The CFTC Encourages Whistleblowers to Report Information Involving Commodities Fraud

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The Commodity Futures Trading Commission (“CFTC” or “Commission”) may not be as familiar as it’s more well known counterpart, the Securities and Exchange Commission, but the agency nonetheless serves an equally vital function by ensuring stability and confidence in the derivatives markets. One of the ways the Commission maintains the integrity of the markets is by actively soliciting the public for information involving commodities fraud through its whistleblower program.

The Creation and Expansion of the CFTC

The passage of the Commodity Futures Trading Commission Act in 1974 substantially amended the Commodity Exchange Act (“CEA”) and led to the creation the CFTC.  The Commission’s predecessor, the Commodity Exchange Authority, was limited to regulating only the agricultural commodities specifically enumerated in the Commodity Exchange Act. By expanding the definition of “commodity” to include transactions in futures and options in United States markets, as well as “any other board of trade, exchange, or market,” the regulatory authority of the newly-created CFTC was significantly expanded.

Today, the CFTC operates as an independent agency of the United States government that regulates and oversees domestic derivatives markets, including commodity futures, options and swaps markets. According to its mission statement, the Commission’s fundamental objective is to “promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.”

Since the 1970s, futures and options markets have expanded to include the trading of futures and options for many non-agricultural commodities, such as oil and gold, as well as financial instruments, including foreign currencies, stock indices, and Treasury debt instruments. The markets under the CFTC’s regulatory authority are significant because of their financial size and importance — trades in these markets amount to billions of dollars annually. Following the financial crisis of 2008, Congress authorized the Commission to regulate and reform the swaps market, another class of derivatives comprised of over-the-counter trading of custom contracts between private parties.

Commodities, Derivatives & Swaps

A commodity is a basic good for which there is demand, but is interchangeable with another commodity of the same type. In other words, there are no practical differences between two or more producers of the same commodity. Examples of commodities include beef, gold, corn and coal. The definition of commodities has expanded over time to apply to additional products including, most recently, certain cryptocurrencies. In 2014, the CFTC first stated its position that virtual currencies are a “commodity” subject to regulatory oversight pursuant to the CEA.

A derivative is a financial instrument, the value of which is based on one or more underlying assets. In practical application, a derivative is a contract between two parties with specific conditions that define the terms by which payments are made. The most common types of derivatives are forwards, futures, options, and swaps. The most common underlying assets are commodities, stocks, bonds, interest rates, and currencies.

A swap is a derivative contract that was first introduced in the late 1980s. A swap between two parties involves the exchange of agreed-upon cash flows of two financial instruments. The cash flows are usually based on a predetermined nominal value, referred to as the notional principal amount. Unlike most standardized options and futures contracts, swaps are not exchange-traded instruments. Rather, they are customized contracts traded in the over-the-counter market between private parties. Since swaps take place on the over-the-counter market, there is always the potential for default by a counterparty.

The CFTC Whistleblower Program

The CFTC whistleblower program was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank was enacted in 2010 in response to the financial crisis of 2008, the Bernie Madoff scandal, and other highly-publicized financial frauds. Section 748 of Dodd-Frank amended the CEA by adding Section 23, entitled “Commodity Whistleblower Incentives and Protection.

Section 23 of the CEA, 7 U.S.C. § 26, authorizes the CFTC to issue monetary awards to whistleblowers who voluntarily report original information involving violations of the CEA. The information must lead to a successful enforcement action resulting in the recovery of monetary sanctions exceeding $1 million, or a related action. A “related action” is one brought by certain government entities based on the same original information provided by the whistleblower that resulted in the successful CFTC enforcement action. An eligible whistleblower can receive an award of between 10% and 30% of the monetary sanctions collected in either the CFTC action or a related action.

Since its inception in 2011, the CFTC whistleblower program has recovered more than $800 million in monetary sanctions, and awarded over $100 million to whistleblowers who provided original information or analysis that led to those successful recoveries. In the last two fiscal years, the CFTC awarded over $90 million to whistleblowers, an amount which represents 88% of the total sum awarded to whistleblowers since the program’s inception.  The sharp increase in the monetary amount of the awards illustrates the Commission’s increased reliance on, and commitment to, whistleblowers.

The CFTC’s Whistleblower Office has actively promoted educational and outreach campaigns designed to reach potential whistleblowers through various means, including speeches, web postings, as well as appearances at seminars, conferences and industry trade shows. In May 2019, the Whistleblower Office started issuing “CFTC Whistleblower Alerts” which cover trending topics and issues on which the Commission has focused its recent investigative and enforcement efforts.

Spoofing and Market Manipulation

The CFTC’s latest Whistleblower Alert, issued in January 2020, deals with a disruptive trading practice known as “spoofing.” In its Interpretive Guidance and Policy Statement on Disruptive Practices, the CFTC explained that a violation of section 4c(a)(5)(C) of the CEA “occurs when the trader intends to cancel a bid or offer before execution.” Additionally, the prohibition against spoofing “covers bid and offer activity on all products traded on all registered entities . . . .”

The Interpretative Guidance lists certain types of disruptive conduct which the CFTC deems to constitute spoofing:

(i) submitting or cancelling bids or offers to overload the quotation system of a registered entity;
(ii) submitting or cancelling bids or offers to delay another person’s execution of trades;
(iii) submitting or cancelling multiple bids or offers to create an appearance of false market depth; and
(iv) submitting or canceling bids or offers with intent to create artificial price movements upwards or downwards.

The Commission further explained that a person must act with a degree of scienter beyond recklessness to violate the prohibition against spoofing in section 4c(a)(5)(C) of the CEA. In a similar context involving a violation of SEC Rule 10b-5, the United State Supreme Court defined scienter as “a mental state embracing intent to deceive, manipulate, or defraud.” Ernst and Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12 (1976).

The CFTC Recovers the Largest Monetary Penalty for Spoofing in History

In November 2019, the CFTC issued an order which included factual findings and the imposition of remedial sanctions against Tower Research Capital LLC (“TRC”), a proprietary financial services firm engaged in futures trading. For a period of at least twenty-one months, the Commission alleged that three TRC traders (“Traders”) engaged in a scheme whereby they placed orders they wanted filled on one side of the market (the “Real Orders”) while also placing orders on the opposite side of the market which they intended to cancel from the outset (the “Spoof Orders”).

Once the Traders received a full or partial fill of their Real Orders, they proceeded to cancel their Spoof Orders, which they allegedly never intended to complete in the first place. Through their actions, the Traders allegedly intended to send false signals to the market that they actually planned to buy or sell the contracts contained in the Spoof Orders. In furtherance of the alleged scheme, the CFTC claimed the Traders broke down larger orders into several smaller, randomly-sized orders in an attempt to camouflage their scheme from others in the market.

According to the CFTC, the ultimate objective of the Traders’ manipulative scheme was to induce other market participants to trade against the Real Orders. As an added benefit, the Traders anticipated the market would react by filling the Real Orders more quickly, at more favorable prices, or in larger quantities than usual. The CFTC alleged the Traders intended to create or exacerbate an order book imbalance, thereby creating a false impression of supply or demand in the market. Thus, the Commission charged that the Traders knew their Spoof Orders would create the false appearance of market depth and induce participants to make trades based on the misleading market activity created by the Spoof Orders.

The CFTC charged TRC with violations section 6(c)(1) of the CEA, 7 U.S.C. § 9(1), and Regulation 180.1(a)(1) and (3), 17 C.F.R. § 180.1(a)(1),(3), which make it is unlawful to intentionally or recklessly “(1) [u]se or employ, or attempt to use or employ, any manipulative device, scheme, or artifice to defraud;” or “(3) [e]ngage or attempt to engage, in any act, practice, or course of business, which operates or would operate as a fraud or deceit upon any person,” in connection with any contract for future delivery on or subject to the rules of a registered entity.

Based on the cited provisions, the CFTC charged that the Traders “employed a manipulative and deceptive scheme” when they placed the Spoof Orders with the intent to create the false appearance of market depth. By virtue of section 2(a)(1)(B) of the CEA, 7 U.S.C. § 2(a)(1)(B), and Regulation 1.2, 17 C.F.R. § l.2, TRC was liable for the alleged fraudulent conduct of the Traders because they acted within the scope of their employment with TRC while engaged in the prohibited conduct.

In order to settle the Commission’s charges, TRC agreed to, among other things, pay: (i) restitution of $32,593,849; (ii) a civil monetary penalty of $24,400,000; and (iii) disgorgement of $10,500,000. These amounts totaled a record-setting penalty of $67.4 million for a spoofing case.

The Importance of Legal Representation for Whistleblowers

The CFTC Whistleblower Program, as well as other those of other government agencies (e.g. the SEC and IRS), provide a process through which individuals can directly report fraud against the government without the assistance of a lawyer. However, if a whistleblower intends to file anonymously, the SEC and IRS whistleblower programs both require that he or she be represented by an attorney. In contrast, the CFTC allows an unrepresented whistleblower to proceed anonymously through the entire process.

While it may be tempting to “go it alone,” a whistleblower without legal representation faces a number of pitfalls that could preclude them from receiving an award, even after providing vital information and assistance that led to a successful recovery. In order to remain eligible for an award, the rules and procedures of a government agency’s whistleblower program must be followed closely. For example, there are strict deadlines for filing objections to a decision concerning an agency’s reliance on the information provided by the whistleblower, or the amount awarded following a successful recovery.

While every government agency protects the identity of a whistleblower to the fullest extent possible, a targeted company can sometimes still surmise the identity of a whistleblower. If, after learning of a whistleblower’s identity, a company retaliates against that person, the company may be subject to separate liability based on statutory protections that provide specific legal and equitable remedies for anyone subjected to their employer’s reprisals.

The experienced attorneys at McEldrew Young Purtell Merritt provide skilled assistance throughout the entire process of filing a whistleblower claim, beginning with a thorough review of evidence and the drafting of a submission designed to persuade the agency to undertake an investigation. If there is a successful recovery based on information provided, our whistleblower attorneys will monitor the notices posted on the agency’s website to ensure that a claim for an award is filed within the narrow time frame prescribed by agency rules.

McEldrew Young Purtell Merritt attorneys also evaluate the amount of an award to ensure it accurately reflects the significance of the information provided and the level of cooperation given during the agency’s investigation. If an award doesn’t fairly reflect the whistleblower’s contributions, we use the appeal process and work to secure a more just result. For a free, no obligation consultation, call McEldrew Young Purtell Merritt’s whistleblower attorneys at (215) 367-5151, or you can submit your information through the contact form on this website.

McEldrew Young Purtell Merritt Whistleblower Lawsuit Against INSYS Results in $225 Million Settlement of Allegations Involving Opioid Sales and Marketing Abuses

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insys

INSYS Agrees to Global Resolution of Claims Arising from Separate DOJ Criminal and Civil Investigations

The Department of Justice announced that INSYS Therapeutics, Inc. (“INSYS”) has agreed to pay $225 million to resolve allegations that it paid kickbacks and engaged in other illegal marketing tactics to promote sales of its fentanyl spray, Subsys. According to the terms of the settlement, INSYS will pay a criminal fine of $2 million and forfeit $28 million. The pharmaceutical manufacturer will also pay $195 million to settle civil claims based on allegations in five different qui tam lawsuits filed by separate relators.

McEldrew Young Purtell Merritt represents one of the five relators, a former INSYS sales representative who became concerned as the drug manufacturer continually pushed the boundaries of its marketing tactics to boost sales of its powerful opioid painkiller. In 2016, McEldrew Young Purtell Merritt filed a complaint under seal on behalf the relator in the United States District Court for the Central District of California. The complaint included allegations that INSYS promoted Subsys for various off-label, or unapproved, uses including musculoskeletal pain, fibromyalgia, neck pain, and back pain, despite the fact that the FDA only approved the drug for the management of breakthrough cancer pain.

Allegations of Improper Dosing Instructions and Meddling with Insurance Authorizations

INSYS management allegedly directed its sales representatives to encourage physicians to prescribe Subsys for continuous use, rather than only as needed, and to start new patients at twice the starting dose permitted by the FDA-approved label. Sales representatives were also allegedly instructed to complete prior authorization forms on behalf of the patient or physician. They also provided physicians with an appeal letter template that would be filled out if patients could not obtain prior authorization from their insurer.

The TIRF REMS Access Program

INSYS allegedly employed other less subtle tactics to remove certain “obstacles” purposely set in place to control distribution of the dangerous class of fentanyl-based painkillers, such as Subsys. For example, the FDA requires that physicians and pharmacists enroll in a program known as the TIRF REMS (Transmucosal Immediate Release Fentanyl – Risk Evaluation and Mitigation Strategy) Access Program. The program was designed to reduce the risks of misuse, abuse, addiction, overdose and serious complications due to medication errors with the use of TIRF medicines. Prescribers and pharmacists must study educational materials and pass an online knowledge assessment exam is order to obtain certification.

In an effort to increase the number of prescribers in the TIRF REMS Access Program, INSYS sales representatives allegedly provided physicians with cheat sheets that contained all the correct answers to the knowledge assessment exam. The practice of distributing the test answers was allegedly considered commonplace among sales representatives. Physicians who allegedly received the cheat sheets could easily circumvent the educational requirement of the program which was intended to ensure that they had sufficient information to make informed risk-benefit decisions prior to starting a patient on a TIRF drug.

Allegations of Sham Speaker Programs and Other Physician Incentives

Much like a number of other pharmaceutical manufacturers, INSYS utilized “speaker programs,” which were purportedly intended to be educational programs through which physicians were paid to present medical information to their colleagues at lunch and dinner events. It was alleged that these events were, in reality, sham programs whose only purpose was to pay doctors and pharmacists to convince their peers to prescribe Subsys for various off-label uses.

According to allegations in the case, many of the speaking events were held at inappropriate locations, such as noisy restaurants and strip clubs, and were nothing more than a pretense to provide attendees with free food, alcohol, and monetary compensation. The alleged payment of bribes and kickbacks to attending prescribers was designed as a way to increase the number of Subsys prescriptions written, as well as the dosage of those prescriptions. Many physician-speakers allegedly received compensation without ever having provided any educational content whatsoever at these events.

Another form of illegal kickbacks allegedly involved the use of gift cards. INSYS management allegedly encouraged sales representatives to provide gift cards to physicians as an incentive to continue prescribing Subsys. Sales representatives allegedly employed covert techniques to conceal the details of the transactions involving the purchase of the gift cards. Under one such scheme, an INSYS sales representative would allegedly purchase gift cards at a local food establishment and persuade the store owner to create fraudulent receipts for the value of the purchase price of the gift cards. The doctored receipts would falsely reflect the purchase of coffee and other small food items which could permissibly be given to a physician’s office. The sales representative would allegedly submit the fraudulent receipts for reimbursement by INSYS and then directly give the gift cards as a form of illegal and untraceable kickbacks to the physicians who prescribed Subsys.

The Rochester Connection

As the manufacturer of Subsys, INSYS was only the first link in the chain of bad actors who allegedly put profit ahead of preventable harm to thousands of vulnerable patients. Rochester Drug Cooperative (“RDC”), the sixth largest distributor of pharmaceutical products in the country, was charged as a corporate entity with conspiring to distribute drugs, conspiracy to defraud the United States, and failing to file suspicious order reports.

Last month, the CEO of RDC signed a Deferred Prosecution Agreement (“DPA”) in connection with the pending charges against the company. Under the DPA and a related consent decree, RDC agreed to: 1) accept responsibility for its conduct by making admissions and stipulating to the accuracy of an extensive statement of facts; 2) pay a $20 million penalty; 3) reform and enhance its Controlled Substances Act compliance program; and 4) submit to supervision by an independent monitor. If RDC remains compliant with the DPA, the government will defer prosecution and seek to dismiss the charges after five years.

The recent charges against RDC stem from a two-year investigation by the Drug Enforcement Administration (“DEA”) after RDC violated the terms of a prior civil settlement. The disclosure of the prior investigation and resulting civil settlement came to light after RDC’s former CEO, Laurence Doud III, filed a lawsuit against the company last year. In the suit against RDC, Doud claims he was fired so that RDC could shift responsibility to him for the recent DEA criminal investigation.

Mr. Doud and RDC’s former chief compliance officer were both recently charged with conspiring to distribute drugs and defrauding the government. The indictments mark the first time that federal criminal charges have been brought against company executives for conspiring to illegally distribute opioids

Linden Care Specialty Pharmacy

In his lawsuit against RDC, Mr. Doud also alleged that two members of RDC’s executive team defamed him by asserting that he and BelHealth Investment Partners had an improper financial relationship. BelHealth Investment Partners is a private equity firm that acquired Linden Care LLC (“Linden Care”), a company that ran a now-defunct specialty pharmacy based in Woodbury, New York.

The recent investigation by the DEA was based, in part, on the inaccurate reporting, or lack of reporting, of pharmaceutical sales between RDC and Linden Care. Prior to going out of business, it is believed that Linden Care was one of the largest, if not the largest, distributors of Subsys in the nation.

McEldrew Young Purtell Merritt’s initial investigation of the allegations against INSYS identified the critical role that Linden Care played as the leading dispenser of Subsys throughout the country. The complaint filed by McEldrew Young Purtell Merritt on behalf of its client was the only one to name Linden Care as a defendant in the INSYS qui tam lawsuit. Although the case against INSYS has settled, McEldrew Young Purtell Merritt’s suit against Linden Care and Belhealth Partners is currently pending before the United States District Court for the Central District of California.

The False Claims Act

The INSYS case demonstrates the importance of whistleblowers in identifying and reporting fraud. Fraud against the government takes many forms, and employees and contractors are often in the best position to detect and report such conduct. The government simply doesn’t have the resources to identify and prosecute every instance of fraud. Consequently, many unscrupulous actors continue to defraud the government, and American taxpayers, for years without detection or prosecution.

The False Claims Act provides a monetary incentive to whistleblowers who provide original information. If the government makes a monetary recovery based on the information provided, a whistleblower can receive between 15 and 30 percent of the recovery. The False Claims Act also contains provisions that protect a whistleblower from retaliation by an employer.

If you have information about fraud against the government, the experienced attorneys at McEldrew Young Purtell Merritt can assist with all aspects of the process, from investigating your claim, filing a complaint, and successful recovery of a reward.

Pharmacy and Drug Fraud: A Prescription for Imprisonment and Big Fines

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Pharmacy Shelves

A number of civil settlements and criminal convictions involving pharmacy and drug fraud in 2018 have highlighted a longstanding problem that imperils patient health and burdens American taxpayers with costs measured annually in the millions of dollars. Pharmacy and drug fraud takes many different forms and can involve everyone in the supply chain from small pharmacy operators to large pharmaceutical distributors.

Electronic Health Records: A Prognosis for Missteps and Potential Fraud

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Misread pap smear lawsuits

The Wall Street Journal recently reported that the Department of Veterans Affairs is in discussions with Apple to provide portable electronic health records (“EHRs”) to military veterans. The plan reportedly calls for Apple to develop specialized software tools that would allow veterans and their families to access their EHRs through Apple’s Health Records EHR data viewer. The proposed plan is intended to simplify and streamline health data access for patients visiting VA healthcare sites.

Sobering News of Fraud in the Addiction Treatment Industry

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Sobering News of Fraud in the Addiction Treatment Industry

The opioid epidemic has exacted an immeasurable cost on our country in both human and financial costs. It has also given rise to a new type of health care scam in America – addiction treatment fraud. Unscrupulous operators of drug treatment centers and sober homes are preying on people in desperate need of drug treatment services while also defrauding American taxpayers out of tens of millions of dollars annually.

Improper Payments to Medicare Advantage Plans Estimated at $16 Billion for FY2016

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medicare enrollment

Medicare Advantage fraud has been an area of increasing focus recently. Earlier this year, the Department of Justice intervened in two whistleblower lawsuits against UnitedHealth. Investigations into the operation of other Medicare Advantage plans are reportedly continuing. And the amount of money at stake in this area continues to increase as more and more people elect to replace traditional Medicare with a private plan from an insurance company authorized through Medicare Advantage.

5 Areas Where President Trump Will Pay Whistleblowers

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whitehouse

There has already been much commentary on the impact that President Trump and his administration will have on government enforcement efforts. Trump has made it clear that he intends to streamline government regulation of business in order to spur the economy. He’s also promised to dismantle Dodd-Frank, the law that started the SEC and CFTC whistleblower programs. If Trump succeeds in getting government off the back of businesses, then that will likely mean less enforcement actions against these businesses for running afoul of regulations that don’t fit into Trump’s plan.

Increased Spending in Compounded Drugs Could Involve Fraud

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medication

Federal spending for compounded drugs has exploded recently and there are concerns some portion of the increase is due to fraud or overbilling, according to recent media reports. Last year, we wrote a post about the increase in Tricare fraud among compounding pharmacies. Recent data reports suggests other programs, including Medicare Part D and federal workers’ compensation, have now been afflicted. Part D has increased its spending for this medicine by more than 600 percent over the last ten years to $508 million, according to a report released by the OIG.

Reminder: CA and IL Allow Insurance Fraud Whistleblowers

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Whistleblower attorneys Philadelphia PA

The majority of work we do for whistleblowers reporting health care fraud involves cases of fraud against the US Government’s Medicare and Medicaid programs under the False Claims Act. However, a recent press release from an attorney settling a case in California reminds us that there are two states which allow private citizens to bring claims of insurance fraud on behalf of the state’s citizens: California and Illinois.

Four Settlements for Justice Dept as Health Care Companies Seek to Avoid Coal for Christmas

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personal injury lawyers Philadelphia PA

It must be the last weekend before Christmas because health care companies are looking to resolve government investigations into their wrongdoing before we leap into the new year! In the last two days, we’ve now seen four multi-million dollar settlement announcements in False Claims Act cases.

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