Category: Whistleblower

DOJ Plan to Offer Whistleblower Awards “A Good First Step”

The Department of Justice (DOJ) will launch a whistleblower rewards program later this year, Deputy Attorney General Lisa Monaco, announced today. Monaco stated that other U.S. whistleblower award programs, such as the SEC, CFTC, IRS and AML programs, “have proven indispensable” and that the DOJ plans to offer awards for tips not covered under these programs.

“This is a good first step, but the Justice Department has miles to go in creating a whistleblower program competitive with the programs managed by the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC),” said Stephen M. Kohn.

“We hope that the DOJ will follow the lead of the SEC and CFTC and establish a central Whistleblower Office that can accept anonymous and confidential complaints. Such a program has been required under the anti-money laundering whistleblower law for over three years, but Justice has simply failed to follow the law,” added Kohn, who also serves as Chairman of the Board of the National Whistleblower Center.

According to Monaco, “under current law, the Attorney General is authorized to pay awards for information or assistance leading to civil or criminal forfeitures” but this authority has never been used “as part of a targeted program.” The DOJ is “launching a 90-day sprint to develop and implement a pilot program, with a formal start date later this year,” she stated.

While the specifics of the program have yet to be announced, Monaco did state that the DOJ will only offer awards to individuals who were not involved in the criminal activity itself.

“The Justice Department’s decision to exclude persons who may have had some involvement in the criminal activity is a step backwards and demonstrates a fundamental misunderstanding as to why the Dodd-Frank and False Claims Acts work so well,” continued Kohn. “When the False Claims Act was signed into law by President Abraham Lincoln in 1863 it was widely understood that the award laws worked best when they induced persons who were part of the conspiracy to turn in their former associates in crime. Justice needs to understand that by failing to follow the basic tenants of the most successful whistleblower laws ever enacted, their program is starting off on the wrong foot.”

Geoff Schweller also contributed to this article.

Copyright Kohn, Kohn & Colapinto, LLP 2024. All Rights Reserved.
For more news on the DOJ’s Whistleblower Award Program, visit the NLR Criminal Law / Business Crimes section.

Road to Victory Just Got a Little Easier for Whistleblowers

In 2017, a federal jury found whistleblower Trevor Murray was wrongfully terminated after he refused “to change his research on commercial mortgage-backed securities.” He won over $900,000. On appeal in 2022, the U.S. Court of Appeals for the Second Circuit overturned Murray’s award, finding whistleblowers who bring a retaliation claim against their employer under the Sarbanes-Oxley Act (SOX) must prove their employer acted with “retaliatory intent.”

Earlier this month, the U.S. Supreme Court weighed in, issuing a unanimous decision in Trevor Murray v. UBS Securities LLC, et al. The justices found that the Second Circuit was wrong. That is, “when it comes to a plaintiff’s burden of proof on intent under SOX, they only need to show that their protected activity contributed to an unfavorable personnel action, such as a firing.” Once the plaintiff does this, the Supreme Court found the burden of proof shifts to the employer to prove that “it would have taken the same adverse action regardless of the employee’s protected activity.” The justices found the law is intended ”to be plaintiff-friendly.”

In light of this development, employers should continue to be diligent in documenting the reasons that lead to an employee’s termination. This is especially true if that employee may be found to have engaged in a protected activity, cloaking them with certain whistleblower protections.

In siding with whistleblower Trevor Murray, the justices rejected UBS’ position that a separate finding of retaliatory intent is required for whistleblower protection under the Sarbanes-Oxley Act, or SOX, which governs corporate financial reporting and recordkeeping.
© 2024 BARNES & THORNBURG LLP
For more on Whistleblowers, visit the NLR Labor & Employment section.

SEC Enforcement Targets Anti-Whistleblower Practices in Financial Firm’s Settlement Agreements with Retail Clients by Imposing Highest Penalty in Standalone Enforcement Action Under Exchange Act Rule 21 F-17(a)

As the year gets underway, the Securities and Exchange Commission (SEC or Commission) is continuing its ongoing enforcement efforts to target anti-whistleblower practices by pursuing a broader range of entities and substantive agreements, including the terms of agreements between financial institutions and their retail clients. The most recent settlement with a financial firm signifies that the SEC is imposing increasingly steep penalties to settle these matters while focusing on confidentiality provisions that do not affirmatively permit voluntary disclosures to regulators. We discuss below the latest SEC enforcement actions in the name of whistleblower protection and offer some practical tips for what firms and companies may do to proactively mitigate exposure.

On 16 January 2024, the SEC announced a record $18 million civil penalty against a dual registered investment adviser and broker-dealer (the Firm), asserting that the use of release agreements with retail clients impeded the clients from reporting securities law violations to the SEC in violation of Rule 21F-17(a) of the Securities Exchange Act of 1934 (Exchange Act).1

The SEC found that from March 2020 through July 2023, the Firm regularly required its retail clients to sign confidential release agreements in order to receive a credit or settlement of more than $1,000. Under the terms of these releases, clients were required to keep confidential the existence of the credits or settlements, all related underlying facts, and all information relating to the accounts at issue, or risk legal action for breach of the agreement. The agreements “neither prohibited nor restricted” the clients from responding to any inquiries from the SEC, the Financial Industry Regulatory Authority (FINRA), other regulators or “as required by law.” However, the agreements did not expressly allow the clients to initiate voluntary reporting of potential securities law violations to the regulators. The SEC found that this violated Rule 21F-17(a) “which is intended to ‘encourag[e] individuals to report to the Commission.’”2 While the Firm did report a number of the underlying client disputes to FINRA, the SEC found this insufficient to mitigate the lack of language in the release agreements that expressly permitted the clients to report potential securities law violations to the SEC.

The SEC initiated a settled administrative proceeding against the Firm, which neither admitted nor denied the SEC’s findings. In addition to the $18 million civil monetary penalty, the settlement requires that the Firm cease and desist from further violations of Rule 21F-17(a). Notably, the SEC credited certain remedial measures promptly undertaken by the Firm, including revising the at-issue release language and affirmatively alerting affected clients that they are not prohibited from communicating with governmental and regulatory authorities.

This enforcement action is significant for several reasons. First, it signals a broader enforcement focus by the SEC with respect to Rule 21F-17(a) in that this is the first action involving the terms of agreements between a financial institution and its retail clients, which are prevalent throughout the financial services industry. Previously, enforcement had focused squarely on restrictive confidentiality provisions involving employees, such as those found in employment or severance agreements or in connection with internal investigation interviews.

Second, the unprecedented magnitude of the penalty in a standalone Rule 21F-17(a) case underscores the SEC’s emphasis on preventing practices that it views as obstructions of whistleblower rights. SEC Enforcement Director Gurbir Grewal’s statement announcing the settlement reflects this position, “Whether it’s in your employment contracts, settlement agreements or elsewhere, you simply cannot include provisions that prevent individuals from contacting the SEC with evidence of wrongdoing.” Companies (public and private), broker-dealers, investment advisers, and other market participants should expect to see continued enforcement investigations in connection with the SEC’s ongoing attention toward compliance with Rule 21F-17(a), as discussed further below.

The SEC’s Whistleblower Protection Program

Established in 2011 pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC Whistleblower Program provides monetary awards to individuals who “tip” the SEC with original information that leads to an enforcement action resulting in monetary sanctions that exceed $1 million. Through the end of the SEC’s FY2023, the SEC has awarded almost $2 billion to 385 whistleblowers.3 In FY2023 alone, the SEC received over 18,000 whistleblower tips and awarded more than $600 million in whistleblower awards to 68 individuals.4

In furtherance of the Whistleblower Program, the SEC also issued Exchange Act Rule 21F-17(a), which provides that “no person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”5

SEC Struck Several Blows in 2023 Against Companies that Failed to Carve out Whistleblower Protections in Their Confidentiality Agreements

The SEC has been aggressively enforcing Rule 21F-17(a) since its first enforcement action in 2015 with respect to that Rule,6 through several waves of enforcement actions. During 2023, the SEC was especially active with a number of settled enforcement actions asserting violations of Rule 21F-17(a) in which the respondents neither admitted nor denied the SEC’s findings:

  • In February 2023, the SEC fined a video game development and publishing company $35 million for violating federal securities laws through its inadequate disclosure controls and procedures. The settled action also included a finding that the company had violated Rule 21F-17(a) by executing separation agreements in the ordinary course of its business that required former employees to provide notice to the company if they received a request for information from the SEC’s staff.7
  • In May 2023, the SEC imposed a $2 million fine on an internet streaming company for: (i) retaliating against an employee who reported misconduct to the company’s management prior to and after filing a complaint with the SEC; and, (ii) impeding the reporting of potential securities law violations, by including provisions in employee severance agreements requiring that departing employees waive any potential right to receive a whistleblower award, in violation Rule 21F-17(a).8
  • In September 2023, in another standalone enforcement action for violations of Rule 21F-17(a), the SEC imposed a $10 million civil monetary penalty on a registered investment adviser (RIA) for requiring that its new employees sign employment agreements that prohibited the disclosure of “Confidential Information” to anyone outside of the company, without an exception for voluntary communications with the SEC concerning possible securities laws violations.9 Further, the RIA required many departing employees to sign a release in exchange for the receipt of certain deferred compensation and other benefits affirming that, among other things, the employee had not filed any complaints with any governmental agency. Although the RIA later revised its policies and issued clarifications to employees that they were not prevented from communicating with the SEC and other regulators, the RIA failed to amend its employment and release agreements to provide the carve out.
  • Also in September 2023, the SEC charged two additional firms with violations of Rule 21F-17(a). In one case imposing a $375,000 civil penalty, the SEC found that a commercial real estate services and investment firm impeded whistleblowers by requiring its employees, as a condition of receiving separation pay, to represent that they had not filed a complaint against the firm with any federal agency.10 In another case, the SEC imposed a $225,000 civil penalty against a privately-held energy and technology company for requiring certain departing employees to waive their rights to monetary whistleblower awards.11 This particular action underscores that Rule 21F-17 applies to all entities, and not only to public companies.

Mr. Grewal, in an October 2023 speech before the New York City Bar Association Compliance Institute, emphasized that potential impediments to the SEC’s Whistleblower Program would be a continued focus of the agency’s enforcement efforts, stating, “we take compliance with Rule 21F-17 very seriously, and so should each of you who work in a compliance function or advise companies. You need to look at these orders and the violative language cited by the Commission and think about how those actions may impact your firms. And if they do, then take the steps necessary to effect compliance.”12

Key Take-Aways

The SEC’s recent enforcement actions demonstrate that violations of Rule 21F-17(a) can carry significant fines and reach virtually any confidentiality agreement that does not carve out communications between a firm’s current or former employees or customers and the SEC or other regulators about potential securities violations. Moreover, although many of the enforcement actions relate to language in agreements, Rule 21F-17 is not so limited and can also apply to language in internal policies, procedures, guidance, manuals, or training materials. The message from the SEC is clear: it will continue to enforce Rule 21F-17 with respect to public companies, private companies, broker-dealers, investment advisers, and other financial services entities.

The SEC in its recent orders has provided credit to companies for cooperation as well as for instituting remedial actions.13 Being proactive in identifying and correcting potential violations in advance of any investigation by the SEC can result in mitigation of any action or penalties.

Legal and compliance officers may want to consider the following steps in order to evaluate and potentially mitigate any potential exposure to an enforcement action:

  • Conduct a review of all employee-facing and client-facing documents or contracts with confidentiality provisions and remove or revise any content that may be viewed as impeding (even unintentionally) a person’s ability to report potential securities law violations to the SEC. Depending on the circumstances, this may involve including a reference expressly permitting communications with the SEC and other government or regulatory entities without advance notice or disclosure to the company.
  • Remove any language from the templates that could be interpreted as hindering an employee’s or client’s ability to communicate with the SEC concerning potential securities law violations, including language threatening disciplinary action against employees for disclosing confidential information in their communications with government agencies when reporting potential violations.
  • Prepare addenda or updates to current employee- and client-facing agreements that reflect the revised confidentiality clauses.
  • Include reference in written anti-retaliation policies that employees’ communications and cooperation with the SEC and other government agencies will not result in retaliation from the company.
  • Conduct trainings for company managers and supervisors regarding appropriate communications to employees regarding their interactions with the government.
  • Implement policies that prevent any company personnel from taking steps to block or interfere with an employee’s use of company platforms or systems to communicate with the SEC and other government agencies.14

1 In the Matter of JP Morgan Securities LLC, Admin. Proc. No. 3-21829 (Jan. 16, 2024), https://www.sec.gov/files/litigation/admin/2024/34-99344.pdf.

2 Id. (quoting Securities Whistleblower Incentives and Protections Adopting Release, Release No. 34-63434 (June 13, 2011)).

3 SEC Office of the Whistleblower Annual Report to Congress for Fiscal Year 2023 (Nov. 14, 2023), https://www.sec.gov/files/2023_ow_ar.pdf; SEC Whistleblower Office Announces Results for FY 2022 (Nov. 15, 2022), https://www.sec.gov/files/2022_ow_ar.pdf; 2021 Annual Report to Congress Whistleblower Program (Nov. 15, 2021), https://www.sec.gov/files/owb-2021-annual-report.pdf; 2020 Annual Report to Congress Whistleblower Program (Nov. 16, 2020), https://www.sec.gov/files/2020_owb_annual_report.pdf.

4 SEC Office of the Whistleblower Annual Report to Congress for Fiscal Year 2023 (Nov. 14, 2023), https://www.sec.gov/files/2023_ow_ar.pdf.

5 17 C.F.R. § 240.21F-17.

6 In the Matter of KBR, Inc., Admin. Proc. No. 3-16466 (Apr. 1 2015), https://www.sec.gov/files/litigation/admin/2015/34-74619.pdf (imposing a US$130,000 fine on a company in a settled enforcement action for requiring that witnesses in certain internal investigations sign confidentiality agreements warning that they could be subject to discipline if they discussed the matters at issue outside the company without prior approval of the company’s legal department).

7 In the Matter of Activision Blizzard, Inc. Admin. Proc. No. 3-21294 (Feb. 3, 2023), https://www.sec.gov/files/litigation/admin/2023/34-96796.pdf.

8 In the Matter of Gaia, Inc. et. al., Admin. Proc. No. 3-21438 (May 23, 2023), https://www.sec.gov/files/litigation/admin/2023/33-11196.pdf.

9 In the Matter of D.E. Shaw & Co., L.P., Admin. Proc. No. 3-21775 (Sep. 29, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98641.pdf.

10 In the Matter of CBRE Inc., Admin. Proc. No. 3-21675  (Sept. 19, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98429.pdf.

11 In the Matter of Monolith Res., LLC, Admin. Proc. No. 3-21629 (Sept. 8, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf.

12 Gurbir S. Grewal, Remarks at New York City Bar Association Compliance Institute (Oct. 24, 2023), https://www.sec.gov/news/speech/grewal-remarks-nyc-bar-association-compliance-institute-102423.

13 See, e.g., In the Matter of CBRE Inc., Admin. Proc. No. 3-21675  (Sept. 19, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98429.pdf (crediting respondent’s remediation program, which included, among other measures, an audit of relevant agreements, updates to policies with respect to Rule 21F-17, and mandatory trainings); In the Matter of Monolith Res., LLC, Admin. Proc. No. 3-21629 (Sept. 8, 2023), https://www.sec.gov/files/litigation/admin/2023/34-98322.pdf (crediting respondent’s prompt remedial acts including revisions to the at-issue release language and affirmatively alerting affected clients that they are not prohibited from communicating with governmental and regulatory authorities.)

14 Cf.  In the Matter of David Hansen, Admin Proc. 3-20820 (Apr. 12, 2022), https://www.sec.gov/enforce/34-94703-s (settled SEC enforcement action against former Chief Information Officer of a technology company for violating Rule 21F-17(a) by, among other things, removing an employee’s access to the company’s computer systems after the employee raised concerns regarding misrepresentations contained in the company’s public disclosures).

Copyright 2024 K & L Gates
For more news on SEC enforcement, visit the NLR Securities and SEC section.

Supreme Court Upholds Corporate Whistleblower Protections in Landmark Ruling

Today, the U.S. Supreme Court issued a unanimous ruling holding that whistleblowers do not need to prove that their employer acted with “retaliatory intent” to be protected under the Sarbanes-Oxley Act (SOX). The decision in the case, Murray v. UBS Securities, LLC, has immense implications for a number of whistleblower protection laws.

“This is a major win for whistleblowers and thus a huge win for corporate accountability,” said leading whistleblower attorney David Colapinto, a founding partner of Kohn, Kohn & Colapinto.

“A ruling in favor of UBS would have overturned more than 20 years of precedent in SOX whistleblower cases and made it exceedingly more difficult for whistleblowers who claim retaliation under many similarly worded federal whistleblower statutes,” Colapinto continued.

“Thankfully, the Court was not swayed by UBS’ attempt to ignore the plain meaning of the statute and instead upheld the burden of proof that Congress enacted to protect whistleblowers who face retaliation,” added Colapinto.

In an amicus curiae brief filed in the case on behalf of the National Whistleblower Center, the founding partners of Kohn, Kohn & Colapinto outlined the Congressional intent behind the burden of proof standard in SOX.

“In crafting the unique ‘contributing factor’ test for whistleblowers, Congress left an incredibly straight-forward legislative history documenting the value of whistleblowers’ contributions, the risks and retaliation whistleblowers faced, the barriers the previous burden of proof presented for whistleblowers, and Congress’ explicit intention to lower that burden of proof for whistleblowers,” the brief states.

In the Court’s opinion, Justice Sonia Sotomayor likewise pointed to the Congressional intent of SOX’s contributing-factor burden of proof standard:

“To be sure, the contributing-factor framework that Congress chose here is not as protective of employers as a motivating-factor framework. That is by design. Congress has employed the contributing-factor framework in contexts where the health, safety, or well-being of the public may well depend on whistleblowers feeling empowered to come forward. This Court cannot override that policy choice by giving employers more protection than the statute itself provides.”

This article was authored by Geoff Schweller.

Copyright Kohn, Kohn & Colapinto, LLP 2024. All Rights Reserved.
For more news on Supreme Court Whistleblower Rulings, visit the NLR Labor & Employment section.

As Three Recent Settlements Demonstrate, Whistleblowers Are the Key to Enforcement of Section 301 Tariffs

The Section 301 tariffs on Chinese-made goods—at the time, known as the Trump Tariffs, although President Biden has embraced them as well—were put in place in 2018. Only recently, more than five years later, have enforcement efforts begun to show up publicly. And, as is often the case, whistleblowers are the tip of the enforcement spear. In particular, over the course of two weeks at the end of 2023, the U.S. Department of Justice (“DOJ”) announced settlements of three qui tam cases, brought under the False Claims Act, that alleged evasion of Section 301 tariffs. These are the first such settlements to be made public, but likely signal the beginning of a wave of settlements or litigation in the coming years.

Starting in July of 2018, and pursuant to Title III of the Trade Act of 1974 (Sections 301 through 310, 19 U.S.C. §§ 2411-2420), titled “Relief from Unfair Trade Practices,” and often collectively referred to as “Section 301,” the United States imposed additional tariffs on a wide range of products manufactured in China. The Section 301 tariffs were rolled out in tranches, but they fairly quickly covered a majority of all Chinese-made products imported into the United States. The Section 301 tariffs imposed an additional 25% customs duty on those products.

As is always the case when high tariffs are imposed on imported goods, the Section 301 tariffs were met with a mix of responses by importers. In some cases, importers simply paid the additional 25% duties. In some cases, the importers found new sources, outside of China, for the products they wished to import. And in many cases, the importers started cheating—evading the tariffs either by lying to Customs and Border Protection (“CBP”) about what was being imported, or engaging to transshipping schemes to make it appear that the products were actually made in some country other than China.

Evasion of customs duties violates the False Claims Act, a federal law that, among other things, outlaws the making of false statements to avoid payment of money owed to the government. Evasion of customs duties will almost always involve such false statements because when goods are imported into the United States, the importer must provide CBP with a completed form, called an Entry Summary (also known as a Form 7501), in which the importer provides information about the nature, quantity, value, and country-of-origin of the goods being imported. To avoid or reduce the payment of duties, the importer will almost always lie on the Entry Summary about one or more of those, thus exposing the importer to liability under the False Claims Act.

The False Claims Act has a qui tam provision, which means that a private person or company may bring a lawsuit in the name of the government against the importer that has evaded payment of duties. If the qui tam lawsuit is successful, most of the money goes to the government. But the person or company that brought the lawsuit typically referred to as a whistleblower or, more technically, as the “relator”—gets an award that is between 15% and 30% of the amount recovered for the government.

When a qui tam case is first filed, it is put “under seal” by the court, meaning that it is secret and not available to the public. The case stays under seal, often for multiple years, as DOJ investigates the claims made in the case. But once DOJ decides to pursue a case, the seal is lifted, and the case becomes public. Often, this happens almost simultaneously with the announcement of a settlement of the case.

That is what happened with three cases that became public in late 2023. The first announcement came on November 29, 2023, when the U.S. Attorney’s Office for the Northern District of Georgia announced a $1.9 million settlement in a case captioned United States ex rel Chinapacificarbide Inc. v. King Kong Tools, LLC. In that case, the whistleblower that had brought the qui tam lawsuit was a competitor company which alleged that King Kong Tools was manufacturing cutting tools in a factory in China, shipping them to Germany, and then importing them from Germany into the United States, claiming falsely that the tools were made in Germany. The whistleblowing company received an award of $286,861.

The second such announcement came on December 5, 2023, when the U.S. Attorney’s Office for the Northern District of Texas announced a $2.5 million settlement in a case captioned United States ex rel. Reznicek et al. v. Dallco Marketing, Inc. In that case, the whistleblowers were two individuals who alleged that the defendants evaded the Section 301 tariffs by underreporting the value of the products they were importing from China into the United States. The whistleblowers received an award of $500,000.

The third such announcement case on December 13, 2023, when the U.S. Attorney’s Office for the Eastern District of Texas announced a settlement of $798,334 in a case captioned United States ex rel. Edwards v. Homestar North America LLC. Like the Dallco Marketing case, the Homestar case was also brought by an individual who alleged that the importer had lied to the government about the value of the goods being imported from China into the United States, in order to avoid payment of Section 301 tariffs. The whistleblower received an award of $151,683.

Accordingly, over the course of just two weeks in late 2023, three Section 301 settlements were publicly announced in quick succession. And notably, all three were whistleblower qui tam cases. This demonstrates the key role that whistleblowers play in the enforcement of customs tariffs and duties. No doubt, many other such cases remain under seal, and will start to become public as DOJ concludes its investigations. And because the Section 301 tariffs remain in place to this day, additional qui tam cases will almost certainly continue to be brought by both individual whistleblowers and competing companies seeking to level the playing field. Accordingly, these three settlements are likely just the early signs of a wave of Section 301 cases that will crest in the coming years.

© 2024 by Tycko & Zavareei LLP
For more news on Whistleblowers and Section 301 Tariffs, visit the NLR Antitrust & Trade Regulation section.

A New Year for Whistleblowers? Emergency Action Needed to Make Current Whistleblower Laws Work

In 2021 the White House, in conjunction with every major executive agency, approved The United States Strategy on Countering Corruption. In this authoritative and non-partisan Anti-Corruption Strategy, the United States for the first time formally recognized the key role whistleblowers play in detecting fraud and corruption. Based on these findings it declared that it was the official policy of the United States to “stand in solidarity” with whistleblowers, both domestically and internationally. As part of the Anti-Corruption Strategy the United States recognized that whistleblower qui tam reward laws must play a major role in combating financial frauds, such as money laundering. The proven ability of whistleblowers to detect fraud among corporate and government elites led the United States government to formally identify them as key players in preventing fraud, strengthening democratic institutions, and combating corruption that threatens U.S. national security.

Despite these findings, leading federal agencies responsible for enforcing whistleblower rights have failed to implement the U.S. Anti-Corruption Strategy’s whistleblower-mandates. Many of their current rules and practices directly undercut and undermine the very whistleblower rights identified by the White House Strategy as playing an essential role in combating corruption.

The 118th Congress will end on January 3, 2025. Thus, there is one year remaining for Congress and the current-sitting executive officers to act on a number of pending whistleblower initiatives, all of which have strong bipartisan support, are based on the plain meaning of laws already passed by Congress, and which are individually or collectively essential for the implementation of the U.S. Anti-Corruption Strategy. Outside of political interference by those who stand to lose when whistleblowers are incentivized and protected, there is no legitimate reason why these reforms cannot be quickly approved. The actions listed below are needed for the Strategy to be implemented, but whose approval has been stalled or blocked by resistant executive agencies or a timid Congress:

  • AML Whistleblower Regulations. The Treasury Department must enact regulations fully implementing the money laundering and sanctions whistleblower provisions of the Anti-Money Laundering Act. This law has been in effect since January 1, 2021, but Treasury has failed to implement the required regulations. Congress did its job, but Treasury has dropped the ball on approving the regulations necessary to ensure that the law is enforced. President Biden must demand that his Secretary of Treasury fully implement the anti-corruption Strategy his White House has approved as a critical national security measure.
  • Justice Department Whistleblower Regulations. Since January 1, 2021 the U.S. Department of Justice (DOJ) has been required, as a matter of law, to accept anonymous and confidential whistleblower disclosures concerning violations of the Bank Secrecy Act, including illegal money laundering and the use of crypto currency exchanges to facilitate violations of law. In December 2022, this requirement was by law extended to whistleblowers, worldwide, who wish to report violations of sanctions covering Russia, Hamas, ISIS, and other covered entities. In contempt of its legal requirements the Justice Department has ignored this law, and has failed to adopt regulations permitting anonymous whistleblowing. Congress did its job, Justice has dropped the ball. President Biden must demand that his Attorney General fully implement the anti-corruption Strategy his White House has approved as a critical national security measure.
  • SEC Whistleblower Regulations. Although the Securities and Exchange Commission’s (SEC) Whistleblower Program has radically improved since its failure to respond to whistleblower disclosures regarding the fraudster Bernie Madoff, regulations approved over 12-years ago continue to violate the statutory rights granted whistleblowers under the Dodd-Frank Act and strip otherwise qualified whistleblowers of their rights. For example, although the law gives whistleblowers the right to provide “original information” to the SEC through a news media disclosure, the SEC has never enforced this right. This has resulted in numerous extremely important whistleblowers to be denied protection or compensation. In the context of foreign corruption, DOJ statistics inform that 20% of all Foreign Corrupt Practices Act (FCPA) cases (which are covered under Dodd-Frank) are based on news media disclosures. Based on these numbers, one in five whistleblowers who report foreign corruption are illegally denied compensation under current SEC rules. An audit by the Organization of Economic Cooperation and Development released data regarding how whistleblowers were being harmed by the SEC’s interpretation of the law, including the failure to protect whistleblowers who make initial reports to international regulatory or law enforcement agencies, even if these agencies work closely with the United States. The SEC can resolve these issues by issuing clarifying decisions and exemptions consistent with the plain meaning of the Dodd Frank law and Congress’ clear intent. President Biden must demand that his appointments to the SEC fully implement the anti-corruption Strategy his White House approved.
  • Stop Repeal by Delay. The Internal Revenue Service (IRS) and the SEC both fail to compensate whistleblowers in a timely manner. These delays, which the IRS admits average over 10-years, cause untold hardship to whistleblowers, many of whom have lost their jobs and careers, and their only hope for economic survival is the compensation promised under law. In response to these untenable and unjustifiable delays, Congress has introduced two laws to expedite paying legally required compensation to whistleblowers, the SEC Whistleblower Reform Act and S. 625, the IRS Whistleblower Reform Act. Both amendments have strong bipartisan support and should be/could be passed quickly. See https://www.grassley.senate.gov/news/news-releases/grassley-warren-reintroduce-bill-to-strengthen-sec-whistleblower-program and https://www.grassley.senate.gov/news/news-releases/grassley-wyden-wicker-cardin-introduce-bipartisan-bill-to-strengthen-irs-whistleblower-program.
  • Strengthen the False Claims Act. The False Claims Act (FCA) whistleblower qui tam provision has proven to be the most effective law ever passed protecting the government from greedy contractors, fraud in Medicare and Medicaid, and from criminal procurement practices. Over $70 billion has been recovered by the taxpayers directly from fraudsters, and countless billions has also been paid in criminal fines. Two bipartisan amendments to the FCA are languishing in Congress.  The first is designed to prevent federal contractors from colluding with government officials when trying to justify their frauds. The second permits the federal government to administratively sanction contractors in smaller cases, where prosecutors rarely file charges in court.  The Administrative False Claims Act, S. 659, has been unanimously passed by the Senate but is stalled in the House of Representatives. The False Claims Act Amendment targeting collusion has strong bipartisan support, but is awaiting votes in Congress.  See    https://www.grassley.senate.gov/news/news-releases/senators-introduce-bipartisan-legislation-to-close-loophole-in-fight-against-fraud    https://www.grassley.senate.gov/news/news-releases/bipartisan-fraud-fighting-bill-unanimously-passes-senate.
  • Pass the CFTC Fund Improvement Act. The whistleblower reward law covering violations of the Commodity Exchange Act has proven successful beyond the wildest dreams of Congress. Billions upon billions in sanctions has been recovered from fraudsters who have manipulated markets ripping off consumers across the globe. These unprecedented whistleblower-triggered prosecutions have created an unintended problem: there are inadequate funds available to compensate whistleblowers as required under law. It is unconscionable for Congress to pass a law mandating that whistleblowers obtain compensation when they risk their jobs, reputations, and even their lives to serve the public interest, but then refuse to allocate funding to pay the mandatory rewards. The CFTC Fund Improvement Act, S. 2500, which has strong bipartisan support, would fix this problem. It needs to be immediately passed. Congress must live up to its promises.  See  https://www.grassley.senate.gov/news/news-releases/grassley-nunn-and-hassan-lead-bipartisan-bicameral-effort-to-bolster-successful-whistleblower-program.
  • Demand that Federal Agencies Respect, Honor, and Compensate Whistleblowers. One of the most unacceptable and unjustifiable hardships facing whistleblowers is the continued resistance to protecting whistleblowers in numerous (most) federal agencies.  This is exemplified by the complete failure of agencies to use their discretionary powers to protect or compensate whistleblowers. The Department of Commerce/NOAA can reward whistleblowers who report illegal fishing or “IUU” fishing violations and crimes committed by large ocean fishing boats operated by countries like China. Yet they have repeatedly failed to implement their whistleblower laws. The same can be said of the Department of Interior/Fish and Wildlife Service which have ignored the Lacey and Endangered Species Acts’ strong whistleblower reward provisions, allowing billions in illegal international wildlife trafficking to fester. Likewise, the Coast Guard largely ignores the whistleblower provisions of the Act to Prevent Pollution from Ships, turning down numerous whistleblower tips and failing to conduct investigations. Worse still, is the Justice Department’s penchant for prosecuting whistleblowers – even those who report crimes voluntarily to the Department pursuant to whistleblower disclosure laws.  President Biden must take action and demand that all executive agencies use their discretionary authorities permitted under law to incentivize and protect whistleblowers consistent with the anti-corruption Strategy his administration has approved.

A first step in changing the anti-whistleblower culture that undermines the public interest within most federal agencies is for the President to enforce the National Whistleblower Appreciation Day resolution that has been unanimously passed by the U.S. Senate over the past ten years. The resolution urges every executive agency to acknowledge the contributions of whistleblowers and educate their workforce as to these contributions. See https://www.grassley.senate.gov/news/news-releases/ten-years-running-grassley-wyden-lead-whistleblower-appreciation-day-resolution (S. Res. 298).

The importance of President Biden’s requiring all federal agencies to institute to Senate resolution is clear, based on the text of the resolution asking that all agencies “inform[] employees, contractors working on behalf of the taxpayers of the United States, and members of the public about the legal right of a United States citizen to ‘blow the whistle’ to the appropriate authority by honest and good faith reporting of misconduct, fraud, misdemeanors, or other crimes; and acknowledging the contributions of whistleblowers to combating waste, fraud, abuse, and violations of laws and regulations of the United States.”

These seven reforms all have bipartisan support and/or can be immediately implemented through executive action. There is simply no justification for delaying the implementation of these minimum and absolutely necessary reforms.

But the buck does not stop at the top. Strong and vocal public support can push all of these bipartisan reforms across the finish line. The American people – across all demographics, stand behind whistleblowers. How do we know this? The highly respected Marist polling agency conducted a scientifically valid survey of “likely American voters.” Their findings speak for themselves:

  • 86% of Americans want stronger whistleblower protections
  • 44% of “likely voters” state that the position of candidates on this issue would impact their vote. 

Despite the divisions within American society the Marist Poll findings demonstrated that the American public is united in supporting whistleblowers:

  • 84% of people without a college education want stronger protection for whistleblowers
  • 89% of people with a college education want stronger protection for whistleblowers
  • 85% of people earning under $50,000 want stronger protection for whistleblowers
  • 89% of people earning over $50,000 want stronger protection for whistleblowers
  • 86% of people living in urban areas want stronger protection for whistleblowers
  • 83% of people living in rural areas want stronger protection for whistleblowers
  • 86% of women want stronger protection for whistleblowers
  • 87% of men want stronger protection for whistleblowers
  • 88 % of Independents want stronger protection for whistleblowers
  • 78 % of Republicans want stronger protection for whistleblowers
  • 94 % of Democrats want stronger protection for whistleblowers

The only thing holding back effective whistleblower laws in the United States is the lobbying power of special interests and powerful government officials’ hostility toward dissent. This must end. Whistleblowing has proven to be the most effective means to detect waste, fraud, abuse and threats to the public health and safety. The United States Strategy on Countering Corruption represents a roadmap for action. It’s time for the President, Congress and those running agencies such as the Department of Treasury and the SEC to get the job done.

Copyright Kohn, Kohn & Colapinto, LLP 2023. All Rights Reserved.

by: Stephen M. Kohn of Kohn, Kohn & Colapinto 

For more news on Current Whistleblower Laws, visit the NLR Criminal Law / Business Crimes section.

Despite Record Year, SEC Must Improve Whistleblower Program to Align with White House Anti-Corruption Initiative

SEC Chair Gary Gensler announced on October 25th that in the 2023 fiscal year, the Commission received a record number of 18,000 whistleblower tips.

The SEC Whistleblower Program has grown rapidly and effectively since its inception in 2010 – the 2022 Fiscal Year set a record of 12,300 whistleblower tips. This was a near doubling of the 2020 tips, which set a record of 6,911.

The SEC transnational whistleblower program responds to individuals who voluntarily report original information about potential misconduct. If tips lead to a successful enforcement action, the whistleblowers are entitled to 10-30% of the recovered funds. The programs have created clear anti-retaliation protections and strong financial incentives for reporting securities and commodities fraud.

The U.S. Strategy on Countering Corruption is a White House initiative from December of 2021 that establishes the fight against corruption as a core tenant of national security interests. It outlines strategic pillars and objectives within each. The recommendations on improving the SEC’s whistleblower provisions as outlined below have the same goal of creating stronger processes to combat corruption.

Since the SEC Whistleblower Program was created in 2010, whistleblowers have played a crucial role in the SEC’s enforcement efforts. Overall, since the whistleblower program was established in 2010, “[e]enforcement actions brought using information from meritorious whistleblowers have resulted in orders for more than $6.3 billion in total monetary sanctions, including more than $4.0 billion in disgorgement of ill-gotten gains and interest, of which more than $1.5 billion has been, or is scheduled to be, returned to harmed investors,” according to the 2022 annual report.

This $6.3 billion recovered via sanctions is money that is put back into the pockets of investors and everyday Americans.

The SEC does not credit related enforcement actions to award notifications and sanctions in order to maintain the anonymity and confidentiality of whistleblowers, award notifications don’t tie to underlying enforcement action. The $6.3 billion does not include DOJ enforcement actions, which combined would show a much larger number.

Non-U.S. citizens who blow the whistle on potential securities frauds committed by publicly traded companies outside the United States are eligible to receive awards, as well as those whistleblowers who report violations of the Foreign Corrupt Practices Act. This anti-corruption legislation prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage.

Whistleblowers from over 130 countries have used the SEC Whistleblower Program to report fraud in their workplace.

Despite the massive growth of tips received, many whistleblowers’ cases are dismissed by the SEC due to insubstantial filing errors and strict time parameters on forms, or reported to the news media, other U.S. government agencies, or international government workers in roles that are public abroad but private in the U.S.

Considering these narrow qualifications and to ensure that the process for qualifying as a whistleblower aligns with U.S. anti-corruption priorities, the National Whistleblower Center recommends that the program be improved by expanding the definition of voluntary, further the provisions of identity protection and rewards. These recommendations align with the White House drafted United States Strategy on Countering Corruption.

Whistleblowers identified in case investigations should be automatically eligible for rewards, rather than mandated to meet technical form requirements.

The SEC should maintain their “Three Conditions” qualifications standards and expand the definition of “voluntary.” The current language disqualifies whistleblowers who report fraud to the media, other government agencies, foreign law enforcement, or a U.S. embassy before the SEC, considering them “involuntary.” These restrictions dissuade potential whistleblowers from engaging with the program and thus interfere with federal anti-corruption objectives. The agency must ensure that whistleblowers who file complaints internally before coming to the SEC maintain award eligibility.

The SEC should not incentivize or require whistleblowers to report internally before filing claims with the agency, as this exposes them to retaliation. If a whistleblower was removed from their position, they could no longer provide the Commission with the most updated information, which would harm the investigation.

By establishing a consistent inter-agency protocol concerning whistleblowers who have participated in the crime they report, the SEC can further protect the confidentiality and anonymity of whistleblowers in all ongoing federal investigations surrounding their disclosures.

Whistleblowers must receive the full force of related action provisions and rewards if the company or agency they report is simultaneously being investigated by another branch of government.

SEC regulations should contain strict deadlines for paying awards. These regulations should be premised on the fact that the SEC and Justice Department investigators and prosecutors will know the identity and contributions of all whistleblowers who would qualify for a reward in a particular case.

In the IRS (Internal Revenue Service) Whistleblower Program, procedures require that their investigators file whether or not there was a whistleblower involved in the case at the time the case file is closed. Agents thus know who the whistleblowers are, and the agency can process a claim quickly. The integration of affidavits and statements from front-line investigators into the decision-making process accelerates the reward payout.

Wait times for awards received are another disincentivizing factor for blowing the whistle. The SEC should establish and abide by a strict deadline for paying awards to ensure that whistleblowers are compensated fully and promptly. Rewards should not have a cap limit.

Such changes reinforce the White House Strategy’s objective to “bolster the ability of civil society, media, and private sector actors to safely detect and expose corruption,” “curb illicit finance,” and “enhance enforcement efforts” in the name of “modernizing, coordinating, and resourcing U.S. Government efforts to fight corruption.”

Enhancing the program ensures that whistleblowers whose information successfully leads to enforcement action on money laundering crimes are rewarded, no matter how they provide the information.

Such provisions will demonstrate to international whistleblowers that the risk of blowing the whistle on fraud is worth taking and the United States will support them through the process.

This article was authored by Sophie Luskin.

Copyright Kohn, Kohn & Colapinto, LLP 2023. All Rights Reserved.
For more news on the SEC Whistleblower Program, visit the NLR Securities & SEC section.

Crypto Fraud Remains Focus of CFTC Whistleblower Program

For the second straight year, the majority of whistleblower tips received by the Commodity Futures Trading Commission (CFTC) Whistleblower Program were related to cryptocurrency fraud.

On October 31, the CFTC released its Annual Report on the Whistleblower Program for the 2023 Fiscal Year. The report revealed that during the fiscal year, the CFTC received a record 1,530 whistleblower tips.

According to the report, “the majority of tips received during the Period involved allegations of fraudulent solicitation and subsequent misappropriation of crypto/digital assets.” The report further explains that examples of these crypto frauds include “pump-and-dump schemes, fraudulent representations of moneymaking opportunities, or refusals to honor withdrawal requests.”

“The majority of the tips received this year involved crypto—an area that continues to have pervasive fraud and other illegality,” said CFTC Commissioner Christy Goldsmith Romero in a statement supporting the Whistleblower Program. “With the rise of crypto, more retail customers have come under the CFTC’s jurisdiction, making even more critical the efforts of the CFTC’s Whistleblower Program and the Office of Customer Education and Outreach.”

Through the CFTC Whistleblower Program, qualified whistleblowers are entitled to monetary awards of 10-30% of the sanctions collected by the CFTC in the enforcement action related to their disclosure. To qualify for an award, a whistleblower must voluntarily provide original information that leads to a successful enforcement action of at least $1 million.

Back in 2019, the CFTC Whistleblower Program issued a Whistleblower Alert drawing attention to how individuals can blow the whistle on cryptocurrency fraud. The Alert explains that “when a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce, CFTC enforcement of the [Commodity Exchange Act] comes into play.”

Since then, the CFTC has filed a number of high-profile charges against entities for crypto fraud. For example, in 2021, BitMEX was ordered to pay $100 million for illegally operating a cryptocurrency trading platform and Coinbase was ordered to pay $6.5 million for false, misleading, or inaccurate reporting and wash trading. Earlier this year, the CFTC charged Binance and its founder, Changpeng Zhao, with operating an illegal digital asset derivatives exchange.

In December 2022, CFTC Chair Rostin Behnam testified before the U.S. Senate about the CFTC’s regulation of digital assets and cryptocurrency. Behnam highlighted the essential role the agency’s whistleblower program plays in its enforcement efforts in these areas. “In the absence of direct regulatory and surveillance authority in an underlying cash market, CFTC enforcement activity begins with a referral or whistleblower tip from an external source,” Behnam stated.

Over the past decade-plus, the CFTC Whistleblower Program has become an integral part of the CFTC’s enforcement efforts. Given that in recent years the agency has increasingly focused on cryptocurrency fraud, it is no surprise that the whistleblower program is playing a central role in the CFTC’s efforts on that front.

“Whistleblowers play a vital role in supporting CFTC investigations related to fraud and other illegality,” Commissioner Romero further stated. “The CFTC could not fully protect customers and markets without whistleblowers. Whistleblowers help identify fraud and other illegality, interpret key evidence, and save considerable Commission resources and time. The faster we can stop fraud, the more we can protect customers from harm.”

This article was authored by Geoff Schweller.

Copyright Kohn, Kohn & Colapinto, LLP 2023. All Rights Reserved.
For more news on Crypto Fraud and the CFTC Whistleblower Program, visit the NLR Communications, Media & Internet section.

CFTC Whistleblower Program’s FY23 Report to Congress Reveals Continued Success of the Program in Protecting Markets and Customers

CFTC Whistleblower Office Receives the Highest Number of Whistleblower Tips and Award Applications Since the Inception of the Program

Today the CFTC’s Whistleblower Program issued its annual report to Congress for FY23.  The report reveals that the program continues to be a key enforcement tool for the CFTC.  Since the inception of the program, the CFTC has awarded approximately $350 million to whistleblowers, and whistleblower disclosures have led to more than $3 billion in enforcement sanctions.  In a statement accompanying the report, Commissioner Christy Goldsmith Romero underscored the vital role of whistleblowers in helping the CFTC to protect customers and markets:

Whistleblowers play a vital role in supporting CFTC investigations related to fraud and other illegality.  The CFTC could not fully protect customers and markets without whistleblowers.  Whistleblowers help identify fraud and other illegality, interpret key evidence, and save considerable Commission resources and time.  The faster we can stop fraud, the more we can protect customers from harm.

Given the great benefit that whistleblowers provide to the CFTC’s enforcement efforts, it is critical for the CFTC to provide both incentives for whistleblowers to come forward, and protections for working with a federal whistleblower program.  The CFTC’s Whistleblower Program recognizes that whistleblowers put themselves at considerable professional and reputational risk in order to help the government.  The Program provides confidential protection to whistleblowers.  The Program also recognizes that incentives in the forms of monetary awards increase the number of whistleblower tips.  This Report confirms that fact, with 1,530 tips this year, the highest of any year.

Highlights of the report include:

  • During FY23, the CFTC granted seven applications for whistleblower awards, totaling approximately $16 million, to individuals who voluntarily provided original information that led to successful enforcement actions. Some of the whistleblowers provided information leading the CFTC to open the relevant investigations, while others provided substantial ongoing assistance and cooperation with the CFTC as the matter progressed.
  • The CFTC’s Whistleblower Office (“WBO”) received 1,530 whistleblower tips, which represents an increase of roughly 50 percent over the number of tips the WBO received in FY 2021 and FY 2020.
  • The WBO received tips regarding a wide range of alleged violations, including market manipulation, spoofing, insider trading, corruption, illegal swap dealer business conduct, recordkeeping or registration violations, and fraud or manipulation related to digital assets, precious metals, and forex trading.
  • The WBO received 301 whistleblower award applications, a new record for the CFTC Whistleblower Program – roughly doubling the previous record established in FY22.
  • The whistleblowers that received awards during FY23 conserved substantial CFTC resources and contributed in various ways, including: (1) providing a high degree of ongoing support to Enforcement Staff, including, among other things, interpreting key evidence, facilitating the appearance of another witness; (2) helping the CFTC expand its analysis of the misconduct and further analyze the harm suffered by customers as a result of the violations; and (3) providing information that was sufficiently specific, credible, and timely to cause Enforcement Staff to open an investigation leading to a successful covered action. In one of the orders granting an award, the CFTC noted that “[w]ithout the whistleblower’s information, DOE staff might not have learned of the violations at issue until much later and more customers could have been harmed.”

CFTC Whistleblower Reward Program

Under the CFTC Whistleblower Reward Program, the CFTC will issue rewards to whistleblowers who provide original information that leads to covered judicial or administrative actions with total civil penalties in excess of $1 million (see how the CFTC calculates monetary sanctions). A whistleblower may receive an award of between 10% and 30% of the total monetary sanctions collected.

Original information “leads to” a successful enforcement action if either:

  1. The original information caused the staff to open an investigation, reopen an investigation, or inquire into different conduct as part of a current investigation, and the Commission brought a successful action based in whole or in part on conduct that was the subject of the original information; or
  2. The conduct was already under examination or investigation, and the original information significantly contributed to the success of the action.

A covered “judicial or administrative action” is “any judicial or administrative action brought by the Commission under [the CEA] that results in monetary sanctions exceeding $1,000,000.”  7 U.S.C. § 26(a)(1).   In determining a reward percentage, the CFTC considers the particular facts and circumstances of each case. For example, positive factors may include the significance of the information, the level of assistance provided by the whistleblower and the whistleblower’s attorney, and the law enforcement interests at stake.

© 2023 Zuckerman Law
For more articles on whistleblowers, visit the NLR Criminal Law / Business Crimes section.

Was This The Least Transparent Report In SEC History?

Professor Alexander I. Platt at the University of Kansas School of Law has just released a draft of a forthcoming paper that takes the Securities and Exchange Commission to task for the lack of transparency in its whistleblower program, Going Dark(er): The SEC Whistleblower Program’s FY 2022 Report Is The Least Transparent In Agency History.  As Professor Platt notes in a footnote, I have been complaining about the whistleblower’s lack of transparency since at least 2016.  See Five Propositions Concerning The SEC Whistleblower Program.  Last summer, I observed that “There is certainly no dearth of irony in a federal agency dedicated to full disclosure cloaking in secrecy a billion dollar awards program”.

Professor Platt offers four possible reasons for the SEC’s lack of transparency: (1) resource constraints; (2) lack of respect for public participation and accountability; (3) data problems; and/or (4) an intent to bury something controversial or embarrassing.  My concern is, and has been, that whatever the reason(s), the SEC’s lack of transparency creates an ideal substrate for fraud.  Unless the SEC drops its cloak of secrecy and exposes its whistleblower program to public scrutiny, it is highly likely that the next article will be about how the whistleblower program was used and abused.

Article By Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP

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