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.

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.

The Annual CFTC Whistleblower Report for 2017


The CFTC has also issued its annual report to Congress on the Dodd-Frank Act whistleblower program during Fiscal Year 2017. The CFTC did not issue any whistleblower awards last year. However, it did amend the whistleblower rules and regulations through a period of public notice and comment rulemaking.

The CFTC Whistleblower Office (referred to in the report as WBO) received 465 whistleblower tips and complaints on a Form TCR during Fiscal Year 2017, a 70% increase over the last year. The annual report detailed generally some of the activities reported in them, including virtual currency trading, spoofing and other forms of disruptive trading, market manipulation, false reporting, misrepresentations to customers regarding the handling of their accounts, forex fraud, Ponzi schemes and other off-exchange futures investment scams. It did not provide detailed information about the number of tips within each category.

The WBO posted 30 Notices of Covered Actions in FY2017. These notices are a precursor to a whistleblower submission of an award application. The CFTC Whistleblower Office received 74 award claims during the last fiscal year. The number of award applications has been steadily increasing since FY 2014.

The new CFTC whistleblower rules went into effect July 31, 2017. In general, they provided additional transparency on the program rules and offered whistleblowers additional protections against retaliation. The program rules were brought more into line with the SEC rules and allowed for CFTC enforcement actions where a person impedes communication with a whistleblower.

The CFTC continues to receive about 1/10th of the number of tips that the SEC receives every year. Given the limited jurisdiction of the CFTC in the regulation of commodities, futures, swaps and other derivatives, this is no surprise. The CFTC also received a number of tips passed along from the SEC as well.

As the number of award applications have increased, it seems like only a matter of time until the CFTC starts making more award announcements. It has issued four to date, including one for a $10 million reward.

Update: At a conference last month, the director of the CFTC program said that this year would be huge for the office.  In the financial report released with the annual report, the Commission expects to pay approximately $45.5 million to whistleblowers as a result of CFTC sanctions that have already been collected.  That amount would be more than the CFTC whistleblower program has paid since its creation by Congress in the Dodd-Frank Act.

If you are a potential whistleblower interested in a free, confidential initial consultation with a CFTC whistleblower lawyers, call McEldrew Young at 1-800-590-4116.

Grassley Proposes Whistleblower Amendments to Senate’s Tax Cuts and Jobs Act


Senator Grassley has proposed 15 amendments to the Senate bill for the Tax Cuts and Jobs Act. Two of those amendments are important to whistleblowers, so we are going to examine them in more detail here.

Amendment #1 from Grassley is intended to unify the tax treatment of whistleblower awards. The amendment seeks to extend the current above-the-line deduction available to successful whistleblowers under the Federal False Claims Act and IRS whistleblower program for attorney fees and court costs to other whistleblower programs.

What is an above-the-line deduction? It means that the US does not require the whistleblower to pay tax on the entire award (before subtracting out the portion paid under the False Claims Act or Internal Revenue Code Section 7623 (IRS Whistleblower program). This is provided for in IRC section 62(a)(20) and 62(a)(21).

If there is no above-the-line deduction, then the whistleblower pays tax on the entire amount of the reward as income and then the attorney would separately claim and pay taxes on the portion they are paid for fees as income.

The amendment would eliminate double taxation for the rewards under the State False Claims Acts, the SEC Whistleblower program, and the CFTC Whistleblower program.

Interestingly, the summary of the amendment does not mention the Motor Vehicle Safety Whistleblower Act, which was enacted in December 2015 as part of the FAST Act. This auto whistleblower law created a program at the Department of Transportation, likely to be handled by the NHTSA. As far as we have seen, the Department of Transportation has yet to issue the implementing regulations for it through. However, the NHTSA is accepting whistleblower tips according to its terms, which provide for submissions before the adoption of the final rules. We’ll be keeping a close eye when the precise language of the amendment is avaiable

Since the firm’s engagement letters do not cover tax advice on rewards and this is a complicated area of the law, we are unable to answer questions about specific situations. However, we do wholeheartedly support this amendment to avoid double taxing whistleblower award payments.

Amendment #2 by Grassley would clarify an important area of the IRS whistleblower program that has resulted in litigation in the U.S. Tax Court over the past few years. The amendment would define the term “proceeds” in IRC section 7623.

The proposed definition is: “(A) taxes, penalties, interest additions to tax, and additional amounts provided under the internal revenue laws, and (b) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate including (i) criminal fines and civil forfeitures, and, (ii) violations of reporting requirements.”

This word has been a point of contention because the U.S. is only required to pay out awards as a percentage of collected proceeds. The IRS interpretation has defined this term broadly, to exclude certain money collected by the IRS in enforcement actions. In a U.S. Tax Court lawsuit decided last year, the IRS took the position that only fines pursuant to Title 26 were collected proceeds. However, the Tax Court sided in favor of an expansive definition for whistleblowers.

Senator Grassley clearly wants to make sure that there is no more confusion over the desired scope of the whistleblower program, and has given it a broader definition than provided for in last year’s opinion. The adoption of this change would be in the interest of tax whistleblowers and we support it as well.

We’ll be closely following these amendments as their full text is published and they are debated.  Stay tuned!

Recap of CFTC Whistleblower Program in FY 2017


We are approaching the end of the U.S. Government’s 2017 fiscal year on September 30th. We haven’t written too much about the CFTC whistleblower program this year because there have only been a handful of newsworthy events in the enforcement of the Commodity Exchange Act. However, after reading the news stories this week concerning the CFTC’s push for self-reporting of financial wrongdoing, we realized that there hasn’t been a single award determination yet in the first nine months of the calendar year. We thought it worth taking a look back at the CFTC Whistleblower program and what has happened over the past twelve months.

The CFTC typically receives only a fraction of the tips that is received by the SEC. Correspondingly, it has issued a smaller number of whistleblower awards. While the SEC program has paid out nearly $160 million to just over 45 whistleblowers since the Dodd-Frank Act, the CFTC has only paid approximately $11 million in four award determinations.

The CFTC hasn’t approved an award application since it announced its fourth whistleblower award on July 19, 2016. Such a delay isn’t too far out of the ordinary. There was one award in 2014, one award in 2015, and two awards in 2016 (including its largest for approximately $10 million). There had been some speculation that the CFTC program was beginning to show signs of picking up momentum.

However, the absence of any award denials in 2017 is definitely unusual. Looking back at the past few years, there were 25 denials in calendar year 2013, 5 denials in calendar year 2014, 5 denials in calendar year 2015, and 8 denials in calendar year 2016. For the government’s fiscal year 2016, there have been two denials of award applications (one in October and the other in November 2016).

One possible explanation for the absence of award determinations is the recent change in the CFTC Whistleblower rules. The CFTC proposed modifications to its whistleblower rules last year. After the comment period and further consideration, the new rules were adopted in May 2017. This could have resulted in some delay in the consideration of award applications as well as implementation issues regarding the new regulations.

Another potential explanation is the changing of the guard with the incoming Presidential administration. CFTC Chairman Timothy Massad tendered his resignation to President Obama in early January effective on January 20, 2017. J. Christopher Giancarlo was designated Acting Chairman on January 20th and confirmed in August with two other commissioners – one Democrat and one Republican.

One explanation that we can reject is the absence of qualifying enforcement actions. There have been 38 Notices of Covered Action issued in 2016 and 23 issued so far in 2017. So it appears that there has been a sufficient flow of enforcement actions over $1 million to ensure that there would have been at least some applications made by whistleblowers.

It also could be that they have made determinations but they simply haven’t been updating the website with them anymore.

If you have evidence of a violation of CFTC rules, call 1-800-590-4116 for a free, confidential initial consultation with one of our CFTC whistleblower lawyers concerning reporting the suspected misconduct.

CFTC Unveils New Self-Reporting Program


The CFTC’s Director of Enforcement unveiled a new program this week to promote self-reporting of violations of the Commodity Exchange Act or CFTC Rules in the financial industry. According to James McDonald, it will provide a significantly reduced penalty for companies and individuals that self-report and fully cooperate with the CFTC.

McDonald unveiled a few aspects of the CFTC cooperation and self-reporting program in a speech this week, including:

1. Voluntary Reporting – The disclosure can’t be made imminently before the threat of a Government investigation.

2. Clear Disclosure – It can’t be a vague reference deep in a compliance report.

3. Without Delay – Companies will only receive full credit for self-reporting if they disclose all known facts in a reasonable time after becoming aware of them.

4. Full Cooperation – The company must disclose all relevant facts it discovers and be proactive. Notification at the outset is not sufficient.

5. Remediation – The company must work to fix the problem in a timely fashion, correcting compliance flaws or internal controls that allowed the misconduct to happen.

McDonald said that companies which self-report, cooperate and remediate would receive a recommendation for a substantial reduction in the penalty from the Division of Enforcement or, in extraordinary circumstances, declination. In an interview about the program, the early expectation for the size of the reduced penalty was roughly 75%. However, this figure was removed from the final draft and “substantial” put in its place.

The CFTC will continue to give credit for cooperation to entities that have not self-reported, according to McDonald. These companies will simply receive less of a benefit than the businesses that self-report, fully cooperate, and remediate.

At least one commentator in a media report has speculated that the new program to encourage self-reporting is a function of the regulator’s limited enforcement budget.

Although the new cooperation program will not have a direct effect on the CFTC whistleblower program, it could have a tangential impact if it speeds up reporting of misconduct by financial institutions. If it works as intended, it could decrease the need for whistleblowers to report wrongdoing in the first place and thus result in fewer awards.

Practically, the combination of incentives for both self-reporting and whistleblower tips could be a boon to provide additional information to the CFTC. In reality, the government has pushed cooperation efforts in exchange for reduced penalties for some time and it is unclear whether another program will result in either earlier reporting or more cooperation by those that broke the law.

If you have evidence of a violation of CFTC rules, call 1-800-590-4116 for a free, confidential initial consultation with one of our CFTC whistleblower lawyers concerning reporting the suspected misconduct.

Precious Metals Fraud Takes Customers for $290 Million


The Commodity Futures Trading Commission has filed an enforcement action against one of the largest precious metals fraud cases in its history. In light of that action, we thought it important to remind victims and industry professionals about the CFTC whistleblower program, which offers rewards for nonpublic information about violations of the Commodity Exchange Act.

In total, the CFTC says the companies scammed thousands of retail customers out of more than $290 million. The entities based in Newport Beach, California, are charged with failure to register as a Futures Commission Merchant (FCM) and defrauding retail customers by pitching leveraged trading in precious metals as a safe, secure and profitable investment.

As part of the Dodd-Frank Act, Congress required certain leveraged commodity transactions to be traded on a regulated exchange. One exception provided by the law is for metals transactions that result in actual, physical delivery within 28 days. For the most part though, Dodd-Frank banned most over the counter (OTC) retail contracts involving gold, silver and other metals. Because the companies were not registered and were not engaging in transactions on a regulated exchange, the CFTC alleges that they were in violation of the Dodd-Frank Act.

The complaint also alleged that the entities were defrauding customers through misleading statements and taking advantage of customers through extraordinarily large spreads for transactions (sometimes as much as 100 times what would be found on a regulated exchange).

The CFTC complaint seeks a preliminary injunction to stop marketing of the program, disgorgement of the profits of the venture and the return of the investor funds (restitution).

Off exchange precious metals fraud has been an active area of enforcement for the CFTC over the past five years, although the typical case is more frequently in the several million dollar range. The CFTC offers whistleblowers in this area rewards of between 10 and 30 percent of the amount recovered under the terms of its Dodd-Frank whistleblower program if the amount recovered is in excess of $1 million.

If you have evidence of the operation of a precious metals fraud, please call 1-800-590-4116 to speak confidentially to Eric Young or one of our other CFTC whistleblower lawyers about reporting it.

Spoofing Case Results in CFTC’s First Non-Prosecution Agreements


In January, the CFTC settled its first civil enforcement action against a bank for spoofing when Citigroup agreed to pay a $25 million fine for sending orders into the U.S. Treasury futures market with the intent of canceling them. Now, the CFTC has entered into its first non-prosecution agreements ever, making deals with three traders who engaged in wrongful conduct but served as cooperating witnesses in that case.

The Dodd-Frank Act declared spoofing illegal as a form of manipulative trading under the Commodity Exchange Act. The agency received its first conviction in a spoofing prosecution against a U.S. trader in 2015. It has brought several other actions under the law, including a high profile action against a UK trader who allegedly contributed to the May 6, 2010 flash crash in the stock market.

The order in January alleged that Citigroup subsidiary Citigroup Global Markets had five traders working on its U.S. Treasury and Swaps desks send 2,5000 orders to the CME with the intent to cancel them before execution. The employees were engaged in spoofing to ensure that its smaller, resting orders on the other side of market (from the spoofed orders) received quicker execution. The order alleged that the investment bank inadequately trained its employees on the law and had inadequate systems and controls in place to detect spoofing by its traders. A head trader reportedly knew of at least one incident of spoofing because a trader lost money on an order that was partially filled before canceled, and admitted to spoofing, but no one reported it to compliance or any other senior manager.

The NPAs announced in late June about five months after the settlement are the first entered into by the CFTC. The Director of Enforcement James McDonald anticipates NPAs will be an important part of incentivizing extraordinary cooperation against wrongdoing in particular cases in the future. McDonald said that cooperating witnesses can help identify more culpable wrongdoers and hold them accountable. In order to receive the NPA here, each trader had to admit to engaging in spoofing. Both the SEC and the Justice Department have previously entered into non-prosecution agreements.

Our CFTC whistleblower attorneys represent individuals reporting violations of the Commodity Exchange Act and CFTC rules. Call 1-800-590-4116 for a free, confidential initial consultation.

Record Award Predicted for SEC Whistleblowers from JPMorgan Fine


A media outlet, Financial Planning, is predicting that a pair of SEC whistleblowers will share an award of approximately $70.6 million out of the $307 million in regulatory fines against JPMorgan in 2015. Another outlet, Advisor Hub, put the number at $61 million instead. Either award amount would be the largest in the history of the SEC whistleblower program to date.

The SEC whistleblower program is authorized by the Dodd-Frank Act to pay awards of between 10 and 30 percent of the amount the United States recovers as a result of a tip. The top award previously was announced in September 2014 and totaled approximately $30 million.

It looks like the discrepancy between the two numbers reported by the media outlets results from the calculation of the overall amount of fines against JPMorgan. Financial Planning is counting both the SEC fine of $267 million as well as the CFTC fine of $40 million. Advisor Hub is counting only the SEC settlement. It seems probable that the larger number is correct and that the CFTC waward

Any award announcement is still probably months away. The calculations are based on a leaked preliminary award determination. The number of whistleblowers, percentages and their allocation can still change as the parties are permitted time to dispute the preliminary determination.

The settlement with JPMorgan was announced in December 2015. Two JPMorgan wealth management subsidiaries agreed to admit wrongdoing and pay $267 million to the SEC and $40 million to the CFTC for the failure to disclose conflicts of interest to clients. The subsidiaries had a preference for clients to invest in the firm’s own proprietary products which it did not disclose to them. The SEC said that the preference deprived clients of information that they needed to make fully informed investment decisions with respect to asset allocation and the selection of fund managers.

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