Whistleblower Primer

Introduction

Billions of tax dollars are stolen each year by companies and individuals who falsely bill government agencies for goods or services not provided or who file fraudulent tax returns.  Other billions are taken from unsuspecting investors by securities fraudsters like Bernie Madoff.  Uncovering these government contracting, tax and securities scams is a huge task for government regulators.  Fortunately — thanks, in part to Section 922 of the Wall Street Reform and Consumer Protection Act of 2010 — private individuals working with their attorneys can now receive significant financial rewards for helping regulators uncover all three categories of fraud.

Pfizer, Inc. offers one example.  In early September 2009, six whistleblowers were awarded more than $102 million after their efforts led the pharma giant to pay $2.3 billion back to federal and state governments for fraudulent promotion of drugs for medically unapproved uses.  Smaller examples abound in derivatives, mortgage, elder care, hospice services, dentistry, defense contracting, banking and many other industries.

No matter how hard federal and state governments work, they can’t possibly find all of the fraud on their own. Simply put, governments need help to protect scarce budget dollars.  As a result, they welcome information from private individuals — sometimes called “whistleblowers” — who are in a position to know where fraud is currently happening or where it has recently occurred.  Whistleblower programs are one way that governments encourage people who know about fraud or waste to report it so that the government can follow up.

If you are in the know, you may be in a position to help. This short article outlines the major categories of whistleblower programs.  For a nuts-and-bolts description of how a whistleblower case works, please read Whistleblower Process.

Whistleblowing

Whistleblower programs exist at federal and state levels.  This article deals with three categories of federal whistleblower claims — False Claims Act, Securities Fraud and Tax Fraud — each of which attacks a different variety of fraud through its own set of laws and regulations.  In the United States, whistleblower programs are usually created by laws called statutes.  After Congress enacts a new whistleblower statute, the relevant regulatory agency — in this case either the DOJ, SEC or IRS — writes more detailed rules and regulations outlining how whistleblowers must submit claims.  Later, the courts add another layer of law by interpreting the statutes and regulations. The discussion that follows deals with U.S. law only.

False Claims Act

The False Claims Act, in the U.S. Code at Title 31, Section 3729, attacks fraud in claims submitted to the federal government, or to contractors who then submit claims to the federal government, in exchange for goods or services.  Under this Act, private persons — individuals or companies — can effectively sue another private party (or sometimes a state or local government agency) on behalf of the federal government. These lawsuits are technically called qui tam suits. Qui Tam is a short version of a much longer Latin phrase meaning “who sues for the king and himself.”

If the federal government collects a settlement or court judgment because of the information provided by the qui tam plaintiff (called the “relator”), the government is generally required to share between 15 and 30 percent of the recovery with the relator.  In theory, the qui tam recoveries can be very large because the False Claims Act requires the defendant to pay the government treble damages plus between $5,500 and $11,000 per false claim.  In practice, however, such amounts materialize only the rare case that is tried all the way to a jury verdict. Cases typically settle for much lower amounts. Relators can also recover reasonable attorneys fees and other costs of prosecuting the claim from the defendant.

Not just anyone, however, can sue. The relator has to be close enough to the fraud to provide reliable, detailed information.  Personal knowledge of false billings to Medicare, for example, is very good.  To have that kind of knowledge, you inside information.  In a medical context, patients, nurses, doctors, billing personnel and medical technicians could all be close enough.  Relators who have participated some way in the fraud can also obtain a reward as long as they are not convicted of criminal wrongdoing.  The Act also has features to compensate employee-whistleblowers for retaliation by their employers.

Qui tam suits are different from normal civil suits in many ways.  First, before filing the lawsuit, the relator is obligated to provide the Justice Department (or equivalent state attorney general) a case narrative backed up by all material evidence in the relator’s possession.  Second, the relator’s complaint must be filed under seal, meaning that no one but the relator, the relator’s attorneys and the Justice Department are initially aware of the existence of the suit.  Third, after the relator files the complaint under seal, the Justice Department has 60 or more days to conduct further investigation to decide if it wants to “intervene” as a party in the lawsuit.  Typically, the DOJ takes about two years to evaluate a claim.  During this investigatory period, before the complaint is unsealed, the relator is legally bound not to reveal the existence of the complaint to anyone but the relator’s attorney.

If the government intervenes, then it takes over the lead role in the case.   If the government decides not to intervene, the relator can choose to move forward alone.  Either way, the complaint will eventually be dismissed, settled, or unsealed and litigated.  Without government intervention, the probability of the relator winning a qui tam case is significantly diminished.  More insight into the Department’s approach to intervention is provided in this DOJ memo. The DOJ publishes aggregate statistics on False Claims Act cases annually. Statistics for 1987-2014 can be found here.

If you believe that you have a valid qui tam claim and think you might be willing to assist the government in pursuing it, you should talk with an attorney immediately.  A few examples of qui tam cases are provided in the False Claims Act Case Studies page.

Securities Fraud (Stocks and Bonds)

What we could call “SEC whistleblowing” under the Wall Street Reform and Consumer Protection Act attacks violations of any securities law — relating to publicly traded or privately-held companies — under the jurisdiction of the Securities and Exchange Commission or “SEC”.  The SEC whistleblower statute, found in Section 922 of the Act, requires the SEC to share with whistleblowers between 10 and 30 percent of the “monetary sactions imposed” and collected by the SEC in covered cases.   It also attempts to protect whistleblowers from retaliation.  You can learn more about blowing the whistle on securities fraud by reading Dodd-Frank & SEC Whistleblowers: What’s in it for you?

Federal Tax Whistleblowing

Whistleblowing with the IRS is an opportunity for just about anyone to take a shot at tax collection.  The IRS has long encouraged whistleblowing in a small way but recently made it a bigger priority thanks to a little known provision in the Tax Relief and Health Care Act of 2006.

On January 14, 2008, the IRS issued “interim guidance” for blowing the whistle under its new program.  The rewards for a successful whistleblower can be substantial — 15 to 30 percent of the tax the IRS collects in response to private information provided by a whistleblower who is not also a participant in the fraud.

Claimants who draw attention to public evidence of fraud — extracted by the claimant from judicial or administrative proceedings, government reports, hearings, audit or investigation, or the media — can also get an award up to 10 percent of the amount collected.

If the IRS denies a claim, the whistleblower can appeal to the U.S. Tax Court.  Awards are fully taxable, but attorney fees and costs paid by or on behalf of the claimant are deductible above-the-line (for Adjusted Gross Income) but only up to the amount of the award.

Summary

Monetary rewards for blowing the whistle on fraud can be substantial.  On the other hand, the risks can also be considerable.  If you have knowledge of a fraud that has been or is currently being perpetrated, you should speak with an attorney to ensure that you fulfill your legal obligations and preserve any reward or compensation to which you are entitled under the law. It is generally not a good idea to speak first with anyone other than an attorney.  This is true, in part, because such disclosure to a non-attorney may stand in the way of a whistleblower award.