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Michael Sullivan

How the New CFTC Whistleblower Rules Will Operate

When the CFTC announced its final whistleblower rules yesterday, it answered many questions about how the new CFTC whistleblower program will work.

David Meister, the CFTC’s Director of the Division of Enforcement, provided this summary according to the unofficial transcript our firm prepared of yesterday’s CFTC public meeting:

The Commission will pay awards to eligible whistleblowers who provide original information to the Commission leading to a successful Commission enforcement action and the imposition of monetary sanctions in excess of $1 million.

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CFTC Announces Final Whistleblower Rules, Rejects “Mandatory Internal Reporting” by Whistleblowers

The final whistleblower rules of the Commodities Futures Trading Commission (CFTC) are being announced now at a CFTC open meeting. Like the SEC, the CFTC has rejected any provision that whistleblowers be required first to report internally the violations in question, but will treat internal reporting as a “positive” consideration in its awards.

The alternative pushed by business would have required all CFTC whistleblowers first to risk career suicide by reporting the boss’s wrongdoing to the boss himself.

Industry’s approach would have made the Commission the laughing stock of law enforcement, since no rational person with a career and a mortgage would risk reporting even major fraud with that requirement.

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Qui Tam Whistleblower Cases Produced $97 Million in Recoveries After Being Declined by Justice Department

When qui tam whistleblower cases under the False Claims Act are “declined” by the Department of Justice, the whistleblower or “relator” is authorized to pursue the case on the government’s behalf.

The DOJ statistics below show that these declined cases have generated more than $97 million in recoveries for taxpayers since 1987, the year after the modern False Claims Act was born.

These facts dispel any notion that the Justice Department has sufficient resources to pursue all meritorious cases. Some of the more notable False Claims Act recoveries were achieved by private attorneys pursuing these “declined” cases.

A list of these declined cases that have brought almost $100 million into the U.S. Treasury is below. This amount is “larger than the sum of all salaries paid to members of the United States House of Representatives and the United States Senate last year,” as observed by Pat Burns of Taxpayers Against Fraud.
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Former Credit Suisse Officials Indicted For Assisting U.S. Taxpayers Evade Taxes Since 1953

The IRS emphasis on international and offshore tax violations continues. Today, the government made clear that U.S. prosecutions for cross-border tax evasion did not end with the 2009 landmark UBS settlement, which followed a tax whistleblower’s approaching U.S officials.

The Justice Department announced today that three more former Credit Suisse bankers have been indicted for helping U.S. taxpayers evade U.S. taxes.

Credit Suisse has been under U.S. scrutiny for at least the past year. Today’s indictments of three former officials bring to seven
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Progress with Dodd-Frank’s Whistleblower Programs: CFTC and SEC Working to Deter the Next Big Schemes to Harm Investing Public

Too often missing in today’s discussions of Dodd-Frank’s one-year anniversary is appreciation of efforts by CFTC and SEC leadership to build from scratch the effective new whistleblower programs mandated by Dodd-Frank.

With scant resources, each agency is creating an essential mechanism to protect today’s investors from the next fraudulent scheme.

Let’s start with the CFTC. When I met with Chairman Gary Gensler and his CFTC staff in March to discuss the CFTC’s proposed whistleblower rules, I was struck by Chairman Gensler’s focus on what improvements could be made to its “draft” commodities whistleblower rules.

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SEC Charges FCPA Bribery Scheme–Feds Collect $15 Million

The SEC Whistleblower Program encompasses not only classic securities violations, but also violations of the Foreign Corrupt Practices Act (“FCPA”), a topic we have followed closely.

This past week, the SEC filed and settled an FCPA case against Armor Holdings, Inc., and collected more than $5.6 million, while the Department of Justice added almost $10.3 million in criminal fines.

The SEC charged that Armor Holdings, Inc. engaged in a bribery scheme to sell body armor to U.N. peacekeeping missions. The Commission also alleged that Armor Holdings violated the federal securities laws’ books and records and internal controls provisions by failing to account properly for commissions in 2001-2007.

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Why the SEC Whistleblower Rules Show A New Seriousness About Using Valuable Whistleblower Information

The suspense over the final SEC whistleblower rules ended with the SEC’s release of its final whistleblower rules last week. The CFTC is to follow suit soon in announcing its own commodities whistleblower rules.

We have followed the SEC rules’ development, after being part of the small group of pro-whistleblower attorneys who met with the Commissioners and staff and urged changes to the draft rules to make them effective.

In January, I had the opportunity to visit with SEC Chairman Mary Schapiro,
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Fraud Enforcement Adds Teeth by Pursuing Individuals Allegedly Responsible for Organizations’ Frauds

Last week the government’s criminal trial of former GlaxoSmithKline vice president and associate general counsel Lauren Stevens ended abruptly, as the judge found no basis to allow the case to go to a jury. Prosecutors had charged that she obstructed justice and made false statements to cover up the company’s improper marketing of the antidepressant drug Wellbutrin SR.

While she dodged a bullet, the case jolted lawyers handling health care fraud investigations, which are more typically civil cases under the False Claims Act.

Yet
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New Supreme Court False Claims Act Decision Today: Could This Court Be Any Friendlier to Qui Tam Defendants?

False Claims Act history repeated itself today.

Since Congress acted decisively in 1986 to breathe life into the False Claims Act through amendments intended to expand use of the nation’s major anti-fraud whistleblower law, the Supreme Court and some lower courts have regularly intervened by imposing their own views on what Congress must have meant in writing the 1986 amendments.

Those decisions hostile to enforcement of the False Claims Act included Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (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)).

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Tax Whistleblower Attorneys At IRS Hearing Urge Treasury and IRS to Be True to Congress’s Intent in Expanding the IRS Whistleblower Program

As has been reported today in Tax Notes and CCH, my colleague Richard Rubin and I addressed the IRS at its hearing yesterday on the proposed IRS Whistleblower rules. We were able to speak for roughly one-third of the hearing.

We focused on fundamentals. We urged that Treasury and the IRS must stay true to the intent of Congress to expand the number and types of IRS whistleblower claims that the IRS receives and pursues, and that merit awards to whistleblowers.

I argued
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First Large SEC Whistleblower Award Is Encouraging, As SEC’s “Loss” in Mark Cuban Case May Be

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

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

Two weeks later, a Texas jury found against the SEC
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The False Claims Act and the New Georgia “Taxpayer Protection False Claims Act’

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

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

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

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

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

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

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

The Justice Department
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CFTC Whistleblower Program Taps SEC Enforcement Lawyer As New Director

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

Mr. Ehrman most recently had been Assistant Director of the SEC’s Office of Market Intelligence. His experience there should serve him well since he “oversaw the processing, review and
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Court Allows N.Y. Tax Whistleblower Case To Proceed Against Sprint-Nextel Corporation

When New York amended its state False Claims Act in 2010, it broke new ground by including tax whistleblower cases. New York’s decision to attract tax whistleblowers bore fruit when the NY Supreme Court recently ruled that New York’s $100 million tax whistleblower case against Sprint-Nextel Corp. may proceed.

If successful, this case may net New York three times the more than $100 million in unpaid taxes that the state alleges Sprint has failed to pay its state and local governments. It may also bring the whistleblower 15%-25% of what the state recovers.

The N.Y. Supreme Court first rejected Sprint’s arguments that the N.Y. Tax Law did not require payment of the sales tax in question. The Court allowed the case to proceed.

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Amid Attacks on the IRS, Recognition of the Best of the IRS Whistleblower Office

Now is the time to tell the story of Bob Gardner. Bob retires this week after 37 years of service with the IRS, most recently with the IRS Whistleblower Office.

Bob understands that public service is a noble calling for so many in our government. He epitomizes all that is good in fairly administering our internal revenue laws.

When IRS Whistleblower Office Director Steve Whitlock began hiring for the first “tax whistleblower” office that Congress had authorized in late 2006, Bob Gardner was
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Reforming the IRS–and Why We Need a Functioning IRS That Follows the Law

Could the IRS and Treasury Department have done a worse job in how they have handled the alleged “targeting” of conservative groups that applied for tax-exempt status before the 2012 elections?

My criticism starts–but does not end–with any IRS personnel who singled out “Tea Party” and similar groups for extra scrutiny based on their political affiliations. Any such acts cannot be tolerated..

But less noticed is what was being done–or not done–since at least mid-2012 by the Treasury Inspector General for Tax Administration (“TIGTA”).

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IRS & SEC Whistleblower Directors Join False Claims Act Officials for Conference on Whistleblower Issues

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

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

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

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Health Care Fraud Institute Discusses False Claims Act Developments

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

This year, I was honored again to be invited to participate as part of the False Claims Act panel with Rick Shackelford, an
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SEC and Justice Department Issue “Resource Guide to the U.S. Foreign Corrupt Practices Act”

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

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

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

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