The United States Department of Justice and numerous state governments have intervened in numerous qui tam whistleblower suits, including one brought by Philadelphia based law firm McEldrew Young against INSYS Therapeutics, Inc. . The suit alleges, among other things, that INSYS engaged in a nationwide illegal scheme to increase profits from Subsys, a fentanyl sublingual spray and schedule II controlled substance.
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.
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.
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.
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.
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.
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 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.
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.
The annual SEC whistleblower report to Congress for Fiscal Year 2017 has been released. It provides information and data about the activities of the SEC Whistleblower Office (referred to in the report as OWB) from October 1, 2016 to September 30, 2017. Over the year period, the SEC received over 4,400 whistleblower tips during Fiscal Year 2017 and paid out awards totaling nearly $50 million. The SEC also brought a number of enforcement actions to address companies that unlawful retaliated against or impeded whistleblowers.
The SEC has now paid our approximately $160 million to 46 whistleblowers since the Dodd-Frank Act created the SEC whistleblower program. Three of the top four awards were announced in 2016 and two of the top 10 awards were announced in 2017. All three awards from FY2017 that were on the top 10 list involved the protection of investor funds.
As has been the case in several other reports, the annual report provided select anonymized data about the successful whistleblowers. Here is some of the data that we found interesting:
- Two-thirds of them provided the impetus for the SEC to open the investigation. One-third of the paid whistleblowers assisted with an already-existing investigation.
- About 62 percent of award recipients were current or former insiders of the entity they reported. Other types of insiders such as consultants or close affiliates, industry professionals, harmed or prospective investors, and other outsiders made up the rest.
- Of the current or former employees, almost 83 percent raised their concerns internally to their supervisors, compliance personnel, through internal reporting mechanisms, or understood that one or more of these individuals were already aware of the information before they reported to the SEC.
- The majority of individuals were represented by legal counsel at the time they initially submitted their tips to the SEC.
- In cases resulting in awards, individuals represented 47% of the defendants, unregistered entities and companies 25%, and registered entities such as broker-dealers, investment advisors and other registered market participants were 28% of defendants
- Nine recipients were foreign nationals or residents of foreign countries when they submitted tips.
The SEC also provided a chart of the percentage of primary securities violations in covered actions assisted by whistleblowers. Here is a summary of the chart:
Misrepresentations/omission violations: 28%
Corporate/issuer disclosure (i.e., FCPA, accounting and offering document issues): 22%
Offering fraud (including Ponzi and pyramid schemes): 22%
Trading violations (including insider trading): 11%
Sales and advisory practices violations: 8%
Other (including operational, registration and fees/markups/commissions violations): 9%
Breakdown of Whistleblower Tips Submitted in FY2017
We can also take a look at the division of tips going into the SEC according to the whistleblower’s own characterization of the violation type:
Corporate Disclosures and Financials: 954
Offering Fraud: 758
Trading and Pricing: 271
Insider Trading: 231
Unregistered Offerings: 144
Market Event: 125
Municipal Securities and Public Pension: 67
Breakdown of International Tips
The SEC received tips in FY 2017 from individuals in 72 foreign countries. The top five countries outside of the United States for tips were:
United Kingdom: 84
Mexico and Russia: 26 (tied)
Tips by State
The leading states for tips within America were:
New York: 438
New Jersey: 175
The Chief’s Annual Message
The message from Jane Norberg, chief of the Office of the Whistleblower, at the beginning of the report specifically mentioned the “critical role of whistleblowers” in protecting investors. Since its inception, whistleblower tips have helped recover $671 million in disgorgement, the majority of which has or is scheduled to be returned to harmed investors. The focus on this role continues the message sent by the Enforcement Division last week in its report that protecting retail investors was a top priority of the securities regulator.
The other key aspect of Norberg’s message was Rule 21F-17 and the SEC’s enforcement of the whistleblower protections. We have written about these SEC regulation here before. Rule 21F-17 prohibits impeding communications between the SEC and whistleblowers. During the last fiscal year, the SEC brought a number of enforcement actions against corporations for efforts to uncover the identity of whistleblowers or restrictive language in severance and separation agreements. The SEC also independently brought an enforcement action for terminating an employee in violation of the Dodd-Frank whistleblower anti-retaliation provisions. Norberg said that reviewing allegations of violations of these laws would “continue to be a focus … in the upcoming fiscal year to ensure that whistleblowers can free report information … without fear of reprisal.”
The other area that was mentioned was the office’s hotline. Since the whistleblower hotline was established at the SEC, the OWB has returned over 18,600 calls from the public. In the last fiscal year, it returned nearly 3,200 calls, an increase over FY2016. We have found this to be a very helpful service that the SEC provides for whistleblowers and their attorneys.
The report also discusses the efforts of the Whistleblower Office on behalf of whistleblowers in federal court cases involving anti-retaliation provisions. It specifically mentions the U.S. amicus curiae brief filed in the Supreme Court in Digital Realty Trust, Inc. v. Somers, which is to be heard by the Court at the end of this month. Somers provides the Court the opportunity to hold that a whistleblower is protected by the Dodd-Frank anti-retaliation provisions even if they only reported internally to a manager or supervisor rather than file a Form TCR with the SEC.
The 2017 annual report is the second issued by Jane Norberg after she succeeded Sean McKessy. It marked the first full year of her leadership at the OWB. McKessy announced that he was leaving the SEC Office of the Whistleblower in July 2016.
The SEC also released its financial report recognizing a contingent liability of $221 million for the year ending on Sept. 30, 2017. This means that the SEC expects that additional whistleblower awards are probable in that amount. The awards have not been announced yet and there is no indication at what stage the SEC will recognize a future payout as a contingent liability.
As always, our attorneys are available for a free, confidential initial consultation with potential SEC whistleblowers. Please call 1-800-590-4116 to speak to an SEC whistleblower attorney at McEldrew Young.