Financial Fraud

Progress with Dodd-Frank’s Whistleblower Programs: CFTC and SEC Working to Deter the Next Big Schemes to Harm Investing Public

Published on: July 21, 2011 | by Michael Sullivan

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.

The only non-lawyer in the room, Gensler seemed to grasp more quickly than anyone potential abuses that its draft rules would not correct.

CFTC Commissioner Bart Chilton has also recognized how essential an effective whistleblower program is to protect investors.

More importantly, even the CFTC’s initial cut at its rules showed that it would not simply copy the SEC whistleblower rules’ approach, but would independently design a meaningful program to protect the public by attracting significant whistleblower information to ferret out frauds.

Likewise, the SEC–whose whistleblower rules have been finalized–has shown a welcome commitment to making SEC whistleblowers welcome. Chair Mary Schapiro, Director of Enforcement Robert Khuzami, and other staff such as Steve Cohen, Jordan Thomas, and Sarit Klein put more than considerable thought and effort in refining the SEC whistleblower rules announced in May 2011.

Some in Congress seek to keep the SEC and CFTC so underfunded that they cannot protect the public effectively. As former SEC counsel Professor Don Langevoort observed, “Congress maintains increasingly tight control over SEC policy largely through the budgetary process, and having the Commission be habitually needy and under-resourced fits well within this strategy. The campaign contributions from various sources with an interest in securities regulation are large, and influential members of Congress hardly maximize their own political advantage by stepping aside and leaving the SEC free to do its work as it sees fit.”
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Why the SEC Whistleblower Rules Show A New Seriousness About Using Valuable Whistleblower Information

Published on: June 1, 2011 | by Michael Sullivan

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, Director Khuzami, and SEC staff, and then separately with Commissioners Luis A. Aguilar, Kathleen L. Casey, Troy A. Paredes, and Elisse B. Walter, to discuss changes to the proposed rules for the new SEC Whistleblower program.

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Financial Fraud Cases Under False Claims Act Continue, As Deutsche Bank and MortgageIT Face Mortgage Fraud Suit

Published on: May 3, 2011 | by Michael Sullivan

The 2008 financial sector collapse has led to another False Claims Act case against financial institutions. Today, Deutsche Bank and MortgageIT were named in a mortgage fraud case under the False Claims Act, filed by U.S. Attorney Preet Bharara of the Southern District of New York.

The government’s Complaint alleges that Deutsche Bank and MortgageIT “repeatedly lied to be included in a Government program to select mortgages for insurance by the Government. Once in that program, they recklessly selected mortgages that violated program rules in blatant disregard of whether borrowers could make mortgage payments. While Deutsche Bank and MortgageIT profited from the resale of these Government-insured mortgages, thousands of American homeowners have faced default and eviction, and the Government has paid hundreds of millions of dollars in insurance claims, with hundreds of millions of dollars more expected to be paid in the future.”

While health care fraud has been the subject of most qui tam cases under the False Claims Act in recent years, bank fraud, mortgage fraud, and other financial fraud and abuse promise to be growing areas of enforcement in False Claims Act cases.

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