Articles Posted in Whistleblower/Qui Tam

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Calculating and Allocating Awards

Before you go about contesting any preliminary determinations, it might help to understand how the SEC goes about calculating its whistleblower awards in the first place. In general, whistleblowers who meet all the requirements are eligible to receive 10%-30% of the monetary sanctions collected by the SEC and related government authorities. If an award involves multiple whistleblowers who are eligible for an award, then that 10%-30% amount gets divided between them.

There are multiple factors the SEC considers when determining the amount of an award, including the importance of the information provided; the assistance provided throughout the action; liability; whether there was an unreasonable delay in reporting; and any interference with internal compliance and/or reporting systems.

Although all of these factors have gotten attention in various awards granted by the SEC, the delay in reporting has gotten the most attention. As we mentioned in Part 3, the SEC is a stickler for timeliness, so don’t ever be late as long as you can avoid it. That said, the SEC has been lenient in some instances of delayed reporting, such as when a whistleblower witnessed only one or two instances and was not aware of the full extent of the fraud taking place. Continue reading

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Filing a Claim

So, the SEC has taken your information and executed a successful enforcement action worth more than $1 million against the offender. Now what?

Once the action has been successfully executed, the Office of the Whistleblower will publish a “Notice of Covered Action” on the SEC’s website, after which the whistleblower involved will have 90 days to file a claim for an award based on that action. This means whistleblowers need to monitor the SEC’s website because they will not be contacted directly if an action involving information they provided has concluded. Filing for a claim means filling out a Form WB-APP and either mailing or faxing a signed copy to the Office of the Whistleblower. You should know that the SEC is a stickler for the time frame provided and also for whistleblowers filling out Form WB-APP completely and honestly.

Contesting a Preliminary Determination

Once an action involving a whistleblower has been fully appealed or the allotted time frame for filing an appeal has expired without an appeal having been filed, the Claims Review Staff will review all the submitted award claims and issue a preliminary determination. The whistleblower then has 60 days to contest either the denial of an award or the proposed amount of a granted award. When deciding whether to contest a preliminary determination, a whistleblower can request to review certain materials related to the decision-making process. If they want to do that, they have only 30 days to file their request.

Before providing any documents, the SEC will require the whistleblower to sign a non-disclosure agreement, which is fairly standard. If they refuse to sign, the SEC can refuse to provide the requested documents. Even when they do provide the requested documentation, the SEC can choose which documents to provide and which to withhold, and even the ones provided are usually heavily redacted.

If a whistleblower does not contest the preliminary order in the allotted amount of time, then the preliminary determination becomes a final order and cannot be appealed to a federal court.

The Exceptions

The SEC has been known to grant exceptions to one or more of these rules, but only if the whistleblower can cite “extraordinary circumstances.” Since the SEC does not want to grant an overabundance of exceptions, it strictly defines “extraordinary circumstances” as anything outside the whistleblower’s control that prevented them from taking the proper administrative steps or from taking those steps in the time allotted. If it was a timing issue (such as illness or ineffective counsel), the whistleblower is required to make up for the lost time as soon as possible.

Now that you know all the requirements for filing a claim for a whistleblower award as well as how to contest the amount if you think it’s unfair, Part 4 is going to discuss how to the SEC goes about calculating the award amount and allocating awards when a case involves more than one whistleblower. Continue reading

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Successful Enforcement

It’s not enough to provide information that may or may not lead anywhere. The information provided must lead directly to a successful action against the accused person or entity in order for the whistleblower to be able to collect an award. Of course, this is only the case if the information provided was also original information. In order to qualify, the information must either directly contribute to the successful enforcement, or it must cause the SEC to open an investigation, reopen an investigation, or pursue a different avenue as part of an ongoing investigation, which then results in a successful enforcement.

When it comes to information that directly leads to a successful enforcement, two or more whistleblowers may be eligible for an award if they come to the SEC independently of each other and provide the same information. The idea is to encourage people with information to come forward, so there’s no point in punishing someone for coming to the SEC with the same information as another whistleblower if the two informants didn’t know about each other.

But information that leads to an SEC investigation isn’t enough. The investigation needs to result in a judicial or administrative action, resulting in monetary sanctions worth more than $1 million.

In addition to SEC actions, a whistleblower can also be eligible for an award if related government agencies opened or reopened an investigation as a result of the information provided by the whistleblower, but only if the whistleblower meets all the other requirements for an award. These actions need to have taken place in addition to an SEC action.

Timing

The Dodd-Frank Act is the legislation that allows whistleblowers to collect awards and it went into effect on July 21, 2010. As a result, any information provided prior to that date is not eligible for a whistleblower award. At least one whistleblower has asked the SEC to consider leniency on the issue of timing, but so far the Commission has been inflexible on that point.

In Writing

After the Dodd-Frank Act went into effect in 2010, the SEC whistleblower rules became effective on August 12, 2011. Normally, any information provided prior to that 2011 date is ineligible for an award – unless it was provided in writing. Any verbal information provided between July 21, 2010, and August 12, 2011, is not eligible for an award, but those who submitted their information in writing in that time frame maintain the possibility of winning an award.

After the effective date of the SEC whistleblower rules, eligible tips have to be submitted using the SEC’s online portal, or by filing a Form TCR.

Professional Assistance

Whistleblowers are not required to be represented by professional counsel unless they are submitting their information anonymously. Even if they are not doing so anonymously, it’s still a good idea for whistleblowers to get professional assistance when submitting information to the SEC. That said, those professionals are unlikely to be eligible to receive any part of the award, if one is granted.

Foreign Whistleblowers

Agents of foreign governments are not eligible for whistleblower awards, but other types of foreign whistleblowers are eligible, as long as the information they provide relates to a securities fraud with any type of U.S. jurisdiction. Continue reading

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The Securities Exchange Commission (SEC) has been granting a record number of awards to whistleblowers alerting the authorities to securities fraud. To sweeten the deal, the awards (especially lately) tend to be in the tens of millions, and they’re only going to increase along with the amount of recovered monetary sanctions. This provides other whistleblowers with an incentive to do the same, but the problem is that not everyone is familiar with what constitutes securities fraud or how to go about reporting it when they see it.

As it turns out, the answers are in the footnotes. The clearest guidance on the facts and rules of securities fraud are to be found in the SEC’s footnotes of orders it has written for whistleblowers who have filed a claim for an award. Of course, going through all those footnotes is a considerable undertaking, so we’ve compiled the highlights for you into 4 articles, of which this is the first.

Although the SEC often makes its orders granting and denying requests for awards public, most of the text is heavily redacted, leaving the footnotes as the most valuable evidence of their process for determining who gets and award and how much. Continue reading

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The ousted founder and former CEO of Orion Energy Systems, Inc., cannot prevail in his federal whistleblowing claim against the company because his complaints to the board did not amount to whistleblowing under the Sarbanes-Oxley Act, the Seventh Circuit recently ruled in considering his appeal.

Neal V. founded Orion in 1996 and took the company public in 2007. His tenure became bumpy in 2012 when Neal asked Orion’s board to help cover the costs of his divorce.

Soon after, Neal and the board began to clash over multiple managerial and other issues, with Neal objecting to everything from excessive legal bills to unauthorized alcohol consumption by the board. The board refused his request to disclose these matters to shareholders, and Neal failed to report them in Orion’s quarterly and annual statements filed with the SEC.

As the conflict between Neal and the board over the running of the company escalated, the board discovered that about one-third of the $170,000 it had reimbursed him for his divorce expenses was unaccounted for. Neal blamed this on a fee dispute with his divorce attorney.

Consequently, the board removed Neal as CEO in September 2012 and renamed him “chairman emeritus.” Among the reasons it cited was high senior management turnover which it attributed to Neal’s “intimidating leadership style.”

Unhappy with his demotion, Neal announced his resignation, which triggered new disagreements over his severance package. Shortly before a board meeting convened to discuss Neal’s termination, he sent an email to the board reiterating his managerial complaints against them and accusing them of conspiring against him. Although he later characterized this email as a “complaint” pursuant to Orion’s whistleblower policy as well as Sarbanes-Oxley, it did not reference any official complaint filed with the SEC or other government entity, nor did it provide the board with new information or do anything except “simply rehash the numerous personal and professional grievances about which he had been complaining over the course of the past year,” in the words of the court. Continue reading

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Whether an airline employee can avail himself of state whistleblower protections currently depends on which federal circuit he finds himself in. He should hope not to be in the Eighth Circuit, which continues to find state whistleblower laws preempted by the federal Airline Deregulation Act (ADA), even where the employee reports serious safety violations (John A. Watson v. Air Methods Corp., No. 15-1900 (8th Cir. 2016)).

John W. was a flight paramedic for Air Methods Corp., which transports and provides in-flight medical care for patients being airlifted to hospitals. Air Methods is an “air carrier” for purposes of federal aviation regulations. John allegedly witnessed numerous federal safety violations by the flight crew, which he reported to Air Methods’ corporate office. After the company terminated his employment, he sued Air Methods in Missouri state court for wrongful discharge in violation of public policy, claiming he was fired for reporting illegal activity to his superiors.

Air Methods removed the case to federal court, then sought dismissal based on the Eighth Circuit’s holding in Botz v. Omni Air International, 286 F.3d 488 (8th Cir. 2002). In Botz, the appeals court ruled the ADA preempted a state wrongful discharge claim in a case where a flight attendant had refused to work a round-trip international flight that exceeded maximum crew working hours. The district court granted Air Methods’ motion and John appealed.

The crux of the Botz ruling was ADA’s express preemption clause, which supersedes state laws and regulations “related to a price, route, or service of an air carrier.” Quoting the U.S. Supreme Court in Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992), the court in the instant case wrote: “This section has a ‘broad preemptive purpose,’ precluding state laws ‘specifically addressed to the airline industry’ and generally applicable laws that indirectly relate to air carriers’ rates, routes, or services.” Continue reading

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A recent case in the Northern District of Illinois, Helfer v. Associated Anesthesiologists of Springfield (2016 WL 183501, addressed what a plaintiff must show to sustain a claim for retaliatory termination under the False Claims Act.

Donald H. was an anesthesiologist and partner at Associated Anesthesiologists of Springfield, Ltd. in Springfield, Ill., which provides anesthesia services for Memorial Medical Center. Donald’s employment agreement gave Associated the right to terminate him with 90 days’ notice.

Donald’s fellow partners had expressed their displeasure with him for taking it upon himself on several occasions to contact third parties, such as Memorial and the Internal Revenue Service, to discuss billing and other matters concerning Associated, without the authorization of the other partners. These communications had resulted in Associated being audited. Some time thereafter, in June 2009, Donald raised concerns with other partners and shareholders about Associated’s billing of Medicare. When his concerns went unresolved, he emailed the Center for Medicare & Medicaid Services directly, again without authorization from the partners. Continue reading

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A federal court in Illinois recently shot down an employer’s claim that having signed a HIPAA “privacy policy” deprived an employee of whistleblower protections.

In United States ex rel. Cieszynski et al. v. Lifewatch Services, Inc. (2016 WL 2771798), Matthew C. brought a qui tam action accusing his employer, LifeWatch Services Inc., of violating the False Claims Act by billing the government for heart monitoring services in violation of Medicare rules. Matthew had signed a confidentiality agreement when he was hired by LifeWatch in 2003, which prevented him from disclosing certain documents. Three years later he was asked to sign a “privacy policy” concerning HIPAA regulations.

In a counterclaim, LifeWatch alleged that Matthew breached his employment contract when he accessed certain confidential information and HIPAA-protected materials that he did not need to carry out his job duties, and that he disclosed the information to “third parties outside LifeWatch,” presumably the government and his own attorney, to support his allegations. Continue reading

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Employees who notice something illegal or immoral going on at work are often made to choose between their conscience and their jobs. The Dodd-Frank Wall Street reform act prohibits employers from retaliating against whistleblowers (those who bring illegal practices to the attention of a regulatory authority), but in practice, these laws rarely have any effect.

An example of this is the case of Johnny Burris. Mr. Burris worked as a broker for JPMorgan’s office in Sun City West, Arizona as a top producing broker and earned glowing performance reviews, at least for his first few years of employment there.

Most of Mr. Burris’s clients consisted of retirees who knew very little about the complicated financial markets, so Mr. Burris considered it part of his job to avoid any investment products which might be unsuitable for his clients, expensive, and/or underperforming. Some of these investment products that Mr. Burris considered allegedly unsuitable included products that JPMorgan offered, and his refusal to promote them to his clients started to draw some criticism from his superiors. Continue reading

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A lot of people lost money in the recent economic downturn. Stocks plummeted, 401K accounts shrank overnight, and for most people, there was nothing that could have been done to prevent it. In some instances, though, an investor’s loss was a direct result of negligence or fraud on the part of the company that was supposed to be protecting their money.

According to the Securities and Exchange Commission (S.E.C.) that is exactly what allegedly happened to investors who trusted their money to MassMutual Financial Group, an insurance company based in Springfield, Massachusetts. Bill Lloyd worked for MassMutual for 22 years and allegedly had a reputation for being a straight arrow. Unlike the stereotypical agent who is interested only in making money for himself, Lloyd truly cared about his customers. As a result, when he encountered a situation in which his customers were allegedly getting ripped off, Lloyd could not let it slide.

In 2007, when money was gushing into variable annuities, MassMutual added two income guarantees: Guaranteed Income Benefit Plus 6 and Guaranteed Income Benefit Plus 5. The idea behind these products was that they would guarantee that the annuity income stream would grow to a predetermined cap regardless of how the investment itself performed.

When the investors retired, they could take six percent (or five percent, depending on which product they bought) of the cap for as long as they wanted or until it ran out of money, and still be able to annuitize it at some point. In theory, the money would never run out, and that is how agents like Lloyd were allegedly told to sell the product to customers. Before long, investors had put $2.5 billion into these products.

In 2008 it allegedly became evident that the products did not work they way customers had been told they would work. As a result of the market’s fall, it was according to Lloyd all but certain that thousands of customers were going to run through their income stream within seven or eight years of withdrawing the money. Continue reading