Review of Barclays fails to recognize role whistleblowers can play in compliance

A recent independent report on British bank Barclays corporate culture, known as the Salz Review, addresses the impact some employees’ conduct has had on the bank’s reputation. It does not, however, go far enough in proposing steps to encourage and protect whistleblowers as a way to prevent future misconduct.

Barclays management commissioned the review by Anthony Salz, a corporate lawyer turned investment banker, following Barclays $450 million settlement last year for its role in the LIBOR-fixing  scandal. The purpose was to identify ways to improve the bank’s damaged reputation by addressing the underlying issues that led to Barclays’ role in rigging the London benchmark lending rates. 

The Salz Review looks closely at past incidents judged to be especially reputation-damaging and offers recommendations for new principles and standards to help correct the damage these events inflicted. Unfortunately, it fails to make any concrete recommendations regarding whistleblowing, saying only that, “Barclays should maintain robust arrangements for raising concerns (whistleblowing) which are perceived to protect those raising them and to lead to actions being taken.”

By neglecting to explicitly address whistleblowing procedures, Salz limits the effectiveness of his recommendations and the scope of his review.  Whistleblowers can be important sources of information about misconduct long before the effects are seen in damage to the bank’s reputation and harm to its customers.  A robust and well laid-out whistleblower procedure might eliminate the need for this kind of grand inquiry into corporate culture in the future. 

Texas reaps rewards of whistleblower cases

A new report issued by the Taxpayers Against FraudEducation Fund highlights the substantial benefits states realize from adopting false claims laws. Fighting MedicaidFraud in Texas, authored by economists Jack Meyer and Chris Wolff of Health Management Associates, examines the recoveries made in the past six years under the Texas False Claims Act (formerly the Texas Medicaid Fraud Prevention Act). 

From 2006 to 2012, Texas recovered over $821 million for both state and federal taxpayers under the state and federal false claims law. More than $800 million of that total is due to whistleblower-initiated cases. Close to half -- over $394 million -- resulted directly from cases that were investigated and prosecuted by the state under the Texas Medicaid Fraud Prevention Act.

“Initiatives by Texas to investigate and prosecute fraud under the Texas Medicaid Fraud Prevention Act have been very successful,” the report said.

Texas received more than $348 million out of the $821 million that was recovered. The amount recovered far exceeds the budget for the Texas attorney general’s anti-fraud staff over the same period, which was between $4.75 million and $8.45 million per year. The remaining $473 million was returned to the U.S. Treasury. Total recoveries under the federal False Claims Act since 1987 exceed $35 billion plus billions more recovered as a result of related criminal fines. 

Currently Texas is one of only 32 states that have statutes with whistleblower reward provisions. The other states are missing out on similar success.

P&C attorney discusses Calif. AG's strategy in charging S&P with False Claims Act violations

The U.S. Dept. of Justice and more than a dozen states have filed suit against Standard & Poor's, alleging that the firm's inflation of mortgage investments cost investors billions when the financial crisis struck.

DOJ's complaint alleges violations of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Most of the state complaints accuse S&P of violating state trade practice or unfair competition laws.  Only California sued S&P for violation of the state's False Claims Act.

Eric Havian of Phillips & Cohen LLP says that California may actually be targeting the issuers of mortgage backed securities and collateralized debt obligations.

Havian told Alison Frankel of Reuters that he wouldn't be surprised if California's strategy were to use discovery in the S&P case to see whether banks were aware of S&P's alleged ratings manipulation.  “If issuers knew the ratings were false and they sold securities to state pension funds, they would absolutely be liable,” he said. “That’s an easy FCA case.”

Whistleblower attorney finds tone at top of SEC and CFTC encouraging for whistleblowers

The whistleblower programs at the Securities and Exchange Commission and the Commodity Futures Trading Commission are working “incredibly well,” according to Phillips and Cohen partner Erika Kelton.

In an interview with Corporate Crime Reporter published this week, Kelton said it was encouraging that the first SEC whistleblower settlement was made within a year of when the SEC whistleblower office was set up and that the SEC awarded the maximum reward (30 percent) to the whistleblower.

“Yes, it was a small amount,” she said. “But still, they did move quickly on that matter.”

She said the “tone at the top” of the SEC and CFTC and the work of certain other officials at those agencies – including SEC whistleblower office head Sean McKessy, CFTC whistleblower office head Vince Martinez -- have helped to create a willingness to work with whistleblowers at those agencies.

“(Former) SEC chairwoman Mary Schapiro was a big advocate for whistleblower enforcement,” Kelton said. “And the SEC’s head of enforcement – Robert Khuzami and the deputy, Steve Cohen – were really invested in making it a success.”

Kelton expressed optimism in Corporate Crime Reporter that the good working relationship the SEC has with whistleblowers would continue under former U.S. Attorney Mary Jo White, if the Senate approves White’s nomination as SEC chairman.

“We had the so called yield burning matter with [White’s] office when she was U.S. Attorney, which was against several dozen Wall Street banks, and which recovered over $200 million,” she noted.

Payments to settle fraud charges shouldn’t be tax deductible

Several banks that recently settled cases for mortgage abuses will be able to deduct those settlement payments as “business expenses,” making those settlements less painful for the banks than they appear, noted New York Times’ columnist Gretchen Morgenson in her Jan. 12 article, “Paying the price, but often deducting It.”

 

Unfortunately, that’s not unusual. In many settlements with the government, companies take tax deductions for the millions and billions of dollars they pay to settle fraud and other civil and criminal liabilities. 

The Securities and Exchange Commission (SEC), however, does not allow such deductions in settlements involving the SEC.  In one case cited by Morgenson, the Department of Justice also disallowed any deductions.

 

Senator Charles Grassley tells Morgenson that he believes, “any portion of a settlement that’s intended to be a penalty should include language clarifying it isn’t deductible. Otherwise, the government’s punishment will have less sting than intended.”

 

Government agencies ought to consider following the SEC’s lead. No extra money is brought into the Treasury by allowing the deductions. The deductions also reduce the efficacy of the punishment and send the rather disappointing message that paying to settle cases of fraud and other liability is just a normal “business expense” in the United States.

Whistleblowers help government recover record $5 billion in FY2012

The government recovered a record-breaking $5 billion in FY 2012 under the False Claims Acts, a top Justice Department official announced today.

Principal Deputy Assistant Attorney General Stuart Delery noted that the False Claims Act “not only protects the Treasury, but also reflects a deep commitment to protecting the health and safety of all Americans and bringing about meaningful change to eliminate cheating from business practices.”

Most of the recoveries were due to whistleblowers, who brought qui tam lawsuits under the False Claims Act.

Two cases that Delery highlighted (Glaxo and ATK) are whistleblower cases brought by Phillips & Cohen LLP.

“The False Claims Act is, quite simply, the most powerful tool that we have to deter and redress fraud,” said Acting Associate Attorney General Tony West.

Six banks have paid $162 million to settle whistleblower lawsuit alleging hidden fees charged on veterans’ loans

Five more banks and mortgage companies have agreed to pay the federal government a total of $116.7 million to settle a whistleblower lawsuit that alleged the banks illegally charged veterans hidden fees on refinanced home loans backed by the Veterans Administration.

The latest settlements bring the total amount recovered so far from the whistleblower lawsuit to $162 million.

The mortgage lenders that settled the whistleblower lawsuit and the amounts they paid are: Countrywide Home Loans Inc. ($45 million), PNC Bank ($38 million), First Tennessee Bank ($16 million), SunTrust Mortgage ($10.2 million) and CitiMortgage ($7.5 million).

In March, JPMorgan Chase agreed to pay $45 million to settle similar claims against it.

The whistleblower lawsuit, which is being litigated by three private law firms on behalf of the federal government, will proceed against Wells Fargo and Mortgage Investors Corporation ("MIC"). A federal district court in Atlanta on Nov. 19 rejected motions by Wells Fargo and Mortgage Investors Corp. to dismiss the “qui tam” lawsuit.

The lawsuit was filed in 2006 in federal district court in Atlanta, Georgia, by Victor Bibby and Brian Donnelly. The lawsuit was brought under the federal False Claims Act, which allows whistleblowers to sue companies that are defrauding the government and collect recoveries on the government’s behalf.

SEC received 3,000 whistleblower tips in the past year.

In the past year, the Securities and Exchange Commission (SEC) received over 3,000 whistleblower tips, according to the SEC’s 2012 “Annual Report on the Dodd-Frank Whistleblower Program” released this week.

That is an astonishing number of tips and shows how successful the two-year-old SEC whistleblower program is. The annual total averages out to roughly 12 tips each business day.

"In just its first year, the whistleblower program already has proven to be a valuable tool in helping us ferret out financial fraud,” said SEC Chairman Mary L. Schapiro in a press release. “When insiders provide us with high-quality road maps of fraudulent wrongdoing, it reduces the length of time we spend investigating and saves the agency substantial resources."

Whistleblower tips to the SEC came from all 50 states and from 49 countries. California was the U.S. state where the most tips originated (435). New York followed closely with 246. The top four outside countries with the most tips were the United Kingdom (74), Canada (46), India (33) and China (27).

The most common complaints were related to corporate disclosures and financials (18.2 percent), offering fraud (15.5 percent) and manipulation (15.2 percent).

The SEC whistleblower program was created under the Dodd-Frank Act in 2010. If the SEC and other government authorities recover more than $1 million based on the whistleblower’s information, the whistleblower is entitled to 10 percent to 30 percent of the recoveries.

Rewards to offset the risks of blowing the whistle

Despite the draw of large whistleblower rewards distributed by the government recently, like the $104 million awarded to Brad Birkenfeld for exposing secrets about Swiss banking to the IRS, a recent New York Times article warns potential whistleblowers to seriously consider the burdens that accompany blowing the whistle before they proceed.

“It’s a life-changing experience,” said John R. Phillips, founder of the law firm Phillips & Cohen and the man credited with devising the amendments that strengthened the government antifraud law, the False Claims Act, in 1986. “If you look at the field of whistle-blowers, you see a high degree of bankruptcies. You may find yourself unemployable. Home foreclosures, divorce, suicide and depression all go with this territory.”

The personal and professional risks that whistleblowers take are a big reason Congress created programs that reward whistleblowers. Under the False Claims Act and the Dodd-Frank law, whistleblowers who file “qui tam” cases or file claims with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) not only receive monetary rewards if there is a recovery but also job protection.  

Sodexo settlement paved the way for Compass Group USA's $18 million settlement

Foodservice management company Compass Group USA has paid $18 million to the state of New York to settle charges that it cheated New York schools for more than seven years by pocketing rebates from food vendors rather than passing those credits on to New York schools. 

The investigation by the New York Attorney General’s office and subsequent settlement with Compass Group USA is due in large part to a “qui tam” lawsuit against foodservice management giant Sodexo, filed by Phillips & Cohen LLP on behalf of whistleblowers under the New York False Claims Act.

Sodexo, like Compass Group USA, was charged with illegally pocketing vendor discounts, or “off-invoice rebates,” and in July 2010 agreed to pay $20 million to settle charges. After the Sodexo settlement, the New York Attorney General’s office launched an investigation into rebate practices by Compass Group USA and other foodservice companies. The Sodexo settlement remains the largest non-Medicaid settlement under the New York False Claims Act.