Key Whistleblower Changes in Bipartisan Budget Act

0

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.

Considering Rewards for Environmental Whistleblowers

0

There have been suggestions that the federal government add incentives for whistleblowers in a number of areas since the passage of Dodd-Frank. One area where I have not seen as much support as I would expect is for the payment of incentives to environmental whistleblowers.

We’re on the verge of the largest fine in history for the violation of the Clean Water Act.  If there was a time to push for it, now would be the time.  BP is facing a potential fine of up to $13.7 billion for violations of the Clean Water Act for the Gulf of Mexico oil spill in 2010.  Transocean already paid $1.4 billion to settle civil and criminal charges related to its role in the spill.

Calls for reform of whistleblower procedures in the securities industry gained momentum because of the unsuccessful efforts of a hedge fund manager to expose the fraud on investors perpetuated by Bernie Madoff.  The BP disaster, similarly, might have been prevented if complaints about the testing of blowout preventers at BP had been encouraged and heeded.

The Potential BP Whistleblower

An industry veteran accused BP of falsifying reports of blowout preventers passing state performance tests in Alaska. The accusations led to his testimony in a 2003 lawsuit. Alaska investigated but did not take action against the company. It only prosecuted one individual, a low level employee.

The BP spill has been blamed in part on problems with the blowout preventer at the Gulf of Mexico rig.  Would additional government scrutiny have led to changes company-wide at BP?  Would the government inspection of this aspect of the oil rig been more stringent after receiving a whistleblower report?

It is impossible to know what would have happened in this case.  Still, there could easily be other looming environmental problems that could be prevented if the EPA gave employees of the company an incentive to come forward.

The Other Environmental Pollution Trial

BP may be garnering all of the headlines, but it isn’t the only environmental trial happening right now.  Dupont is currently facing a trial in a lawsuit under the False Claims Act for failure to report the release of cancer-causing gas at a plant in Louisiana.  The lawsuit, brought by a whistleblower, is based on the company’s failure to report the release under the Toxic Substances Control Act.

Environmental lawsuits are only a small part of the False Claims Act.  More typically, FCA lawsuits have been brought in cases where contractors are paid to cleanup environmental disasters and do not perform the work or overcharge for it.

As it is interpreted by the courts, though, it is no substitute for an EPA whistleblower program.

Why aren’t There Calls for Reform??

The government uses rewards in other areas to encourage insiders and other individuals to bring misconduct to light.  After large oil spills, the need for a government investigation is clear.  So it isn’t an area where the government necessarily needs someone to come forward in order to spur an investigation.  The government may be concerned that parasitic tips will be provided that don’t substantially aid the investigation.

On the other hand, EPA enforcement actions led to $163 million in fines and penalties last year and companies agreed to pay $9.7 billion to clean up contaminated sites and control pollution.  Would the opportunity to prevent billions in environmental damage not be worth the rewards paid to individuals who helped stop them from continuing?

The EPA and Whistleblowers Now

The environmental laws and the EPA don’t totally ignore whistleblowers now.  The EPA website already contains a page to allow for the reporting of environmental violations.  The Clean Air Act, Clean Water Act, CERCLA and RCRA contain protections for whistleblowers who experience retaliation.

The Clean Air Act even authorizes awards of up to $10,000 for information about violations of the law. Unfortunately, an investigation into this provision by Public Employees for Environmental Responsibility last year turned up no evidence it has been used.

Are these measures enough?  Have they been successful?  It would be interesting to see a Governmental Accountability Office report in this area similar to the one done concerning antitrust whistleblowers.

Could it Work?

Corporations are no doubt committing violations of the nation’s environmental laws on a daily basis. Incentivizing whistleblowers have proven to be a cost effective tool to help the United States learn about violations of the fraud and securities laws.  It could similarly help the EPA enforce U.S. laws against environmental pollution.  The SEC and CFTC programs could prove a model for the EPA to implement.

Given the support among environmental groups for protection of the environment and major prosecutions of Kerr-McGee and BP, it’s surprising that there haven’t been more calls for expanded use of whistleblowers in this area. Let’s hope that this is an area that gains additional support. The enforcement of our environmental laws for clean air, water and soil is a worthy place to encourage people to tip off the government to misconduct.

DOJ Announces Largest Hospice Fraud Settlement Ever – $75 Million

0

The Justice Department announced the resolution of a False Claims Act lawsuit with a $75 million settlement by Chemed Corporation and various wholly-owned subsidiaries, including Vitas Hospice Services. The settlement is the largest amount ever recovered under the False Claims Act from a provider of hospice services, according to Acting Assistant Attorney General of the Civil Division, Chad A. Readler.

Vitas is the largest for-profit hospice chain in the United States, operating 51 for-profit hospice programs in 18 states. Historically, around 90% of Vitas’ revenue is derived from Medicare. Chemed acquired the Vitas-affiliated companies in 2004.

CRISIS CARE

Crisis care is designed to allow a hospice provider to assist with the management of uncontrolled symptoms during a short period of time to return the patient to a state of comfort. It provides for around-the-clock care for up to 24 hours, with its appropriateness reassessed every 24 hours.

The lawsuit alleged that the Defendants submitted or caused false claims for crisis care services that were not provided to patients, that were inappropriately provided, or were not medically necessary because the patients were not in crisis during the periods that the Defendants claimed. According to the complaint filed by the United States, Vitas misled patients through their marketing materials to believe that patients would routinely receive “intensive comfort care” paid for by Medicare without informing them of the required acute medical symptoms. Vitas also used this marketing technique with potential referral sources.

According to the allegations in the complaint, Vitas not only distributed materials that incorrectly informed staff how and when to initiate crisis care, but the companies set aggressive goals for billing Medicare for crisis care. One nurse stated that she was sent to the home of patients for crisis care to find them not in crisis on more than one occasion. In one instance where crisis care rates dropped, Vitas’ Vice President of Operations sought an analysis of what caused the drop and how the location will correct it.

The complaint also alleges that Chemed and Vitas knew through regular internal audits that patients did not qualify for crisis care which they received or that the crisis care was inconsistent with the patient’s plan of care. Defendants were also aware that their Medicare reimbursement for crisis care far exceeded the rest of the hospice industry.

In many cases, according to the allegations, the care billed as “crisis care” by Vitas was simply a part of routine home care services. In total, the United States listed seven patient examples of this conduct.

END OF LIFE CARE

It is well known that Medicare requires hospice patients to be terminal and have a life expectancy of 6 months or less. Hospice care is designed to provide end-of-life comfort and is not designed for patients still seeking a cure or who may live for years.

According to the allegations, Vitas also admitted patients who did not need end of life care and billed Medicare for them. Managers at Vitas’ headquarters set aggressive admissions goals and made focused inquiries when admission numbers were low. They also evaluated general managers of each program based on its profitability and as a result the program managers often disregarded nurse and doctor concerns regarding patients who were not terminally ill.

Vitas similarly evaluated marketing representatives based on meeting their admission goals and paid bonuses based on enrollment into the program. The company philosophy, according to one former hospice manager, was to sign everybody up. Medical staff also reported that they felt pressured to admit or readmit patients who were inappropriate. Another nurse reported that the goal at discharge meetings was to disregard as few patients as possible without regard to the appropriateness of care. One doctor even reported that he was overruled on several occasions when he did not certify patients as eligible for hospice.

The United States offered seven patient examples for the allegations that Defendants billed hospice care for patients who did not meet the Medicare requirements.

THE FALSE CLAIMS ACT LAWSUITS

There were three whistleblower lawsuits filed against one or more of the companies involved in the settlement. The United States intervened in the lawsuits and transferred them to the Western District of Missouri, where they were consolidated with a lawsuit filed by the United States against the Defendants. As part of the settlement, Vitas entered into a five-year Corporate Integrity Agreement.

If you have evidence of hospice fraud occurring at another health care provider, call 1-800-590-4116 for a free consultation with a McEldrew Young False Claims Act attorney.

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

0

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

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

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

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

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

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

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

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

Collected Proceeds Clarification for IRS Whistleblowers Dropped from Tax Bill

0

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.

Switch from GAAP to IFRS could expose accounting fraud to whistleblowers.

0

Last week, James Schnurr, the new chief accountant for the Securities and Exchange Commission, told reporters that he was reviewing prior agency work on the potential accounting switch from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). The transition, which the SEC has been considering since at least 2007, will be revisited again by Scnhurr, a partner at Deloitte LLP prior to starting at the SEC a month ago. No decision has been made on the ultimate course of action the agency will pursue, although it will have implications for the method of accounting used by public companies distributing financial statements to shareholders.

The Wall Street Journal identified computer software and wireless communications as two industries where this transition could lead to dramatic changes in corporate accounting. In areas where GAAP and IFRS differ, there is the possibility that the rule switch could potentially expose accounting irregularities at large corporations as historical treatments are re-examined or lead to new situations of accounting fraud if companies attempt to adopt more favorable treatments during the transition.

More than 100 countries including the European Union currently use IFRS. The United States still uses GAAP in company-issued financial statements. When measured by market capitalization, more than half of the world’s companies still use US GAAP.

DEVELOPMENT OF ACCOUNTING STANDARDS

GAAP has been used extensively in the United States since the 1930s. Development started during the Great Depression as the country needed a way to restore confidence in the financial statements of corporations. The SEC encouraged the private sector to develop the accounting standards in 1938.

The movement for development of a set of international accounting standards started to grow in the 1960s. In the 1970s, the Financial Accounting Standards Board was created and began developing the International Accounting Standards. In 2001, the International Accounting Standards Board took over development and the name change to IFRS happened.

In 2005, companies began using IFRS in the European Union. Canada replaced its GAAP with IFRS in 2011. Japan has been promoting greater use of IFRS on a voluntary basis.

The SEC began exploring convergence with the IFRS set by the IASB in 2007. The initial roadmap published in 2008 suggested the potential for use by US issuers as early as 2014. However, according to the Wall Street Journal, “concerns about cost, implementation and the burden on smaller companies” stalled momentum.

IMPLICATIONS FOR WHISTLEBLOWERS

If new rules are adopted, the transition may expose problematic accounting treatments currently on the books or lead to new cases of accounting fraud. If the transition happens, and accountants are asked to adopt questionable accounting practices, they should consider the appropriate response given available options at their employer, the company and the SEC. The SEC whistleblower program or even the IRS program are options.

The IESBA is still working on a new code of ethics for professional accountants but the proposed guidelines currently open the door for an accountant to follow their conscience and report suspected noncompliance with laws and regulations.

SEC Whistleblowers May Not Receive Jury Trial in Retaliation Cases

0

 

A recent decision in a Georgia federal court presents serious implications for SEC whistleblowers subject to retaliatory employment actions.  In an apparent case of first impression, on Nov. 12, U.S. District Judge J. Owen Forrester of the United States District Court for the Northern District of Georgia rendered a decision holding an SEC whistleblower is not entitled to a jury trial in a retaliation action.  The whistleblower in the matter was a former compliance manager for BlueLinx Holdings, Inc. who brought his concerns that the company violated securities laws to the SEC and the company’s internal ethics committee.

The Dodd-Frank Wall Street Reform and Consumer Protection Act enacted a series of sweeping regulatory reforms, designed to prevent the abuses and risky Wall Street behavior, which in large part led to our nation’s latest economic calamity, dubbed the “Great Recession.”  In addition to financial reforms, Dodd-Frank mandated the creation of the Securities and Exchange Commission’s Office of the Whistleblower.  This office is tasked with processing and overseeing complaints of securities violations brought forth by knowledgeable whistleblowers.

Critically important to the program’s success, Dodd-Frank also created significant anti-retaliation protections for whistleblowers, which mirror those of the False Claims Act.  Pursuant to Dodd-Frank, it is unlawful for an employer to take retaliatory actions, including but not limited to termination, against employees attempting to report securities violations.  Dodd-Frank expressly grants whistleblowers, subject to retaliatory action, the right to file a civil lawsuit in federal court, seeking doubled back-pay, reinstatement, and attorney fees and costs.

In his decision, Judge Forester determined that these individuals are not entitled to a jury trial, as required by the Seventh Amendment to the U.S. Constitution.  Judge Forester determined that the remedies available to SEC whistleblowers in retaliation actions are inherently equitable in nature.  Plaintiff’s seeking equitable remedies, such as injunctive relief, are not entitled to a jury trial.  The Court was not persuaded by the plaintiff’s argument that the statutory relief of double back-pay was akin to compensatory or punitive damages, prayers for relief which generally entitle a litigant to a jury trial.  Finally, the Court found legislative silence on the issue favored the defendant’s position.

While the implications of this case outside the Northern District of Georgia are not yet known, if the rationale employed by Judge Forester is widely adopted the ramifications for SEC whistleblowers could be significant.  Generally speaking, a jury trial in an action claiming that a whistleblower was subject to retaliation is certainly preferable to a bench trial.  Many trial lawyers will attest that the juries are more receptive than judges to the emotional drama presented by the facts of such cases.

The case is Pruett v. BlueLinx Holdings, Inc., case number 1:13-cv-02607, in the U.S. District Court for the Northern District of Georgia.

McEldrew Young is a nationwide leader in whistleblower representation and has successfully represented numerous clients in some of the nation’s largest qui tam cases for over a decade.  For a free confidential consultation with one of our SEC whistleblower attorneys concerning whistleblower protections from retaliation, please call Eric L. Young, Esquire at (800) 590-4116 or complete the online form here.

 

Latest Settlement Reveals Mortgage Fraud Continued Years After Financial Crisis Ended

0

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.

The Largest Auto Fines in U.S. History

0

Motor vehicle crashes are a leading cause of death in the United States. Although manufacturers have made significant strides in decreasing the number of fatalities since the late 1960s and early 1970s, there have been several significant instances of auto manufacturers delaying recalls and leaving potentially defective vehicles on the road after they knew or suspected problems.

In 2014, National Highway Traffic Safety Administration (NHTSA) issued more than $126 million in civil penalties, its highest annual total ever to that point. In 2015, it quickly exceeded that amount as it continued to heavily fine auto manufacturers and part suppliers for delayed recalls and inadequate reporting of issues.

The adoption of the Motor Vehicle Safety Whistleblower Act as part of the FAST Act in December 2015 is meant to help the U.S. Government address this problem. The law authorizes the Transportation Secretary to issue rewards to auto industry employees of up to 30% of monetary sanctions over $1 million related to defective vehicles and parts. By incentivizing external reporting of problems, the U.S. Government hopes to encourage timely recalls and stop delayed recalls quickly when they do occur.

The adoption of this whistleblower law means that we will be adding the representation of auto whistleblowers to the practice of our whistleblower attorneys. So we thought it worth a look at some of the largest fines of car and auto parts manufacturers that the U.S. Government has handed down over the past few years.

You may be wondering how some of these fines exceeded the maximum cap for civil penalties imposed on the NHTSA. In some cases, the maximum fine was higher than $35 million because more than one car/problem was at issue. In other cases, the Justice Department determined that criminal charges were warranted and there is no maximum penalty in the potential criminal fines to be imposed. Future fines may be larger as the FAST Act increased the maximum penalty the NHTSA can impose.

Here are the largest fines that we have discovered so far:

toyotalexus

Toyota Motors – $1.26 Billion

Toyota Motors agreed to pay $1.2 billion to settle the Justice Department’s criminal investigation into whether the company hid safety defects related to unintended acceleration. Toyota also agreed to pay $48.8 million in 2010 and $17.4 million in 2012.

chevycobalt

General Motors – $935 Million

General Motors agreed to pay $900 million in September 2015 to settle the criminal investigation into its ignition switch recall. In May 2014, it also agreed to pay $35 million to the NHTSA over the delayed recall.

hyundaielantra

Hyundai and Kia – $300 Million

Hyundai Motor Group affiliates Hyundai and Kia agreed to pay the United States civil fines of $100 million and forgo $200 million in regulatory credits as a result of the overstating fuel economy claims.  The company was investigated by the U.S. Environmental Protection Agency and the Department of Justice.  Hyundai also settled a class action lawsuit over the fuel economy issues for nearly $400 million.

takataracing

Takata – $200 Million

The NHTSA fined Takata a total of $200 million for selling defective air bag inflators but only $70 million would be due if the company met its commitments and no other violations were discovered. In connection with the Consent Order, the company admitted that it was aware of a defect but failed to issue a timely recall. At the time of the settlement, the Justice Department was still conducting its own investigation into the company for potential criminal charges.

jeepwrangler

Fiat Chrysler – $105 Million
In July 2015, a civil penalty of $105 million was imposed by the NHTSA for failing to complete 23 safety recalls of more than 11 million vehicles.

honda dealer

Honda Motor – $70 Million
In January 2015, the NHTSA fined Honda for under-reporting hundreds of death and injury claims in violation of the TREAD Act.

mini cooper

BMW – $40 Million
The NHTSA in December 2015 agreed to a consent order with BMW North America for recall failures with the Mini Cooper. BMW agreed to a fine of $10 million, $10 million in spending to overhaul procedures and $20 million in deferred fines.

fordescape

Ford – $17.35 Million
Ford settled an NHTSA investigation into the timeliness of its recall of certain Ford Escape because of a potential issue with a “stuck throttle” after the release of the accelerator pedal.

hyundai genesis

Hyundai – $17.35 Million
The company failed to timely notify regulators of a corrosion risk to 2012 Hyundai Genesis sedans because of their brake fluid.

Photo Credits: Michael R. PerryToyota Lexus: Alexander Nie, Chevy Cobalt: Ryan Frost, Hyundai Elantra: peterolhofTakata Racing: andrewjsan, Jeep Wrangler: Abdullah AlBargan, Honda: Mike MozartMini Cooper: The Pug Father, Ford Escape: RL GNZLZ, Hyundai Genesis: Michael Gil

Note: Pictures may not match models or years impacted by recalls.

How 700 Bank Whistleblowers Get Ignored

0

Like much of America, we have been following the story of Wells Fargo’s sales tactics and the government response to it. We haven’t discussed this matter in depth yet here on our blog (just a brief comment about its implications for whistleblower retaliation), so I thought we would discuss it following the media reports that the Feds knew of 700 whistleblower complaints at the bank in 2010 regarding its sales practices.

Our whistleblower attorneys speaks regularly with employees and ex-employees of corporations of all sizes after the individual has internally reported suspected wrongdoing and the business has failed to adequately address their concerns. It is not surprising at all to us that tips would be ignored by a company. If large corporations corrected violations of the law after learning about them from their employees, we would not be in the practice of whistleblower law because there would be no need for us.

We also understand how these tips could be packaged together, explained away by the company and dismissed upon Government review. But we will discuss that more below.

Since we haven’t posted on this topic before, let’s briefly recap what has happened. Wells Fargo was fined $185 million, including a $100 million penalty by the Consumer Financial Protection Bureau, last September for fraudulently opening customer accounts. The practice involved as many as 1.5 million bank accounts and 565,000 credit card applications opened without the customer’s consent over a period dating back to at least 2011. Recently revealed evidence suggests it may have been going on since at least 2004 or 2005. It also agreed to settle a class action by consumers regarding the practices for $110 million.

After the practice became public, several ex-employees came forward to discuss their whistleblowing. Between 2009 and 2014, at least five former Wells Fargo employees notified OSHA that they were fired due to concerns about the opening of unauthorized accounts and credit cards. OSHA has recently ordered Wells Fargo to rehire one former manager and pay $5.4 million for its whistleblower retaliation, the largest award ever issued by the agency for an individual whistleblower.

There have been a great deal of investigations concerning the practices at Wells Fargo, both from government agencies and Wells Fargo. Two reports, one from Wells Fargo and one from the government regarding how to improve its regulatory oversite, have been released recently.

A few weeks ago, the Independent Directors of the Board of Wells Fargo put out a 113 page investigation report on sales practices. It examines in substantial detail the roles of numerous individuals and entities within Wells Fargo.

Unfortunately, there is so much evidence in the report that everyone knew Wells Fargo had a problem (at least as early as the December 2013 Los Angeles Times report), that it doesn’t spend much time on the issue of how it could improve its handling of whistleblower tips. Indeed, the most substantial examination of a whistleblower matter is on page 75 concerning a 2011 letter by a group of terminated bankers and tellers from a California branch to then CEO John Stumpf claiming they were unjustly terminated for practices condoned by branch management and happening across the bank.

The report does announce a few organizational changes which may impact how whistleblower issues are treated. It highlights the creation of a new Office of Ethics, Oversight and Integrity (with oversight by the Board’s Risk Committee). It also notes on page 17 that the Board’s Human Resources Committee will increase its oversight of terminations and the EthicsLine implementation.

This may not be the only report put out by Wells Fargo so it is possible one will follow later about changes to its handling of whistleblower tips. Wells Fargo has undertaken efforts to review non-anonymous calls to its confidential ethics line over the past five years to determine whether the employees were terminated within a year of the call. It is not yet known whether it will release publicly the details of that investigation.

The report that triggered the media focus on 700 whistleblowers was issued by the Office of the Comptroller of the Currency (OCC). The OCC is the primary regulator of banks chartered under the National Bank Act and Wells Fargo falls within its Large Bank Supervision operating unit. The Office of Enterprise Governance and the Ombudsman at the OCC completed its internal report two days ago and provided its lessons learned in the aftermath of the revelations about sales practices at Wells Fargo. Much of that report focused on what went wrong with the handling of tips from whistleblowers. It was a shorter document however (13 pages if memory serves).

The OCC report found Wells Fargo had issues with the handling of both consumer complaints and whistleblower cases. Among other things, Wells Fargo failed to document resolution of whistleblower cases and failed to follow up on significant complaint management and sales practices issues. When asked in 2010 about a high number of complaints by the Government, a Wells Fargo Senior Executive Vice President said that company culture generated a high volume of complaints and then they are investigated and addressed.

The OCC itself received 14 whistleblower tips about sales practices from mid-March 2012 to early September 2016. Just over 50% had no documentation in the regulator’s system. Both whistleblower tips and consumer complaints at the OCC are taken in by the Customer Assistance Group (CAG).

The report made numerous suggestions to improve the OCC and prevent a similar situation from happening again. Among the suggestions were for periodic review and analysis of complaints and whistleblower cases, as well as greater efforts to inform the public how to communicate whistleblower information to the OCC.

After this somewhat long review, we are back at the central issue here: how and why whistleblowers get ignored.

1. They don’t consider it a material issue for the company.

Wells Fargo reported $88.26 billion in revenue in 2016. To resolve the allegations concerning what was a massive multi-year violation of the law cost roughly $300 million. At some point, perhaps it should be said (like at many Wall Street investment banks) that government fines like these are just a cost of doing business. Wells Fargo saw 1% of its staff was being dismissed every year for bad sales practices and thought that number was great because 99% were acting ethically.

2. Lack of focus.

We speak to a great number of people that feel every violation of the law, no matter how small, is a vital national issue. As a result, they lump together both important and unimportant matters when they blow the whistle. When highly speculative matters of minor importance get tossed out in the same breath as serious violations of the law, it makes everything less credible.

3. Poor articulation of the details.

The law is complex. So are the factual scenarios that can arise. When non-lawyers try to explain violations of the law, they often oversimplify the facts and the law. If it is not articulated properly, it can be unconvincing. There may be various shades of grey obscuring a black and white violation of the law.

4. No documentation.

In the electronic age, documents matter. If there is no evidence presented, it is harder to disprove witness statements to the contrary.

5. Aggregation of reports.

It sounds like the government was working from a company summary of the EthicsLine complaints. If there was a detailed accounting and investigation of each incident, it would not have been so easy to dismiss. Aggregation hides the severity and specificity of events where the details matter.

6. Many don’t have lawyers.

Would you take an anonymous call from a random employee as seriously as you would a complaint from a high powered attorney seeking money on behalf of a specific client? There is a reason that the EthicsLine is handled by HR and not the Legal Department. Those that do get lawyers are dismissed as disgruntled employees.

7. The tone at the top is wrong.

When the focus is always on meeting advancing sales targets, compliance takes a back seat. This includes investigations of high performers accused of wrongdoing.

8. There’s no fear of the consequences.

“Everyone is doing it.” This isn’t a big deal.

9. Too many excuses.

The report details how Wells Fargo was overrun by individual wrongdoers to the point where it became a systemic and widespread problem. It failed to change the underlying causes of this behavior or the systems that allowed it to happen. Instead, they ended up firing more than 5,000 bad apples before the Government stepped in to say enough is enough.

A Proposed Solution

There is a way to get rid of the excuses and put more power in the hands of whistleblowers. It is not mentioned by the OCC report. But it is what happened at the SEC. Congress passed the Dodd-Frank Act to reward whistleblowers that come forward. It created a department within the SEC to ensure that whistleblowers had advocates. This program has been a success, paying out more than $100 million in rewards in the first six years.

This was the result of the ponzi scheme by Bernie Madoff. Despite a whistleblower tip, the SEC missed it. So Congress gave whistleblowers a monetary incentive to come forward. Now, investment banks are well aware of the SEC whistleblower program. If they are not taking internal employee whistleblower tips seriously, they do so at their peril.

There has been much discussion about rewarding bank whistleblowers. Former NY Attorney General Eric Schneiderman even proposed legislation in New York State to protect and reward banking, insurance and financial service whistleblowers in 2015.

FIRREA would be one mechanism for the federal government to do so. FIRREA is the Financial Institutions Reform, Recovery and Enforcement Act. It currently provides rewards of up to $1.6 million for whistleblowers providing information about fraud against federally insured financial institutions. Before leaving office, former Attorney General Eric Holder told an audience at New York University School of Law that lifting the cap would significantly improve the Justice Department’s ability to gather evidence of wrongdoing in complex financial crimes. FIRREA has been getting increasing usage both as a tool against mortgage fraud and even cases of consumer fraud involving auto loans. It makes sense to expand it.

It should come as no surprise that we would support this solution. When Congress wanted to put a stop to delayed product recalls, it gave the Transportation Secretary the power to pay auto whistleblower rewards and increased potential fines from the NHTSA. Doing the same for bank whistleblowers would give the OCC a substantial incentive to take control of its whistleblower process and employees to gather the evidence needed to put a stop to Wells Fargo type practices earlier.

Photo Credit.

Call Now