Whistleblower Lawyer Blog

Since the Madoff and Stanford schemes proved ruinous to so many investors, many have asked why the SEC has no meaningful "whistleblower" program to expose wrongdoing, a topic we have written about previously.

Perhaps Harry Markopolis' voice is finally being heard, albeit faintly. Last week, the House Financial Services Committee approved legislation that would expand both whistleblower rewards and whistleblower protections, among other things.

Still, past experience with the False Claims Act and the IRS Whistleblower statute shows that the proposed rewards need to be beefed up to be effective.

The “Investor Protection Act of 2009” (excerpted below) also would increase the SEC’s budget and make other changes designed to strengthen enforcement.

The new rewards to whistleblowers would be up to 30% of monetary sanctions of more than $1 million:

"In any judicial or administrative action brought by the Commission under the securities laws that results in monetary sanctions exceeding $1,000,000, the Commission, under regulations prescribed by the Commission and subject to subsection (b), may pay an award or awards not exceeding an amount equal to 30 percent, in total, of the monetary sanctions imposed in the action or related actions to one or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the action."

The proposed new whistleblower rewards are reminiscent of those under the new IRS Whistleblower Program, but need at least two corrections to be effective.

First, the current SEC bill creates no enforceable "right" to a reward--a defect that made the old IRS Whistleblower statute ineffective before it was amended in December 2006.

Second, there should be a minimum percentage of perhaps 15% for the SEC rewards; it should not be left at 0-30%, as the bill now reads. Who would risk a 1% (or even lower) reward? The False Claims Act only became effective after 1986 amendments increased rewards to at least 15% in most cases. The new IRS Whistleblower law is attracting whistleblowers left and right because it provides for a minimum of 15% in most instances.

The proposed SEC law has one advantage over the IRS version: The IRS law unfortunately omits protection of whistleblowers from retaliation, but the proposed SEC whistleblower provisions would provide a remedy similar to that furnished whistleblowers under the False Claims Act. Here is what the proposed bill states (in part):

"An employee, contractor, or agent prevailing in any action brought under subparagraph (B) shall be entitled to all relief necessary to make that employee, contractor, or agent whole, including reinstatement with the same seniority status that the employee, contractor, or agent would have had, but for the discrimination, 2 times the amount of back pay, with interest, and compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorneys' fees."

The bill's proposed SEC whistleblower language is below; the entire bill may be found here:

Continue reading "New SEC Whistleblower Rewards and Whistleblower Protections Approved by House Committee--But Improvements Are Needed" »

Defrauding the government of taxpayer dollars has gotten tougher over the past five months.

Important changes to the nation's primary anti-fraud statute, the False Claims Act, took effect on May 20, 2009, when the Fraud Enforcement and Recovery Act of 2009 became law.

Among the most significant changes, Congress clarified and corrected the False Claims Act by legislatively overruling certain court decisions that sought to limit the scope of the Act, including Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008); United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), cert. denied, 544 U.S. 1032 (2005); and United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev'd, 562 F.3d 295 (4th Cir. 2009).

These important 2009 changes to the False Claims Act include the following:

1. The amendments expand the definition of "claim," and fraud directed against government contractors, grantees and other recipients is now plainly covered by the law.

2. Funds administered by the United States government (such as in Iraq) are now protected.

3. Retaining overpayments of money from the government is now an explicit basis of liability, which will be a source of concern for health care providers, among others.

4. Liability for "conspiracy" to violate the Act is broader than before.

5. Protection of whistleblowers and others against "retaliation" now extends not only to "employees," but also to "contractors" and "agents"; and persons other than "employers" potentially may be liable for retaliation.

6. In investigating, the government now has authority to use "Civil Investigative Demands" more broadly, and to share information more with state and local authorities and with whistleblowers/relators.

7. A standard definition of what is "material" now applies in False Claims Act cases.

8. The statute of limitations has been clarified to allow the government to assert its own claims, after the whistleblower (or "relator") has filed a qui tam case under the False Claims Act.

Click here for a detailed discussion of the False Claims Act and the wave of new State False Claims Acts.

The amended False Claims Act is reprinted below, in its entirety:

Continue reading "New False Claims Act Amendments Strengthen Enforcement of Health Care Fraud and Procurement Fraud Laws " »

Outrage over misuse of public funds is a healthy reaction to those who cheat taxpayers. It can also create interesting bedfellows, as newly-introduced legislation in the House demonstrates.

HR 3571, aimed at "de-funding ACORN," would ban federal contracts and most federal funds to any organization that "has filed a fraudulent form with any Federal or State regulatory agency," among other things. (Complete bill is below.)

As. Rep. Alan Grayson (D-FL) observed correctly, fraud by those who receive government funds involves much "bigger fish" than ACORN--and bigger dollar amounts of alleged fraud.

"We can't have a situation where the laws of justice are applied to one organization and not to any of the others, particularly when there are organizations that are polluting water for our soldiers and electrocuting them." Grayson presumably was referring to allegations that KBR's performance of government contracts for our troops has caused soldiers to be electrocuted and otherwise endangered.

Rep. Grayson is on target. He saw these abuses as a lawyer vindicating the public's interest in fighting fraud in pursuing qui tam whistleblower cases under the False Claims Act, the nation's primary civil statute for combating fraud and false claims against the government.

On the other side of the aisle, Rep. Dan Issa (R-CA) appeared to agree with this principle--"abuse and fraud will not be tolerated," as his spokeperson told ABC News.

Battling fraud against taxpayers can and should be a universal concern of both parties. Let's see whether this bill is weakened by those who reap the most rewards from cheating the public. The full text of the proposed legislation is below:

Continue reading "Federal Contractor Fraud Laws To Get Tougher? ACORN Controversy Casts Spotlight on Larger Contractors That Violate False Claims Act" »

Since the Madoff and Stanford scandals, we have written about the calls for the Securities and Exchange Commission (SEC) to establish a meaningful whistleblower rewards program. Currently, no adequate incentives exist for whistleblowers to speak up when they might have a chance to stop large scale fraud and prevent the next Madoff or Stanford debacle. How much better off would so many Americans be if someone had exposed Madoff before he defrauded so many investors?

Forbes has run interesting column by Bill Singer, calling for a statute that apples "False Claims Act" whistleblower remedies to Wall Street. Why not protect investors from the massive losses that so many incurred? The current system obviously failed to do so. Harry Markopolis has described eloquently how the SEC could do so much better, and new SEC whistleblower rewards should make a huge difference.

We are already seeing the successes of another innovative law based on the same idea, the IRS Whistleblower Program. To stop those who would have you and I carry their share of the nation's tax burden, private citizens are stepping forward with better and better information to provide to the IRS about significant tax cheating. The quality of the information that our clients are presenting is compelling, and some of it will help stop major abuses of the tax laws.

Continue reading "Calls Continue for a "False Claims Act" for Wall Street Whistleblowers" »

In one of two prominent whistleblower cases in the news this week, whistleblower John Kopchinski will be awarded more than $50 million for his role in exposing improper "off-label marketing" of the drug Bextra by Pfizer. Other whistleblowers also will be rewarded because of this settlement. That settlement of $2.3 billion is the largest in history ($1 billion to settle False Claims Act allegations, and $1.3 billion in criminal fine and forfeiture).

As large as the Pfizer settlement is, the other whistleblower's actions seem likely to lead to recovery of dollars that could dwarf this $2.3 billion settlement. UBS whistleblower Bradley Birkenfeld has lifted the shroud of secrecy from thousands of American taxpayers' offshore accounts at UBS. He has given the IRS a foothold into recovering potentially many billions in unpaid taxes owed.

Yet Birkenfeld was recently sentenced to serve 40 months in federal prison for conspiracy to defraud the United States in a tax fraud scheme while at UBS. His conviction also calls into question his ability to receive a reward under the IRS Whistleblower Program from the billions to be collected by the IRS.

How could this happen?

There are tried and true steps lawyers representing whistleblowers must take to protect their clients from the risk of prosecution. This was one of the topics of the "IRS Whistleblower Boot Camp" panel discussion that I led this past March, with panelists including IRS Whistleblower Office Director Steve Whitlock--how to protect the whistleblower who has potential criminal liability, but who has valuable information.

If adequate protection cannot be obtained, often the whistleblower with real criminal exposure should choose not to go forward. If the information is important enough to the government, however, protection for the whistleblower often can be negotiated, so long as the whistleblower is truthful and forthcoming. As former federal prosecutors who have also defended clients in white collar criminal prosecutions, we have represented many clients in obtaining this type of protection.

Continue reading "Protecting Whistleblowers from Criminal Prosecution: The Mystery of the UBS Whistleblower's Prison Sentence" »

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" »

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.

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.

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

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.

I am very excited about co-chairing the Annual "Whistleblower Law Symposium" once again this week.

From Atlanta, Boston, Chicago, New Orleans, San Antonio, and Washington, D.C., many of the country's leading attorneys in whistleblower cases under the "qui tam" statute, the False Claims Act, the Sarbanes-Oxley statute, and the IRS Whistleblower Program will gather in Atlanta on March 4 to discuss some of the more challenging aspects of representing whistleblowers (or defending against whistleblower claims) under these laws.

We are honored to have one of the officials of the IRS Whistleblower Office, Dawn Applebaum, join us in person to discuss the progress of the new IRS Whistleblower Rewards Program. The IRS Whistleblower Office has just celebrated its second anniversary.

We are also privileged to have the top state enforcement officials in health care fraud cases from Texas, Florida, and Georgia, to explain how they coordinate state and federal health care fraud whistleblower cases under the federal and state False Claims Acts.

Also joining us is Rep. Edward Lindsey, the Legislative Sponsor both of the Georgia State False Medicaid Claims Act, and recent legislation to solidify Georgia’s Office of State Inspector General.

Because of the wave of new whistleblower statutes that have been inspired by the successes of the False Claims Act, our firm instituted the Whistleblower Law Symposium. Once again, top-notch speakers will address a broad variety of issues that arise under these whistleblower laws, including:

--Whistleblowers in Health Care: Recent Cases and Strategies for Healthcare Providers and Counsel When a Whistleblower Calls

--Recent Developments in Qui Tam Cases Under the False Claims Act—The Relator’s Perspective

--Update on the IRS Whistleblower Program

We are fortunate to have such excellent faculty members from around the country join us. Our faculty members and their topics are listed below.

Continue reading "Whistleblower Attorneys to Discuss Qui Tam Cases Under False Claims Act, IRS Whistleblower Program, and Sarbanes-Oxley Whistleblower Cases at Annual "Whistleblower Law Symposium"" »

Taking a brief break from "substantive" writing on this whistleblower lawyer blog, I could not help but briefly note this story today:

Filmmaker Michael Moore is seeking whistleblowers in the financial industry for his next film. He concludes "if you work for a bank, a brokerage firm or an insurance company -- or if you have seen things or heard things that you believe the American people have a right to know -- please contact me" via the email address posted on his blog.

Perhaps those whistleblowers should follow Sen. Grassley's strong advice to use the qui tam whistleblower provisions of the False Claims Act to report fraud and abuse in TARP or other "bailout" measures. Persons in the financial services industry already have contacted us to do just that, and some also have potential claims in the IRS Whistleblower Program.

Both the False Claims Act and the IRS Whistleblower law allow the private citizen whistleblowers to share in the government's recovery of money wrongfully obtained, as we have written about extensively.

We anticipate that the "stimulus" package in Congress this week also will produce many opportunities for fraud and abuse of taxpayer funds, so that whistleblowers also will be important to deter those abuses through use of the False Claims Act and the IRS Whistleblower Program.

Continue reading "Wall Street Financial Industry "Bailout" Whistleblowers Sought by--Michael Moore?" »

Those potential whistleblowers watching for TARP waste, fraud and abuse should note today's report of the Congressional Oversight Panel. According to the report, the Treasury Department has received "far less value in stocks and warrants than the money it injected into financial institutions."

The report, "Valuing Treasury Acquisitions," concludes that Treasury paid "substantially more for the assets it purchased under the TARP than the market value of those assets" at the time this deal was announced. The Panel revealed that, in the ten largest transactions with TARP funds, for each $100 spent by Treasury, it received assets worth only approximately $66.

The full report can be found at COP.Senate.gov.

Sen. Charles Grassley has emphasized that whistleblowers must use the qui tam provisions False Claims Act to guard against misuse of TARP funds through fraud, waste and abuse.

The Congressional Oversight Panel oversees the TARP funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and provides recommendations on regulatory reform. The Panel members are Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York, Damon Silvers, Associate General Counsel of the AFL-CIO, former U.S. Senator John E. Sununu (R-NH), and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School.

We hope the Panel protects these taxpayer funds with zeal, and stops the inevitable attempts at misuse of the funds.

When improprieties occur with hedge funds, the hedge funds' lack of transparency and dearth of disclosure obligations make violations of the law difficult to uncover. Sometimes, persons in the hedge fund industry report those abuses through the IRS Whistleblower Program, as some of our IRS Whistleblower clients have done.

Nonetheless, the hedge fund industry remains cloaked in secrecy, frustrating experts who now seek to gauge the impact of hedge funds on the current financial crisis.

A new bill just introduced in the Senate, the "Hedge Fund Transparency Act," would lift that cloak and create disclosure requirements for hedge funds and oversight of hedge funds by the SEC. This bipartisan bill sponsored by Senators Chuck Grassley and Carl Levin modifies a prior approach to hedge fund scrutiny pressed by Sen. Grassley, after a whistleblower complained that SEC supervisors were impeding an investigation into a major hedge fund.

According to Sen. Grassley, "The bill contains four basic requirements to make hedge funds subject to SEC regulation and oversight. It requires them to register with the SEC, to file an annual disclosure form with basic information that will be made publicly available, to maintain books and records required by the SEC, and to cooperate with any SEC information request or examination."

Until the Bear Stearns debacle, there seemed little political will for any serious oversight of hedge funds. The SEC in 2004 had issued a rule requiring hedge funds to register under the Investment Advisers Act, to comply with related regulations, and to provide basic information through a public disclosure form. In June 2006, however, the U.S. Court of Appeals for the District of Columbia Circuit declared the rule invalid as incompatible with the Investment Advisers Act.

In hindsight, that absence of scrutiny may be seen as a grave error, one which may have helped create the current financial meltdown.

Since 1998, when the Federal Reserve acted to rescue Long-Term Capital Management (LTCM), a hedge fund with more than $125 billion in assets under management and a total market position of approximately $1.3 trillion, investments in hedge funds have grown dramatically.

Continue reading "Hedge Funds Face Regulation & Oversight by SEC--Will There Be Another Compliance Tool in Addition to IRS Whistleblower Program?" »

When the Wall Street "bailout" grew with Congress' creation of the Troubled Asset Relief Program (TARP), Sen. Chuck Grassley emphasized the importance of "whistleblowers" and the False Claims Act to protecting these taxpayer funds from fraud and abuse.

Tonight, the House added to the bailout by passing the economic stimulus package, HR 1, and approved an amendment adding whistleblower protection for federal employees.

The stimulus bill reportedly provides for $523 billion in spending, and $275 billion in tax cuts. It originally lacked protection for federal employees who are whistleblowers. An amendment by Reps. Todd Platts, R-Pa., and Chris Van Hollen, D-Md. added those protections from last year's thwarted Whistleblower Protection Enhancement Act, which cleared the House but not the Senate.

The history of government spending programs proves beyond doubt that the vast majority of fraud and abuse can only be revealed by whistleblowers. Protecting taxpayer dollars means protecting and rewarding whistleblowers. As Sen. Grassley observed in a November 17, 2008 letter about TARP:

As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated.

Both the False Claims Act and the IRS Whistleblower Program will be important in stopping fraud and misuse of taxpayer funds. When there is fraud, there is often an IRS violation as well.

Continue reading "Whistleblower Protections Added to Economic Stimulus Bill Passed by House" »

Financial fraud is a frequent topic of whistleblower cases and of this whistleblower lawyer blog, especially with TARP and the Wall Street "bailout" dominating headlines.

Senators Chuck Shumer and Richard Shelby have proposed a bipartisan bill to bolster federal resources to combat securities fraud and accounting fraud, the Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act.

Here are excerpts from the Senators' announcement:

“Our white collar crime divisions are under-staffed, under-funded, and overwhelmed,” Schumer said. “When a wave of violent crime sweeps through a city, the immediate response is to beef up the police forces, putting more cops on the beat, extending overtime, and making sure the city returns to safety. Our reaction to the financial crisis and the massive and complex financial fraud investigations that loom should be no different.”

The senators said Thursday that the investment in enforcement is a small price to pay to protect U.S. markets, and it could pay for itself. An increase in fines levied by the SEC and collection of orders of restitution in criminal cases could be far greater than the $110 million cost of increasing enforcement personnel.

As our government hemorrhages its taxpayers' funds to "bail out" firms that made poor decisions--such as American International Group (AIG), Bank of America, Citigroup, Goldman Sachs, and American Express--a just-issued report from the Government Accountability Office (GAO) raises a disturbing question: have many of the same firms already been avoiding paying their "fair share" of U.S. taxes by using offshore tax "havens"?

If so, whistleblowers will be performing a civic duty by reporting any tax evasion and noncompliance through the IRS Whistleblower Program.

"This report shows that some of our country's largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And some of those companies have even received emergency economic funds from the government," said Sen. Byron Dorgan. "I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that."

GAO's findings included that:

Eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions and 74 of the 83 had federal contracts in fiscal year 2007. For the 74 corporations, the amount of the federal contract obligations ranged from $12,000 to over $23 billion.

Several insurance companies, including American International Group Inc., Hartford Financial Services Group, Travelers Cos. Inc., Allstate Corp. and Berkshire Hathaway Inc. reportedly have subsidiaries in tax havens or financial privacy jurisdictions such as Bermuda and Switzerland.

With a "tax gap" of more than $350 billion each year--the amount owed but not paid in federal taxes--it is galling to most taxpayers to see any company that avoids paying its fair share now receive billions more in a "bailout" through the TARP program.

The GAO report did not state that any of the listed firms utilizing tax "havens" were necessarily violating current law. Sen. Dorgan did say that he planned to introduce legislation to "shut down these tax dodgers."

Continue reading "Will Wall Street Bailout Help Firms That Are "Tax Dodgers" and Hide Income in Offshore Tax "Havens"? And Will the IRS Whistleblower Program Provide a Remedy?" »

Continuing the "bailout," the Treasury Department has just announced the release of $14.77 billion in TARP funds to what it refers to as 43 "local" banks (listed below).

"Local" may be a misnomer, as the list includes $10 billion to Bank of America Corp., and more than $3 billion to American Express Company.

Let's hope that Congress and the Treasury Department make good on the promise to protect these taxpayer funds through effective oversight, meaningful restrictions, and whistleblower protections, and that Sen. Grassley's prediction that the qui tam whistleblower provisions of the False Claims Act will be used vigorously to redress any fraud or abuse with TARP funds comes true.

Below are today's announced recipients of the funds:

Continue reading "Treasury Department Announces $14 Billion in TARP Funds to More Than 40 "Local" Banks" »

Much criticism has flowed from how the first $350 billion in TARP "bailout" funds are being used. Thus far, the need for additional restrictions to prevent and penalize fraud and abuse of TARP money remains unmet.

In response, yesterday House Financial Services Committee Chairman Barney Frank proposed legislation establishing greater limits on use of TARP funds, among other things.

The "TARP Reform and Accountability Act of 2009" (HR 384) would require quarterly reports from recipients on their use of TARP funds, restrict the use of TARP funds for acquisitions, and impose further limits on executive compensation. Among its other terms are that it would increase the authority of the Financial Stability Oversight Board.

A potentially very significant point is that the Act empowers Treasury to apply the new limits on bonuses and other executive compensation to past recipients of TARP funds.

The new restrictions should further Sen. Grassley's call for use of the False Claims Act, the very successful qui tam whistleblower statute, to protect TARP funds.

The entire TARP Reform and Accountability Act of 2009 may be found at http://www.rules.house.gov/111/LegText/111_HR384txt.pdf.

The Treasury Department last week issued its December 2008 report to Congress on what it has done with the "bailout" funds through the Troubled Asset Relief Program (TARP) and Capital Purchase Program (CPP). With more than 200 institutions receiving taxpayer money, an overriding question is how to prevent and redress the inevitable fraud and abuse of TARP and other taxpayer funds, through whistleblowers and other means.

Treasury reported that, as of December 31, 2008, it had invested $177.5 billion in more than 200 U.S. financial institutions. As discussed previously on the whistleblower lawyer blog, Treasury recounted its announced assistance to General Motors and GMAC, as part of the Automotive Industry Financing Program (AIFP).

Treasury also described its New Year's Eve investment in Citigroup of $20 billion in preferred stock and warrants, as part of a new Targeted Investment Program (TIP). It also discussed reporting to Congress on the "Asset Guarantee Program," an insurance program.

Treasury's list of institutions receiving funds is reprinted below.

With abuses already being reported by TARP whistleblowers, we urge the government to act decisively to plan for and redress the inevitable abuses that will occur. Sen. Grassley has emphasized that the qui tam whistleblower provisions of the False Claims Act be used to deal with TARP bailout fraud and abuse, as we have discussed previously. The IRS Whistleblower Rewards Program should also serve an essential role in protecting taxpayer funds, as well as rewarding whistleblowers.

Continue reading "With Treasury Reporting TARP Funds to More Than 200 Financial Institutions, Who--Besides Whistleblowers--Can Guard Against Fraud and Abuse?" »

The TARP bailout funding continues, as the Treasury Department announced today that it will buy $5 billion in senior preferred equity with an 8% dividend from GMAC LLC.

Senator Charles Grassley has emphasized that TARP and other "bailout" funds must be protected through whistleblower protections and whistleblower laws such as the False Claims Act. The GMAC announcement today will present ample opportunities to test those premises on which Congress approved the bailout funding.

The Treasury announcement is reprinted below:

Continue reading "Treasury Department Announces TARP Investment in GMAC" »

On the same grey November day when President Bush visited Wall Street's Federal Hall to address the ever-morphing "bailout," I was in lower Manhattan meeting with IRS officials about an IRS Whistleblower matter. The tax evasion scheme we discussed was yet another that has cost taxpayers dearly.

As NYPD officers scurried about to help protect the President that day, I wondered who and what would protect our taxpayer funds--the hundreds of billions the government was now about to dole out--from fraud and abuse.

Fraud is rampant, as proven by the evidence brought to light by so many of our whistleblower clients under the qui tam statute, the False Claims Act, and now under the new IRS Whistleblower Program.

A few days later, Sen. Chuck Grassley hammered the same point in a November 17, 2008 letter to Treasury Secretary Paulson and Attorney General Mukasey. Grassley has insisted on effective oversight of the Troubled Asset Recovery Program (TARP) and the Capital Purchase Program (CPP), as well as on encouraging "whistleblowers" to come forward:

In the meantime, taxpayer dollars are at risk and I believe it is important to discuss alternative procedures and measures that can be taken to ensure taxpayers aren’t taken to the cleaners by unscrupulous individuals. One proven and effective method of overseeing taxpayer funds has been to support courageous whistleblowers who risk their jobs and livelihoods to bring forth allegations of fraud, waste, and abuse of taxpayer monies. As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated. As such, I believe you should both work to ensure that all entities participating in the TARP and CPP are made aware that any allegations of fraud, waste, or abuse will be treated seriously and properly referred to the Treasury Inspector General or the Attorney General for review until a Special Inspector General for the TARP is appointed.

Grassley also emphasized the importance of the False Claims Act, the nation's primary civil weapon for combating fraud against taxpayer funds, in preventing and penalizing fraud in the bailout:

[E]ntities who receive federal funds under the TARP and CPP are subject to the provisions of the FCA should they use false or fraudulent submissions in order to obtain federal funds. For instance, any entity that submits false or fraudulent information in an application to Treasury in order to obtain federal funds available through the CPP would be liable to the Government under the FCA. Further, while it has been reported that the Treasury does not currently plan to utilize authority under the Act to use the TARP to purchase distressed assets either directly or indirectly, should Treasury exercise its authority to do so, any fraudulent statements or submissions made to induce the Government to purchase those assets would also subject the fraudfeasors to liability. As a result, these individuals and corporations could be subject to civil penalties and treble damages for committing fraud against the Government.

Continue reading "Whistleblowers, TARP, and Other Wall Street "Bailout" Measures--Why the False Claims Act and IRS Whistleblower Program Are More Essential Than Ever" »