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Whistleblower Blog

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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In Largest False Claims Act Case Over Mortgage Fraud, Bank of America to Pay $1 Billion

Since the 2008 financial collapse, many have called for imposing liability on those whose fraud fueled the crisis.

In this early phase of what we predict will be a wave of financial fraud cases, the Justice Department announced today the largest False Claims Act settlement to date over mortgage fraud. Bank of America has agreed to pay $1 billion to resolve allegations that the Bank, through Countrywide Financial Corporation and some of its subsidiaries and affiliates, engaged in underwriting and origination mortgage fraud.

DOJ
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IRS Whistleblower Claims Explored at Heckerling Institute, the Leading Conference for Estate & Trust Lawyers and Estate Planners

The University of Miami’s Heckerling Institute last week brought together the nation’s leading estate planners, including attorneys, trust officers, accountants, insurance advisors, and wealth management professionals. For the first time, these estate planning professionals delved into how estate and gift tax issues are the subjects of many IRS Whistleblower claims.

This program was organized by Marty Basson, who recently retired from the IRS Whistleblower Office and hung out his shingle (now providing a wealth of knowledge to the private bar), after a distinguished career as the IRS authority on estate and gift tax issues.

Marty has long served on the Heckerling Institute faculty at the University of Miami. Marty is also a charter member of the IRS Estate and Gift Tax National Advisory Panel, a select group of IRS attorneys who assist in forming nationwide policy decisions in the estate and gift tax area.

Marty asked me to join him and Dawn Applebaum of the IRS Whistleblower Office for a Heckerling panel discussion last week on the IRS Whistleblower Program in the estate and gift tax arena. While a few professionals in attendance had already filed IRS Whistleblower claims, the vast majority had not.

Heckerling provided a first class forum to address many of the “hot” issues in the tax whistleblower program. I was honored to join Marty and Dawn as the private whistleblower attorney who provided the perspective of whistleblowers in the IRS Whistleblower Program.

Once Congress created the new IRS Whistleblower Program in December 2006, the IRS Whistleblower Office was unsure whether it would receive many estate tax and gift tax claims. It received far more estate and gift tax claims than anticipated.

Consider a typical case of a divorced couple who both know that a parent has hidden accounts offshore. When that parent dies, the estranged spouse knows that the offshore accounts will not likely appear on the estate tax return. Such information about tax evasion is very useful to the Service, so that honest taxpayers do not bear more than our fair share of the burden.

Our Heckerling discussion covered many, many aspects of the IRS Whistleblower Program in a spirited discussion that ran out of time. Marty was suddenly free to express his own observations, not simply the official position of the IRS.

Among the topics were recent Tax Court opinions on protecting the confidentiality of whistleblowers and of taxpayer information in appeals, and the protections of taxpayer information in proposed new Tax Court Rule 345.

I was asked to discuss steps to protect whistleblowers from criminal and civil liability, which has been an important issue in past presentations after UBS whistleblower Bradley Birkenfeld found himself prosecuted for a federal offense. Marty also asked me to discuss the view of numerous tax whistleblowers as their claims progress through the process.
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How Whistleblowers in Qui Tam, IRS, and SEC Whistleblower Cases Must Protect Email Communications

At the Healthcare Fraud Institute this past week, I was asked to address what steps whistleblowers should take to ensure confidentiality of emails with their lawyers. Although qui tam cases under the False Claims Act were the focus of our discussion, the same principles apply to tax whistleblowers and SEC whistleblowers.

Potential whistleblowers should never use their company’s email system, or any email account shared with or accessible to another person, for communicating with their attorney or for gathering information or evidence to report to the government.

Although the law encourages whistleblowers to report fraud, whistleblowers can create unnecessary problems for themselves by not following this rule.

First, emails between whistleblowers and their attorneys are privileged and confidential, but the privilege can disappear and be waived if the communication is disclosed to others.

Second, qui tam whistleblower cases under the False Claims Act are filed with a court order “sealing” the case from public view, while the government investigates. If an email accidentally exposes the case, the whistleblower may have violated the court’s “seal” order.

Third, alerting a defendant company that the whistleblower has reported the company’s fraud to the government is almost certain to provoke retaliation against an employee who is a whistleblower. Immediate suspension or firing often follows. Although the False Claims Act and the SEC and CFTC whistleblower laws create remedies for retaliation, those remedies take time to achieve. They will not pay the whistleblower’s mortgage next month–or this year.

We advise all of our clients that they must protect the confidentiality of their emails. Many people do not realize that emails sent from a company’s computer system usually leave some record, even if the employee is accessing a personal Gmail account.
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Qui Tam Whistleblower Cases Under False Claims Act Explained

I have been asked to publicize a seminar at which I am speaking on handling qui tam whistleblower cases under the False Claims Act, the nation’s primary whistleblower law addressing fraud that steals government funds. Here is the announcement:

AAJ will hold a “Qui Tam” Teleseminar on December 6, 2011 at 2:00 pm EST. With recently amended whistleblower laws and several high profile settlements, lawyers need to understand the procedural complexities and pitfalls in qui tam whistleblower cases. Cosponsored by the Qui Tam Litigation
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2011 IRS Whistleblower Boot Camp Hears of Deputy Commissioner Steve Miller’s “Desire for the Whistleblower Program to Grow”

At this past week’s third annual “IRS Whistleblower Boot Camp,” Deputy IRS Commissioner for Service and Enforcement Steven T. Miller spoke of his “desire for the whistleblower program to grow.” A major announcement was that he would “push for” the IRS to begin using the expertise of whistleblowers who can help the IRS interpret information obtained in its audits..

In his remarks, Deputy Commissioner Miller described “offshore” tax abuses as a key area. He commented that whistleblower submissions have a “unique place” in “breaking bank secrecy.”

With budget reductions, the IRS is looking for ways to “leverage” its efforts. According to Miller, whistleblower submissions in at least three areas can help:

1. Promotion of abusive tax shelters known to potential whistleblowers
2. Tax violations in which sophisticated information technology systems pose a barrier to the IRS, unless a whistleblower can explain them
3. Inadequate information reporting that is required of third parties, and that whistleblowers can address
When it “makes sense” for the IRS to use the whistleblower’s expertise, Miller said he would encourage use of disclosure agreements with whistleblowers authorized under section 6103(n) of the Internal Revenue Code, which governs disclosure of taxpayer information. Examples he gave include review of information received in response to the Service’s information document requests, or explanation of information technology issues known to the whistleblower.

Sen. Chuck Grassley recently urged the IRS to make better use of expertise and resources that whistleblowers and their lawyers can provide, as the Justice Department does in False Claims Act cases.

This year’s IRS Whistleblower Boot Camp also included many other senior IRS officials. Whistleblower Office Director Steve Whitlock and his office’s Special Counsel Debra Bowe were major participants.

Once again, the Office of Chief Counsel’s Senior Counsel Tom Kane participated and was again very generous with his time, both during and after the program. He addressed various litigation issues that arise in whistleblower matters. Senior Program Analysts Dawn Applebaum and Kathy Onken also provided a great deal of knowledge and insight into how the program is operating.

The most fascinating issues to me were those involving the international and offshore efforts of the IRS, the subject of the session I moderated. On this panel, joining IRS Whistleblower Office director Steve Whitlock and Senior Analyst Dawn Applebaum were Toni Weirauch, Deputy Director of International Crimes in the IRS Criminal Investigation Division; and Donna Prestia of the new Global High Wealth Division. The attendees gained an appreciation of the considerations of representing whistleblowers who may be foreign nationals gathering evidence in ways that comport with U.S. law, but that may be contrary to other countries’ bank secrecy laws.

My colleagues Erika Kelton, Paul Scott, Linda Stengle, and Margaret (Peggy) Finnerty deserve thanks for their excellent presentations as well.
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Next IRS Whistleblower Boot Camp: Offshore and International Tax Whistleblower Issues and Latest Developments

Each year’s “IRS Whistleblower Boot Camp” brings together senior officials of the IRS Whistleblower Office and tax whistleblower attorneys to explore the latest developments in the IRS Whistleblower Program. This year’s Boot Camp is November 15, 2011 in Washington.

Of special interest this year is that Deputy IRS Commissioner for Services and Enforcement Steven T. Miller will participate for the first time. Other IRS officials participating include (in order of appearance):

—Stephen Whitlock, Director of the IRS Whistleblower Office
–Debra Bowe, Special
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Qui Tam Whistleblower Cases, and the New Financial Whistleblower Programs by the SEC, CFTC, and IRS To Be Discussed at Whistleblower law Symposium

Every two years, attorneys prosecuting or defending qui tam whistleblower cases under the False Claims Act and other whistleblower laws gather for the Whistleblower Law Symposium.

We have written much about “qui tam” whistleblower cases under the False Claims Act. Since last year’s passage of the Dodd-Frank law, whistleblowers who help expose (1) violations of the securities laws or (2) commercial bribery of foreign government officials, now can receive rewards of 10-30% of money sanctions imposed under the new SEC Whistleblower Program. The new IRS Whistleblower program pays whistleblowers 15-30% of amounts recovered. These cases also help stop fraud against taxpayers and investors.

On October 21, an unusual group of national experts on these claims will gather for the Whistleblower Law Symposium, which our firm organizes every two years. Not only do we have senior attorneys from the Department of Justice and experienced whistleblower lawyers discussing qui tam cases, but the Director of the IRS Whistleblower Office Steve Whitlock will participate and explain the tax whistleblower program. Senior SEC attorneys also have stated that they wish to be part of our seminar to discuss the new SEC Whistleblower Program, and are seeking approval to participate.

This conference is broader in scope than any whistleblower law conference in the country of which I am aware, as we have a national faculty of lawyers on both sides of these cases, as well as some of the top government officials involved.

Registration is still open for those who want to register online here:

Please feel free to call or email me with any questions. The Agenda is below.
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GAO Report Released on IRS Whistleblower Program: Raising–But Not Answering–the Fundamental Questions of What the Tax Whistleblower Program Needs to Be Most Effective

The promising new IRS Whistleblower Program that Congress authorized in December 2006 is the subject of a long-anticipated GAO Report released this morning.

Disappointingly, the report raised, but did not attempt to answer, fundamental questions that will determine whether the IRS realizes the full potential of the new program in helping close the “tax gap”–or settles for a fraction of what it can accomplish.

Inspired by the dramatic successes of the False Claims Act in combating fraud against the government through rewarding whistleblowers,
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Whistleblower Lawyer and IRS Whistleblower Office Staff to Speak at 2012 Heckerling Institute on Estate Planning

The new IRS Whistleblower Program for tax whistleblowers will be featured for the first time at the nation’s leading conference for estate planners, the Heckerling Institute on Estate Planning.

The Heckerling Institute is known as the country’s “leading conference for estate planners, including attorneys, trust officers, accountants, insurance advisors, and wealth management professionals.” This is the 46th Annual Institute, named after late Professor Philip E. Heckerling, founder of the University of Miami Law School’s Estate Planning Institute. The conference will take place from
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How the New CFTC Whistleblower Rules Will Operate

When the CFTC announced its final whistleblower rules yesterday, it answered many questions about how the new CFTC whistleblower program will work.

David Meister, the CFTC’s Director of the Division of Enforcement, provided this summary according to the unofficial transcript our firm prepared of yesterday’s CFTC public meeting:

The Commission will pay awards to eligible whistleblowers who provide original information to the Commission leading to a successful Commission enforcement action and the imposition of monetary sanctions in excess of $1 million.

Congress provided that the amount of the whistleblower award must be between 10% and 30% of sanctions collected in either the Commission action or related action as defined in the rules. The Commission has discretion in determining the amount of the award within that 10 – 30 percent range.

The rules set forth a number of factors that the Commission will consider in determining the amount of the award. These factors include the significance of the information; the degree of the whistleblower’s assistance; the Commission’s programmatic interest; whether the award enhances the Commission’s ability to enforce the Commodity Exchange Act, protect customers and encourage people to come forward with high quality information; and potential adverse incentives from oversized awards.

To be award eligible, a whistleblower is not required, under our recommendation– a whistleblower is not required to report his information internally to his employer. Staff believes that such a requirement would deter some whistleblowers from coming forward, which would undermine congressional intent.
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