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Whistleblower Blog

The False Claims Act and the New Georgia “Taxpayer Protection False Claims Act’

After I helped draft Georgia’s new False Claims Act enacted last year, the “Taxpayer Protection False Claims Act,” I have been asked many questions about this new whistleblower law. Like the federal False Claims Act, its “qui tam” provisions allow private citizens to report fraud against public funds and receive a share of the recovery.

What many people may not know is that Georgia’s two False Claims Acts now apply to all spending by the state, and all spending by local governments.

The 2012 Act can be used by a wide array of “local government” bodies, and by citizens who know about fraud against those entities. The Act defines “local government” broadly to include “any Georgia county, municipal corporation, consolidated government, authority, board of education or other local public board, body, or commission, town, school district, board of cooperative educational services, local public benefit corporation, hospital authority, taxing authority, or other political subdivision of the state or of such local government, including MARTA.”

To answer many questions, we have uploaded here our summary of these laws, titled “The False Claims Act and the New Georgia ‘TaxProtectionection False Claims Act,'” which you may download here.

Please feel free to contact us with any questions about the False Claims Act or the new Georgia Taxpayer Protection False Claims Act.
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Liechtenstein Bank Secrecy Gives Way in $23.8 Million IRS Settlement That Exposes US Tax Evaders

Another shoe dropped for offshore tax evaders today, in an encouraging sign for the IRS Whistleblower Office.

A Liechtenstein bank avoided prosecution by agreeing to turn over files on 200 U.S. customers and to pay $23.8 million for assisting U.S. taxpayers in opening and maintaining undeclared bank accounts from 2001 through 2011.

Liechtensteinische Landesbank AG (LLB-Vaduz) helped a significant number of U.S. taxpayers hide these offshore accounts, evade U.S. taxes, and file false tax returns with the IRS, according to today’s announcement.

The Justice Department
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CFTC Whistleblower Program Taps SEC Enforcement Lawyer As New Director

In January, the Commodity Futures Trading Commission (CFTC) lost to the SEC the first director of the new CFTC Whistleblower Office, Vincente Martinez. CFTC Chairman Gary Gensler has announced that he has recruited from the SEC Enforcement Division Christopher Ehrman to lead the CFTC Whistleblower Office’s efforts to attract whistleblowers in the swaps and futures markets.

Mr. Ehrman most recently had been Assistant Director of the SEC’s Office of Market Intelligence. His experience there should serve him well since he “oversaw the processing, review and
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Court Allows N.Y. Tax Whistleblower Case To Proceed Against Sprint-Nextel Corporation

When New York amended its state False Claims Act in 2010, it broke new ground by including tax whistleblower cases. New York’s decision to attract tax whistleblowers bore fruit when the NY Supreme Court recently ruled that New York’s $100 million tax whistleblower case against Sprint-Nextel Corp. may proceed.

If successful, this case may net New York three times the more than $100 million in unpaid taxes that the state alleges Sprint has failed to pay its state and local governments. It may also bring the whistleblower 15%-25% of what the state recovers.

The N.Y. Supreme Court first rejected Sprint’s arguments that the N.Y. Tax Law did not require payment of the sales tax in question. The Court allowed the case to proceed.

Sprint was successful in limiting the time in question to March 31, 2008 forward, but now faces discovery and a potential trial over allegations that include whether Sprint knowingly made “false records or statements” and repeatedly engaged in “fraudulent or illegal activity.”
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Amid Attacks on the IRS, Recognition of the Best of the IRS Whistleblower Office

Now is the time to tell the story of Bob Gardner. Bob retires this week after 37 years of service with the IRS, most recently with the IRS Whistleblower Office.

Bob understands that public service is a noble calling for so many in our government. He epitomizes all that is good in fairly administering our internal revenue laws.

When IRS Whistleblower Office Director Steve Whitlock began hiring for the first “tax whistleblower” office that Congress had authorized in late 2006, Bob Gardner was
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Reforming the IRS–and Why We Need a Functioning IRS That Follows the Law

Could the IRS and Treasury Department have done a worse job in how they have handled the alleged “targeting” of conservative groups that applied for tax-exempt status before the 2012 elections?

My criticism starts–but does not end–with any IRS personnel who singled out “Tea Party” and similar groups for extra scrutiny based on their political affiliations. Any such acts cannot be tolerated..

But less noticed is what was being done–or not done–since at least mid-2012 by the Treasury Inspector General for Tax Administration (“TIGTA”).

The Senate Finance Committee’s official “timeline” states that, in May 2012, “TIGTA briefs [IRS] Commissioner Shulman on the targeting by the IRS of tea party applications for 501(c)(4) status.”

So the Inspector General’s Office knew, at least six months before the 2012 elections, that “targeting” of these applicants had occurred? If TIGTA told Commissioner Shulman that it was auditing the problem, why did it take TIGTA another year to issue its May 2013 report?

And did Commissioner Shulman, a Bush appointee with no reason to “hide” any “targeting” of conservative groups, rely on the Inspector General’s staff to gather evidence and take appropriate action? Shouldn’t TIGTA have acted expeditiously? TIGTA’s other FY 2013 reports reveal nothing so pressing that it should have taken it another year.to complete its work.
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IRS & SEC Whistleblower Directors Join False Claims Act Officials for Conference on Whistleblower Issues

This week in a rare occurrence, the heads of the IRS and SEC Whistleblower programs and federal and state False Clams Act officials participated in one conference to discuss prosecuting and defending whistleblower cases.

Our firm has organized this “Whistleblower Law Symposium” since 2007 to explore developments in the growing number of federal and state whistleblower laws that seek to stop fraud against taxpayer funds.

“Sequestration” threatened to keep some major speakers from participating because of travel restrictions. The solution was “beaming in” Sean McKessey, Director of the SEC’s Office of the Whistleblower, and Steve Whitlock, Director of the IRS Whistleblower Office, to join our panelists by videoconference.

The conference began with an overview I provided of the country’s major whistleblower law, the False Claims Act. Its successes since 1986 inspired Congress to create both the new IRS Whistleblower Program in 2006, and the new SEC Whistleblower Program in the 2010 Dodd-Frank Act.

An excellent discussion of the False Claims Act in health care followed, led by Rick Shackelford of King & Spalding, LLP. Rick was joined by my former partner John E. Floyd of Bondurant, Mixson & Elmore, LLP; Daniel P. Griffin of Miller & Martin, PLLC; and Marlon Wilbanks of Wilbanks & Bridges, LLP.

Another panel then analyzed Georgia’s New 2012 “Taxpayer Protection False Claims Act, a 2012 state False Claims Act that I helped draft. This law encompasses all spending by state, county, municipal, and other local governments in Georgia. Nels Peterson, who as Georgia’s Solicitor General is charged with overseeing the implementation of the new statute, explained the framework of the law.

Because the new state FCA applies to fraud against local governments as well, we also heard how the Act might be used by cities and counties. Mary Carole Cooney, former Atlanta Deputy City Attorney, and Bill Linkous, former Dekalb County Attorney, provided their perspectives on how the new whistleblower law might expose fraud in various areas of local government spending.

SEC Whistleblower Chief Sean McKessey then joined us electronically to discuss the most pressing issues in bringing (and defending) SEC Whistleblower claims.
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Health Care Fraud Institute Discusses False Claims Act Developments

Each December, some of the nation’s top health care lawyers gather to discuss developments in prosecuting and defending health care fraud cases at the Health Care Fraud Institute in Atlanta. Because the qui tam law–the False Claims Act– is the government’s primary civil tool to combat fraud and false claims, the False Claims Act developments are a highlight of the discussion.

This year, I was honored again to be invited to participate as part of the False Claims Act panel with Rick Shackelford, an
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SEC and Justice Department Issue “Resource Guide to the U.S. Foreign Corrupt Practices Act”

The SEC Whistleblower Program authorized in 2010’s Dodd-Frank law has greater significance because the SEC and the Justice Department share jurisdiction over Foreign Corrupt Practices Act cases.

Today, SEC Director of Enforcement Robert Khuzami and Assistant Attorney General Lanny Breuer released the “Resource Guide to the U.S. Foreign Corrupt Practices Act.” They describe the Guide as “a unprecedented undertaking by DOJ and SEC to provide the public with detailed information about our FCPA enforcement approach and priorities.”

FCPA investigations have increased significantly in the past few years, and the dollar amount of these cases is often quite large. FCPA cases brought by SEC whistleblowers will only add to amount of FCPA violations uncovered.

The Guide is a primer on the FCPA. The SEC and DOJ have attempted to summarize “who and what is covered by the FCPA’s anti-bribery and accounting provisions; the definition of a ‘foreign official’; what constitute proper and improper gifts, travel and entertainment expenses; the nature of facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context.”

Chapter 3 describes the accounting provisions over which the SEC has authority. When a defendant pays commercial bribes to foreign officials, the offending companies often disguise the payments through false accounting entries. The FCPA creates civil liability for such violations of the Act’s “books and records” provision.

The FCPA’s “internal controls” provision is also important, as it requires that issuers devise and maintain a system of internal accounting controls to assure management’s control,authority, and responsibility over the firm’s assets.
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As IRS Commissioner Steps Down Today, How the Next IRS Commissioner Can Immediately Help Address the “Fiscal Cliff” by Expanding the IRS Whistleblower Program

Today marks the end of IRS Commissioner Doug Shulman’s tenure, just as President Obama and Congressional leaders shift to addressing the looming “fiscal cliff.” Rather than disrupt the process of narrowing the deficit, Shulman’s departure could actually assist it–in an important way that does not depend on raising tax rates.

The timing is perfect for a new IRS leader to back fully a bipartisan effort long advocated by Republican Sen. Chuck Grassley (R-Iowa) to tackle the “tax gap”–the more than $300 billion owed but not paid by tax cheats each year. Grassley seeks to expand the IRS Whistleblower Program to fulfill the promise of changes to the tax whistleblower law that Grassley sponsored almost six years ago.

Grassley should enlist as a ready ally President Obama, whose Justice Department is about to announce a record year of fraud recoveries in False Claims Act cases brought by whistleblowers. Grassley also has been the driving force behind that highly successful law since at least 1986.

Although the IRS has assembled highly skilled professionals to staff its Whistleblower Office led by Director Steve Whitlock, Grassley’s efforts have been stymied by bureaucratic resistance among others in the IRS. Those naysayers create endless obstacles to attracting whistleblowers–even though the Treasury Inspector General has determined that whistleblower information is essentially twice as effective as other sources for uncovering tax violations.

The Justice Department has learned over the past quarter century that working closely with “insider” whistleblowers and their counsel is the key to unravelling significant fraud schemes. In contrast, too many in the IRS refuse to learn from the DOJ’s experience and to heed Congress’ directive to expand the use of whistleblowers. For example, after convincing Grassley’s staff in 2006 that they could and would work closely with whistleblowers, the IRS Chief Counsel’s Office over almost six years has refused to approve even a single agreement with a whistleblower to allow that cooperation.
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Justice Department’s New Focus on Individuals’ Liability in “Yates Memo” Should Impact Qui Tam Whistleblower Cases under False Claims Act

Yesterday the Justice Department apparently responded to the frequent lament, “Why has almost no one gone to prison for the financial crisis?” DOJ signaled that it will now look to hold responsible both culpable individuals and their companies for corporate misdeeds–both criminally and civilly.

If DOJ means what it says, this policy change is profound. It should hit corporate officers whose business models are based on fraud and false claims. It should also snare high level executives who turn a blind eye to wrongdoing, and who typically get away with it.

Corporations can act only through the humans who run them. Sometimes those humans steer the business to corrupt methods.

Until yesterday’s change in DOJ policy, however, the few corporations brought to heel by DOJ for crimes, fraud, or false claims absorbed the consequences, while the individuals who directed the wrongdoing usually escaped responsibility. Those individuals were free to continue their corrupt practices at the same firm or a different one.

New U.S. Deputy Attorney General Sally Yates plans to change that result. As a federal prosecutor in Atlanta, Yates was not afraid of pursuing big cases against individuals and their companies, as I learned from representing clients in some of those cases.

Yesterday Yates issued a Memorandum titled, “Individual Accountability for Corporate Wrongdoing.” It is far-reaching, if implemented. Yates announced “six key steps to strengthen [DOJ’s] pursuit of individual corporate wrongdoing, some of which reflect policy shifts and each of which is described in greater detail below:
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SEC Whistleblower Office’s Stand Against “Silencing” Employees Through “Confidentiality” Agreements

Sean McKessy of the SEC Whistleblower Program is right to continue his mission against muzzling whistleblowers through “confidentiality” agreements, for one simple reason:

Intimidating witnesses from reporting fraud is a form of obstruction of justice.

Although “confidentiality” agreements may appear innocent on their face, a company’s suggesting in any way that its employees refrain from reporting fraud or other violations of securities laws crosses the line. Too often, that is often the effect of these agreements–if not the intent as well.

The SEC took action last month in filing and settling charges against KBR Inc. It announced this “first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.”

The SEC said that, in internal investigations, KBR required witnesses to sign confidentiality statements warning that they could face discipline and be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department. The SEC found that KBR violated SEC Rule 21F-17, which bars firms from impeding whistleblowers from reporting possible securities violations to the SEC.

As Mr. McKessy observed, “KBR changed its agreements to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers before contacting us.” He warned that “[o]ther employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.”

Bloomberg BNA contacted me recently to comment on the prevalence of such misuse of confidentiality agreements, in a piece reprinted here in part:

“More and more we see firms attempt to conceal fraud by using ‘confidentiality agreements’ to intimidate witnesses from reporting wrongdoing to authorities,” said Michael Sullivan, a partner at Finch McCranie LLP, Atlanta, who represents SEC whistle-blowers.
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Qui Tam, IRS, CFTC, and SEC Whistleblower Claims Update: Today’s Whistleblower Law Symposium A Success

Since 2007, top officials from federal and state agencies and many of the country’s experts in whistleblower cases have gathered in Atlanta to discuss and debate anti-fraud efforts at the Whistleblower Law Symposium.

Today I was excited to chair our Whistleblower Law Symposium once again, as these experts explored the latest developments in qui tam cases under the False Claims Act, and SEC whistleblower, CFTC whistleblower and IRS whistleblower claims. The breadth of expertise of today’s speakers was unusual.

First, top enforcement officials from California, Georgia and Texas shared their approaches and priorities under their state False Claims Acts. We were honored to hear from Britt Grant, Solicitor General of Georgia, about Georgia Attorney General Sam Olens’ impressive new efforts to stop the theft of taxpayer funds.

Joining Britt Grant were California’s Nicholas Paul, Texas’ Ray Winter, and Georgia’s Van Pearlberg, who described how their offices battle Medicaid fraud that is brought to light in state False Claims Act cases. A special thanks goes to Jim Breen for moderating this discussion and sharing his own experiences in working with the states in pursuing large health care fraud cases.At today’s Whistleblower Law Symposium, Jim Breen joined me in presenting former Rep. Edward Lindsey with the “Integrity in State Government Award” from the Taxpayers Against Fraud Education Fund.

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Today’s SEC Whistleblower Award to Former Officer of Company Shows Flexibility of SEC Whistleblower Rules

The SEC announced today its first SEC Whistleblower award to a former company officer. The award of a half-million dollars was for “original, high-quality information about a securities fraud,” which resulted in an SEC enforcement action with sanctions of more than $1 million.

Typically, corporate officers, directors and other corporate fiduciaries are not eligible for SEC Whistleblower awards when they learn of fraud through employee reports. The SEC built in flexibility in its rules, however, when the officer waits “more than 120 days after other
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SEC Welcomes SEC Whistleblowers Who Are Foreign Citizens Living Abroad

Yesterday’s record award to an SEC whistleblower has far-reaching consequences because the SEC made clear it will reward foreign citizens living abroad who meet its criteria for a whistleblower award.

This decision rejects any suggestion that the SEC Whistleblower Program’s reach ends at the nation’s borders. The SEC recognized that a leading federal appeals court imposed such a limitation on the anti-retaliation provisions of the Dodd-Frank law, which authorized the SEC Whistleblower Program, but announced it is taking a different approach to whistleblower awards:
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SEC Whistleblower Receives Record Award of $30 Million

Today the SEC Office of the Whistleblower announced the largest-ever award to an SEC whistleblower: $30 million to a whistleblower living abroad.

The size of the award reflects the SEC’s seriousness about utilizing whistleblowers’ information to expose major securities violations. The SEC described this as “ongoing fraud that would have been very difficult to detect” without the whistleblower, according to the Director of the SEC’s Division of Enforcement, Andrew Ceresney.

Sean McKessy, Chief of the SEC’s Office of the Whistleblower, added that this award demonstrates
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FATCA – Foreign Bank Account Headaches

FATCA is being implemented in a number of countries outside the U.S., with the result that U.S. individuals who hold foreign bank or financial accounts and have not disclosed these accounts in the U.S., are about to be reported to the IRS.

(This post is by our colleague Richard Rubin of Rubin Law (www.rubinlaw.us), a tax attorney with significant experience in U.S. cross-border matters, including FATCA and U.S. international compliance.)

Bank accounts in countries outside the U.S. can cause headaches when owned by U.S. taxpayers. While owning foreign accounts has always entailed a reporting headache for U.S. taxpayers, the problem has recently heightened as a result of the FATCA legislation that is being implemented in a number of countries outside the U.S.

FATCA is a set of U.S. tax reporting rules that impact U.S. citizens, Green Card holders and other U.S. tax resident individuals who have accounts with non-U.S. banks or financial institutions.

An acronym for the Foreign Account Transactions Compliance Act, FATCA requires banks and financial institutions in countries outside the U.S.to provide the IRS with details of accounts that are owned by U.S. taxpayers. Although the mechanism varies slightly by country, in most countries where FATCA has been implemented banks and financial institutions are required to report these details to the Revenue Authority of that country, and the Revenue Authority is required to pass this information along to the IRS.
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What the Just-Released 2013 IRS Whistleblower Office Annual Report Means for Future Tax Whistleblowers

The just-released FY 2013 IRS Whistleblower Office Annual Report reveals clues to what the future holds for tax whistleblowers.

Steve Whitlock, Director of the IRS Whistleblower Office, gave a preview last Fall. Listening to an audience react enthusiastically to his SEC counterpart Sean McKessy discuss awarding more than $14 million to a whistleblower, Whitlock wryly observed that the IRS had “only” awarded $50 million to whistleblowers in FY 2013.

To those who follow the IRS Whistleblower Program closely, Whitlock’s comment was a rare moment to
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New York False Claims Act Case Against Sprint Nextel Takes Giant Step Forward

In a momentous decision that will impact many future cases, New York Attorney General Eric Schneiderman has just won a major victory in his pioneering tax fraud case against Sprint Nextel Corp.

The Appellate Division unanimously affirmed the trial court’s 2013 ruling (background discussed here) to allow Schneiderman’s first tax enforcement case under the New York False Claims Act to proceed.

The Complaint alleges that Sprint unlawfully failed to collect and pay $130 million in New York sales taxes on a portion of its revenue from fixed monthly access charges. Like the federal False Claims Act, the New York False Claims Act provides for recovery of three times the amount of damages incurred–“treble damages.”

A major aspect of Schneiderman’s victory was that it makes Sprint potentially liable under the New York False Claims Act for tax fraud that preceded the Act’s 2010 amendments to include tax violations. In fact, the court affirmed the trial court’s decision allowing the case to proceed in all respects:

The court properly denied the motion to dismiss the complaint in its entirety. Plaintiffs’ complaint adequately alleges that defendants violated New York’s False Claims Act (State Finance Law § 189[1][g]), Executive Law § 63(12) and Article 28 of the Tax Law by knowingly making false statements material to an obligation to pay sales tax pursuant to Tax Law § 1105(b)(2). Contrary to defendants’ interpretation, the Tax Law provision is not preempted by the Federal Mobile Telecommunications Sourcing Act (4 USC 116 et seq.).

The court also properly rejected defendants’ argument that the New York False Claims Act with respect to statements made under the Tax Law should not be given its stated retroactive [*2]effect. Defendants fail to show that the Act’s sanction of civil penalties, including treble damages, is so punitive in nature and effect as to have its retroactive effect barred by the Ex Post Facto Clause (US Const, art I, § 10).

We once again applaud the efforts of Attorney General Schneiderman and his office to protect the public’s purse though the New York False Claims Act. The case shows the value that tax whistleblowers can bring to stop those who refuse to pay their fair share of the tax burden.

The Attorney General’s announcement is linked here.
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First Large SEC Whistleblower Award Is Encouraging, As SEC’s “Loss” in Mark Cuban Case May Be

“Government shutdown” month (October 2013) has brought encouraging news from the SEC–including some good news you might not realize.

On October 1, the SEC announced its first SEC whistleblower award of more than $1 million. The Commission’s Office of the Whistleblowerer led by Sean McKessy awarded more than $14 million to a whistleblower who remains confidential. According to the SEC, the whistleblower’s information “led to an SEC enforcement action that recovered substantial investor funds.”

Two weeks later, a Texas jury found against the SEC
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