The Economist predicted that 2012 would be “The Year of the Whistleblower.” That prediction has come true in many ways. If attendance at this year’s annual whistleblowers’ convention is any guide, I predict the same thing for 2013.
This year, I could hardly find a seat at the Taxpayers Against Fraud (“TAF”) conference in Washington,DC, and it was not because there were fewer chairs. Attendance was up 20% and it is easy to see why. Awards to whistleblowers (and their lawyers) have been skyrocketing. Since its rebirth in 1986, recoveries under the False Claims Act (“FCA”) have topped $36 billion, with $9 billion collected this year alone.
In a successful FCA case, the whistleblower is eligible for a share of the government’s recovery. For example, GlaxoSmithKline paid $750 million to the federal government to settle allegations that products from its manufacturing plant inPuerto Rico, such as Paxil, were dangerously adulterated. The whistleblower in that case, Cheryl Eckard, was awarded $96 million (until recently the largest award to a single whistleblower in history).
The success of the FCA has begotten more than thirty similar acts at the state level, and now three additional programs run by the IRS, the SEC, and the CFTC. The IRS program has been around since 2006, but, in the words of its director Steven Whitlock, the program has been largely “unblemished by success.” The SEC program is just over a year old, but it has already announced its first award to a Wall Street insider who has remained unidentified. The Commodities Future Trading Commission (“CFTC”) program is essentially the same as the SEC program except that it covers fraud in relation to the sale of commodities rather than securities.
Thus, when the TAF conference presented a panel hosted by all three directors of the new programs, the place was packed to capacity. Steve Whitlock (IRS), Sean McKessy (SEC), and Vincente Martinez (CFTC) discussed the ways in which their programs operate and how they can be used to augment recovery efforts on behalf of the taxpayer.
The SEC and CFTC programs appear to be moving efficiently. So far, the SEC has received about 3000 “tips.” The process is pretty simple and, unlike a formal False Claims Act case, does not require the filing of a lawsuit. Though it may dismay readers of this newspaper to know, you do not even need a lawyer to file a tip and to claim a reward (although the tipster must be represented by counsel to proceed anonymously). Vincent Martinez, perhaps conscious of not yet completing a successful prosecution, joked that because no one knows what the CFTC does, they have seen fewer cases than the SEC. Still, it is only the IRS program which has come in for any real criticism.
The IRS program is now six years old, and so far, it has made just four awards in its lifetime, despite the fact that in the last five years more than 1300 cases have been filed. Having said that, the second of those awards broke Ms. Eckard’s record. Earlier this year the IRS announced that it had awarded $106 million to the former UBS banker, Bradley Birkenfield. Mr. Birkenfield had approached the IRS with information about secret Swiss accounts. The IRS now has recovered more than $2 billion based on Mr. Birkenfield’s information and implemented an amnesty scheme for wealthy Americans to avoid the harshest penalties. So far, more than 14,000 individuals have signed up for the amnesty program netting a further $3 billion for the IRS.
So, what the IRS program has lacked in turnover, it has made up for in magnitude, at least to the satisfaction of Bradley Birkenfield. Even so, Senator Grassley a longtime champion of the False Claims Act and author of the 2006 IRS reforms has written repeatedly to the director of the program seeking an explanation for the glacial pace of turnover. The Senator also has been very critical of the “black box” approach to communicating with whistleblowers, inasmuch as the program has been noted for its secrecy. Indeed, so secretive is the program that, in the case of last month’s $38 million dollar award, neither the identity of the whistleblower, nor the Fortune 500 tax-dodger, has been made public.
This inscrutability has created a trapdoor in the IRS program that may also make lawyers cautious to bring tax cases. Although the IRS whistleblower program is a distinct function of the IRS, the general rules limiting communication of taxpayer information still apply. Therefore, to pursue a case, an attorney needs her client’s power of attorney to be able to file documents relating to the claim – and even then, the attorney will not receive any communications from the IRS about the status of the claim. Indeed, TAF panelist Steve Whitlock confessed that, “We make our decisions in a closed box we don’t invite you in” – adding, “you will not know what is going on with an IRS case; it is just a fact of life.” The real problem comes if the client revokes the power of attorney. The ensuing radio silence could be business as usual at the IRS or it might be because you are now “out of the loop.” The client might reap the rewards of a successful prosecution and skip abroad. With such large incentives, it has been known to occur!
At the same time, there are those who criticize the incentives. For example, when the contours of the SEC program were being debated, industry lobbyists tried to include a rule that the would-be whistleblowers would have to report fraud internally before going to the SEC directly. Opponents argued that such a rule would chill the reporting of fraud and “insiders” would quickly find themselves “outsiders” and looking for unemployment benefits. In the end, the final rule does not require whistleblowers to put themselves at risk of retaliation for reporting fraud up the chain. They can now go directly to the SEC and the CFTC.
Others have tried to cap the awards that may be made under these programs. Controversially, Michael Loucks, the former acting U.S. Attorney for the District ofMassachusetts, has called for the introduction of a $2 million cap on awards. Loucks now defends whistleblower cases at Skadden Arps, and some say that has colored his thinking; Loucks has countered that he has always advocated for caps even while at the U.S. Attorney’s Office. Either way, there are many in industry, particularly the pharmaceutical industry, who would like to see these incentives diminished.
So, if 2013 is going to be another Year of the Whistleblower, what will it look like? I see two trends. The first is a more rapid processing and turnover of cases. Department of Justice statistics indicate that for most years in the last decade, there were between 300 and 400 new FCA cases. Last year, that number jumped more than 50% to 638. The national average for the length of the court seal is thirteen months, but there is now rumored to be an unofficial nine-month policy at the Department of Justice. These shorter seal deadlines in conjunction with increased caseloads are pressuring government lawyers to make a decision to intervene in a case or cut it loose. Accordingly, cases will be churned more rapidly for good or bad, and as a result, a greater number of these cases will be litigated by private lawyers rather than settled by the government.
The second trend is globalization. The SEC and CFTC programs offer a reward following successful enforcement actions. One of those laws that the SEC seeks to enforce is the Foreign Corrupt Practices Act. If a publicly-tradedU.S.company succumbs to the pressure to pay off government officials overseas, anybody aware of that bribery may file a tip in theUnited States. Indeed, of the 3000 or so tips filed in the last twelve months, the whistleblowers represent more than forty-five foreign nations.
The hot topics in 2013 will be Forex manipulation; “allocating” company income to low tax jurisdictions; mishandling of customer funds; and inadequate market disclosures. It will be a busy year for practitioners in the area. In fact, I think I need to book my seat at the next TAF conference today.