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Whistleblower Lawyer Blog

Whistleblowers Reporting Derivatives Fraud? Whistleblower Incentives Must Be Paid by CFTC Under New Financial Reform Bill

The new financial reform bill that awaits the President’s signature this week has something important for potential whistleblowers with knowledge of fraud in options, futures, derivatives and other financial products within the jurisdiction of the Commodity Futures Trading Commission (CFTC). The bill will modify the Commodity Exchange Act to provide whistleblower rewards and protections.

Similar to the new SEC whistleblower awards for persons who reports securities fraud, the rewards to whistleblowers will be available if the CFTC recovers monetary sanctions of more than $1 million because of the whistleblower’s information.

Like SEC whistleblowers, CFTC whistleblowers will have an enforceable right to 10-30% of what the CFTC recovers in substantial cases when the whistleblower has “voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action.” (Section 748 of Dodd-Frank Wall Street Reform and Consumer Protection Act, reprinted below).

Crucial to the success of these new whistleblower programs, whistleblowers will know that they will receive at least 10% of the recovery in significant cases when the whistleblower meets the law’s criteria.

The history of the nation’s major whistleblower statute, the False Claims Act, shows that guarantees of meaningful rewards are the critical element in causing whistleblowers to report substantial fraud. Fraud recoveries increased dramatically once Congress amended the False Claims Act in 1986 to provide meaningful whistleblower rewards of 15-25% in cases in which the government intervenes.

The new IRS Whistleblower Program is proving the same point, as quality submissions have poured in now that a right to a meaningful whistleblower award exists.

Congress has set forth general criteria for the CFTC to determine the amount of the award within the 10-30% range. Factors that the CFTC will consider include:

“(I) the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action;

”(II) the degree of assistance provided by the whistleblower and any legal representative of the whistleblower in a covered judicial or administrative action;

”(III) the programmatic interest of the Commission in deterring violations of the Act (including regulations under the Act) by making awards to whistleblowers who provide information that leads to the successful enforcement of such laws; and
”(IV) such additional relevant factors as the Commission may establish by rule or regulation”.
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New SEC Whistleblower Program Approved by Senate in Financial Reform Bill

Since the SEC refused for years to heed Madoff whistleblower Harry Markopolis’ warnings that Madoff was running a Ponzi scheme, we have followed with great interest the efforts of those who sought to create the first meaningful SEC whistleblower program.

The Senate this week took an important step by authorizing a new SEC whistleblower program–one more potent than the SEC apparently wanted–as part of the Wall Street Reform and Consumer Protection Act.

When the Madoff fiasco surfaced, Congress asked why the law failed to encourage SEC whistleblowers to come forward, in the same way the qui tam whistleblower provisions of the False Claims Act have been so successful in rewarding whistleblowers for helping stop fraud against the government. Those same principles in the new IRS Whistleblower program have caused an explosion of valuable information presented by whistleblowers in exposing tax liability of many billions of dollars.

SEC leadership helped shape the tepid House version, which would have made rewards to whistleblowers wholly discretionary.

When we criticized the House version of the proposed SEC whistleblower rewards for that reason, staffers of the Senate Banking Committee contacted us to discuss what a meaningful whistleblower program should include, based on our experience with whistleblowers under the False Claims Act and IRS Whistleblower program. Our response was that, at minimum, a whistleblower with information about significant fraud must have a legally enforceable right to a meaningful reward.

Fortunately, the Senate version included such a right to an award of 10-30% in substantial cases, and the Senate view ultimately prevailed (see below text of whistleblower provisions in Section 922).

It remains to be seen how SEC leadership will respond. At this spring’s Offshore Alert Conference in Miami, an SEC official listened to his panelists describe how successful mandatory rewards have been in causing whistleblowers to come forward in False Claims Act cases and IRS Whistleblower claims, yet apparently failed to “get” that SEC whistleblowers need a similar incentive to come forward in the best cases.

In our experience in representing whistleblowers, persons with the most significant information will rarely come forward without an enforceable right to a meaningful reward. The SEC has not exactly fostered public confidence in its judgment in recent years. If it embraces whistleblowers as Congress has directed, the SEC will find that–like the IRS Whistleblower Office–it will receive better, and dramatically more, information about fraud within its jurisdiction.

The full text of section 922 regarding SEC whistleblowers is reprinted below:
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New IRS Procedures for Whistleblowers Should Encourage More Significant IRS Whistleblower Claims

This morning’s Washington Post quotes me, among others, in criticizing one aspect of the new procedures for IRS whistleblowers recently published in the Internal Revenue Manual. That one glaring defect aside, the new IRM procedures are welcome news that should encourage more IRS whistleblowers to come forward.

Today’s Post article by David Hilzenrath on the IRS whistleblower procedures makes the following point, among others:

“There’s apparently an institutional resistance to rewarding whistleblowers that will take some time to dissipate,” said Michael A. Sullivan
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TARP Fraud and Other Violations Alleged by SEC Against Chairman of Major Mortgage Lender

As we have written previously, the billions of “bailout” dollars to financial institutions through the TARP program inevitably would result in many fraud cases, including some by TARP whistleblowers.

Today, the SEC announced allegations of TARP fraud and securities fraud of more than $1.5 billion other violations against Lee B. Farkas, through his company Taylor, Bean & Whitaker Mortgage Corp. (TBW).

According to the SEC, Farkas “sold more than $1.5 billion worth of fabricated or impaired mortgage loans and securities to Colonial Bank. Those loans and securities were falsely reported to the investing public as high-quality, liquid assets. Farkas also was responsible for a bogus equity investment that caused Colonial Bank to misrepresent that it had satisfied a prerequisite necessary to qualify for TARP funds. When Colonial Bank’s parent company – Colonial BancGroup, Inc. – issued a press release announcing it had obtained preliminary approval to receive $550 million in TARP funds, its stock price jumped 54 percent in the remaining two hours of trading, representing its largest one-day price increase since 1983.”

Perhaps the SEC is showing a new attitude after the Madoff debacle. Whistleblowers should soon be able to participate in the new SEC whistleblower program, which is part of the financial reform legislation now being hashed out in conference committee.

The SEC’s full release is reprinted below:
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New IRS Whistleblower Claim Procedures for Determining Awards to Whistleblowers Announced

Today the long-awaited IRS Whistleblower Office procedures for determining awards to tax whistleblowers were announced in an update to the Internal Revenue Manual.

The new provisions for IRS Whistleblower claims address many details of how tax whistleblower claims will be handled. The full provisions are reprinted below:

Part 25. Special Topics
Chapter 2. Information and Whistleblower Awards
Section 2. Whistleblower Awards

25.2.2 Whistleblower Awards
25.2.2.1 Overview: Authority and Policy
25.2.2.2 General
25.2.2.3 Submission of Information for Award under Sections 7623(a) or (b)
25.2.2.4 Initial Review of the Form 211 by the Whistleblower Office
25.2.2.5 Grounds for Not Processing Claims for Award
25.2.2.6 Processing of the Form 211 7623(a) Claim for Award
25.2.2.7 Processing of the Form 211 7623(b) Claim for Award
25.2.2.8 Whistleblower Award Administrative Proceeding
25.2.2.9 Award Computation
25.2.2.10 Appeal Rights under section 7623(b)
25.2.2.11 Confidentiality of the Whistleblower
25.2.2.12 Funding Awards
25.2.2.13 Award Payment Procedures
25.2.2.14 Annual Report to Congress
Exhibit 25.2.2-1 1891 Letter
Exhibit 25.2.2-2 Rejection Letter – 1010 Letter
Exhibit 25.2.2-3 Acknowledgement Letter – Whistleblower Office
Exhibit 25.2.2-4 Debriefing Checksheet
Exhibit 25.2.2-5 Rejection Letter from the Whistleblower Office
Exhibit 25.2.2-6 Memorandum from Steven T. Miller, February 17, 2010
Exhibit 25.2.2-7 Sample Notice of Opportunity to Comment Letter
Exhibit 25.2.2-8 Sample Summary Award Report
Exhibit 25.2.2-9 Award Recommendation-Opportunity to Comment
Exhibit 25.2.2-10 Confidentiality Agreement
Exhibit 25.2.2-11 Sample Preliminary Award Report
Exhibit 25.2.2-12 Sample Determination Letter
Exhibit 25.2.2-13 Award Calculation Computation Guidelines (more…)

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Offshore Tax Violations: Sen. Grassley Calls For Accounting of Use of UBS Information Provided by Tax Whistleblower

Offshore tax evasion is a great priority for the IRS, and thus also the IRS Whistleblower Program.

Today, the leading advocate for robust whistleblower laws has called for the Treasury Department and the IRS to account for their use of information provided by the “UBS whistleblower,” Bradley Birkenfeld.

Sen. Chuck Grassley issued a press release today summarizing his letter to Treasury Secretary Tim Geithner and IRS Commissioner Douglas Shulman. Grassley commented on Swiss legislators’ move today to “unravel a U.S.-Swiss treaty that would allow for the disclosure of more client information to allow U.S. officials to review cases for potential enforcement of U.S. tax laws.”

“The action by Swiss legislators today to try to unravel an international treaty emphasizes the need for U.S. authorities to exhaust the information they have on U.S. taxpayers who use offshore accounts to evade taxes,” Grassley said. “Honest taxpayers deserve to know what’s happened with what could be very valuable leads, and if it’s nothing, they deserve to know why. It’s a matter of tax fairness and law enforcement. And the IRS shouldn’t wait for international agreements to fall into place when tax evaders can be identified through other appropriate tools.”

Grassley did not advocate for the UBS whistleblower’s release from federal prison, however, but focused on the government’s use of the information he provided. (See prior discussions of the UBS whistleblower’s case here).

Grassley, more than anyone, is responsible for passage of the December 2006 legislation that created the first meaningful IRS Whistleblower Program. The promising new IRS Whistleblower Program was inspired by the great successes of the nation’s primary whistleblower statute for exposing fraud, the False Claims Act.

Sen. Grassley’s announcement and letter today are reprinted below:
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Health Care Industry and 2009-2010 Changes to False Claims Act

The health care industry is adjusting to major changes to the nation’s major “whistleblower” law, the False Claims Act.

Both in 2009 and 2010, Congress has removed obstacles to whistleblowers’ use of this anti-fraud statute to address Medicare and Medicaid fraud, as well as fraud affecting every other federal program. As we have written about previously, the Fraud Enforcement and Recovery Act of 2009 (“FERA”) overruled key judicial decisions that had undermined the the False Claims Act’s effectiveness.

This year, the landmark health
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Offshore Tax Evasion Scheme to Defraud IRS Alleged in Indictment of Miami Beach Developers

A high priority for IRS Whistleblower cases is the abuse of offshore “tax havens” or offshore financial centers to conceal income from the IRS that is subject to U.S. taxation. Over drinks in Miami Beach recently with IRS agents who worked the massive UBS matter, I discussed some of the recent announced cases the IRS has made involving offshore abuses.

Using shell corporations and “nominee” entities established in the Cayman Islands, Switzerland, or a host of other countries that market “secrecy,” those looking to conceal income from the IRS, or assets from potential creditors, have made offshore tax havens a booming business.

An interesting example of allegations of offshore tax violations was described in the Justice Department’s announcement yesterday of the indictment of two Miami Beach hotel developers. Mauricio Cohen Assor and his son, Leon Cohen-Levy. They were charged with conspiring to defraud the United States and filing false tax returns. The government alleged as follows:

According to court documents, the two men and their co-conspirators used nominees and shell companies formed in tax haven jurisdictions, including the Bahamas, the British Virgin Islands, Panama, Liechtenstein and Switzerland to conceal their assets and income from the IRS. In order to further conceal their assets and income from the IRS, court documents state the men also provided false and forged documents to banks, opened bank accounts in the name of nominees, titled their personal residences and luxury vehicles in the name of shell companies, filed false and fraudulent tax returns, failed to file other tax returns, suborned perjury in a civil matter pending before the New York Supreme Court by directing individuals to testify falsely under oath, and induced other individuals to make false statements to federal law enforcement agents.

Both defendants are permanent resident aliens who, in 2000, received approximately $33 million from the sale of the New York Flatotel, according to the government. They transferred the proceeds using various Swiss bank accounts in the names of foreign nominee entities, including at least one “bearer share” corporation.

When bearer shares are used, the corporation’s records do not list its owners, as the owners are whoever has physical possession of the stock certificates. As IRS Special Agent Scott Johnson testified by affidavit, “[b]earer share corporations are often used to hide the true ownership of assets because ownership records are not maintained and nominee officers and directors are often used to control the affairs of the corporation.’

Later, the defendants allegedly transferred the funds to accounts of nominee companies at that bank’s New York location, and later to the escrow account of a Florida attorney. The government also alleged that defendants used the money to “fund a luxury lifestyle for themselves and for their family members.”

Offshore tax abuse remains a great priority of the IRS, and thus is a major focus of many IRS Whistleblower claims. The new IRS Whistleblower Program recognizes that whistleblowers have an enforceable right to 15-30% of what the IRS recovers based on information whistleblowers provide.

The government’s full press release is below:
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