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.
The U.S. House of Representatives on Thursday approved banking reforms in the Financial CHOICE Act of 2017 that would, if adopted, “gut many of the key banking reforms implemented after the financial crisis” according to a CNBC article. Apart from the overall impact on the Dodd-Frank Act, the law makes an important change to the SEC whistleblower program which would impact employees reporting violations of the federal securities laws.
Trying to save money, the federal government is cutting funding for the IRS. The result may be a loss of revenues costing taxpayers untold billions. By the end of Fiscal Year 2010, $330 billion dollars in federal taxes will remain uncollected. In context, $330 billion dollars represents nearly 9 times the projected savings of the recently agreed upon budget. However, in the recent budget agreement, lawmakers decided that no additional funds would be used to hire new IRS agents.
Although there is evidence that for every dollar spent on enforcing the tax code the investment results in up to ten dollars of revenue for the government. Politicians, fearing to align themselves with the tax man, have shown reluctance in supporting funding for additional IRS agents.
The idea is particularly troublesome in that the federal deficit continues to mount and broader compliance of the already existing tax code would help relieve the burden of an exploding deficit. Egan Young’s recent case is a prime example of the need for a strong IRS. An anonymous Whistleblower client of Egan Young received the very first mandatory tax fraud reward under the 2006 IRS Whistleblower rules. The program which had been in place since the end of 2006, had taken nearly five years to distribute its first mandatory reward. The IRS acting on the tip of the Whistleblower, and the advocacy of attorney Eric Young, netted in excess of $20 million in unpaid federal taxes. This recent case highlights the need for a strong IRS. $20 million from one case represents near 2/3 of the savings the federal government cut in its recent budget negotiations. The addition of IRS agents, resources for the whistleblower office, and increased investment in IRS infrastructure would be a nearly 10 to 1 investment in paying down the exploding federal deficit.
Last week, Representative Elijah E. Cummings and Senator Tammy Baldwin proposed a bill to modify several financial industry laws including the Dodd-Frank Act and Sarbanes Oxley Act to enhance and extend whistleblower rewards and anti-retaliation protections for bank and Wall Street whistleblowers. For those looking to follow the legislation in the House of Representatives, the Whistleblower Augmented Reward and Non-Retaliation Act of 2016 (WARN Act) is H.R. 4619.
It’s the 5 year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Obama on July 21, 2010. An important piece of the Dodd-Frank Act, the whistleblower programs at the Securities & Exchange Commission and the Commodity Futures Trading Commission, is primed for a test as the potential for turmoil in the financial markets is rising.
In the past thirty years, the U.S. Government has relied more on whistleblowers than ever before. They have helped the Department of Justice to recover billions in improper payments to health care providers, mortgage companies and government contractors. Congress has also encouraged whistleblowers to come forward by offering them protection from retaliation, such as when Congress added whistleblower protections in the Sarbanes-Oxley Act to help ward off another accounting debacle like Enron.
Prior to Dodd-Frank, there was economic turmoil both for investors and the public. The SEC was unable to stop the Ponzi scheme promoted by Bernie Madoff despite warnings about problems, including the repeated attempts by Harry Markopolos to draw the Government’s attention to the fraud. And bank excesses led the government and investors to purchase billions of dollars in Commercial Mortgage Backed Securities that weren’t what they expected.
The law aims to stop these sorts of problems. In the Dodd-Frank Act, Congress recognized that an employee considering telling the truth risks career suicide and as a result added rewards for whistleblowers to encourage them to come forward with information about violations of the securities laws. Sean McKessy, head of the SEC’s Office of the Whistleblower, has said that ultimately what the program is all about is getting whistleblowers to provide assistance to stop “potential fraud in its tracks so that no future investors are harmed.” Given that the SEC mission is to protect investors, facilitate capital formation, and maintain fair and efficient markets, it is obvious the potential beneficial role that whistleblowers could play.
Since opening the program, whistleblowers have helped the SEC fine companies more than $100 million for misconduct. With thousands of tips a year flowing into the securities regulator with information about potential violations, it is only a matter of time before there are more success stories. There was one just last week, in which a corporate insider was paid $3 million for assistance stopping fraud against investors.
For the past five years, the SEC and the whistleblower program has been operating in fairly calm waters. The economic problems of the Tech Bubble and the Great Recession seemed behind us. The economy is growing, unemployment is down and the stock market has achieved relatively steady year over year gains. The CFTC was also able to fine banks billions for manipulating LIBOR and the FOREX market.
Yet, there are seeds sprouting that warn about trouble in the world again. China, Greece, Puerto Rico and the bond market are all potential problems that have been at the head of the news this year. Let’s look at each one individually.
Chinese stocks had been tearing it up but these shares are now in free fall. At the start of June, the one year gain for the Shanghai Composite Index was over 100%. However, the market fell by more than 30% from its highs and the media started talking about the Chinese Bear Market. Even if the market has stabilized and is on the mend, the instability that led to the evaporation of $3 trillion in wealth in under a month can’t be good.
During the Great Recession, a bailout saved Greece from defaulting on debts owed to creditors. This summer, Greece was once again in trouble. After battling to avoid leaving the eurozone, it looks like the “Grexit” has been avoided. Nevertheless, the potential problems may have only been pushed farther into the future and the spillover effects on financing by other countries, such as Italy, Spain and Portugal, are still up in the air.
Puerto Rico’s Governor recently announced that the territory was unable to pay its debts and it needed to renegotiate their terms with creditors. Public entities there have more than $72 billion in debt and do not have the ability to file for bankruptcy as a municipality in the United States would have. Puerto Rico has been in a sustained economic recession and nearly half of its population lives below the poverty line. The effect of this debt crisis in the United States, either due to losses in bonds held by mutual funds or a spill over to the $3.7 trillion municipal bond market, is unknown.
The final area of concern right now is bond market liquidity. With the Federal Reserve poised to start reversing historically low interest rates, bond prices will be under pressure. For a large set of reasons, experts including Nouriel Roubini, Robert Schiller, and Bill Gross have warned about potential problems finding bond buyers in a crisis. In the worst case scenario, falling bond prices could spread problems to other areas of the American economy given that the $37 trillion bond market significantly exceeds the size of the US stock market.
None of these problems directly implicate the whistleblower programs of the SEC and the CFTC of course. However, if there is economic turmoil, corporate wrongdoing will be exposed and other individuals will violate federal law in order to attempt to keep the Wall Street gravy train flowing. The former happened following the Tech Bubble, when accounting fraud was discovered at Enron and Worldcom. The latter happened in investment banking during the Great Recession, as banks packaged problematic mortgages for sale and traders manipulated markets to stem losses on financial assets.
The next downturn will be a key test for the whistleblower programs and Dodd-Frank. The fifth anniversary is simply too soon to judge a law that is still being implemented. Will the SEC and CFTC be able to sift through the tips and put a stop to securities fraud before billions of dollars in investments are lost due to misconduct this time around? Let’s hope so. If it does, it will definitely have been worth it.
If you have evidence of corporate wrongdoing in violation of federal securities laws, contact one of our SEC whistleblower attorneys. An attorney can be reached by our contact form or calling 1-800-590-4116.
Today is the one year anniversary of the derailment of Amtrak Train 188 at the Frankford Curve in Philadelphia. Sarah Feinberg, the Administrator of the Federal Railroad Administration, called it the “most deadly rail accident we’ve had in a very long time.” We thought we would take a look at some of the changes that have been made since the accident and some of the news that is expected in the next week or so.
A 2012 audit of a Medicare Advantage plan provided by UnitedHealth Group through PacifiCare of Washington State of 201 patients found 153 erroneous diagnoses out of 786 diagnoses. In total, the Government paid too much for nearly half of the patients on the insurance plan.
Medicare should have paid less in 49 percent of bills, with higher payments 15 percent in the audit. As a result, the government asked the health insurer to pay the difference, a total penalty for UnitedHealth of only $381,000 since the audit only involved a small number of cases and the government did not seek to predict the adjustment in the other patient populations.
And yet it formed the basis of a three year legal battle that remains ongoing. UnitedHealth objected to having to collect the medical records to support the erroneous diagnoses. 64 percent of the improper payments involved insufficient documentation. For example, 38% of the objectionable records lacked a physician’s signature.
The internal estimates of CMS officials concerning Medicare Advantage fraud totaled $13.5 billion in billing errors in 2010 alone. The Center for Public Integrity had previously estimated that improper payments to Medicare Advantage plans could top $12 billion in 2014.
A recent study by the National Bureau of Economic Research suggested that $2 billion of those improper payments are the result of upcoding. The working paper estimates that patients on Medicare Advantage plans have 6% to 16% higher risk scores than they would under traditional Medicare. The paper, which stops short of calling all issues the result of intentional manipulation, also suggests that CMS hasn’t gone far enough with its 2010 decrease in risk scores.
The Department of Justice has been investigating the use of risk adjustment scores in MA plans at healthcare plans, providers and vendors. Humana, one of the largest U.S. providers, has previously disclosed a government inquiry into its practices, for example. Several health care whistleblowers have already filed lawsuits under the False Claims Act to challenge fraud in insurance plans in this area as well.
Audits like the one performed on UnitedHealth are called Risk Adjustment Data Validation. If risk scores are inaccurate, it can cause Medicare to pay higher rates for people who are not as sick as the health care provider or insurer represents. In the audit, auditors typically review medical records to confirm that patient conditions are properly documented and the facility was entitled to payment.
The Center for Public Integrity obtained the documents concerning UnitedHealth through a FOIA request.
Medicare Advantage has been a hot topic since it now treats 17 million Americans at a cost of more than $150 billion a year. It is the subject of a few different bills in Congress at the moment. A recent bill to extend the period of time for comment on rates and policy changes by 15 days just passed the House. And another to extend poorly rated drug plans set to be eliminated in 2015 to be extended until 2018 to give seniors using the Medicare plans a chance to find a different insurance plan.
As the House and Senate consider extending the EB-5 program into 2019, the SEC has filed a civil enforcement action against a California developer for investor fraud in the visa program. An article in the Los Angeles Times about the filing notes the increase in these types of cases, as the securities regulator has filed five this year versus a total of three in the previous two years.
Cybersecurity seems to be a priority of the securities and commodities regulators this year. Given the frequency of comments in this area, it is probably only a matter of time until we get additional rules regarding the requirements for cyber defense by market participants or disclosures by public companies.
SEC Chair Mary Jo White made comments Friday on the importance of disclosures by public companies to the U.S. Government even if they aren’t making public disclosures. And the CFTC in March held a roundtable on cybersecurity testing in order to ensure market participants, registered entities and other organizations are following best practices. Both White and CFTC Chairman Timothy Massad have recognized the potential impact of illegal hacking on market integrity.
It seems like only a matter of time before Congress, the SEC, or the CFTC take action. Congress is already considering several bills. One of them, passed by the House already, would provide protection from liability for companies sharing information about cyberthreats with each other and the government.
The CFTC is also considering a rule to require the exchanges and clearing organizations to test their cybersecurity defenses. In a speech in November at the Future Industry Association Expo, Massad said the commodities regulator is overseeing preparations against cyber attacks and looking to ensure robust disaster recovery capabilities.
The SEC issued a Risk Alert warning investors and the financial industry about concerns with cybersecurity in early February. The SEC, which last issued voluntary guidelines for disclosures by public companies in 2011, may also be considering further regulations in this area. However, at the moment, it seems content to let companies advance measures on their own without government interference.
Senators John Thune (R-S.D.) and Bill Nelson (D-Fla) are expected to introduce a bill to provide auto industry whistleblowers with up to 30% of monetary penalties resulting from enforcement actions by the Department of Transportation or Justice Department. Called the Thune-Nelson Motor Vehicle Safety Whistleblower Act, it will provide for the Secretary of the Treasury to issue auto industry employees and contractors discretionary rewards for voluntary information about problems at motor vehicle manufacturers, parts suppliers and dealerships. The legislation is modeled after the Internal Revenue Service and Securities and Exchange Commission whistleblower programs, including confidentiality protections.
It is co-sponsored by Claire McCaskill (D-Mo.) and Dean Heller (R-Nevada), the leaders of the Commerce Committee’s subcommittee on consumer protection. The subcommittee is investigating delayed recalls of ignition switches at General Motors. The bipartisan sponsors of the bill suggest that the issue may cross party lines even though corporations have in the past vehemently opposed past efforts to strengthen rewards.
The Detroit News called out the bill as “the first significant auto safety proposal to receive backing of a top Republican.” The chairman of the House Energy and Commerce Committee, Representative Fred Upton (R-MI) said he is still considering proposing a bill for auto reform.
Democrats in the House and Senate proposed sweeping reforms earlier this year. In September, the Vehicle Safety Improvement Act was introduced to reform the industry. Senate Democrats proposed the Early Warning Reporting System Improvement Act in March followed by the Motor Vehicle and Highway Safety Enhancement Act in August.
The introduction of the whistleblower bill comes at a time when several companies in the auto industry are being investigated for defective products. The introduction of the bill coincides with a hearing today in the Senate Commerce Committee regarding the recall of 7.8 million vehicles by 10 major automakers because of defective Takata air bags.
In June, news broke about a GM whistleblower who had been silenced and fired by the company for accusing it of dragging its feet to fix safety issues. The company had known about the problematic ignition switches for years before it finally issued a recall.
Toyota paid a $1.2 billion fine earlier this year for misleading the government and consumers about unintended acceleration complaints. U.S. Attorney Preet Bharara said, “Even while giving unequivocal assurances that it had fully addressed a grave safety problem, Toyota knew full well that the problem of unwanted acceleration persisted.” Toyota initially blamed the problem on the accelerator being stuck under the floor mat while hiding the potential for “sticky pedals”. The company recall didn’t cover all of the cars in danger and they continued to manufacture problematic vehicles.
Earlier this month, Hyundai Motor and Kia Motors were also fined $300 million for overstating vehicle fuel-economy standards. We haven’t been able to track down the bill yet to determine whether information about this time of fine for a violation of the Clean Air Act will also be covered.
This bill is not the only area where the U.S. Government is considering expanding rewards.
Representative Maxine Walters (D-CA) introduced the Holding Individuals Accountable and Deterring Money Laundering Act (H.R. 3317) into the House of Representatives last October. It provides for an increase in the potential payment for FinCEN whistleblowers from the current maximum payment of $150,000. The new law would offer a minimum of 10 percent and maximum of 30 percent on eligible recoveries over $1 million.
The Centers for Medicare and Medicaid Services proposed an increase last year in the maximum reward for its own Medicare Incentive Reward Program to $9.9 million from $1,000. The U.S. Government Accountability Office also published a report on reform of the criminal cartel enforcement laws in 2011 which considered, among other things, adding incentives for reports of antitrust violations.
New York is also considering rewards for information provided to its Department of Financial Services. The agency, run by Benjamin Lawsky, has issued several large fines against financial institutions this year, including this week’s $315 million settlement with Bank of Tokyo Mitsubishi UFJ. It also will reportedly pursue penalties against Barclay’s for forex manipulation similar to the conduct involved in settlements between five banks and the CFTC last week.