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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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The final whistleblower rules of the Commodities Futures Trading Commission (CFTC) are being announced now at a CFTC open meeting. Like the SEC, the CFTC has rejected any provision that whistleblowers be required first to report internally the violations in question, but will treat internal reporting as a “positive” consideration in its awards.

The alternative pushed by business would have required all CFTC whistleblowers first to risk career suicide by reporting the boss’s wrongdoing to the boss himself.

Industry’s approach would have made the Commission the laughing stock of law enforcement, since no rational person with a career and a mortgage would risk reporting even major fraud with that requirement.

Fortunately, the CFTC put first its responsibility to protect the public, and is taking seriously its law enforcement duties by seeking to root out major frauds.

Madoff, Stanford, and the other major frauds of the past decade prove that internal compliance programs cannot protect the public. That is why Congress in Dodd-Frank demanded the first meaningful SEC and CFTC whistleblower programs.

We applaud the CFTC on this important stand, and look forward to reviewing the text of the final rules when made available.
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When qui tam whistleblower cases under the False Claims Act are “declined” by the Department of Justice, the whistleblower or “relator” is authorized to pursue the case on the government’s behalf.

The DOJ statistics below show that these declined cases have generated more than $97 million in recoveries for taxpayers since 1987, the year after the modern False Claims Act was born.

These facts dispel any notion that the Justice Department has sufficient resources to pursue all meritorious cases. Some of the more notable False Claims Act recoveries were achieved by private attorneys pursuing these “declined” cases.

A list of these declined cases that have brought almost $100 million into the U.S. Treasury is below. This amount is “larger than the sum of all salaries paid to members of the United States House of Representatives and the United States Senate last year,” as observed by Pat Burns of Taxpayers Against Fraud.
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The IRS emphasis on international and offshore tax violations continues. Today, the government made clear that U.S. prosecutions for cross-border tax evasion did not end with the 2009 landmark UBS settlement, which followed a tax whistleblower’s approaching U.S officials.

The Justice Department announced today that three more former Credit Suisse bankers have been indicted for helping U.S. taxpayers evade U.S. taxes.

Credit Suisse has been under U.S. scrutiny for at least the past year. Today’s indictments of three former officials bring to seven the number of Credit Suisse bankers charged thus far.

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Too often missing in today’s discussions of Dodd-Frank’s one-year anniversary is appreciation of efforts by CFTC and SEC leadership to build from scratch the effective new whistleblower programs mandated by Dodd-Frank.

With scant resources, each agency is creating an essential mechanism to protect today’s investors from the next fraudulent scheme.

Let’s start with the CFTC. When I met with Chairman Gary Gensler and his CFTC staff in March to discuss the CFTC’s proposed whistleblower rules, I was struck by Chairman Gensler’s focus on what improvements could be made to its “draft” commodities whistleblower rules.

The only non-lawyer in the room, Gensler seemed to grasp more quickly than anyone potential abuses that its draft rules would not correct.

CFTC Commissioner Bart Chilton has also recognized how essential an effective whistleblower program is to protect investors.

More importantly, even the CFTC’s initial cut at its rules showed that it would not simply copy the SEC whistleblower rules’ approach, but would independently design a meaningful program to protect the public by attracting significant whistleblower information to ferret out frauds.

Likewise, the SEC–whose whistleblower rules have been finalized–has shown a welcome commitment to making SEC whistleblowers welcome. Chair Mary Schapiro, Director of Enforcement Robert Khuzami, and other staff such as Steve Cohen, Jordan Thomas, and Sarit Klein put more than considerable thought and effort in refining the SEC whistleblower rules announced in May 2011.

Some in Congress seek to keep the SEC and CFTC so underfunded that they cannot protect the public effectively. As former SEC counsel Professor Don Langevoort observed, “Congress maintains increasingly tight control over SEC policy largely through the budgetary process, and having the Commission be habitually needy and under-resourced fits well within this strategy. The campaign contributions from various sources with an interest in securities regulation are large, and influential members of Congress hardly maximize their own political advantage by stepping aside and leaving the SEC free to do its work as it sees fit.”
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The SEC Whistleblower Program encompasses not only classic securities violations, but also violations of the Foreign Corrupt Practices Act (“FCPA”), a topic we have followed closely.

This past week, the SEC filed and settled an FCPA case against Armor Holdings, Inc., and collected more than $5.6 million, while the Department of Justice added almost $10.3 million in criminal fines.

The SEC charged that Armor Holdings, Inc. engaged in a bribery scheme to sell body armor to U.N. peacekeeping missions. The Commission also alleged that Armor Holdings violated the federal securities laws’ books and records and internal controls provisions by failing to account properly for commissions in 2001-2007.

Demonstrating the SEC’s increased emphasis on FCPA enforcement, this case is one of 32 FCPA cases the Commission has filed since 2010. Bribery of foreign government officials for business is having increased repercussions.

According to the SEC’s Complaint, through a U.K. subsidiary Armor Holdings paid more than $200,000 through an intermediary to a United Nations official who could send it business, and used a sham consulting agreement to disguise its actions. The result was more than $7 million in additional revenues, and more than $1.5 million in additional profits, according to the SEC.
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The suspense over the final SEC whistleblower rules ended with the SEC’s release of its final whistleblower rules last week. The CFTC is to follow suit soon in announcing its own commodities whistleblower rules.

We have followed the SEC rules’ development, after being part of the small group of pro-whistleblower attorneys who met with the Commissioners and staff and urged changes to the draft rules to make them effective.

In January, I had the opportunity to visit with SEC Chairman Mary Schapiro, Director Khuzami, and SEC staff, and then separately with Commissioners Luis A. Aguilar, Kathleen L. Casey, Troy A. Paredes, and Elisse B. Walter, to discuss changes to the proposed rules for the new SEC Whistleblower program.

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Last week the government’s criminal trial of former GlaxoSmithKline vice president and associate general counsel Lauren Stevens ended abruptly, as the judge found no basis to allow the case to go to a jury. Prosecutors had charged that she obstructed justice and made false statements to cover up the company’s improper marketing of the antidepressant drug Wellbutrin SR.

While she dodged a bullet, the case jolted lawyers handling health care fraud investigations, which are more typically civil cases under the False Claims Act.

Yet also last week, prosecutors succeeded in convicting Raj Rajaratnam for insider trading. Wall Street’s hedge fund industry took note of the government’s use of investigative tools such as recorded phone calls.

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False Claims Act history repeated itself today.

Since Congress acted decisively in 1986 to breathe life into the False Claims Act through amendments intended to expand use of the nation’s major anti-fraud whistleblower law, the Supreme Court and some lower courts have regularly intervened by imposing their own views on what Congress must have meant in writing the 1986 amendments.

Those decisions hostile to enforcement of the False Claims Act included Allison Engine Co. v. United States ex rel. Sanders, 553 U.S. 662 (2008); United States ex rel. Totten v. Bombardier Corp., 380 F.3d 488 (D.C. Cir. 2004), cert. denied, 544 U.S. 1032 (2005); and United States ex rel. DRC, Inc. v. Custer Battles, LLC, 376 F. Supp. 2d 617 (E.D. Va. 2005), rev’d, 562 F.3d 295 (4th Cir. 2009)).

Since then, in 2009 and 2010 Congress responded emphatically with three more sets of FCA amendments to state, in essence, what Congress actually intended in 1986, and still intends, the law to mean. We have previously discussed those amendments made by the 2009-2010 legislation known as FERA, PPACA, and Dodd-Frank. (Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617 (“FERA”); Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (“PPACA”); Dodd-Frank Financial Reform Act (“Dodd-Frank”), Pub. L. No. 111-203, 124 Stat. 1376.)

Today’s decision in Schindler Elevator Corp. v. United States ex rel. Kirk is a victory for those who seek to make it more difficult to use the “old” version of the False Claims Act to battle fraud against taxpayers. The Supreme Court’s decision today continued the legislative tennis match with Congress.

The Court held that what is known as the “public disclosure bar” of the False Claims Act deprived courts of jurisdiction over this qui tam whistleblower case, because the whistleblower had attempted to corroborate his allegations through FOIA requests.

Fortunately for those who favor stopping fraud against taxpayers, the decision should have no effect on qui tam cases filed after the March 22, 2010 enactment of PPACA, the major health reform bill.
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As has been reported today in Tax Notes and CCH, my colleague Richard Rubin and I addressed the IRS at its hearing yesterday on the proposed IRS Whistleblower rules. We were able to speak for roughly one-third of the hearing.

We focused on fundamentals. We urged that Treasury and the IRS must stay true to the intent of Congress to expand the number and types of IRS whistleblower claims that the IRS receives and pursues, and that merit awards to whistleblowers.

I argued that, from the outside, it appears that the intent of Congress has not yet been realized. Instead, major rules and policies proposed to date are in many ways more restrictive than those under the “old” program, which cannot be the result Congress intended.

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