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Whistleblower Involvement Leads to Substantially Greater Penalties and Criminal Sentences, Study Finds

According to a recently-released academic study on the impact of whistleblowers on financial misrepresentation enforcement actions, the involvement of whistleblowers in securities enforcement actions has a significant impact on both the penalties imposed and jail time faced by company executives and employees. In particular, SEC and DOJ enforcement actions relating to financial misrepresentations to shareholders result in financial penalties for companies that are $90-$93 million greater, financial penalties for executives that average $50-$56 million more, and prison sentences for executives and employees that average 22-27 months longer when a whistleblower is involved.

Designed as an incentive to encourage employees to report wrongdoing, rewards for whistleblowers can be substantial. Under Dodd-Frank, for example, rewards may range from 10%-30% of monetary sanctions over $1 million from investigations and/or enforcements resulting from the employee’s report. The increasing trend toward greater financial rewards for whistleblowers and high-level government encouragement of their actions give rise to a corollary question whether whistleblower involvement in enforcement actions makes a meaningful difference.

Exploring that question, the study reviewed all SEC and DOJ enforcement actions associated with financial misrepresentation between 1978 and 2012, focusing on the effect of employee whistleblowers’ involvement on financial penalties assessed, sentences imposed, and duration of the enforcement actions. Over the study period, approximately $70 billion in penalties were assessed, and various industries were represented, including financial services, utilities, health care, and manufacturing. In the end, the study concluded “that whistleblower involvement in an SEC or DOJ investigation is associated with a significant increase in penalties.”

Whistleblowers would, therefore, seem to be a valuable source of information for regulators, both in terms of disclosing misconduct that might otherwise go undiscovered and in facilitating higher penalties. Companies across a wide range of industries and sectors would be wise to revisit their policies to ensure they have mechanisms in place to timely and properly address whistleblower complaints when they are voiced.

Whistleblower Study

The Justice Department’s Aggressive Enforcement of the False Claims Act Should Give Banks Pause

On November 20th, the Department of Justice announced that it had recovered approximately $5.7 billion in fiscal year 2014 through litigation and settlements under the False Claims Act. Somewhat surprisingly, the financial sector, accounting for $3.1 billion of that total, outpaced all other industries, including such historical FCA stalwarts as the health care and government contracting sectors.

The total financial sector recovery was significantly bolstered by several high-profile settlements, including a $1.9 billion settlement with Bank of America relating to alleged misconduct with the origination and sale of mortgages and $615 million from JPMorgan & Chase Co. as part of a global settlement of fraud claims against it. Those settlements represent the termination of financial crisis-related claims against those financial institutions, and other banks are reportedly also in the process of discussing global settlements of FCA claims with the Justice Department.

With the prospective resolution of FCA claims relating to the housing bubble and 2008 financial crisis, financial institutions cannot rest easy or become complacent. Although the size of individual recoveries may go down, the government will likely continue utilizing the FCA as a powerful tool in its ongoing effort to prosecute financial institutions that engage in fraudulent behavior. Whether through government-initiated litigation or qui tam actions brought by whistleblowers (the Justice Department revealed that whistleblowers filed more than 700 qui tam actions in fiscal year 2014), the FCA is a powerful and cost-effective vehicle.

And with ongoing government efforts to encourage whistleblowing, combined with potentially significant financial rewards to whistleblowers, there is no reason to believe government scrutiny will diminish. Especially in light of public comments from Attorney General Eric Holder calling for more whistleblower activity in the financial services sector. Banks should exercise diligence and seriously investigate information suggesting potential impropriety.

The False Claims Act: From Dead Mules to Increasingly Complex and Sophisticated Schemes to Defraud the Federal Government

In 1863, the federal government – the Union government – had a problem. Not only was it fighting a rebel army that was conducting itself with no small measure of vigor and success, but it also confronted a host of unscrupulous defense contractors that were billing the Union Army for dead mules, horses that could barely walk, boots with soles that had been glued on rather than stitched, shoddy uniforms that dissolved in the rain, guns that could not be fired, and bags of gunpowder that had been mixed with sawdust.

Aware that the federal government lacked the insider knowledge necessary to uncover sophisticated schemes of fraud against the federal treasury, President Lincoln proposed and the Congress passed the False Claims Act – the so-called Lincoln Law – to combat defense procurement fraud. The statute, codified at 31 US.C. § 3729, and mechanisms of fraud have significantly evolved over the last 150+ years. And its qui tam provisions, which allow private individuals to sue on behalf of the federal government and receive a portion of the recovery, help ensure the statute’s ongoing vitality.

Nowadays, the fraud schemes subject to scrutiny under the False Claims Act are far beyond the provision of dead mules. Instead, based on case activity and year-end reports, some of the more commonly seen mechanisms of fraud that are pursued under the statute relate to the following:

  • fraudulently seeking/obtaining federal government contract (g., fraud relating to the qualifications to obtain a contract)
  • fraudulent application for grant of government money (g., fraud relating to qualifying for the grant and/or other perquisites of the grant program)
  • seeking payment reimbursement under a program for which the company is not eligible
  • submitting a claim that falsely certifies compliance with the law, contract terms, and/or regulations
  • charging for services not rendered (g., submitting a claim to the government for reimbursement when the service/product wasn’t actually provided as claimed)
  • mortgage fraud for government-subsidized loans based on false information
  • health care
    • billing for services/products not actually provided
    • billing for services that were not medically necessary
    • quality of care (g., providing care that is so bad it is essentially worthless or so bad the government should not pay)
    • upcoding the services actually provided to another category for greater reimbursement amounts
    • off label marketing and promotion
    • kickback (paying/receiving money for referrals)
    • inflating charges

The scope of these mechanisms is limited only by the imagination of those perpetrating the fraud on the federal government. And it is for that reason, in large part, that the False Claims Act encourages whistleblowers to come forward with information by offering potentially substantial monetary rewards.

Employee Involvement in Misconduct May Not Bar False Claims Act Suit

In a long-running False Claims Act qui tam lawsuit involving a provider of pharmaceuticals to long-term care facilities, a Texas federal judge on Tuesday determined that the defendant could not escape liability by arguing that the purported whistleblower was involved in the alleged misconduct.

In Ruscher v. Omnicare, Inc., Omnicare asserted in an “unclean hands” or “inequitable conduct” affirmative defense that the plaintiff cannot proceed with her claims under the False Claims Act (FCA) because she was involved in the alleged illegal conduct her lawsuit purports to unveil. Treating the plaintiff’s motion for summary judgment as a motion to strike the defense, U.S. District Judge Keith Ellison of the Southern District of Texas ruled that the FCA does not bar whistleblowers who take part in wrongdoing from pursuing litigation.

Judge Ellison recognized that neither the Fifth Circuit nor the FCA itself directly resolve whether unclean hands is a defense to a FCA suit. However, because the statute provides a mechanism for reducing a prevailing plaintiff’s share of the proceeds if she participated in the underlying wrongdoing, it strongly suggests that unclean hands is not a bar to suit. Therefore, although a whistleblower’s share of the ultimate proceeds may be reduced because of her participation in the misconduct, that participation may not be a legally viable defense to fraud claims under the FCA.

Ruscher v. Omnicare, Inc., Civil Action No. 4:08-CV-3396 (S.D. Tex.)