

Treasury has announced, as of March 31, 2009, the parameters of how
$590.4 billion of the $700 billion in TARP funding authorized by the Emergency
Economic Stabilization Act of 2008 (“EESA”) would be spent through the 12
programs. Of the $590.4 billion that Treasury has committed, $328.6 billion has
actually been spent as of March 31, 2009. This report provides an update on those
TARP programs that had been announced as of SIGTARP’s Initial Report, as well
as descriptions of programs that have subsequently been announced.

SPECIAL INSPECTOR GENERAL I TROUBLED ASSET RELIEF PROGRAM
OVERSIGHT ACTIVITIES OF SIGTARP

Since the Initial Report, SIGTARP has been actively engaged in fulfilling its vital investigative
and audit functions as well as in building its staff and organization.
On the investigations side, SIGTARP’s Hotline (877-SIG-2009 or accessible
at www.SIGTARP.gov) is staffed, operational, and providing an interface with the
American public to facilitate the reporting of concerns, allegations, information,
and evidence of violations of criminal and civil laws in connection with TARP. As of
the drafting of this report, the SIGTARP Hotline has received and analyzed nearly
200 tips, running the gamut from expressions of concern over the economy to
serious allegations of fraud. Both from the Hotline and from other leads, SIGTARP
has initiated, to date, almost 20 preliminary and full criminal investigations.

Although the details of those investigations generally will not be discussed unless
and until public action is taken, the cases vary widely in subject matter and include
large corporate and securities fraud matters affecting TARP investments, tax matters,
insider trading, public corruption, and mortgage-modification fraud.

SIGTARP has been proactive in dealing with potential fraud in TARP. For
example, to get out in front of any efforts to profit criminally from the Term
Asset-Backed Securities Loan Facility (“TALF”), which, as announced, involves
up to $1 trillion of lending by the Federal Reserve backed by up to $80 billion in
TARP funds, SIGTARP has organized and leads a multi-agency task force to deter,
detect, and investigate any instances of fraud or abuse in the program. In addition
to SIGTARP, the TALF Task Force consists of the Office of the Inspector
General of the Board of Governors of the Federal Reserve Board, the Federal
Bureau of Investigation, Treasury’s Financial Crimes Enforcement Network, U.S.
Immigration and Customs Enforcement, the Internal Revenue Service Criminal
Investigation division, the Securities and Exchange Commission, and the U.S.
Postal Inspection Service. Representatives from each member organization participate
in regular briefings about TALF, collectively identify areas of fraud vulnerability,
engage in the training of agents and analysts with respect to the complex issues
surrounding the program, and will serve as points of contact for leads relating to
TALF and any resulting cases that are generated. The TALF Task Force represents
a historic law enforcement effort with an ambitious goal: to redefine the policing of
complex Federal Government programs by proactively arranging a coordinated law
enforcement response before fraud occurs.

On the audit side, SIGTARP has initiated and is in the process of conducting
six audits:

• Use of Funds: SIGTARP’s first audit examines the use of TARP funds by TARP
recipients, and is based upon a survey that SIGTARP sent to 364 TARP recipients
that had received funds as of January 31, 2009.

• Executive Compensation Compliance: SIGTARP’s second audit, also based
on SIGTARP’s survey, examines how TARP recipients are implementing controls
with respect to applicable executive compensation restrictions.

• Bank of America: The third audit examines the review and approval processes
associated with TARP assistance to Bank of America under three different
TARP programs and examines Treasury’s decision making related to additional
TARP assistance provided in connection with Bank of America’s acquisition
of Merrill Lynch. Since its commencement, the audit’s scope has expanded to
examine broadly Treasury’s decision making regarding the first nine institutions
to be considered for funding under TARP.

• External Influences: The fourth audit examines whether, or to what extent, external
parties may have sought to influence decision making by Treasury or bank
regulators in considering and deciding on applications for funding from individual
banks seeking TARP funds. This audit seeks to determine what procedures
are in place to avoid undue outside influence on the process, whether there are
any indications of any undue influence, and what actions might be needed to
strengthen existing processes to avoid such undue influences in the future.

• AIG Bonuses: The next audit examines Federal oversight of executive compensation
requirements, with a particular focus on recent payouts of large bonus
payments to American International Group, Inc. (“AIG”) employees. Accordingly, SIGTARP
has undertaken an audit to determine: (i) the extent to which the recent bonus
payments were made in accordance with conditions imposed in return for TARP
assistance, and (ii) Treasury’s monitoring of AIG’s executive compensation
agreements and whether it was aware of the full range of executive compensation,
bonus, and retention payments throughout AIG’s corporate structure.

• AIG Counterparty Payments: AIG, which has received the largest amount of
financial assistance from the Government during the current financial crisis,
reportedly made counterparty payments to other financial institutions, including
foreign institutions and other TARP recipients, at 100% of face value. SIGTARP
will examine the basis for the counterparty payments and seek to determine
whether any efforts were made to negotiate a reduction in those payments.

SIGTARP’S RECOMMENDATIONS ON THE
OPERATION OF TARP

One of SIGTARP’s oversight responsibilities is to provide recommendations to Treasury
so that TARP programs can be designed or modified to facilitate effective oversight
and transparency and to prevent fraud, waste, and abuse. In Section 4 of this report,
SIGTARP details instances in which Treasury has addressed recommendations made in
and since the Initial Report, and makes a series of new recommendations, including:

• Use of Funds: SIGTARP continues to recommend that Treasury require all
TARP recipients to report on their actual use of TARP funds. This recommendation
is particularly important with respect to the potential application of
the Capital Purchase Program (“CPP”) to large insurance companies that may
have purchased banks eligible for CPP in order to access TARP funds, and to
Treasury’s recent announcement of an additional $30 billion investment in AIG.
Simply put, the American people have a right to know how their tax dollars are
being used. This recommendation applies not only to capital investment and
lending programs involving banks and other financial institutions, but also to
programs in which TARP funds are used to purchase troubled assets, including
transactions in the Public-Private Investment Program (“PPIP”) and surrenders
of collateral in TALF.

• Expansion of TALF: The announced expansion of TALF to permit the posting
of MBS as collateral poses significant fraud risks, particularly with respect to
legacy residential MBS (“RMBS”). SIGTARP has made a series of recommendations
to mitigate these risks, including, among others, that Treasury should require
a security-by-security screening for legacy RMBS; that any RMBS should
be rejected as collateral if the loans backing particular RMBS do not meet
certain baseline underwriting criteria or are in categories that have been proven
to be riddled with fraud, including certain undocumented subprime residential
mortgages (i.e., “liar loans”); and that Treasury should require significantly
higher haircuts for all MBS, with particularly high haircuts for legacy RMBS.

• PPIP Fraud Vulnerabilities: Aspects of PPIP make it 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. SIGTARP has made a series of recommendations to address
these concerns, including, among others, that Treasury should (i) impose strict
conflict-of-interest rules upon Public-Private Investment Fund (“PPIF”) fund
managers, (ii) mandate transparency with respect to the participation and management
of PPIFs, including disclosure of the beneficial owners of the private
equity stakes in the PPIFs and of all transactions undertaken in them, and (iii)
that all PPIF fund managers have stringent investor-screening procedures, including
comprehensive “Know Your Customer” requirements at least as rigorous
as that of a commercial bank or retail brokerage operation.

• Interaction Between PPIP and TALF: In announcing the details of PPIP,
Treasury has indicated that PPIFs under the Legacy Securities Program could,
in turn, use the leveraged PPIF funds (two-thirds of which will likely be taxpayer
money) to purchase legacy MBS through TALF, greatly increasing taxpayer
exposure to losses with no corresponding increase of potential profits. Such an
expansion could cause great harm to one of the fundamental taxpayer protections
in the original design of TALF by signifi cantcantcantly diluting the private party’s
personal stake, the “skin in the game,” and therefore reduce their incentive to
conduct appropriate due diligence. Treasury should not allow Legacy Securities
PPIFs to invest in TALF unless significant mitigating measures are included
to address the dilution of this incentive, which could include prohibiting the
use of leverage for PPIFs investing through TALF or proportionately increasing
haircuts for PPIFs that do so.

• Mortgage Modification Program: To prevent fraud in the mortgage modification
program, SIGTARP has recommended that Treasury build certain fraud
protections into the mechanics of the program, including requiring third-party
verification of residence and income, conducting a closing-like procedure in
which identities of participants are confirmed, and delaying modification incentive
payments to servicers. SIGTARP has also recommended that Treasury
proactively educate homeowners about the nature of the program, publicize that
no fee is necessary to participate in the program, and collect and maintain a
database of the names and identifying information for each participant in each
mortgage modification transaction.

False Claims Act Amendments Gain Momentum In Bill to Combat Financial Fraud

2009-04-21T15:51:06Z

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.

Tax Evasion Using Offshore Accounts Establishes Fraud, As IRS Prevails Against Statute of Limitations Argument

2009-04-17T19:12:34Z

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.

IRS Announces New List of "Dirty Dozen" Tax Scams

2009-04-13T19:35:56Z

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 should be wary of scams to avoid paying taxes that seem too good to be true, especially during these challenging economic times,” IRS Commissioner Doug Shulman said. “There is no secret trick that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams.”

Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.

The IRS urges taxpayers to avoid these common schemes:

Phishing

Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing@irs.gov. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov.

Hiding Income Offshore

The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.

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.

]]> Filing False or Misleading Forms

The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.

Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Return Preparer Fraud

Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.

False Claims for Refund and Requests for Abatement

This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited.

Disguised Corporate Ownership

Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

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

2009-04-10T18:57:49Z

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:

]]> In sum, we conclude: (1) that the district court erred in limiting
the relators’ claim for damages on the Dinar Exchange
Contract to a claim for $3 million; (2) that the court erred in
ruling as a matter of law that the relators did not present evidence
sufficient to demonstrate that Custer Battles presented
false claims on the Dinar Exchange Contract to officers or
employees of the United States; (3) that the court erred in
implying a requirement of presentment in 31 U.S.C.
§ 3729(a)(2); and (4) that the court correctly entered summary
judgment in favor of Custer Battles on the Airport Contract.

Accordingly, we reverse the district court’s orders limiting
the relators’ claims and granting Custer Battles’ Rule 50(a)
motion for judgment as a matter of law and remand for further
proceedings. On remand, the district court shall first give the
relators the option to have a new trial on the Dinar Exchange
Contract claims and, if a new trial is not elected, shall address
Custer Battles’ remaining issues on its Rule 50(a) motion. If
the court denies Custer Battles’ Rule 50(a) motion on the
remaining issues, it shall enter judgment on the verdict in
favor of the relators. We affirm the district court’s summary
judgment with respect to the Airport Contract.

AFFIRMED IN PART, REVERSED IN PART,
AND REMANDED FOR FURTHER PROCEEDINGS

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

2009-03-23T20:10:05Z

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.

]]> Since the late 1980s, our attorneys have worked with the major whistleblower law, the False Claims Act. We have represented whistleblowers who reported fraud and false claims in many government programs, including contractor fraud in Iraq reconstruction, other military contracts, NASA programs, Hurricane Katrina and other disaster relief, and of course Medicare/Medicaid fraud.

Ever since the beginning of the new IRS Whistleblower Program, our whistleblower lawyers at Finch McCranie, LLP have represented whistleblowers in the new program. We have represented persons with IRS Whistleblower claims in the hedge fund industry, other financial services industries, real estate, manufacturing, and many other businesses, as tax fraud, tax evasion, and tax noncompliance are not limited to one area.

For a free consultation about a possible whistleblower claim, please call us at 800-228-9159, or email us HERE.

The AIG Whistleblowers Begin to Speak About Its Credit Default Swaps?

2009-03-18T09:06:20Z

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.

Appreciating Harry Markopolis, the Madoff "Whistleblower" to the SEC

2009-03-16T19:55:11Z

I had the pleasure of seeing again and speaking last week with Harry Markopolis, the "whistleblower" now renowned for his excellent work in recognizing and reporting to the SEC that Bernie Madoff was running a huge Ponzi scheme. Harry was in Washington attending the "IRS Whistleblower Boot Camp" sponsored by Taxpayers Against Fraud.

Harry Markopolis exemplifies the whistleblower who works diligently to "do the right thing." His appearance on 60 Minutes gave us a taste of his frustration over the years in attempting to cause the SEC to take action about Madoff.

We commend Harry for wearing the "white hat" so well--and we take our hats off to him. Let's hope the SEC creates a meaningful whistleblower program and listens to Harry about how it should operate.

IRS Whistleblower Attorneys Join IRS Whistleblower Office Director and Other IRS Officials for "IRS Whistleblower Boot Camp"

2009-03-10T03:29:57Z

I spent a very productive day today with IRS Whistleblower Office Director Steve Whitlock, former IRS Commissioner Margaret Richardson, IRS Special Counsel Tom Kane, and other senior IRS officials working with the IRS Whistleblower Office, in helping stage the most comprehensive legal education program yet about the new IRS Whistleblower Program--the "IRS Whistleblower Boot Camp." The day-long event was sponsored by Taxpayers Against Fraud.

After sessions on various aspects of how the tax whistleblower program operates, I was honored to lead the panel discussion with Director Whitlock and others on some difficult and complex issues in representing whistleblowers. We discussed in depth claims by whistleblowers such as CPAs, lawyers, and fiduciaries who have had confidential relationships with the taxpayers in question; and claims by whistleblowers who were involved in misconduct. Joining our panel discussion were Special Counsel Tom Kane of the Office of Chief Counsel, and my friend and fellow whistleblower attorney Paul D. Scott of San Francisco.

Whistleblower Lawyer Blog Co-Author Michael A. Sullivan (left) moderates the panel discussion with IRS Whistleblower Office Director Steve Whitlock (right).

Director Whitlock explained how the claims submitted to the two year-old IRS Whistleblower Office have grown from approximately 80 in the first year, to approximately 2000 at present.

The IRS officials reviewed offshore tax schemes, tax fraud and tax evasion, and many other types of tax noncompliance as potential bases of IRS Whistleblower claims.

The IRS Whistleblower Boot Camp began with "IRS Whistleblower Office 101," a panel discussion introducing the applicable regulations, providing an overview of the IRS Whistleblower Office, and providing an update on the progress of the program. It was moderated by TAF Member Margaret Finerty, and included as panelists Director Steve Whitlock, and IRS Whistleblower Office Analysts Robert Gardner, Dawn Applebaum, and Al Gibson. (Dawn Applebam had joined me last week in Atlanta to make an excellent presentation on the IRS Whistleblower Program at the annual "Whistleblower Law Symposium" that our firm sponsors.)

The main domestic and international tax fraud schemes, and the types of cases the IRS Whistleblower Office would like to receive, were the subject of a discussion by former IRS Commissioner Margaret Richardson. The panelists were IRS "Subject Matter Experts" Larry Brongel (Large and Mid-sized Business Division (LMSB), Retailers, Food, Pharmaceuticals and Healthcare Industry); Sheila Olander (Sr. Analyst Special Agent with the IRS Criminal Investigative Division, Office of Financial Crimes); Elizabeth Elfrey (Director, Fraud/Bank Secrecy Act in the IRS Small Business/Self Employed (SBSE)); and Al Gibson (Whistleblower Office Analyst).

TAF member Frederick Morgan, and attorney and CPA Ralph Minto, then discussed expanding a False Claims Act practice to include IRS Whistleblower cases.

TAF President Neil Getnick led a panel discussion on issue-spotting and practice pointers when bringing IRS Whistleblower cases. The panelists were Director Steve Whitlock, Special Counsel Tom Kane, and TAF Member and fellow whistleblower attorney Brian Kenney.

]]> I was honored to participate in planning the program, and to lead a session on perhaps the most complex and difficult issues in representing IRS whistleblowers.

Our firm's former federal prosecutors at Finch McCranie, LLP have represented whistleblowers in the new IRS Whistleblower Program since it began in 2006.

You may contact us toll-free at 800-228-9159, or by email by clicking HERE. There is no charge or fee for speaking with us about a potential IRS Whistleblower case or qui tam whistleblower case under the False Claims Act.

False Claims Act Amendments Approved by Senate Judiciary Committee As Part of FERA (Fraud Enforcement and Recovery Act) Today

2009-03-05T19:18:44Z

Today, we were excited to hear that the Senate Judiciary Committee has sent long-needed amendments to the False Claims Act to the full Senate, as part of the "bailout" and "stimulus" inspired "Fraud Enforcement and Recovery Act" (FERA).

Where there are taxpayer funds being spent, there will be attempts to engage in fraud to cheat the public. As hundreds of billions of dollars are poured into federal and state programs through the “economic stimulus” package, the continuation of the Troubled Assets Relief Program (“TARP”), the many federally funded health care programs such as Medicare and Medicaid, and the vast defense procurement industry that is servicing two wars, opportunities for fraud will only increase. The speed at which the "stimulus" funds will be spent will only increase the opportunities for fraud.

Senator Grassley has been steadfast in his efforts to ensure that these taxpayer funds receive the protection of the False Claims Act, which is the primary civil weapon to combat fraud and false claims. This bipartisan legislation would restore the False Claims Act to its original intent by "undoing" several attempts by judges to limit its reach. Among the goals of the Amendments are:

--to clarify that False Claims Act liability protects all federal funds;

--to solely vest the Government with the power to dismiss whistleblower- filed False Claims Act lawsuits that are based on public allegations;

--to remove confusion over the statute of limitations period;

--to explicitly clarify that the False Claims Act applies to those who discover an overpayment and decide to pocket the funds; and

--to provide strengthened employment protection for whistleblowers.

All taxpayers should support these Amendments to the False Claims Act, and we applaud the Senate Judiciary Committee for this bipartisan effort to protect taxpayer funds.