Kansas City Whistleblower Lawyer Blog

Primer on the Foreign Corrupt Practices Act

Thu, 03 May 2012 13:44:45 -0600

What Is the Foreign Corrupt Practices Act?

The Foreign Corrupt Practices Act of 1977 was passed in response to scandals in the mid 1970s that exposed over 400 U.S. companies that had been making payments to foreign government officials to facilitate preferential treatment. One of the incidents that prompted the passage of the law was the Bananagate scandal of 1974. It was found that not only did the United Brands Company bribe government officials in Honduras to lower export taxes on bananas, but they also tried to convince the SEC that these bribes should remain secret.

The FCPA is found in the United States Code (15 USC §78dd-1 et seq.). Its requirements can be broken down into two basic categories:

First, according to the Department of Justice, is to "[prohibit] corrupt payments to foreign officials for the purpose of obtaining or keeping business." The definition of "foreign official" is interpreted rather broadly. Payment through an intermediary is also considered a violation of the FCPA if the payer knows that that money will ultimately be used to bribe a government official.

Second, is an accounting provision (as detailed in 15 USC § 78m), largely overseen by the SEC. This statute mandates that corporations keep accurate and complete records of all transactions. Low-level payments that do not confer special privileges and are "necessary to achieve ministerial action" are still permitted.

Who Enforces the FCPA?

The Department of Justice is responsible for enforcement of the law's criminal penalties. The Securities and Exchange Commission enforces the civil penalties. Private causes of action cannot be supported by the FCPA alone, but an FCPA violation can be part of a private lawsuit under another law such as Racketeer Influenced and Corrupt Organizations (RICO) Act.

Whistleblowers?

When the Dodd-Frank Act created its general whistleblower incentive program, the SEC adopted its own rules to incentivize disclosure of information leading to the discovery of fraudulent transactions involving public companies. Whistleblowers are entitled to 10-30% of the recovery in any resulting settlement or action borne of a successful enforcement based on the information. The reporting may be anonymous, but receipt of the reward requires disclosure of one's name to the SEC.

The reward provisions do not apply to those with a legal duty to report corrupt transaction or those convicted of a crime related to those transactions.

The information must also arise from a "voluntary submission" i.e. before the SEC contacts the prospective whistleblower. Second, the information must be based on "independent knowledge," not something that could be gleaned from publically available sources unless the whistleblower himself was the source for the public reports.

How Effective Is It?

Enforcement of the FCPA has increased dramatically in recent years. There were only two cases prosecuted in 2004; in 2010 the number jumped to 48.

The recent Wal-Mart scandal is a classic example of the type of corruption that the FCPA was meant to counteract. Back in 2005, it was discovered that Wal-Mart paid Mexican government officials more than $24 million. However, law enforcement officials were never notified and the story remained dormant until this past April when the New York Times wrote an important article about the scandal.

The article described how trusted agents would deliver "envelopes of cash" to any official who could have potentially hindered Wal-Mart's rapid growth in Mexico. These envelopes of cash are a classic example of the payments that would leave behind the vague records that send up a red flag to the DOJ and SEC regarding possible FCPA violations. The Times also noted that the company's records indicated $16 million dollars worth of "donations" and "contributions" to various Mexican municipal governments. While some of the payments were made to facilitate getting business licenses, they went far beyond the low level ministerial payments permitted by the FCPA.

Source:
Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle, by David Barstow, published at NYTimes.com, April 21, 2012.

Whistleblowers and the IRS

Thu, 26 Apr 2012 12:34:51 -0600

On average, there is a $450 billion annual gap between the taxes that are owed to the federal government and the taxes that are actually paid. In theory, those who help the government find those who cheat on taxes and contribute to the shortfall should be the heroes that the federal government wants to reward. After all, the people who underreport income or hide assets can cost the government millions of dollars. At first glance it seems that Congress wanted to create incentives to report potential income tax fraud. Back in December 2006, Congress passed legislation that increased the reward for reporting tax fraud to the heights typically reserved for Qui Tam whistleblowers. During the last five years, potentially $500 million dollars in unreported or falsely deducted corporate and personal income tax could have been recovered thanks to this legislation.

Sadly, only one reward has been given under the new law since 2006. Four and a half million dollars was awarded to a corporate auditor who tried to convince his employer to pay the $20 million in taxes they rightfully owed.

The problem is not a shortage of claims nor is it the quality of the information. The problem appears to come from the IRS itself. In a 2010 interview, former IRS chief Donald Korb had this to say in Tax Notes:

The new whistle-blower provisions Congress enacted a couple of years ago have the potential to be a real disaster for the tax system. I believe that it is unseemly in this country to encourage people to turn in their neighbors and employers to the IRS, as contemplated by this particular program. The IRS didn't ask for these rules; they were forced on it by the Congress.

Such a statement speaks to a great institutional resistance to change, especially change that is, in the words of Korb, "forced on it by Congress."

However, due to decades of case law about "agency deference," the IRS has a great deal of leeway in interpreting just how to implement these new rules forced on it by Congress. Every opportunity that the IRS had to interpret these rules, it chose the path of most resistance. Some examples of problematic guidelines include:

Narrowed the sources of recovery that are the basis of whistle-blower awards.

Imposed unprecedented withholding requirements on whistle-blower awards.

Created roadblocks to IRS interactions with whistle-blowers, such as the 2008 "one-bite" rule (now relaxed) that limited receipt of information to an initial meeting.

Defined "planners and initiators" of the tax scheme - who by law receive only a reduced award (if any) - in a manner that could block employees whose involvement is far removed from the true architects of a scheme from receiving a reward.

Lawyers who work with such whistle-blower claims frequently complain of the "black hole" that seems to consume them before a resolution can be reached. Recently a whistleblower filed suit against the IRS to not only pay him, but also disclose how the information he provided contributed to finding and collecting from those he reported as committing tax fraud.

That a whistle-blower should have to sue an agency to learn how his information helped uncover fraud is the height of absurdity. It's not as if all federal agencies are as recalcitrant - the SEC has been quite amenable to whistleblower information. They understand that citizens who help uncover fraud are allies and not antagonists. There's no need for the IRS to get defensive about citizens "turning in their neighbors" or for attorneys representing whistle-blowers to become demoralized at the complete lack of progress due to some power struggle between Congress and the IRS.

Source:
IRS Keeps Ignoring Whistleblowers, by Richard Lavinthal, published at WashingtonExaminer.com, April 12, 2012.

Medicare Fraud: Has Anti-Fraud Predictive Modeling been Successful Thus Far?

Fri, 06 Apr 2012 16:41:19 -0600

Last summer, the Brady & Associates Whistleblower Blog published an article that described the new Medicare fraud detection system implemented by the government to detect potential health care fraud before it occurs. The statistical modeling system evaluates large amounts of data and recognizes patterns that lead to fraud. By applying this model to individual claims, the system can evaluate the risk associated with each claim. The claim may then be flagged as a potential fraud item prior to payment. Other agencies have improved on their pursuit of healthcare fraud, which has resulted, according to the proponents of the system, in about $4.1 billion in taxpayer money recovered in fiscal year 2011.

Ted Doolittle, Deputy Director of the Center for Program Integrity (CPI), a new department under the Center for Medicare & Medicaid Services (CMS), answered questions about the modeling system in a recent interview with Beckers's Hospital Review. During that interview, the questioner asked Doolittle about the $4.1 billion recovery and his agency's focus. Mr. Doolittle pointed out that a large percentage of this figure represents money recovered from qui tam lawsuits. Qui tam suits are commenced by individuals, private attorneys and the Justice Department on behalf of the U.S. Government. Thus, not all of the recovery can be associated with the Center's efforts.

Procedures have been expanded to detect fraud by providers and suppliers. The predictive model is applied to determine risk. One of the goals of the modeling system is to screen providers likely to commit fraud. Getting the high risk providers out first is essential. Automated public records allow the agency to evaluate providers in the system once they have been enrolled. Any changes, such as changes in business affiliations, are automatically detected. Additional information can then be gathered. Early fraud detection makes it more difficult for questionable providers to get in and to stay in. This is different from how the Medicare system worked in earlier years. Previously, once a provider was enrolled, they had good standing until revalidation, which rarely, if ever, resulted in disenrollment. In addition, new procedures have been implemented to make it easier for good providers to enroll.

Medicare claims processing is another area with enhanced investigation. During this phase, fraudulent claims and providers making them identified. When a fraudulent claim is identified, it is essential that the provider of the claim be eliminated from the Medicare program. The modeling capability allows the agency to detect details about the claims and compare those claims against the algorithms in the model. Mr. Doolittle commented that no one in the health care arena is doing such a large-scale analysis and that CMS continues to add complexity to the system to generate more alerts. This should result in continuous improvement in the probability of identifying undesirable providers and eliminating them from the program for good.

Not everyone, however, is convinced that the new modeling program is a success. According to a recent article in the Huffington Post, the million dollar computer program has not given taxpayers a good return on their investment. Since its inception, the program has saved taxpayers just under $8,000 in claims. Proponents of the program, however, say that it is unfair to judge the soundness of the new modeling software off the small amount it has recovered. Doolittle said, "Suspending payments is only one way of stopping the money. . . There's lots of ways of stopping the money, and we are using them all. Looking at payment suspensions only - that's an unsophisticated view that doesn't give you a full picture of our activities." Other features of the new predictive modeling system must be considered to fully understand the benefit it is providing to the health care industry. Proponents claim that when those other benefits are factored into the analysis, the potential savings in the first six months could reach $20 million.

Others who find the program troubling highlight that the purpose of the predictive modeling program was to stop Medicare's previous "pay-and-chase" method of addressing fraud. Under pay-and-chase, claims were paid, and afterwards the government would attempt to track down and recoup the claims that were paid out erroneously. This was never an effective strategy. The new system allows Medicare to flag suspicious claims and investigate before the claim is paid to the provider. Some, however, do not believe that the new system has been successful in ending pay-and-chase. "The whole idea for creating this technology was they were going to be able to end pay-and-chase," said Hank Walther, formerly the head of the Justice Department's health care fraud division. "But we haven't yet seen evidence of its success."

Though the predictive program has only prevented $7,591 in fraudulent payments so far, it is important to remember that the system is new and contractors are still training those responsible for enforcement, proponents say. Increased familiarity with the system should improve the numbers. However, the ultimate goal of the system is to get rid of providers that are likely to commit fraud.

The proponents of the new system hope to expand it to impact hospital Part A and Part B claims processing. As new mathematical algorithms are developed, operators will be able to target specific types of claims or provider types, such as orthopaedic surgery or other health care sub-groups.

Sources:
Where Does Predictive Modeling Stand? Q&A With CMS Center for Program Integrity Deputy Director Ted Doolittle, by Bob Herman, published at BeckersHospitalReview.com, March 21, 2012.

Anti-fraud effort disappoints, by Kelli Kennedy and Ricardo Alonso-Zaldivar, published at HuffingtonPost.com, February 23, 2012.

$25 Billion Agreement Reached on Mortgage Fraud

Thu, 23 Feb 2012 12:53:46 -0600

High-level cooperation and coordination among several government enforcement agencies paved the way toward an unprecedented joint federal-state settlement related to abusive practices by mortgage servicers. A $25 billion agreement with Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. was reached by the federal government and 49 state attorneys general to address mortgage loan servicing and foreclosure abuses. Not only does this agreement provide relief to America's homeowners, it also provides for future protections for new homeowners.

Attorney General Eric Holder stated, "It holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers. As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated."

Colorado Attorney General Suthers also commented, "This settlement has broad bipartisan support from the states because the attorneys general realize that the partnership with the federal agencies made it possible to achieve favorable terms and conditions that would have been difficult for the states or the federal government to achieve on their own."

New standards for mortgage loan servicing requirements and a $25 billion commitment to cover federal and state law violations are the basis of the joint federal-state agreement. The types of violations by mortgage loan servicers include "servicers' use of 'robo-signed' affidavits in foreclosure proceedings; deceptive practices in the offering of loan modifications; failures to offer non-foreclosure alternatives before foreclosing on borrowers with federally insured mortgages; and filing improper documentation in federal bankruptcy court."

It is important to note that, while this agreement resolves violations by mortgage loan servicers, it does not limit the pursuit of criminal action, such as illegal securitization activities, by federal and state agencies. Additionally, the agreement does not limit the United State's authority to go after losses incurred due to a bank's faulty due diligence on government-sponsored loans. Finally, individual borrowers are still free to pursue lawsuits on their own behalf.

As part of the global settlement, Loretta E. Lynch, US Attorney for the Eastern District of New York, announced that government claims against the Bank of America, Countrywide Financial Corporation and subsidiaries will be resolved with a settlement of $1 billion to be paid to the United States for mortgage origination and underwriting fraud. The investigation resulted in findings that the FHA insurance fund was defrauded by the bank and Countrywide through a practice of originating mortgage loans for real estate with inflated appraisals and making loans to unqualified borrowers. This particular settlement was achieved largely with remedies available under the False Claims Act. Findings indicate that the underwriting and origination practices were systematic, resulting in hundreds of millions of dollars in damages to the Federal Housing Authority (FHA) insurance fund.

"It is fundamental that lending institutions that earn the authority to directly endorse FHA-insured mortgages apply our standards," said HUD Secretary Donovan. "This is the largest false claims act settlement related to mortgage fraud and will not only compensate FHA but will also ensure assistance for homeowners who have been harmed by Countrywide."

The interagency Financial Fraud Enforcement Task Force, established by President Barack Obama, was paramount in attaining this landmark joint federal-state agreement. His task force, which includes a cross section of federal agencies, regulators, and inspectors general, as well as state and local law enforcement officials, is a proactive initiative utilizing the best and most powerful range of enforcement resources.

On January 27, 2012, Attorney General Eric Holder announced the development and implementation of the new Residential Mortgage-Backed Securities Working Group, which will operate as part of Obama's Financial Fraud Enforcement Task Force. This new group will concentrate on efforts to pursue illegal activities related to residential mortgage-backed securities, including packaging, marketing and valuation.

Sources:

Federal Government and State Attorneys General Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address Mortgage Loan Servicing and Foreclosure Abuses, The U.S. Department of Justice, Office of Public Affairs, February 9, 2012

$1 Billion to be Paid by The Bank of America to The United States, Largest False Claims Act Settlement Relating to Mortage Fraud, United States Attorney's Office, Eastern District of New York, Robert Nardoza, Public Affairs Officer, February 9, 2012

Attorney General Holder Speaks at the Announcement of the Financial Fraud Enforcement Task Force's New Residential Mortgage-Backed Securities Working Group, The U.S. Department of Justice, January 27, 2012

Federal Crack Down on Medicare Fraud Reaps Record Recovery of $4.1 Billion

Thu, 16 Feb 2012 09:25:14 -0600

New fraud monitoring tools implemented by federal authorities in order to crack down on healthcare fraud are paying off. Reports indicate that a record $4.1 billion was recovered and returned to Medicare Trust Funds, the Treasury and other departments during 2011. The Department of Justice and the Department of Health and Human Services conducted joint programs so that federal, state and local law enforcement agencies were coordinated to better combat healthcare fraud. Compared to 2009, this amount represents a 50 percent increase.

In addition to actually visiting healthcare providers' sites that are in a moderate risk category to assure that a legitimate office exists, the Department of Health and Human Services reports that they are also improving the screening process for providers prior to allowing their entry into the system, along with more stringent enrollment requirements. Those providers that are identified as higher risk are required to go through fingerprint and criminal background checks.

This more proactive approach is beginning to take hold. Authorities screen providers and categorize suspicious providers so that payments can be stopped prior to incurring the cost of fraudulent activities. This puts an end to the old system of paying claims, then going after the suspicious ones, a system by which the fraudsters are able to either flee the country or dump their provider ID to escape liability. Federal health officials report that the sharing of data with other agencies is also improving. It is estimated that Medicare fraud costs the nation in the range of $60 billion to $90 billion annually.

Kathleen Sebelius, Health and Human Services Secretary, said in a statement, "Fighting fraud is one of our top priorities and we have recovered an unprecedented number of taxpayer dollars. Our efforts strengthen the integrity of our health care programs, and meet the President's call for a return to American values that ensure everyone gets a fair shot, everyone does their fair share, and everyone plays by the same rules."

Much of the credit for the increase in recovered funds goes to strike force teams that have been established in cities around the country, including Miami, Detroit and Los Angeles. A total of 323 defendants were charged in 2011, representing more than $1 billion billed to the Medicare program by these criminals. One of the cases involved more than 100 doctors, nurses and physical therapists across nine states.

For those criminal matters related to the pharmaceutical and device manufacturing industry, $1.3 billion in criminal fines, forfeitures, restitution and disgorgement were recovered by the Justice Department by obtaining 21 criminal convictions and under the Food, Drug and Cosmetic Act. Civil healthcare fraud recoveries obtained under the False Claims Act were approximately $2.4 billion dollars.

Officials at the Department of Justice report that the message is now going out with longer sentences levied by judges. Compared to 2010, the average sentence in 2011 increased by 5 months, from 42 months to 47 months.

"These efforts reflect a strong, ongoing commitment to fiscal accountability and to helping the American people at a time when budgets are tight," Attorney General Eric Holder said in a statement.

"Fighting fraud is one of our top priorities and we have recovered an unprecedented number of taxpayer dollars," Health and Human Services Secretary Kathleen Sebelius said.

Sources:

Feds Recover Record $4.1B in Health Fraud, UPI.com, February 14, 2012

Feds Beef Up Screening for Medicare Providers; Agency Recovered $4.1 Billion Last Year, Washington Post, February 13, 2012

Related Blog Post:

Medicare Fraud Detection Goes on the Offense

Another Successful Year for Whistleblowing: DOJ Recovers $3 Billion

Thu, 19 Jan 2012 15:43:22 -0600

For the fiscal year ending September 30, 2011, the US Department of Justice (DOJ) recovered more than $3 billion under the False Claims Act. Of this amount, recoveries for fraud against US health care programs amounted to $2.4 billion. This is the 2nd year in a row that justice has recovered greater than $3 billion and the grand total amount recovered for all claims since 2009 was $8.7 billion.

The provisions of the False Claims Act allow individuals to file claims on behalf of the government. These individuals are known as relators and/or whistleblowers who report fraud, oftentimes an act that is fraught with risk and personal sacrifice. Assistant Attorney General West thanked these citizens with the following statement. "We are tremendously grateful to whistleblowers who have brought fraud allegations to the government's attention and assisted us in this public-private partnership to fight fraud."

US healthcare programs that sustained fraud include Medicare and Medicaid programs, health programs for Federal employees and Veterans, as well as the TRICARE program, which is administered by the Department of Defense for the benefit of Uniformed Service members, retirees and their families. Use of the False Claims Act for the recovery of federal health care dollars has yielded in excess of $6.6 billion dollars just since January 2009, which is the most recovered under this act during any previous 3 year period.

This was a top priority for the Obama administration. In support of this goal, the Health Care Fraud Prevention and Enforcement Action Team (HEAT) was created in May of 2009 in order to improve coordination between agencies and to step up enforcement.

Of the amounts recovered for healthcare fraud, the feds report that claims against the pharmaceutical industry represent the largest source of recoveries. Allegations against drug companies include illegal pricing for the purpose of profit maximization as well as criminal and civil charges against GlaxoSmithKline for adulterated drugs paid for by federal healthcare programs. Unfortunately, industry executives define these payouts, off-the-record, as a cost of doing business. Patrick Burns of Taxpayers Against Fraud, writes, "We are not seeing a decline in pharmaceutical fraud cases. Instead we are seeing the addition of other fraud streams, such as medical devices and pension fraud."

Justice also continues to aggressively pursue fraud in government procurement and financial fraud in the housing and mortgage industries in the aftermath of the financial disaster. To this end, the Financial Fraud Enforcement Task Force was established by President Obama in 2009 and is tasked with the pursuit of individuals and corporations contributing to the crisis. Nearly $358 million of the $3 billion collected in fiscal year 2011 resulted from this effort.

Senator Charles Grassley (R-Iowa) and Representative Howard Berman (D-California) have been leading the way since 1986 when they successfully led Congress to amend the False Claims Act, which included enhanced qui tam provisions that incented individuals to blow the whistle on fraud when they saw it. These individuals, along with Senator Patrick J. Leahy, chairman of the Senate Judiciary Committee, also supported the Fraud enforcement and Recovery Act of 2009. This act made possible additional improvements to the False Claims Act and many other fraud statutes.

Assistant Attorney General West stated that, "Twenty-eight percent of the recoveries in the last 25 years were obtained since President Obama took office. These record-setting results reflect the extraordinary determination and effort that this administration, and Attorney General Eric Holder in particular, have put into rooting out fraud, recovering taxpayer money and protecting the integrity of government programs."

Sources:

Justice Department Recovers $3 Billion in False Claims Act Cases in Fiscal Year 2011, Department of Justice, December 19, 2011.

Pharma Fraud Continues to Fill the US Treasury, by Ed Silverman, Pharmalot.com, December 19, 2011

New SEC Whistleblower Office Helps Foster Uptick in Whistleblower Activity

Thu, 06 Oct 2011 12:58:39 -0600

The new Securities and Exchange Commission's Office of the Whistleblower opened on August 12, 2011. The new office is responsible for fielding tips received from whistleblowers, enforcing SEC rules and supporting the SEC in determining awards for whistleblowers. Motivated by the potential for large monetary awards, along with citizens' wanting to speak out about corporate wrongdoing, the expectation is that the number of individuals willing to report complaints to the SEC will increase dramatically.

This increase in activity is evidenced by the increase in these types of cases filed with the federal government since 2005, according to the Department of Labor's Occupational Safety and Health Administration (OSHA). While supporters of labor and shareholder interests are very much in favor of this trend, it puts increased pressure on corporations to ensure that strong internal compliance programs are in place as well as good communications and training to encourage internal reporting. Additionally, corporations are well served to have anti-retaliation policies in place.

OSHA administers multiple whistleblower protections under laws such as Sarbanes-Oxley and the Consumer Financial Protection Act. The agency has seen an increase in whistleblower complaints, specifically 2,339 charges in 2011 (through September 14, 2011), compared to 2,319 for all of 2010, and 2,158 in 2009.

Geoffrey Rapp, the Harold A. Anderson Professor of Law and Values at the University of Toledo's College of Law, commented on the increase in whistleblower charges. "The goal here is to get information about fraud before it becomes so serious, as in the collapse of [Bernard] Madoff and Enron, where the whole company falls apart, or the economy falls apart."

One such case recently concluded against Bank of America, in which the bank allegedly used retaliatory tactics against a whistleblower. OSHA ordered the bank to pay the former employee $930,000 in interest and back wages and to reinstate the employee.

The uptick in whistleblower activity garners conflicting opinions within the legal industry. Gregory Keating, co-chair of Littler Mendelson's whistleblower practice, believes that the monetary incentives are motivating individuals to go forward with unsubstantiated claims, citing examples of employees who were suffering from poor performance threatening to blow the whistle.

Those on the other side of the argument indicate that since government enforcers are limited, the new rules are necessary to incent corporate employees, who might otherwise be reluctant to come forward to blow the whistle on wrongdoing. Some also say that the increase in complaints is a sign of the times in which we live.

The 2010 Ethics & Workplace Survey by Deloitte reports that the financial collapse has compromised trust and ethics, highly important components in conducting business. The survey indicated that almost a third of employees reported that their colleagues are more likely to be unethical in this environment and that those planning to look for new jobs would do so as a result of a loss of trust in their employers.

Reuben Guttman, an attorney for Grant & Eisenhofer, a law firm specializing in corporate governance and fraud, stated that, "We live in an era where people are more open about second-guessing institutional activity." He also indicated that the financial collapse caused many people to "open their eye[s]. Entities we thought were reputable may be making misrepresentations and not telling the truth about what they're doing."

Sources:

Increased motivation for whistle-blowing, AccountingWEB in Watchdog, November 18, 2010

More workers willing to blow the whistle on their employer, Careers on MSNBC.com, September 19, 2011

Rise of the Whistleblowers, Law360, New York, August 22, 2011

SEC Rules in Effect for Whistleblowers

Thu, 25 Aug 2011 15:23:33 -0600

The Dodd-Frank Wall Street Reform and Consumer Protection Act established a whistleblower program to be adopted by the Securities and Exchange Commission (SEC). Specifically, section 922 of the Dodd-Frank act amended the Securities Exchange Act of 1934 by adding a new section called "Securities Whistleblower Incentives and Protection." According to this new section, the SEC is to pay awards to whistleblowers that provide the SEC with original information that leads to the successful action whereby the SEC assesses greater than $1 million in fines and sanctions. The rules for this program to be adhered to by corporate compliance departments were finalized on May 25, 2011. Prior to the Dodd-Frank Act, the SEC's authority for rewarding whistleblowers covered only insider trading cases.

On August 12, 2011, the new rules became effective and the SEC launched a webpage designed for individuals to access, report violations and apply for financial awards. The new webpage at www.sec.gov/whistleblower contains necessary information regarding how to submit a tip, eligibility requirements, and frequently asked questions and answers.

The final rules of this program, seen as one of the most controversial requirements of Dodd-Frank, were adopted by a very slim margin, a 3-2 vote by the SEC. Mary Schapiro, chairman of the SEC commented that the new rules "build upon our efforts over the past two years and our experience with the Sarbanes-Oxley Act - an Act that made great strides in creating whistleblower protections and requiring the internal reporting systems at public companies. From that experience, we learned that despite Sarbanes-Oxley, too many people remain silent in the face of fraud. Today's rules are intended to break the silence of those who see a wrong."

The 'no' votes were entered by Commissioners Kathleen Casey and Troy Paredes, their concerns being that the new rules would weaken corporations' internal compliance programs. The rules actually provide that whistleblowers are still eligible for a reward if they internally report wrongdoing to the company, and the company, in turn, reports it to the SEC. Additionally, a whistleblower could achieve a higher award if it is reported to the company first.

Commissioner Casey went on to elaborate that the rules could further decrease the bandwidth of the commission that is already struggling to keep up with limited resources. Commissioner Paredes believes that the new rules and process for providing tips to the SEC and then obtaining awards are "burdensome" and that individuals may not be as willing to report information.

Sean McKessy, Chief of the SEC's Office of the Whistleblower, commented that the agency would make changes if problems occurred. After a speech, delivered at Georgetown University's McDonough School of Business, he said, "If our program is not doing what it's intended to do, then we'll look at it and figure out ways to fix it."

McKessy also commented that, "Whistleblowers remain loathed in industry, but financial incentives should help the SEC ferret out more wrongdoing and could make investigations quicker and cheaper." He went on to say, "Look in a thesaurus under 'whistleblower' and see what kind of words you get out. I'm either the head of the office of the rats, or the rat finks, or rat bastards," McKessy said. "If even one fraud is stopped before it gets to a Madoff-type situation, then all the effort has been worth it."

Sources:

US SEC Says Will Fix Whistleblower Rule if Any Problems, Reuters, by Andrea Shalal-Esa, August 11, 2011

SEC's new Whistleblower Program Takes Effect Today, Securities and Exchange Commission, August 12, 2011

Price WaterHouse, A closer Look, The Dodd-Frank Wall Street Reform and Consumer Protection Act, PwC, May 19, 2011.

Federal Whistleblower Wins Settlement after Exposing Government Contractor in Iraq

Thu, 28 Jul 2011 17:15:08 -0600

A federal whistleblower, Bunnatine "Bunny" Greenhouse, has just won a major victory with the U.S. District Court in Washington. On Monday, July 25th, the court approved an award to Greenhouse in the amount of $970,000, which represents full restitution of wages, compensatory damages and attorney fees.

The case involves Kellogg Brown and Root (KBR), a subsidiary of Halliburton, and the settlement is with the Army Corps of Engineers. Greenhouse was an employee of the agency and took issue with KBR using its own cost projections for a "multi-year no-bid, no competition contract." After her initial objection with KBR, she took the contract issue to Congress. The result of her communication with Congress was that she was removed from the Senior Executive Service and her top secret clearance was revoked.

It all started in February of 2003, a short time prior to the U.S. invasion of Iraq. A Pentagon meeting agenda included the subject of an approximately $7 billion government contract award to Kellogg Brown and Root for the purpose of restoring Iraq's oil facilities. Greenhouse was in attendance in addition to officials from Defense Secretary Donald Rumsfeld's office and aides to retired Lieut. General Jay Garner. To her dismay, also present were several representatives from Halliburton. Her issue with the presence of the Halliburton representatives was with regard to the sensitive nature of the discussions and the obvious potential for conflict of interest with KBR, with Halliburton representatives in the meeting being privy to internal discussions about the terms of the contract. She requested, with a whisper to the presiding general, that the Halliburton employees be asked to leave the meeting.

Greenhouse then raised other concerns including the fact that the contract had never been put out for competitive bid and the five-year term was not justified, that the contract term should be opened to competition after only a one year term. When the contract came back for approval, the term was still five years. The war was looming and she had no choice but to approve the terms, but added a handwritten reservation voicing her objections and stating that a no-bid contract with greater than a one year term could imply, "there is not strong intent for a limited competition."

These objections did not become public until October of 2004. In January of 2004, the government had replaced the noncompetitive contract with two competitively bid awards. Interestingly, Halliburton was awarded the larger of the two, worth up to $1.2 billion. As early as 2004, she had received a lot of trouble for issuing concerns about the deal and was warned to stop interfering and then was threatened with a demotion. At the time, her lawyer sent a letter to the acting Secretary of the Army, charging that her superiors had tried to silence her. The letter states that over the seven years previous to the Halliburton contract, Greenhouse had voiced reservations about many procurement documents, but only after the Halliburton issue was she warned to stop. The letter also states that Robert Griffin, the major general who warned her, later gave a sworn statement in which he admitted her reservations on contracts had "caused trouble" for the army and that it was "intolerable" and "had to stop." The letter also states that he threatened to downgrade her.

Greenhouse said in a statement, "I hope that the plight I suffered prompts the administration and Congress to move dedicated civil servants from second-class citizenry and to finally give federal employees the legal rights that they need to protect the legal trust."

After suffering terrible working conditions, including a fall on a rigged trip cord in her office that resulted in a painful injury to her knee, Greenhouse retired with 29 years of service with the federal government. This retirement was earlier than she had planned and she retired without her SES credentials and top secret clearance.

Stephen Kohn, president of the National Whistleblowers Center, claimed that she was "an American hero." In a statement released by his office, he said, "She had the courage to stand alone and challenge powerful special interests. She exposed a corrupt contracting environment where casual and clubby contracting practices were the norm. Her courage led to sweeping legal reforms that will forever halt the gross abuse she had the courage to expose."

Her case illustrates the need to protect federal whistleblowers. Although legislation that would improve these protections has been in front of Congress for years, it has never gained any final approval.

Sources:
Beyond the Call of Duty, Time Magazine, October 24, 2004

A Bittersweet Win for a Federal Whistleblower, The Washington Post, July 26, 2011

Federal Prosecutors Relax Guidelines, Wall Street Polices Itself

Thu, 14 Jul 2011 16:25:51 -0600

During the summer of 2008, a move by Federal prosecutors that was not publicized much outside of the legal community, led to newly relaxed guidelines for charging corporations with crimes. Not surprisingly, these new rules were good news for banks and their defense counsel.

Unlike previous, more aggressive Justice Department practices, the new rules move toward more deferred prosecutions and new guidelines that promise leniency when companies under investigation self report their deviations from the rules. The new guidelines allow the government to agree to delay or cancel a prosecution if the company under investigation promises to change operations and move toward compliance. Although used prior to the financial crisis, deferred prosecution agreements were officially offered as an alternative by the Justice Department in 2008. Critics believe this self-reporting approach risks letting companies off too easily.

"If you do not punish crimes, there's really no reason they won't happen again," said Mary Ramirez, a professor at Washburn University School of Law and a former assistant United States attorney. "I worry and so do a lot of economists that we have created no disincentives for committing fraud or white-collar crime, in particular in the financial space."

Deferred prosecution is not a tool used only at the Justice Department. After the Supreme Court overturned the conviction won by the SEC against Arthur Anderson, the SEC began pulling back from prosecutions. So now the SEC not only employs deferred prosecution, but also has added another alternative to prosecution, reports that chronicle wrongdoing at institutions "like Moody's Investors Service," often without punishing anybody.

Now government lawyers are outsourcing investigations. During the early stages of an inquiry, the government lawyers instruct companies to determine whether improper activities occurred. The companies then hire law firms to investigate and report to the government. This arrangement only heightens compromise and conflicts of interest whereby government lawyers allow companies and their lawyers to self police their activities.

This collaboration is even more widespread in the banking industry and dates back to the mid 1990's. In an effort to reduce regulators' workload, the Treasury Department requested that banks regularly report suspicious activities. This assumes that banks would willingly identify and report all wrongdoing, the likelihood of which is rather low according some academics.

Solomon L Wisenberg, former chief of the financial institutions fraud unit for the United States attorney in the Western District of Texas in the early 1990s said, "Traditionally, a bank would tell the Department of Justice when an employee engaged in crimes, but what do you do when the bank itself is run by a criminal enterprise? You have to be able to investigate without just waiting for the bank to give you the referral. The people running the institutions are not going to come to the D.O.J. and tell them about themselves."

Industry wide strategies to respond to investigations are being developed as a result of companies' cooperation with the government. "The corporate crime defense bar has this down to a science," said Russell Mokhiber, the editor of Corporate Crime Reporter, a publication that tracks prosecutions. "I interview them all the time, and they boast about how they've gamed the system."

In the end the process occurs behind closed doors. The Justice Department does not make public any details about its decision making in specific cases. We can never know why individuals at a company were never charged.

Source:
As Wall St. Polices Itself, Prosecutors Use Softer Approach, The New York Times; Business Day, by Gretchen Morgenson and Louise Story, July 7, 2011.

The New Whistleblower Playing Field

Thu, 07 Jul 2011 11:17:17 -0600

Final rules regarding the whistleblower provisions of the Dodd-Frank Act have been released by the U.S. Securities and Exchange Commission. The rules are effective as of August 12, 2011 and will apply retroactively to whistleblower tips made since July 21, 2010. If you provide original information about potential securities law violations you can receive a monetary award for that information if it results in a successful enforcement action by the SEC or a related agency.

The rules do not require that employees first report their suspicions to an internal compliance system prior to going to the SEC. This creates an incentive for whistleblowers to skip a company's internal compliance procedures. If this is done, compliance programs would be undermined and companies would not have an opportunity to quickly respond to a problem or self report prior to an investigation. In order to reduce the possibility of whistleblowers skipping internal compliance procedures, the SEC made rules that are intended to encourage the whistleblower to in fact use the company's internal compliance procedure.

Companies now have a strong incentive to encourage whistleblowers to report suspicions internally and promptly respond to reports. Potential whistleblowers should expect to see companies implementing strong internal reporting procedures as well as the latest investigation techniques. Corporate attorneys will be at the ready to protect the company's attorney-client privilege and attorney work product protections by being involved with the reporting and investigation of whistleblower claims. Companies will adapt a proactive approach with regulators to avoid surprises from whistleblowers or the SEC.

One provision of the rules is the 120 day look-back provision. When a whistleblower reports internally, he or she will have 120 days from the date of the internal report to provide the same information directly to the SEC without losing his or her place in line to claim a bounty award. Therefore, companies will have 120 days from receiving a report to do an investigation and determine if they wish to self report to the SEC.

Whistleblowers should expect to see various, easily accessible reporting methods including 24/7 access to anonymous reporting systems like free hot lines, web and email reporting methods and access to company compliance officers.

Training about reporting tools and availability will be emphasized.

Instead of whistleblowers being shunned, they will probably be recognized and praised.

Companies will most likely make it a requirement that all employees must report possible misconduct and violations and certify periodically that they are not aware of securities law violations not already reported.

On the investigation side of things, if the whistleblower identifies him or herself, he or she will most likely be one of the first witnesses interviewed. The whistleblower can expect to be in the loop on communication about the report because management will not want to make the whistleblower feel that no action is being taken.

Company attorneys will most likely conduct investigations or at least supervise the investigators doing the investigation. This is because the company will want to preserve and protect the company's attorney-client privilege and this can only be done if a company attorney is directly involved.

Expect to see more companies making more voluntary disclosures because the SEC will treat the company more favorably if the company has disclosed the wrongdoing before a whistleblower broadcasts the wrongdoing.

Source:
Dealing with tipsters under Dodd-Frank; New SEC whistleblower rules will require companies to examine and restructure their internal compliance programs; Corporate & Business Law, The Wall Street Journal, June 27, 2011

America's Revolutionary War: History of First Whistleblower-Protection Law

Thu, 30 Jun 2011 15:29:24 -0600

Forty years to the day that the New York Times began publication of the Pentagon Papers, Mr. Stephen M. Kohn, Executive Director of the National Whistleblowers Center, writes an enlightening article in the Times about our founding fathers and their actions that established America's first whistleblower-protection law.

"That it is the duty of all persons in the service of the United States, as well as all other inhabitants thereof, to give the earliest information to Congress or any other proper authority of any misconduct, frauds or misdemeanors committed by any officers or persons in the service of these states, which may come to their knowledge."

The genesis of this law was the reporting by 10 revolutionary sailors and marines that their commander of the Continental Navy, Commodore Esek Hopkins, had participated in the "inhuman and barbarous" treatment of captured British sailors. This occurred during the winter of 1777, a time during which warship Warren was anchored near Providence, R.I. The men accusing Commodore Hopkins included 10 sailors and marines that were engaged in the revolutionary war. They met on the Warren in order to discuss their issues about the commander, knowing full well the risks they faced, considering that Hopkins was from a very powerful New England family.

The result of their petition, presented to the Continental Congress by a Marine Captain named John Grannis, was that the Continental Congress voted in March of 1777 to suspend Hopkins from his post.

Hopkins, who was furious with the suspension, retaliated with the filing of a criminal libel suit in Rhode Island against the whistleblowers. Two of Hopkins' accusers, who were in Rhode Island at the time, were jailed. In July of 1778 the men pleaded that they had been "arrested for doing what they then believed and still believe was nothing but their duty." The result of their pleading was Congress' enacting of the whistleblower-protection law. Congress went another step further by authorizing payment for the legal fees of the two men, thereby ensuring that the whistle-blowers could have the funds for legal counsel to fight the libel charges.

Mr. Kohn's article makes the point that, "Congress did not hide behind government secrecy edicts, even though the nation was at war. Instead, it authorized the full release of all records related to the removal of Hopkins. No "state secret" privilege was invoked. The whistle-blowers did not need to use a Freedom of Information act to obtain documents to vindicate themselves. There was no attempt to hide the fact that whistle-blowers had accused a Navy commander of mistreating prisoners."

Two hundred years later, the Supreme Court justice William O. Douglas reiterated the meaning of the first amendment and praised our founders' commitment to freedom of speech. He wrote, "The dominant purpose of the First Amendment was to prohibit the widespread practice of government suppression of embarrassing information."

However, just in the last 20 years, laws that were in place to protect federal employee whistleblowers have unraveled. The government now has the right to "strip employees of their security clearances and fire them, without judicial review." Another loophole affects employees of the National Security Agency and the Central Intelligence Agency by barring them from any coverage under the law. Finally, national security whistle-blowers, fired for uncovering and exposing wrongdoing, are barred from obtaining protection in federal court.

Our current administration continues to aggressively pursue leakers such as Thomas A. Drake, a former official at the National Security Agency and Bradley E. Manning, an Army private. Drake just plead guilty to a misdemeanor claiming misuse of the agency's computer system by providing information to a reporter and Manning is suspected of passing classified data to Wiki Leaks and has been imprisoned based on these allegations since May of 2010.

Kohn closes the article with, "Instead of ignoring and intimidating whistle-blowers, Congress and the executive branch would do well to follow the example of the Continental Congress, by supporting and shielding them."

Source:
The Whistle-Blowers of 1777, The New York Times, June 12, 2011

Medicare Fraud Detection Goes on the Offense

Thu, 23 Jun 2011 12:00:55 -0600

It is estimated that health care fraud carrys about a $60 billion a year price tag for taxpayers, with Medicare as one of the main targets for fraudsters. The Medicare program now faces huge financial challenges, including possible insolvency. As such, it is more important than ever to battle.

Since the inception of the program, Medicare, the Government health program for retirees, has always paid claims and then later asked questions. The payment of fraudulent claims prior to pursuit of scam artists has been a losing proposition. Medicare announced on June 17 that it will be implementing screening technology to mitigate fraud. The new system is scheduled to begin operation July 1. This technology is similar to what is currently used by credit card companies.

The technology is designed to detect system abuses, such as billing for a particular procedure at a suddenly much higher rate than that of major medical institutions in the same geographical area.

Patrick Burns, of Taxpayers Against Fraud, states that Medicare "is putting in place the kind of computer program it should have had in 1980 or earlier." He goes on to say, "The bad news is that the largest Medicare and Medicaid frauds are designed at the highest levels of companies, with accountants, billing experts and salespeople smoothing over the paperwork so that it will slide past all the proctors."

The routine process that has been employed by Medicare includes basic testing for fraud on an individual claim basis prior to making payment. The new system is designed to analyze large amounts of data in order to recognize patterns and anomalies in claims, which can lead to discovery of potential fraud. The data analysis leads to the development of a predictive model that may then be applied to individual claims. Through this process of data evaluation, the system assigns risk scores to claims. An alert is issued when the risk score indicates a problem. This will allow the claim to be investigated before it is paid out. Medicare claims payers will even be able to customize the new system so that particular types of facilities, geographic areas, services or equipment may be flagged.

The Wall Street Journal article reports that, "United Health Group has said it saved about $125 million over two years using predictive modeling."

The contract for development of the new system, which is valued at $77 million, has been awarded to Northrup Grumman along with a group of companies. Peter Budetti, Medicare anti-fraud czar, said, "We will be able to translate their experience from the private sector into Medicare."

Medicare Administrator Don Berwick said, "We're getting ahead of the game here." Hopefully the new technology will deliver a good process for detecting fraud on the front end, as opposed to tracking down perpetrators after the fact.

Sources:
Medicare goes high-tech to head off fraud, Business Week, The Associated Press, June 17, 2011

Medicare Will Start Flagging Suspicious Claims - Before They're Paid, The Wall Street Journal, June 17, 2011

Fuel Cards Used by Truckers may be Vulnerable to Fraud and Theft: Contact Brady & Associates if You have had a Loss

Thu, 16 Jun 2011 12:03:11 -0600

In an article published by Land Line Magazine in the June 2011 issue, the subject of fuel card fraud is discussed. Two truckers share experiences of being the victims of theft related to their fuel credit card accounts with Comdata and EFS Transportation Services. In one instance, the perpetrators had been able to gather enough information about a card holder's account to write thousands of dollars of checks against the account. The trucker had been told two weeks prior to this event that Comdata had discontinued online checks.

Another owner-operator from Soldiers Grove, WI lost $10,400 in April when his EFS Transportation Services fuel card was hacked. Seventeen checks were cashed in three states using the account. The driver alleges that the company had time to stop payment and didn't.

In both instances, the victims express a great deal of frustration with the credit card companies in that the companies and law enforcement authorities do not provide much assurance of getting to the bottom of the issue. Comdata does not accept responsibility for the loss, even though it acknowledges that its customers have been the target of hackers. The risk management representative states that, "This appears to be a group of hackers who have been targeting the industry as a whole."

Land Line magazine conducted an informal survey on its website and the results indicate that 10 percent of respondents communicated that their fuel card/check was compromised or hacked one or more times. Fifteen percent say that they go ahead and pay for diesel with cash.

A recent lawsuit filed by Brady & Associates against Pilot Travel Centers, LLC is based on the Fair and Accurate Credit Transactions Act (FACTA) rule that "[N]o person that accepts credit cards or debit cards for the transaction of business shall print more than the last five digits of the card number or the expiration date upon any receipt provided to the cardholder at the point of sale or transaction." The lawsuit alleges that the defendant willfully violated FACTA and failed to protect Plaintiff and others similarly situated against identity theft as well as credit card and debit card fraud by printing "more than the last five digits of the card number" on receipts provided to cardholders doing business with Pilot.

The attorneys at Brady & Associates would like to hear from drivers who use fuel cards who have also been the victim of fraud or identity theft. Please contact us if you or someone you know has experienced a loss you suspect may be due to these alleged vulnerabilities.

Source:
Fuel cards hacked? Comdata warns of account thefts, Land Line Magazine, June 2011

The Dilemma of "Too-Big-To-Fail"

Thu, 09 Jun 2011 16:40:03 -0600

The "too-big-to-fail" problem is defined as the government using taxpayer dollars to rescue "systemically important" banks. Federal Reserve Chairman Ben Bernanke said that regulatory reform would fail if it did not contemplate a system where Goldman Sachs could take bankruptcy and its creditors lose money. So far banking reform has fallen short of what Bernanke wanted. More importantly, the solutions being debated may increase overall risk instead of reducing it.

The expectation of bailouts gives banks no incentive to take precautions against greater risks. Bank rescues can cause worldwide economic problems.

According to Ernie Patrikis, a partner in White & Case LLP, banking regulators want banks safe, sound, and big. Multinational firms see large money-center banks as indispensable. They provide investment banking and capital-raising. They are some of the best-run banks in the country per JoAnn Lilek of consulting firm Accretive Solutions and former CFO of Midwest Bank Holdings.

Many financial executives feel irresponsible management should suffer consequences, but worry that middle-market companies would be more vulnerable without a government safety net. Large corporations can increase their stable of lenders, smaller companies have to concentrate their credit relationships with one or two banks to get access to debt.

The question is "Can U.S. banking regulators solve the too-big-to-fail problem without causing financial institutions higher capital costs and subjecting banks customers to another credit crunch, or granting banks an incredible amount of political independence?"

It seems unwise to let operating entities of big banks to declare the kind of Chapter 11 in which they enter a turnaround situation or are acquired without government assistance. Under the current regulatory framework it would be nearly impossible per restructuring experts. Jacen Dinoff of KCP Advisory Group says "you're not going to see a bank file Chapter 11 and sit in bankruptcy winding down its assets while depositors petition as creditors to get percentage recoveries on life savings."

The Dodd-Frank Wall Street Reform and Consumer Protection Act does limit how far regulators will go in propping up a large bank. The FDIC has powers to dismantle the largest financial firms when they falter; the FDIC becomes a receiver for a bank if its failing presents a systemic risk to the financial markets.

During the Latin American debt crisis U.S. regulators took a very measured approach. They let the largest banks work out their problems over an extended period, rather than forcing them to recognize losses if they had to sell the debt immediately. Per Sandy Brown, of Bracewell & Giuliani LLP, "In the next crisis, multiple institutions will experience problems simultaneously, and regulators need flexibility to work in a manner that is not terribly hasty."

Time is not something regulators want to give failing banks. Globally there is a concentrated push to get national regulators to intervene sooner.

An early intervention strategy is no cake walk. There are at least two problems: First, spotting a bank that is headed for failure is not easy. Second, if U.S. regulators do catch problems early, there may be no resolve to take action.

Dodd-Frank ensures that taxpayers will no longer bear all the burden of federal rescues. In a perfect world banks and their investors will bear some or all of any losses. If regulators instill a sense of greater market discipline on investors, the hope is that investors will become better watchdogs of bank risk-taking.

No changes would necessarily change the risky behaviors of large banks or eliminate another global banking crisis. Nor would changes preclude the U.S. from rushing to the aid of giant, crippled institutions. So, the too-big-to-fail problem is still with us. And, it could get bigger. There is nothing to prevent more banks from entering the too-big-to-fail fraternity. Banks get bigger when larger institutions merge with troubled banks. And so it goes around and around.

Source:
The Big Fail, CFO Magazine, April 2011