Thursday, May 26, 2011

SEC resists attempts to weaken new whistleblower program

The final rules for the Securities and Exchange Commission's whistleblower reward program contain provisions that will protect and encourage those who report fraud.

Erika Kelton of Phillips and Cohen told the New York Times that employees almost always report their concerns about misconduct and fraud to managers and supervisors first. "It has only been after they have been retaliated against for doing so that they have come to us.”

Ms. Kelton noted that the SEC resisted intense pressure from corporate interest groups to weaken the rules. "By establishing incentives for people to report fraud concerns internally before going to the SEC -- but not making such reporting mandatory -- the SEC has struck a balance that still will encourage whistleblowers."

Wednesday, May 25, 2011

Whistleblower attorneys applaud SEC rules on whistleblower reward program

The Securities and Exchange Commission took a big step today to establish a strong whistleblower program by endorsing final rules for the SEC whistleblower program that would reward – but not require – whistleblowers to report concerns of wrongdoing and fraud to internal compliance programs first.

The Chamber of Commerce and other corporate interests had barraged the SEC with complaints that internal compliance programs would be rendered worthless unless employees were required to report fraud to those internal programs before going to the SEC. Fortunately, the SEC seemed to realize that such a requirement would emasculate the program. Instead, the rules would make whistleblowers eligible for an increased reward if they report their concerns to internal compliance programs first.

The SEC also clarified that whistleblowers who bring information to the SEC are protected by anti-retaliation measures whether they get an award or not.

Whistleblower attorneys with Phillips & Cohen applauded the SEC’s decision about the whistleblower reward program. The SEC press release and fact sheet provide detailed info about the final rules.

Tuesday, May 24, 2011

Calif. Attorney General will use FCA to fight mortgage fraud

California Attorney General Kamala Harris has vowed to use the state's False Claims Act to go after mortgage fraud scammers.

The new Mortgage Fraud Strike Force will have three teams. The corporate fraud team will target misconduct involving investments and securities tied to subprime mortgages, as well as false or fraudulent claims made to the state with respect to these securities.

A consumer enforcement team will focus on predatory lending, unfair business practices in originating loans, deceptive marketing, and loan modification and foreclosure consultant scams. The criminal enforcement team will prosecute criminal frauds, including fraudulent investment and money laundering schemes related to mortgage lending or foreclosure relief.

Harris said, “We are prepared to use it [the state's False Claims Act] in a way that will look at all those who have made false statements or misled investors of any nature – be they individuals, institutions or municipalities."

Thursday, May 19, 2011

BAE settlement shows government is serious about international fraud

The U.S. State Department’s settlement with BAE Systems PLC of the United Kingdom highlights the increasing focus on international fraud committed by multinational companies in the tax, securities, export and bribery (Foreign Corrupt Practices Act) areas.

BAE, Europe’s largest military contractor, paid a total civil penalty of $79 million for alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR). It is the largest civil penalty the State Department has ever levied.

In a related criminal case, BAE pleaded guilty last year to two criminal charges involving Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR) violations and payments made to win huge contracts in Saudi Arabia and other countries. BAE paid nearly $450 million in criminal penalties.

As Congress has put in place whistleblower reward laws that reach such violations (the False Claims Act, a stronger IRS whistleblower program and the Dodd-Frank SEC whistleblower program), we can expect to see more and larger cases brought by insiders who have lacked any incentive to come forward until now.

Supreme Court rules FOIA request may bar whistleblower action

Under the False Claims Act, prior public disclosure of the allegations or transactions in a federal “report, hearing, audit or investigation” may preclude filing a qui tam lawsuit. On May 16, 2011, in Schindler Elevator Corp. v. United States ex rel. Kirk, No. 10-181 (May 16, 2011), the United States Supreme Court issued an unprecedented opinion holding that a response to a Freedom of Information Act request, even one filed by a whistleblower looking for corroborative evidence of fraud to present to the United States, is a federal “report” potentially barring jurisdiction over the action.

Although the public disclosure/original source rules were further amended in 2009, the federal “report” language applies to both versions of the statute. Accordingly, under the Supreme Curt’s interpretation, any response to a FOIA request, even one obtained from someone other than the whistleblower could, potentially, bar the action unless the whistleblower can show she qualifies as an “original source.”

Relator Daniel Kirk had worked for Petitioner Schindler Elevator Corporation (Schindler) for twenty-five years and alleged that Schindler had falsely certified its compliance with the Vietnam Era Veterans' Readjustment Assistance Act of 1972 (VEVRAA), which requires contractors to report information concerning its employment of veterans to the U.S. Department of Labor (DOL). He also alleged that Schindler failed to file certain required VETS-100 reports and included false information in VETS-100 reports.

As part of his investigation, Kirk’s wife submitted three FOIA requests to DOL including all VETS-100 reports filed by Schindler for the years 1998-2006. DOL sent copies of ninety-nine VETS-100 reports that Schindler filed, and a FOIA response informing her it could not locate Schindler's VETS-100 reports for 1998, 1999, 2000, 2002, or 2003. Kirk used this information to support its allegations.

In holding that a response to a FOIA request is a governmental “report,” the Supreme Court held that such a response falls within the ordinary meaning of the word “report” because it is “something that gives information,” “a notification,” and an “official or formal statement of facts.” The Supreme Court also held that any records produced with the FOIA response are also part of the “report” and may be used to support a public disclosure defense.

The Supreme Court thus held that the three written FOIA responses in this case, along with the accompanying records produced to Mrs. Kirk, are reports within the meaning of the public disclosure bar. The Court remanded for a determination whether the Kirk’s suit is “based upon . . . allegations or transactions” disclosed in those reports. If so, Relator Kirk will need to demonstrate on remand that he is an original source to proceed with his claims.

For whistleblowers, this case means that one should likely not use FOIA before bringing one’s claims to an experienced qui tam lawyer to discuss and perhaps first bring to the government before looking for corroborating evidence.

Monday, May 16, 2011

Supreme Court rules in qui tam whistleblower case

Today’s U.S. Supreme Court decision in Schindler Elevator v. United States ex rel Kirk has implications for whistleblowers and False Claims Act cases. The decision undermines fraud-fighting efforts by blocking whistleblowers who use the Freedom of Information Act to corroborate their evidence that their employers have defrauded the United States.

The vote was 5-3, with Justice Thomas writing for the majority and Justice Ginsburg writing the dissent. Justice Kagan was recused.

The Schindler opinion is posted on the Supreme Court website.

Thursday, May 12, 2011

Foreign bribery conviction is a first

The conviction of Lindsey Manufacturing Co., two of its executives and a Mexican sales agent marks the first time a company has been convicted at trial of violating the Foreign Corrupt Practices Act. The defendants were accused of paying bribes to officials at the Mexican state-owned utility ComisiĆ³n Federal de Electricidad to obtain business from the utility. Lindsey Manufacturing makes emergency restoration systems and other equipment used by utility companies.

The FCPA is expected to an important enforcement tool under the new Dodd-Frank law and similar cases are likely to end up in court. Bribery is a routine practice in many foreign countries, but the U.S. Department of Justice doesn't view it as beningn.

Assistant Attorney General Lanny Breuer said, “Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last. Foreign corruption undermines the rule of law, stifling competition and the health of international markets and American businesses. As this prosecution shows, we are fiercely committed to bringing to justice all the players in these bribery schemes – the executives who conceive of the criminal plans, the people they use to pay the bribes, and the companies that knowingly allow these schemes to flourish. Bribery has real consequences.”

Grassley urges SEC to reconsider proposed SEC whistleblower rules

Sen. Charles Grassley has expressed “serious concerns” about the Securities and Exchange Commission’s proposed regulations for implementing its new whistleblower program, saying the proposed rules “threaten to limit the effectiveness of the program.”

In a May 10 letter to the SEC, Grassley said one of his concerns was an “over-emphasis” on internal compliance programs at the expense of whistleblowers. Corporate interests have been demanding the SEC require whistleblowers to report concerns about securities law violations to internal compliance programs before informing the SEC. The SEC didn’t go that far in its proposed regulations. But it did propose that whistleblowers would receive a larger reward if they report fraud to internal compliance programs before going to the SEC.

Grassley said such a requirement “would effectively render the whistleblower program null and void.” he said that would effectively chill good faith whistleblowers from coming forward for fear they would be terminated.

See Grassley’s website to read his entire letter to the SEC about the proposed whistleblower rules.

Monday, May 02, 2011

Duane Reade kiosks violate Anti-Kickback statutes

Duane Reade has agreed to pay $370,000 to settle allegations that it defrauded the New York State Medicaid program. The original whistleblower lawsuit charged that company's Kiosk Program violated state and federal Anti-Kickback statutes.

Automated kiosks were installed in physicians' offices to allow and encourage patients to fill their prescriptions at Duane Reade. Patients could enter prescription information into the kiosks and pick up their prescriptions at a local Duane Reade. The company's monthly "rent" payments to participating physicians violated the Anti-Kickback statutes by paying higher "rents" to physicians who generated a high volume of prescriptions.

DOJ joins whistleblower suit alleging illegal recruitment practices by Education Management

The U.S. Dept. of Justice joined an employee whistleblower suit against Education Management, the second largest operator of for-profit colleges. The suit alleges that the company compensated some employees based on the number of students they enrolled into the company's colleges

DOJ's intervention, the first in a qui tam suit alleging illegal student recruitment practices, follows investigations by Congress and the federal Education Department into sales practices, student-loan defaults and job placement claims at for-profit colleges.

The company's announcement said that several states are expected to join the action alleging violations of their respective state False Claims Acts.