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Key Whistleblower Changes in Bipartisan Budget Act


The Bipartisan Budget Act of 2018, passed overnight and signed this morning by President Trump to end the second federal government shutdown of this year, includes two key provisions for whistleblowers previously introduced by Senator Charles Grassley but removed from the January budget deal.

For IRS whistleblowers, the law clarifies the term collected proceeds to include criminal fines and civil forfeitures as well as violations of reporting requirements. The IRS has previously taken the position that tax whistleblowers are only eligible for rewards based on fines pursuant to Title 26. This interpretation was rejected by the U.S. Tax Court last year and the Government appealed to the D.C. Circuit to reverse the decision. This section essentially resolves that appeal and affirms the U.S. Tax Court decision giving a broad definition to the term.

The legislation will also unify the tax treatment of whistleblower awards for the major laws. For some time, whistleblowers awarded money under the Federal False Claims Act and IRS whistleblower program were entitled to an above-the-line tax deduction for their attorney fees. The tax deduction did not clearly extend to CFTC and SEC whistleblowers, or rewards under the State False Claims Acts. These awards were subject to taxation of the entire amount received by the individual and then again for the amount paid by the client to the law firm.

In other words, IRC sections 62(a)(20) and 62(a)(21) allowed False Claims Act relators and IRS whistleblowers to only pay taxes for the amount received after paying their attorney fees. The law firm is responsible for paying tax on the amount of attorney fees that they are paid by their client. The legislation extends the above-the-line deduction to Dodd Frank Act whistleblowers and relators paid under the state False Claims Acts. Notably, it does not mention the Motor Vehicle Safety Whistleblower Act, which was

We have discussed these issues several times on this blog since the Grassley Amendments were initially introduced into the Senate’s Tax Cuts and Jobs Act in November 2017. If you have questions about these or other aspects of the whistleblower laws, please call 1-800-590-4116 to speak to a McEldrew Young whistleblower attorney.

CFTC Issues Record $30 Million Fine for Spoofing to Deutsche Bank


The CFTC announced enforcement actions against three banks and six individuals for spoofing at the end of January. The three banks, Deutsche Bank, UBS, and HSBC, were charged with spoofing in precious metals futures contracts trading on the Commodity Exchange, Inc. (COMEX).

The fine against Deutsche Bank was the largest imposed by the CFTC to date for spoofing-related misconduct. The cases were investigated and filed by the CFTC Enforcement Division’s Spoofing Task Force, a new coordinated effort to handle this type of market manipulation.

Deutsche Bank and a subsidiary agreed to pay a $30 million civil monetary penalty. UBS AG agreed to pay a $15 million civil monetary penalty. The HSBC Securities (USA) Inc. involved the conduct of one trader in the New York office and HSBC agreed to pay a $1.6 million civil monetary penalty.

A statement by CFTC Director of Enforcement James McDonald indicated that the UBS self-reported the misconduct and that the fine for each of the banks would have been substantially higher if not for their substantial cooperation.

Spoofing is a type of market manipulation through technology that uses electronic and algorithmic trading to inject false information into the market that distorts prices and tricks others into trading at the manipulated prices. The anti-spoofing provision in the Dodd-Frank Act made it illegal to bid or offer with the intent to cancel the bid or offer before execution in the commodities market. The SEC has had the authority to punish spoofing through a civil fine since the 1930s.

The civil complaints against the individuals involved three cases of spoofing for major banks, two individuals who engaged in spoofing at proprietary trading firms, and one individual (as well as the company) that built a program designed to spoof the market. The market manipulation happened in some of the most heavily traded futures contracts in the world.

McDonald renewed the CFTC’s commitment to facilitate electronic trading and other new market opportunities while holding wrongdoers accountable and deterring future misconduct. This includes individual actions against those who teach others how to spoof, build tools designed to spoof, and otherwise aid and abet wrongdoing.

Spoofing has been an area of focus at the CFTC over the past few years as it implemented the Dodd-Frank Act and began bringing civil and criminal enforcement actions. The $46.6 million in settlements, from the January actions, is the largest to date.

There was no mention in the press release about how the CFTC came to be aware of the misconduct by DB and HSBC. The CFTC will soon issue Notices of Covered Action alerting any CFTC whistleblowers to file a claim for a reward. If a whistleblower alerted the government or provided substantial assistance during the investigation, the individual may be eligible for a reward of between 10 and 30 percent of the fine.

If you have evidence of a bank division or other trading professional engaged in spoofing of the futures or commodities markets, call McEldrew Young at 1-800-590-4116 to speak to a whistleblower attorney about reporting it.

Study Confirms Breast Implants Increase Rare Cancer Risk


The largest study of the link between breast implants and lymphoma to date found that there is a greatly increased risk of a rare cancer, according to the report published this month in JAMA Oncology. The study found breast implants are associated with a 421 times greater risk of anaplastic large cell lymphoma.

This scientific evidence linking breast implants to ALCL could spark another wave of class action lawsuits by women seeking compensation for their injuries. In the 1990s, women claiming injuries from silicone breast implants agreed to a $3.7 billion settlement with several companies.

BIA-ALCL, the acronym for it, is a cancer of the immune system rather than a form of breast cancer. The absolute risk of this type of non-Hodgkin lymphoma in a woman with breast implants is estimated to be 1 in 7,000. For every 7,000 women with breast implants, one will get BIA-ALCL. An article in JAMA Surgery last fall previously put the affected range from 1 in 4,000 women to 1 in 30,000 women with breast implants.

According to an FDA announcement last year, the agency received more than 350 reports of the cancer linked to breast implants between June 2010 to February 2017. The precise cause of the increased risk is not yet known. However, the study found the majority of the cases of BIA-ALCL had textured implants rather than smooth surface ones. A review of 115 scientific articles last year focusing on BIA-ALCL found 93 cases of the cancer in the medical literature.

Textured implants gained in popularity in the 1990s. The average time to diagnosis of BIA-ALCL is about 10 years after getting the breast implants. Researchers expect that the number of BIA-ALCL cases diagnosed will increase because the rates of women getting breast implants are increasing every year.

If you or a loved one have had a diagnosis of ALCL following breast implants (whether textured or smooth surface), call McEldrew Young’s attorneys at 1-800-590-4116 to speak to a personal injury attorney in a free consultation.

False Claims Act Whistleblowers Paid $392 Million in Fiscal Year 2017


The Department of Justice recovered more then $3.7 billion in settlements and judgments in Fiscal Year 2017 from the False Claims Act according to the press release issued last week. The majority of the funds recovered were in lawsuits initiated by whistleblowers. Qui tam lawsuits led to $3.4 billion of the $3.7 billion in settlements and judgments.

Whistleblowers received $392 million during FY2017 for bringing fraud to the attention of the United States and the Department of Justice. Whistleblower awards were down from last year, when the United States paid out $519 million to whistleblowers based on the recovery of $2.9 billion. The False Claims Act provides for awards of between 15 and 30 percent of funds recovered from False Claims Act lawsuits.

There were 669 qui tam lawsuits filed during the last fiscal year. The number is the fourth highest on record since the 1986 amendments of the False Claims Act. This number was down from Fiscal Year 2016, when there were 702 qui tam lawsuits filed. The highest number of new matters filed by whistleblowers was in Fiscal Year 2013. Many of these cases will still be working their way through the legal system as government investigations into matters may take years before litigation starts in earnest.

The majority of the funds recovered by the federal government in FY 2017 were from the health care industry. The government recovered $2.4 billion from health care fraud, the eighth consecutive year that civil health care fraud settlements and judgments exceeded $2 billion. These funds have usually been taken inappropriately from Medicare or Medicaid, although there are other federal funded health care programs that lose money from health care fraud such as TRICARE, which is the managed service healthcare program for service members, reservists and their dependents.

Over $900 million in recoveries were from the drug and medical device industry. The government’s press release cited settlements by Shire ($350 million) and Mylan ($465 million) as examples. Other health care lawsuit settlements mentioned were Life Care Centers of America ($145 million) and eClinicalWorks ($155 million).

The Government reported settlements and judgments of $543 million from housing and mortgage fraud in FY 2017. The press release specifically mentioned a jury verdict of $296 million against Allied Home Mortgage as well as settlements with Financial Freedom ($89 million) and PHH Mortgage ($65 million).

There were a variety of other matters resolved under the False Claims Act in FY 2017, including procurement fraud, grant fraud, fraudulently obtained small business contracts, and fraudulently obtained government subsidies for discounted mobile phone services to low-income consumers.

The recoveries detailed by these numbers include around 8.5 months during the Trump Administration and 3.5 months during the Obama Administration as the United States fiscal year runs from October 1, 2016 to September 30, 2017. In total, the United States has recovered more than $56 billion since 1986 when Congress amended the civil False Claims Act.

Collected Proceeds Clarification for IRS Whistleblowers Dropped from Tax Bill


The Wall Street Journal reported yesterday that the reconciliation of the tax legislation has dropped the definition of collected proceeds for the IRS whistleblower program introduced into the Senate version that passed. The amendment was added by Senator Chuck Grassley, an advocate for whistleblowers and responsible for introducing the legislative provision in 2007 that created the IRS whistleblower program.

The reconciliation process is used to achieve a final bill when there are differences in the bills passed by the House and Senate. The original version of the tax bill passed by the U.S. House of Representatives did not include Senator Grassley’s amendments.

The definition of collected proceeds for the IRS whistleblower law is currently under review by the U.S. Court of Appeals for the D.C. Circuit. The proposed measure would have codified an interpretation of the term collected proceeds to provide whistleblowers a percentage of both criminal fines and civil forfeitures. The IRS argued in U.S. Tax Court last year that these funds were not included in the term. The U.S. Tax Court decided a broad interpretation of the term was warranted in a decision that favored the whistleblowers. The ruling is now on appeal.

The reconciled bill also appears to have eliminated Senator Grassley’s other proposed amendment, to clarify that SEC and CFTC whistleblower awards are exempt from double taxation under the Civil Rights Tax Relief Act (adopted as part of the American Jobs Creation Act of 2004).

The potential for double taxation is created when successful whistleblowers must pay tax on the entire amount of their award and then the whistleblower’s attorney pays tax on the portion they receive from the contingency fee. The Relief Act allows for an exemption for the contingent fee portion so that only one tax payment is made. As always, consult a tax lawyer for specific legal advice with regard to tax issues.

The reconciliation was passed by the U.S. House, 227-203, and the U.S. Senate, 51-48. It will now be sent to President Trump’s desk for signature.

Latest Settlement Reveals Mortgage Fraud Continued Years After Financial Crisis Ended


We are reaching the end of a decade since mortgage fraud hit its peak in 2007. However, the latest settlement by IberiaBank suggests that at least one lender continued aspects of mortgage fraud against the Federal Housing Administration (FHA) well after becoming informed of their wrongdoing.

IberiaBank agreed to pay the United States more than $11 million in response to allegations that it did not comply with federal requirements on FHA mortgage loans. The settlement resulted from allegations made under the False Claims Act by whistleblowers who were formerly employed at the bank.

Similar to other allegations against banks during the financial crisis, IberiaBank admitted that certain loan files contained inadequate documentation on income, inadequate verification of the down payment, and unresolved appraisal discrepancies.

The most disturbing part of the allegations is that the bank told HUD that it was no longer paying underwriter commissions after a HUD review in 2010 notified IberiaBank that it was not in compliance with a prohibition on underwriter commissions. Nevertheless, the bank did not disclose that it was making incentive payments to underwriters. These payments continued to be made by the bank until 2014. As a result, the period of covered conduct for the settlement was from the beginning of 2005 until the end of 2014.

IberiaBank is not the only one to be in the news recently for problems in its mortgage department. Wells Fargo is in the process of refunding rate-lock extension fees assessed to mortgage borrowers where the delay was due to its practices. President Trump recently denied media reports that the U.S. was going to let Wells Fargo off the hook without a fine for falsifying records to blame the mortgage-processing delays on the consumers borrowing money. Instead, President Trump suggested in a tweet that while he has promised to cut regulations, penalties for those caught cheating would be severe.

According to media reports, Wells Fargo said that it assessed around $98 million in rate-lock extension fees, although it contends some of those were legitimate. Wells Fargo has already paid around $200 million in fines and penalties following allegations which emerged last year that it opened millions of fake accounts on behalf of customers.

If you are a current or former mortgage industry professional with evidence of lending fraud involving FHA loans, call our mortgage whistleblower attorneys at 1-800-590-4116 for a free, confidential initial consultation.

SEC Has Recovered Over $1 Billion Due to Whistleblower Tips


Over the past week, the U.S. Securities and Exchange Commission has issued total rewards of over $20 million to three SEC whistleblowers. As a result, SEC enforcement actions involving whistleblowers have now recovered more than $1 billion in financial remedies against whistleblowers.

The SEC whistleblower program has been accepting tips for more than five years now and has been repeatedly acknowledged as an important tool in the government’s arsenal to detect and stop violations of federal securities laws.

In the first announcement (last week), the SEC split more than $16 million between two whistleblowers. According to the press release, the first whistleblower alerted the agency to the misconduct that became the focus of the investigation and the cornerstone of the enforcement action. The second SEC whistleblower on this matter provided significant additional information and provided ongoing cooperation that saved significant time and agency resources.

One interesting aspect of this announcement was that the second whistleblower received a similar award to the first. Although the SEC whistleblower program favors the first person to provide information to the U.S. Government, it makes clear that there is still substantial value to the Government in receiving information after the investigation has already started.

In the second announcement (two days ago), the SEC paid a former company insider more than $4.1 million for reporting a widespread, multi-year violation of the securities laws. According to the press release, the whistleblower was a foreign national working outside of the United States. The individual alerted the SEC to the fraud and provided assistance throughout the investigation.

No money has been taken or withheld from harmed investors to pay whistleblower awards. When Congress set up the whistleblower programs in the Dodd-Frank Act, it committed a certain amount of money in the budget to the payment of whistleblower awards. As a result, rewards are not paid out of the amount of funds recovered even though the amount of funds paid are expressed as a percentage of the money collected from the enforcement action.

More awards are expected. In the financial reports released about the program last month, the SEC recognized contingent liabilities of $221 million. This suggests that there are at least $200 million more in awards announcements coming.

SEC Cyber Unit Files First Action to Halt ICO Fraud PlexCoin


The SEC today announced an enforcement action against the Initial Coin Offering (ICO) by PlexCoin. The SEC obtained a freeze on the purportedly $15 million in investor funds raised by PlexCoin from thousands of U.S. and international investors since August.

According to the complaint filed by the SEC in the emergency action, PlexCoin and its owners promised early investors returns of 1,354% in under 29 days. They also indicated the potential returns could be as high as 88,000% based on other ICOs or cryptocurrency investments. They made other misrepresentations too, including that they had a team of people operating in Singapore.

Quebec’s Financial Markets Authority obtained an injunction against the sale of PlexCoin Tokens but the Defendants continued to sell them. The U.S. alleged that the Defendants misappropriated at least $200,000 from investor funds for extravagant personal expenditures as well as would soon gain access to three accounts with more than $810,000 from their fraud.

The SEC press release praised the quick action of the Cyber Unit to protect retail investors and the Chief of the Cyber Unit said this “is exactly the kind of misconduct the unit will be pursuing.”

The SEC’s pursuit of fraud in the ICO market should come as no surprise since many have already warned about it.  Previously, Wikipedia founder Jimmy Wales told CNBC in October that many initial coin offerings were scams as he cautioned investors from participating. Brad Garlinghouse, CEO of Ripple (a large cryptocurrency), told CNBC that “a lot of what’s happening in the ICO market is actually fraud ….” Joseph Lubin, co-founder of ethereum, told CNBC that there has been “a lot of copycat projects” where the company was copying previously used materials and didn’t intend to deliver value to buyers.

In other bitcoin news, Thomas Peterffy, CEO of Interactive Brokers, expressed concerns to the CFTC that the launch of bitcoin futures could create a Lehman Brothers-style collapse of a clearing house if traders purchased too many futures and couldn’t cover the shortfall during a price decline.

The bitcoin futures contracts at the CME will start trading on December 18, 2017 and there will be a margin requirement of 35% for transactions, which is high for a currency.  CBOE trading will start on December 11th.  The Nasdaq has not yet confirmed media reports that they will soon allow trading in the digital currency.

If you have evidence of an ICO fraud, contact our SEC whistleblower attorneys by calling 1-800-590-4116. We offer a free, confidential consultation to evaluate your evidence and discuss the process of reporting to the U.S. Government.

Evaluating Cryptocurrencies for Potential Whistleblower Cases


Cryptocurrency, led by bitcoin, has become a hot topic in the mainstream media recently. Both the CME and Nasdaq have announced plans to introduce trading in bitcoin futures. And the investing community continues to be split between those who believe it is the future of currency and those who believe it is a bubble or, worse, a fraud, as Jamie Dimon called it in September.

There are many big questions with uncertain answers about virtual currencies, including the right valuation, whether it is in a bubble, or how fraud will be dealt with given its current state of regulation. Amid these questions though, it seems almost certain that there will be more whistleblower cases involving bitcoin and other cryptocurrencies in the future. So we thought it worth beginning to talk about some of the issues that we are seeing.

In 2014, the U.S. Consumer Financial Protection Bureau (CFPB) called virtual currencies such as bitcoin the “Wild West” of financial products. However, the SEC has since made it clear that they consider qualifying ICOs subject to the registration requirements of the federal securities laws. The CFTC also came out with a publication in October 2017 that reiterated its 2015 stance that bitcoin and other such assets are commodities.

It seems likely that there will be many instances of unregistered offerings. A former lawyer for the SEC recently spoke at the ICO Forward Summit and suggested that there might be the creation of an assembly line for enforcement actions where the SEC issues a subpoena to participants in an ICO and then brings a lawsuit if the facts match a particular pattern of misconduct. As it relates to SEC whistleblowers, it is worth noting that there needs to be $1 million recovered in order to qualify for a reward.

There are also expected to be instances of ICO fraud. A company that raised nearly $375,000 through an initial coin offering, Confido, recently deleted its website and investors have lost contact with the company. According to media reports, the background of the CEO appears to be fake since two of the three companies on it have confirmed that they have no record of him. The cryptocurrency exchange which Confido used to launch its ICO has announced that it will reimburse investors.

There have also been cybercrimes. Nikkei Asian Review called digital currency thefts a record in Japan when hacking led to more than half a million dollars in reported cybercrimes in the first half of 2017. The cases involved unauthorized computer access to take bitcoin, ethereum, and Ripples’s XRP. Although the general hacking case is probably not eligible for a whistleblower reward, the hacking of a regulated entity like an investment bank to take bitcoins they are holding for customers could be a very different matter and get the attention of regulators.

There will probably also be IRS enforcement actions started as a result of IRS whistleblower tips. This is one area that the IRS has been digging into recently. A federal court has partially granted a request from the IRS for information about users of Coinbase, a cryptocurrency exchange allowing buy/sell trading functionality in 33 countries including the United States. According to the IRS in the request, less than 1,000 taxpayers identified capital gains or losses on IRS Form 8949 in each of the years 2013 through 2015. Given the popularity of virtual currency, the IRS obviously suspects that there is a great deal of tax underpayments among those earning profits from buying and selling bitcoins.

We’re keeping an eye out for other potential whistleblower cases that develop in this area. It is a topic that may seem like it is moving faster than the current regulation, but fast-growing new securities can lead to big government fines as a result of misconduct. It has not been that long since the government fined corporations billions for their conduct with respect to credit default swaps and residential mortgage backed securities from the recent financial crisis. After all, the credit default swap market was once also referred to as the Wild West.

Collected Proceeds Debate Continues in IRS Whistleblower Cases and Congress


The Justice Department has appealed a decision by the U.S. Tax Court last year to provide an IRS whistleblower reward based upon a criminal fine and civil forfeitures. The Government’s appeal to the D.C. Circuit attempts to reverse a favorable decision for whistleblowers on the definition of collected proceeds used in the terms of the IRS whistleblower program.

The case involves the proceeds of a $74 settlement where portions were allocated to a tax resolution, a criminal fine, a civil forfeiture of fees received for its services, and the relinquishment of claims to money previously forfeited. IRS rewards are required to be paid on collected proceeds. The IRS took the position in Tax Court that only fines received pursuant to Title 26 are collected proceeds according to the law. The Tax Court sided with the whistleblowers, refusing to limit the scope of the term collected proceeds.

It appears based on the Government’s appeal that the United States will continue to oppose a broad interpretation of the term.  According to the United States, money recovered from a civil forfeiture or criminal fine are not eligible to be counted as collected proceeds and thus the tax whistleblower is not entitled to a portion of that money.

The appeal might largely be irrelevant in the future.  Senator Grassley’s amendment to the Senate’s tax legislation to define the term collected proceeds in the IRS Whistleblower program was adopted and is currently part of the legislation under consideration. If the bill is adopted without changes by the Senate and the provision survives reconciliation, it would define collected proceeds eligible for awards to include: (1) penalties, interest, additions to tax, and additional amounts, and (2) any proceeds under enforcement programs that the Treasury has delegated to the IRS the authority to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements.

The Senate is expected to vote on the tax bill today with Senator Grassley’s amendment.  It would then face reconciliation with the terms of the tax bill passed by the U.S. House of Representatives.