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Whistleblower Blog

With Treasury Reporting TARP Funds to More Than 200 Financial Institutions, Who–Besides Whistleblowers–Can Guard Against Fraud and Abuse?

The Treasury Department last week issued its December 2008 report to Congress on what it has done with the “bailout” funds through the Troubled Asset Relief Program (TARP) and Capital Purchase Program (CPP). With more than 200 institutions receiving taxpayer money, an overriding question is how to prevent and redress the inevitable fraud and abuse of TARP and other taxpayer funds, through whistleblowers and other means.

Treasury reported that, as of December 31, 2008, it had invested $177.5 billion in more than 200 U.S. financial institutions. As discussed previously on the whistleblower lawyer blog, Treasury recounted its announced assistance to General Motors and GMAC, as part of the Automotive Industry Financing Program (AIFP).

Treasury also described its New Year’s Eve investment in Citigroup of $20 billion in preferred stock and warrants, as part of a new Targeted Investment Program (TIP). It also discussed reporting to Congress on the “Asset Guarantee Program,” an insurance program.

Treasury’s list of institutions receiving funds is reprinted below.

With abuses already being reported by TARP whistleblowers, we urge the government to act decisively to plan for and redress the inevitable abuses that will occur. Sen. Grassley has emphasized that the qui tam whistleblower provisions of the False Claims Act be used to deal with TARP bailout fraud and abuse, as we have discussed previously. The IRS Whistleblower Rewards Program should also serve an essential role in protecting taxpayer funds, as well as rewarding whistleblowers.
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Treasury Department Announces TARP Investment in GMAC

The TARP bailout funding continues, as the Treasury Department announced today that it will buy $5 billion in senior preferred equity with an 8% dividend from GMAC LLC.

Senator Charles Grassley has emphasized that TARP and other “bailout” funds must be protected through whistleblower protections and whistleblower laws such as the False Claims Act. The GMAC announcement today will present ample opportunities to test those premises on which Congress approved the bailout funding.

The Treasury announcement is reprinted below:
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KPMG Tax Shelter Fraud Trial Ends With Three Tax Evasion Convictions for Accountants and Lawyer

Fraudulent tax shelters continue to be a target not only of IRS Whistleblower claims, but also of enforcement actions.

We have followed closely the KPMG tax shelter fraud case in this whistleblower lawyer blog. The trial of four defendants ended this week, with two former KPMG partners and one attorney convicted of multiple counts of tax evasion for their roles in the bogus tax shelters. Another lawyer defendant was acquitted.

Prosecutors alleged that KPMG officials offered wealthy clients illegal offshore tax shelters, and paid outside attorneys to give the bogus shelters the appearance of legitimacy. According to the government, the investments had no real risk, and generated “paper losses that allowed the accounting firm’s clients to offset income.

Through tax shelters with names such as BLIPS, FLIP and OPUS, the clients were able to claim falsely that they had taken sizeable loans to buy stock, according to the government. Clients allegedly paid fees equal to 7 percent of the amount of losses sought.

After a two month trial, former KPMG tax partner Robert Pfaff, former KPMG senior tax manager John Larson, and attorney Raymond J. Ruble were found guilty on multiple counts of tax evasion. Another former KPMG tax partner was acquitted on the five counts of tax evasion.

The accounting firm agreed two years ago to pay $456 million to resolve the allegations against the firm itself. Guilty pleas previously were entered by the government’s chief witness, David Amir Makov, former KPMG partner David Rivkin, and former HVB Group accountant Domenick DeGiorgio.
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Qui Tam Whistleblower Recoveries under False Claims Acts (Federal and State) in 2008

Some recent significant recoveries under the False Claims Act–the nation’s primary tool for fighting fraud and false claims–are summarized below. This summary is part of a paper I submitted in connection with serving on the faculty (with some excellent attorneys) of the “Southeastern Health Care Fraud Institute” on December 18, 2008.

Health care attorneys will gather at the Institute to discuss developments under the qui tam provisions of the nation’s major whistleblower statute, the False Claims Act, as well as other issues relating to fraud in the health care industry.

Recent Significant False Claims Act Recoveries
(as reported by www.taf.org)

Merck ($650 million settlement in February 2008, arising from allegations of nominal pricing fraud, and kickback and best price violations for the arthritis drug Vioxx, the cholesterol drug Zocor, the acid-reflux drug Pepcid, the hypertensive medication Cozaar, the bone loss drug Fosamax, the migraine medication Maxalt, and the asthma medication Singulair.)

Cephalon ($375 million settlement in November 2007 arising from alleged off-label marketing of narcotic lollipop Actiq (Afentanyl citrate@) as well as Gabitril (an epilepsy medication) and Provigil (a narcolepsy medication.)

Amerigroup ($225 million settlement in July 2008, which was the final settlement after jury trial over allegations that the defendant was Acherry-picking@ the healthiest patients to reduce Medicaid HMO liability/spending.)

Staten Island University Hospital ($88 million settlement in September 2008, based on allegations that the hospital fraudulently billed Medicaid and Medicare for inpatient alcohol and substance abuse detoxification treatment beds for which it did not have verification, fraudulently inflated its patient count, and fraudulently billed Medicare for stereotactic body radiosurgery treatment that was provided on an out-patient basis to cancer patients.)
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Pharmaceutical Industry Hit by Layoffs

The country’s ongoing economic distress has produced layoffs in many industries, and pharma appears to be feeling the pain as well.

Recent layoffs reported in the drug industry include Sanofi (650 sales reps);Novartis (550 U.S. salespersons);Merck (8,000); Wyeth (2,440); GSK (1,000); Schering-Plough (5,500);and Boehringer Ingelheim (200).

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Whistleblowers, TARP, and Other Wall Street “Bailout” Measures–Why the False Claims Act and IRS Whistleblower Program Are More Essential Than Ever

On the same grey November day when President Bush visited Wall Street’s Federal Hall to address the ever-morphing “bailout,” I was in lower Manhattan meeting with IRS officials about an IRS Whistleblower matter. The tax evasion scheme we discussed was yet another that has cost taxpayers dearly.

As NYPD officers scurried about to help protect the President that day, I wondered who and what would protect our taxpayer funds–the hundreds of billions the government was now about to dole out–from fraud and abuse.

Fraud is rampant, as proven by the evidence brought to light by so many of our whistleblower clients under the qui tam statute, the False Claims Act, and now under the new IRS Whistleblower Program.

A few days later, Sen. Chuck Grassley hammered the same point in a November 17, 2008 letter to Treasury Secretary Paulson and Attorney General Mukasey. Grassley has insisted on effective oversight of the Troubled Asset Recovery Program (TARP) and the Capital Purchase Program (CPP), as well as on encouraging “whistleblowers” to come forward:

In the meantime, taxpayer dollars are at risk and I believe it is important to discuss alternative procedures and measures that can be taken to ensure taxpayers aren’t taken to the cleaners by unscrupulous individuals. One proven and effective method of overseeing taxpayer funds has been to support courageous whistleblowers who risk their jobs and livelihoods to bring forth allegations of fraud, waste, and abuse of taxpayer monies. As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated. As such, I believe you should both work to ensure that all entities participating in the TARP and CPP are made aware that any allegations of fraud, waste, or abuse will be treated seriously and properly referred to the Treasury Inspector General or the Attorney General for review until a Special Inspector General for the TARP is appointed.

Grassley also emphasized the importance of the False Claims Act, the nation’s primary civil weapon for combating fraud against taxpayer funds, in preventing and penalizing fraud in the bailout:

[E]ntities who receive federal funds under the TARP and CPP are subject to the provisions of the FCA should they use false or fraudulent submissions in order to obtain federal funds. For instance, any entity that submits false or fraudulent information in an application to Treasury in order to obtain federal funds available through the CPP would be liable to the Government under the FCA. Further, while it has been reported that the Treasury does not currently plan to utilize authority under the Act to use the TARP to purchase distressed assets either directly or indirectly, should Treasury exercise its authority to do so, any fraudulent statements or submissions made to induce the Government to purchase those assets would also subject the fraudfeasors to liability. As a result, these individuals and corporations could be subject to civil penalties and treble damages for committing fraud against the Government.

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Offshore Tax Evasion Investigations by IRS and Justice Department Expand, As IRS Whistleblowers Continue to Come Forward

The Justice Department has announced that its investigation of offshore tax evasion will expand to include Europe’s largest bank, HSBC in London, and Credit Suisse in Zurich. The increasing scrutiny of illegal offshore tax schemes comes as the Wall Street bailout and turmoil in the banking and financial services industries generate more interest in IRS Whistleblower Program claims.

DOJ and IRS continue to investigate UBS, Switzerland’s largest bank. Last month saw the unsealing of the an indictment of Raoul Weil, a UBS senior
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Justice Department Announces 2008 Fraud & “Qui Tam” False Claims Act Recoveries, with Medicare, Medicaid, and Other Health Care Fraud Alone Topping $1 Billion in Recoveries of Taxpayer Funds

Will Wall Street Bailout Produce the Next Round of Whistleblowers Reporting Fraud?

The U.S. Department of Justice this week announced its FY 2008 recoveries in fraud and False Claims Act cases, with more than $1 billion in health care fraud recoveries alone, and a total of more than $1.3 billion. (As explained below, we believe the $1.3 billion figure is low and understates the actual fraud recoveries this year.)

Cases brought by “relators” or whistleblowers under the nation’s primary whistleblower statute, the False Claims Act, accounted for 78% of the money recovered. Since the False Claims Act took its current form in 1986, this law has recovered more than $21 billion of taxpayer funds from those who defraud the government.

As health care costs have grown as a percentage of the federal budget, so have recoveries for health care fraud. Recoveries of federal dollars were made because of fraud not only in Medicare and Medicaid, but also other federal programs such as Tricare and the Federal Employees Health Benefits Program.

The largest recoveries were from pharmaceutical companies–Cephalon Inc., Merck & Co. and CVS Caremark Corp. paid more than $640 million. Pharmaceutical fraud cases also repaid $430 million to state Medicaid programs.

DOJ also cited recoveries in cases of fraud affecting defense procurement contracts, disaster assistance loans and agricultural subsidies.

The actual recoveries were greater if you compare DOJ’s announcements of its settlements, as well as include dollars recovered under the various State False Claims Acts. (We have written extensively about why states are enacting their own State False Claims Acts to mirror the federal False Claims Act, given the federal law’s successes.)

With whistleblowers reporting fraud infecting in the Wall Street bailout funds (because no federal program is immune), it will be interesting to see how these billions of federal dollars show up in future statistics of fraud recoveries.

We have reprinted below DOJ’s “fact sheet” about its FY 2008 significant recoveries. We congratulate Justice on another very successful year in fighting fraud and false claims.
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Tax Court Prepares for IRS Whistleblower Cases by Adopting New Proposed Amendments to Rules of Practice and Procedure

One of the hallmarks of the new IRS Whistleblower Rewards Program is that whistleblowers have an enforceable right to rewards, and can appeal the IRS Whistleblower Office’s rewards decisions to the U.S. Tax Court.

The Tax Court has taken a step forward in issuing new proposed amendments to its Rules of Practice and Procedure to prepare for IRS whistleblower cases. The amendments are reprinted below.

A critical improvement is that the Tax Court has listened to concerns expressed by whistleblower attorneys about the need to allow whistleblowers to proceed “anonymously” and not reveal their identity publicly. The explanation of New Rule 340 would allow anonymous filings to endeavor to preserve confidentiality:

“Pursuant to section 7461(b)(1), the Court may issue protective orders, upon motion by a party or any other person and for good cause shown, to prevent or restrict the disclosure of trade secrets and other information. See Tax Court Rule 103(a). As result of this authority, in appropriate cases, the Court may permit a petitioner to proceed anonymously and seal the record in that case. See, e.g., Anonymous v. Commissioner, 127 T.C. 89 (2006). The Court contemplates that these generally applicable statutory provisions, Rule 103, and related case law, while they do not require the Court’s records in all whistleblower actions to be sealed or require the Court to permit all petitioners in those cases to proceed anonymously, do provide authority for the Court to allow a petitioner to proceed anonymously and to seal the record when appropriate in whistleblower actions.”

The full text is as follows:
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IRS Addresses Deductibility of Payments by Defendants to Settle False Claims Act Cases

In our former life as lawyers defending False Claims Act cases, our defendant clients had to consider whether the payments made to settle qui tam cases under the False Claims Act were deductible for tax purposes, and to what extent.

The IRS recently issued a paper on the subject: whether a defendant’s payment to the Department of Justice to resolve False Claims Act allegations is “deductible in its entirety as a section 162(a) ordinary and necessary business expense, or includes non-deductible penalty amounts under section 162(f).”

This paper, LMSB-4-0908-045, is reproduced below:
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Hedge Funds Face Regulation & Oversight by SEC–Will There Be Another Compliance Tool in Addition to IRS Whistleblower Program?

When improprieties occur with hedge funds, the hedge funds’ lack of transparency and dearth of disclosure obligations make violations of the law difficult to uncover. Sometimes, persons in the hedge fund industry report those abuses through the IRS Whistleblower Program, as some of our IRS Whistleblower clients have done.

Nonetheless, the hedge fund industry remains cloaked in secrecy, frustrating experts who now seek to gauge the impact of hedge funds on the current financial crisis.

A new bill just introduced in the Senate, the “Hedge Fund Transparency Act,” would lift that cloak and create disclosure requirements for hedge funds and oversight of hedge funds by the SEC. This bipartisan bill sponsored by Senators Chuck Grassley and Carl Levin modifies a prior approach to hedge fund scrutiny pressed by Sen. Grassley, after a whistleblower complained that SEC supervisors were impeding an investigation into a major hedge fund.

According to Sen. Grassley, “The bill contains four basic requirements to make hedge funds subject to SEC regulation and oversight. It requires them to register with the SEC, to file an annual disclosure form with basic information that will be made publicly available, to maintain books and records required by the SEC, and to cooperate with any SEC information request or examination.”

Until the Bear Stearns debacle, there seemed little political will for any serious oversight of hedge funds. The SEC in 2004 had issued a rule requiring hedge funds to register under the Investment Advisers Act, to comply with related regulations, and to provide basic information through a public disclosure form. In June 2006, however, the U.S. Court of Appeals for the District of Columbia Circuit declared the rule invalid as incompatible with the Investment Advisers Act.

In hindsight, that absence of scrutiny may be seen as a grave error, one which may have helped create the current financial meltdown.

Since 1998, when the Federal Reserve acted to rescue Long-Term Capital Management (LTCM), a hedge fund with more than $125 billion in assets under management and a total market position of approximately $1.3 trillion, investments in hedge funds have grown dramatically.
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Whistleblower Protections Added to Economic Stimulus Bill Passed by House

When the Wall Street “bailout” grew with Congress’ creation of the Troubled Asset Relief Program (TARP), Sen. Chuck Grassley emphasized the importance of “whistleblowers” and the False Claims Act to protecting these taxpayer funds from fraud and abuse.

Tonight, the House added to the bailout by passing the economic stimulus package, HR 1, and approved an amendment adding whistleblower protection for federal employees.

The stimulus bill reportedly provides for $523 billion in spending, and $275 billion in tax cuts. It originally lacked protection for federal employees who are whistleblowers. An amendment by Reps. Todd Platts, R-Pa., and Chris Van Hollen, D-Md. added those protections from last year’s thwarted Whistleblower Protection Enhancement Act, which cleared the House but not the Senate.

The history of government spending programs proves beyond doubt that the vast majority of fraud and abuse can only be revealed by whistleblowers. Protecting taxpayer dollars means protecting and rewarding whistleblowers. As Sen. Grassley observed in a November 17, 2008 letter about TARP:

As a longtime supporter of whistleblowers, I can attest to the fact that whistleblowers are often the key to uncovering schemes to defraud the government. With their inside knowledge of how businesses, corporations, or government agencies operate they are often privy to information that is often the necessary component to piece together how a fraud is perpetrated.

Both the False Claims Act and the IRS Whistleblower Program will be important in stopping fraud and misuse of taxpayer funds. When there is fraud, there is often an IRS violation as well.
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With TARP and Wall Street Bailout, Securities Fraud and Accounting Fraud Are Targeted by New Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act

Financial fraud is a frequent topic of whistleblower cases and of this whistleblower lawyer blog, especially with TARP and the Wall Street “bailout” dominating headlines.

Senators Chuck Shumer and Richard Shelby have proposed a bipartisan bill to bolster federal resources to combat securities fraud and accounting fraud, the Supplemental Anti-Fraud Enforcement (“SAFE”) Markets Act.

Here are excerpts from the Senators’ announcement:

“Our white collar crime divisions are under-staffed, under-funded, and overwhelmed,” Schumer said. “When a wave of violent crime sweeps through a city,
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Will Wall Street Bailout Help Firms That Are “Tax Dodgers” and Hide Income in Offshore Tax “Havens”? And Will the IRS Whistleblower Program Provide a Remedy?

As our government hemorrhages its taxpayers’ funds to “bail out” firms that made poor decisions–such as American International Group (AIG), Bank of America, Citigroup, Goldman Sachs, and American Express–a just-issued report from the Government Accountability Office (GAO) raises a disturbing question: have many of the same firms already been avoiding paying their “fair share” of U.S. taxes by using offshore tax “havens”?

If so, whistleblowers will be performing a civic duty by reporting any tax evasion and noncompliance through the IRS Whistleblower Program.

“This report shows that some of our country’s largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And some of those companies have even received emergency economic funds from the government,” said Sen. Byron Dorgan. “I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that.”

GAO’s findings included that:

Eighty-three of the 100 largest publicly traded U.S. corporations in terms of 2007 revenue reported having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions and 74 of the 83 had federal contracts in fiscal year 2007. For the 74 corporations, the amount of the federal contract obligations ranged from $12,000 to over $23 billion.

Several insurance companies, including American International Group Inc., Hartford Financial Services Group, Travelers Cos. Inc., Allstate Corp. and Berkshire Hathaway Inc. reportedly have subsidiaries in tax havens or financial privacy jurisdictions such as Bermuda and Switzerland.

With a “tax gap” of more than $350 billion each year–the amount owed but not paid in federal taxes–it is galling to most taxpayers to see any company that avoids paying its fair share now receive billions more in a “bailout” through the TARP program.

The GAO report did not state that any of the listed firms utilizing tax “havens” were necessarily violating current law. Sen. Dorgan did say that he planned to introduce legislation to “shut down these tax dodgers.”
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Offshore Tax Evasion Case: Former UBS AG’s Raoul Weil Declared a Fugitive

Offshore tax evasion and international tax avoidance schemes have been priorities of the IRS and its IRS Whistleblower Program, as our whistleblower lawyer blog has followed repeatedly.

This week, the U.S. prosecution of the former head of UBS AG’s wealth management business, Raoul Weil, took a strange turn as he failed to surrender himself and was declared a fugitive. Weil allegedly conspired to help 17,000 American taxpayers conceal approximately $20 billion of assets in Swiss accounts, to avoid payment of U.S. taxes.

Weil is not the only person to try to conceal himself from the many ongoing DOJ and IRS investigations into tax fraud, tax evasion, and other tax cheating and fraud. In June, former hedge fund manager Samuel Israel III reportedly tried to fake his own death, rather than face a 20-year prison sentence for defrauding investors out of $400 million. (He later turned himself in to authorities.)

Of course, these disappearances raise questions about Bernard Madoff’s actions while not incarcerated as he faces the music for what is apparently perhaps the largest known fraud scheme in history.
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Treasury Department Announces $14 Billion in TARP Funds to More Than 40 “Local” Banks

Continuing the “bailout,” the Treasury Department has just announced the release of $14.77 billion in TARP funds to what it refers to as 43 “local” banks (listed below).

“Local” may be a misnomer, as the list includes $10 billion to Bank of America Corp., and more than $3 billion to American Express Company.

Let’s hope that Congress and the Treasury Department make good on the promise to protect these taxpayer funds through effective oversight, meaningful restrictions, and whistleblower protections, and that Sen. Grassley’s prediction that the qui tam whistleblower provisions of the False Claims Act will be used vigorously to redress any fraud or abuse with TARP funds comes true.

Below are today’s announced recipients of the funds:
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More IRS Whistleblower Procedures Announced by IRS Large and Midsize Business Division (LMSB)

The IRS Large and Midsize Business Division (LMSB) has published a new memorandum on how it will handle IRS Whistleblower claims, the process for citizens to report tax fraud, tax evasion, and other tax noncompliance–and share in the government’s recovery of money. (https://www.irs.gov/pub/foia/ig/lmsb/lmsb-4-1108-052.pdf).

The LMSB Division has responsibility over corporations, subchapter S corporations, and partnerships with assets greater than $10 million. This IRS Division is divided by industry groups, including (1) Communications, Technology, and Media; (2) Financial Services; (3) Heavy Manufacturing and Transportation;
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Fraud and Abuse in Underpayment of Royalties from Oil and Gas Leases–The False Claims Act Provides A Solution

As hundreds of billions in taxpayer funds flow to TARP bailout recipients, the government must make doubly sure to stop or minimize fraud and abuse in every federal program.

One area that cries out for attention is the underpayment of royalties owed to the government under oil and gas leases. The qui tam whistleblower provisions of the False Claims Act provide a basis for taxpayers to recover damages–and the whistleblower to receive a share of the recovery–when obligations to the government are underpaid.
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TARP Fund Restrictions Are Proposed in New Legislation

Much criticism has flowed from how the first $350 billion in TARP “bailout” funds are being used. Thus far, the need for additional restrictions to prevent and penalize fraud and abuse of TARP money remains unmet.

In response, yesterday House Financial Services Committee Chairman Barney Frank proposed legislation establishing greater limits on use of TARP funds, among other things.

The “TARP Reform and Accountability Act of 2009” (HR 384) would require quarterly reports from recipients on their use of TARP funds, restrict the use of
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IRS on Tax Preparer Fraud: Report Illegal Tax Schemes to IRS Whistleblower Office

With tax season approaching, the IRS has alerted the public to “tax preparer fraud” by issuing issued a “fact sheet” (at https://www.irs.gov/newsroom/article/0,,id=202123,00.html). The IRS also has attached information about reporting abusive tax schemes through the IRS Whistleblower Program, which provides rewards to whistleblowers.

Interestingly, the IRS has included descriptions of some of the tax fraud and tax evasion schemes that have caused courts to issue “more than 290 permanent injunctions against abusive tax scheme promoters and abusive return preparers since 2001.”

The summary by the IRS is reprinted below:
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