Category: white collar crime

A Guide for All Medicare Whistleblowers

Becoming a whistleblower and notifying federal authorities of Medicare fraud is a big public service and can even lead to a lucrative whistleblower award. Furthermore, the chief concern for interested whistleblowers is whether they could get reprimanded at their job for blowing the whistle on healthcare fraud or even fired, but any form of whistleblower retaliation is unlawful under the Whistleblower Protection Enhancement Act.

If you think that you have uncovered evidence of Medicare fraud and want to learn more about what could happen next, here are four things to know.

  1. There are Lots of Known Ways to Defraud Medicare

Medicare is an $800 billion federal program, but estimates are that tens of billions, if not nearly $100 billion of that is lost to fraud every year – and that estimate is widely regarded as a conservative one.

A lot of this type of health care fraud can be categorized into one of the following types of schemes, many of them having to do with fraudulent billing tactics:

  • Phantom billing, where medical goods or services are billed against Medicare even though they were never provided or the purported patient does not exist
  • Double billing for the same goods or services
  • Providing medically unnecessary healthcare
  • Buying prescription drugs with Medicare drug plan money and then reselling them
  • Upcoding, or providing a healthcare service to a patient, but then billing Medicare for a similar but more expensive one
  • Unbundling, or billing for each service independently even though they are normally charged in a discounted package because they are often performed together
  • Paying or taking financial kickbacks for referring patients to a certain healthcare provider, or to a provider that the referring party has a financial stake in

However, these are just the types of Medicare fraud that have been discovered. There are likely other ways of defrauding the program that have yet to be detected. Therefore, even if the evidence that you have uncovered does not fit squarely into one of these types of Medicare fraud does not necessarily mean that it is not a problem.

  1. What Happens After Deciding the Blow the Whistle on Medicare Fraud

Most people are not completely familiar with how other civil or criminal cases move forward in the justice system. Because whistleblower cases are different and even more nuanced and complex, even fewer people understand the process – and those that presume that they are just like other cases find themselves misinformed.

Whistleblower cases are nearly unique in that they have three parties to them:

  1. The whistleblower
  2. The government
  3. The defendant

After you have found evidence of Medicare fraud and abuse, decided to report suspected fraud and become a whistleblower, and hired a law firm well versed in federal laws to represent you, you will continue to gather evidence to support your allegations. This is a sensitive endeavor, as most whistleblowers only have access to the incriminating evidence through their employment, and their employer may be actively trying to cover up the fraudulent activity.

Being represented by an experienced whistleblower lawyer is essential for this stage of the process. They will have gone through it before and will see how to gather evidence to support your case without exposing yourself to the risk of being detected for reporting fraud.

Once you have a strong case, the next step is to present it to the law enforcement agency that would have jurisdiction over your case. Typically you would present information to the Health and Human Services Office or Office of the Inspector General (OIG) hotline. For Medicare fraud, reports are often made to the Centers for Medicare and Medicaid Services, or CMS. The goal is typically to persuade agents there to intervene in your case, conduct the investigation that you started, and prosecute the fraudsters.

If the agency declines to intervene, you can still pursue the case on the government’s behalf.

  1. You Can Receive a Financial Award

One of the main incentives for whistleblowers is the award that they can receive for bringing the evidence to the attention of federal law enforcement. That award can be substantial.

Because Medicare is a federal program, most claims of Medicare fraud advance under the False Claims Act (31 U.S.C. §§ 3729 et seq.). This federal law provides an avenue for whistleblowers who have evidence of fraud against the government.

Importantly, the False Claims Act offers quite generous whistleblower awards, even when compared to other whistleblower statutes. The amount that you receive depends on several factors, the most important of which is whether the government intervened in your case or not. If it did, you can receive between 15 and 25 percent of the proceeds of the case. If it did not and you prosecuted the case on behalf of the government, you can recover up to 30 percent of the case’s proceeds.

Other factors include:

  • Whether there are other whistleblowers who played a role in the case
  • How important the evidence was that you brought to the table
  • Whether you played a part in the Medicare fraud
  1. Your Job is Protected 

Because workplace retaliation is such a foreseeable outcome of becoming a whistleblower, and because the federal government relies so heavily on whistleblowers, it should come as no surprise that the False Claims Act and other whistleblower statutes provide legal protections in the workplace for those who engage in lawful whistleblower activities.

For Medicare fraud whistleblowers, the False Claims Act’s anti-retaliation provision, 31 U.S.C. § 3730(h), is particularly strong. Not only does it protect you from retaliatory conduct that falls short of termination, like workplace harassment and threats to fire you, it also entitles you to significant remedies if your employer breaks the law and commits an act of reprisal.

Oberheiden P.C. © 2024
For more news on Medicare fraud whistleblowers, visit the NLR Criminal Law / Business Crimes section.

Justice Department has Opportunity to Revolutionize its Enforcement Efforts with Whistleblower Program

Over the past few decades, modern whistleblower award programs have radically altered the ability of numerous U.S. agencies to crack down on white-collar crime. This year, the Department of Justice (DOJ) may be joining their ranks, if it incorporates the key elements of successful whistleblower programs into the program it is developing.

On March 7, the Deputy Attorney General Lisa Monaco announced that the DOJ was launching a “90-day policy sprint” to develop “a DOJ-run whistleblower rewards program.” According to Monaco, the DOJ has taken note of the successes of the U.S.’s whistleblower award programs, such as those run by the Securities and Exchange Commission (SEC) and Internal Revenue Service (IRS), noting that they “have proven indispensable.”

Monaco understood that the SEC and IRS programs have been so successful because they “encourage individuals to report misconduct” by “rewarding whistleblowers.” But how any award program is administered is the key to whether or not the program will work. There is a nearly 50-year history of what rules need to be implemented to transform these programs into highly effective law enforcement tools. The Justice Department needs to follow these well defined rules.

The key element of all successful whistleblower award programs is very simple: If a whistleblower meets all of the requirements set forth by the government for compensation the awards must be mandatory and based on a percentage of the sanctions collected thanks to the whistleblower. A qualified whistleblower cannot be left out in the cold. Denying qualified whistleblowers compensation will destroy the trust necessary for a whistleblower program to work.

It is not the possibility of money that incentives individuals to report misconduct but the promise of money. Blowing the whistle is an immense risk and individuals are only compelled to take such a risk when there is real guarantee of an award.

This dynamic has been laid clear in recent legislative history. There is a long track record of whistleblower laws and programs failing when awards are discretionary and then becoming immensely successful once awards are made mandatory.

For example, under the 1943 version of the False Claims Act awards to whistleblowers were fully discretionary. After decades of ineffectiveness, in 1986, Congress amended the law to set a mandate that qualified whistleblowers receive awards of 15-30% of the proceeds collected by the government in the action connected with their disclosure.

The 1986 Senate Report explained why Congress was amending the law:

“The new percentages . . . create a guarantee that relators [i.e., whistleblowers] will receive at least some portion of the award if the litigation proves successful. Hearing witnesses who themselves had exposed fraud in Government contracting, expressed concern that current law fails to offer any security, financial or otherwise, to persons considering publicly exposing fraud.

“If a potential plaintiff reads the present statute and understands that in a successful case the court may arbitrarily decide to award only a tiny fraction of the proceeds to the person who brought the action, the potential plaintiff may decide it is too risky to proceed in the face of a totally unpredictable recovery.”

In the nearly four decades since awards were made mandatory, the False Claims Act has established itself as America’s premier anti-fraud law. The government has recovered over $75 billions of taxpayer money from fraudsters, the vast majority from whistleblower initiated cases based directly on the 1986 amendments making awards mandatory.

Similar transformations occurred at both the IRS and SEC where ineffective discretionary award laws were replaced by laws which mandated that qualified whistleblowers receive a set percentage of the funds collected thanks to their whistleblowing. Since these reforms, the whistleblower programs have revolutionized these agencies’ enforcement efforts, leading directly to billions of dollars in sanctions and creating a massive deterrent effect on corporate wrongdoing.

Most recently, Congress reaffirmed the importance of mandatory whistleblower awards when it reformed the anti-money laundering whistleblower law. The original version of the law, which passed in January 2021, had no set minimum amount for awards, meaning that they were fully discretionary. After the AML Whistleblower Program struggled to take off, Congress listened to the feedback from whistleblower advocates and passed the AML Whistleblower Improvement Act to mandate that qualified money laundering whistleblowers are awarded.

Monaco states that the DOJ has long had the discretionary authority to pay whistleblower awards to individuals who report information leading to civil or criminal forfeitures and has “used this authority here and there — but never as part of a targeted program.”

The most important step in turning an underutilized and ineffective whistleblower award law into an “indispensable” whistleblower award program has been made clear over the past decades. Qualified whistleblowers must be guaranteed an award based on a percentage of the sanctions collected in connection with their disclosure.

By administering its whistleblower program in a way that mandates award payments, the DOJ would go a long way towards creating a whistleblower program which revolutionizes its ability to fight crime. The Justice Department has taken the most important first step – recognizing the importance of whistleblowers in reporting frauds. It now must follow through during its “90-day sprint,” making sure reforming the management of the Asset Forfeiture Fund works in practice. Whistleblowers who risk their jobs and careers need real, enforceable justice.

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

Is the SEC’s Shadow Trading Win Proof That There is a Federal Common Law of Crime After All?

Last week, the U.S. Securities and Exchange Commission‘s Director of Enforcement celebrated a jury verdict in its insider trading case against Matthew Panuwat:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.”

I disagree, many have described the SEC’s theory of shadow trading as “novel”. More importantly, you won’t find it in Section 10(b) or Rule 10b-5, the ostensible bases for insider trading prosecutions. I have long decried the “make it up as you go along” aspect of insider trading jurisprudence:

Notably, Rule 10b-5 itself doesn’t explicitly mention insider trading. It would be more than a half century before the SEC finally adopted a rule, Rule 10b5-1 defining just one element of insider trading – when a purchase or sale constitutes trading “on the basis of” material non public information. It is no surprise then that federal courts have struggled to define who can be guilty of insider trading and why. The result is that the crime of insider trading has a decidedly “make it up as you go along” quality. Individuals don’t know where the lines are until the courts draw them and then convict. Consequently, people have gone to prison even as courts have adopted the theories for their convictions. The fact that the U.S. Supreme Court is still defining the crime more than seven decades after Mr. Freeman cobbled together Rule 10b-5 suggests that the definition of insider trading has been too inchoate to support criminal convictions. However “well tuned to an animating principle” a theory might be, I simply don’t think due process exists when a crime is only defined after a conviction.

If Congress truly believes that insider trading should be a crime, it should define the exact elements of the crime rather than leave it to the courts to make up the rules as they send people to prison. The California legislature has in fact done just that in Corporations Code Section 25402. For more on Section 25402, see my article, California’s Unique Approach to Insider Trading Regulation, 17 Insights 21 (July 2003).

Why Bassam Salman Should Not Have Been Convicted.

The willingness of federal courts to send people to prison based on a crime that isn’t expressed, much less defined, in any federal statute is at odds with the principle that only the people’s elected representatives in the legislature are authorized to make an act a crime. United States v. Hudson, 7 Cranch 32, 34, 11 U.S. 32, 3 L.Ed. 259 (1812). While the SEC’s case against Mr. Panuwat was civil, I expect that this novel theory will soon be applied in a criminal prosecution.

© 2010-2024 Allen Matkins Leck Gamble Mallory & Natsis LLP
For more news on SEC Insider Trading Cases, visit the NLR Securities & SEC section.

Department of Justice Ramps Up Investigations of Private Clubs that Received PPP Loans

As Varnum’s government investigations team has previously discussed, (link) the COVID-era Paycheck Protection Program (PPP) resulted in millions of businesses receiving emergency loans. The PPP’s hurried implementation, coupled with confusion among recipients over eligibility requirements, created an environment ripe for both fraud and the issuance of loans to ineligible recipients. Over the past few years, the Department of Justice (DOJ) has focused on fraud by among other things, opening civil investigations under the False Claims Act and bringing criminal charges against PPP loan recipients who misused loan proceeds on luxury items. But recently, the DOJ has shifted its focus to a new category of PPP recipients: social clubs that may have been technically ineligible for the loans they received.

The opportunity for improper loans to social clubs comes about because of a technical wrinkle in how Congress wrote the American Rescue Plan Act of 2021. In this Act, Congress made social clubs (i.e. golf clubs, tennis clubs, yacht clubs) organized under 26 U.S.C. § 501(c)(7) eligible for PPP loans. However, Congress incorporated an agency regulation that prohibited loans to “private clubs and businesses which limited the numbers of memberships for reasons other than capacity.” The result is that social clubs that limit their number of members for any reason besides capacity were technically ineligible for PPP loans.

In recent months, the DOJ has issued Civil Investigation Demands (CIDs) to clubs that it believes might not have been eligible for PPP loans. These CIDs are demands for documents and interrogatory answers and often relate to employment records, income statements, the membership admission process, prospective members’ applications, the club’s governance, and membership information. CIDs are expansive and the government can use the club’s answer in future civil or criminal proceedings.

Given the DOJ’s new focus, clubs should review their PPP paperwork now and consult with an attorney to determine whether their loan was properly issued. If the clubs find technical violations, proactively approaching the government through counsel may be beneficial. If a club receives a CID, it should immediately contact an attorney to begin preparing the appropriate response.

© 2024 Varnum LLP
by: Ronald G. DeWaard, Regan A. Gibson, Gary J. Mouw, Neil E. Youngdahl of Varnum LLP

For more news on Paycheck Protection Program Fraud Enforcement, visit the NLR Criminal Law / Business Crimes 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.

Client Alert: New Reporting Requirements Under the Corporate Transparency Act

On January 1, 2024, the Corporate Transparency Act (CTA) took effect. This new federal anti-money laundering law obligates many corporations, limited liability companies and other business entities to report to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), certain information about the entity, the entity’s beneficial owners and the individuals who created or registered the entity to do business. This client alert summarizes the CTA’s key requirements and deadlines. For more detailed information, please review the official “Beneficial Ownership Information Reporting FAQs” and the “Small Entity Compliance Guide” published by FinCEN.

Frequently Asked Questions

WHO MUST REPORT INFORMATION UNDER THE CTA?

The following “reporting companies” are subject to the CTA’s reporting requirements: (a) any U.S. corporation, limited liability company or other entity created by the filing of a document with a state or territorial government office; and (b) any non-U.S. entity that is registered to do business in any U.S. jurisdiction.

The CTA provides for 23 types of entities that are exempt from its reporting requirements, including companies that currently report to the U.S. Securities and Exchange Commission, insurance companies and tax-exempt entities, among others. Most notably, a company does not need to comply with the CTA if it has more than $5,000,000 in gross receipts for the previous year (as reflected in filed federal tax returns), at least one physical office in the U.S. and at least 20 employees in the U.S. For a full list of exemptions, including helpful checklists, please see Chapter 1.2, “Is my company exempt from the reporting requirements?”, of the Small Entity Compliance Guide.

A subsidiary of an exempt entity also will enjoy exempt status.

WHAT INFORMATION MUST BE REPORTED?

A reporting company is required to report the following information to FinCEN, and to keep the information current with FinCEN on an ongoing basis:

  1. The reporting company’s full legal name;
  2. Any trade name or “doing business as” (DBA) name of the reporting company;
  3. The reporting company’s principal place of business;
  4. The reporting company’s jurisdiction of formation (and, for non-U.S. reporting companies, the jurisdiction where the company first registered to do business in the U.S.); and
  5. The reporting company’s Employer Identification Number (EIN).

A reporting company also is required to identify its “beneficial owners” and “company applicant.” A beneficial owner is an individual who either: (a) exercises “substantial control” over the reporting company; or (b) owns or controls at least 25 percent of the ownership interests of the reporting company. A company applicant is an individual who directly files or is primarily responsible for filing the document that creates or registers the reporting company.

A reporting company must report and keep current the following information for each beneficial owner and company applicant:

  1. Full legal name;
  2. Date of birth;
  3. Complete current address;
  4. Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
    a. U.S. passport;
    b. State driver’s license; or
    c. Identification document issued by a state, local government or tribe.

WHEN ARE REPORTS DUE?

A reporting company that was first formed or registered to do business in the United States before January 1, 2024 will need to file its initial report with FinCEN no later than January 1, 2025.

A reporting company that is first formed or registered to do business in the United States between January 1, 2024 and January 1, 2025 will need to file its initial report with FinCEN within 90 calendar days after the effective date of its formation or registration to do business.

A reporting company that is first formed or registered to do business in the United States on or after January 1, 2025 will need to file its initial report with FinCEN within 30 calendar days after the effective date of its formation or registration to do business.

HOW DOES MY COMPANY FILE REPORTS WITH FINCEN?

Reports must be filed electronically through the BOI E-Filing System. For additional instructions and other technical guidance, please see the Help & Resources page.

WHAT HAPPENS IF MY COMPANY DOES NOT COMPLY WITH THE CTA?

At the time the filing is made, a reporting company is required to certify that its report or application is true, correct, and complete. Therefore, it is the reporting company’s responsibility to identify its beneficial owners and verify the accuracy of all reported information.

A person or reporting company who willfully violates the CTA’s reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues, plus criminal penalties of up to two years’ imprisonment and a fine of up to $10,000.

In the case of an accidental violation – for instance, if an initial report inadvertently contained a typo or outdated information – the CTA provides a safe harbor for reporting companies to correct the original report within 90 days after the deadline for the original report. If this safe harbor deadline is missed, the reporting company and individuals providing inaccurate information may be subject to the CTA’s civil and criminal penalties.

OTHER THAN FILING ACCURATE REPORTS, HOW CAN MY COMPANY STAY COMPLIANT?

A reporting company should consider taking the following actions to facilitate compliance with the CTA’s reporting requirements:

  • Amending existing governing documents, such as LLC or stockholder agreements, to require beneficial owners to promptly provide required information and otherwise cooperate in the company’s compliance with the CTA;
  • Designating an officer to oversee the company’s initial and ongoing CTA reporting;
  • Maintaining, reviewing and updating records on a regular cadence to reflect equity transfers, option grants and other transactions that affect ownership interest calculations; and
  • Developing a secure process for collecting and storing a beneficial owner’s photo identification and other sensitive information for CTA reporting purposes.
© Copyright 2024 Stubbs Alderton & Markiles, LLP
For more news on CTA Reporting Requirements, visit the NLR Financial Institutions & Banking 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.

Women in Whistleblowing: The Intersection Between Women’s Rights and Federal Employee Whistleblower Protections

Introduction

Pew Research Center data found that 42% of women in the United States have suffered discrimination in the workplace on the basis of their gender. Although there are statutory frameworks in place prohibiting such discrimination, the threat of retaliation can make it exceedingly difficult for employees who are already experiencing discrimination and harassment to come forward as whistleblowers under these provisions. On top of the personal and professional risks inherent in whistleblowing, federal employee whistleblowers have been saddled with added burdens by the statutory framework: in addition to proving her substantive claims, a federal whistleblower of sex discrimination is required to demonstrate that she has exhausted certain administrative remedies before she can be heard by a jury of her peers.  Because workplace discrimination disproportionally affects women, ensuring expansive and effective whistleblower protections and remedies, particularly for women in federal employment, is undoubtedly a women’s rights issue. To celebrate Women’s History Month, this article highlights just a few of the remarkable women who have come forward as whistleblowers within this framework to make enormous strides in preserving, enforcing, and expanding crucial protections for future generations of women in the federal workplace.

Statutory Framework

Title VII of the Civil Rights Act of 1964 (“CRA”) prohibits discrimination by private employers based on race, color, religion, sex, or national origin, and further prohibits retaliation by forbidding discrimination against an employee who has “made a charge, testified, assisted, or participated in” a Title VII proceeding or investigation. In 1972, the Equal Opportunity Act (“EOA”) expanded Title VII’s coverage to include certain categories of federal employees, providing that all personnel actions taken in regard to these employees “shall be made free from any discrimination based on race, color, religion, sex, or national origin.” Many courts have interpreted the EOA to extend both the anti-discrimination and anti-retaliation provisions of the CRA to federal employees. However, in a report on whistleblowing conducted by Senator Patrick Leahy in 1978, it was noted that although some interpretations of the existing statutory framework had been generous to whistleblowers, many courts were still “reluctant to play a role in the whistleblower problem”

Thus, the Civil Service Reform Act (“CSRA”) was passed in an attempt to cement protections for federal whistleblowers, creating an office within the Merit Protections Board (“MSPB”) to bring retaliation claims on behalf of whistleblowers. However, by 1989 not a single corrective action had been brought on behalf of whistleblowers to the MSPB, which was seen as largely ineffectual. In 1989, the Whistleblower Protection Act was passed, which for the first time created an individual right of action for federal employee whistleblowers. As the law currently stands, a federal employee whistleblower may bring a discrimination claim that would have been appealable to the MSPB as a civil action in federal court after the relevant administrative agency has failed to take action for a certain amount of time.

While this statutory framework provides critical tools for female whistleblowers to come forward and expose sex discrimination in the workplace, the accessibility of these tools remains particularly limited for federal employees who are required to go through the MSPB’s arduous administrative procedures before being heard in federal court, all the while often suffering continued discrimination and harassment at work. Thus, the real thrust of the work to protect female whistleblowers has been accomplished not by the provisions of the law but by those individual women brave enough to come forward and fight extensive legal battles to enforce, cement, and expand those provisions.

The Right to a Jury Trial for Federal Whistleblowers

Among the shortcomings of the statutory framework seeking to protect whistleblowers of sex discrimination in the federal workplace is an ambiguity in the scope of the individual right of action. The text of the statute explicitly gives the district court jurisdiction over discrimination claims arising under, inter alia, the Civil Rights Act. Therefore, it remains unclear whether a “mixed case”– which includes both discrimination claims and related non-discrimination retaliation claims – must remain within agency jurisdiction, or whether the entire mixed case, including the whistleblower retaliation claims, can be heard by a federal jury. This crucial gap in the legislation has been directly remedied by individual female whistleblowers.

In 1999, Dr. Duane Bonds was serving as Deputy Chief of the Sickle Cell Disease Branch of the Division of Blood Diseases and Resources within the NIH, where she was a highly prominent medical researcher. Throughout her employment, Dr. Bonds experienced repeated sexual harassment at the hands of her male supervisor. In retaliation for reporting the harassment to the EEOC, Dr. Bonds was removed from her position and demoted. In her new position, Dr. Bonds discovered that human DNA had been improperly used in NIH projects. She escalated these concerns over the objections of her supervisor, who retaliated by submitting negative performance reviews which caused her removal from the project. Dr. Bonds again filed a complaint with the EEOC in 2005, alleging that the removal constituted unlawful discrimination and retaliation. Throughout the complaint and investigation process, Dr. Bonds experienced continued sex discrimination and harassment in her workplace and was ultimately terminated in 2006. Dr. Bonds initiated a final EEOC complaint in 2007, detailing the extensive discrimination and whistleblower retaliation she had experienced. With no administrative action taken within the statutorily determined time frame, Bonds filed her case with the District Court.

Because it included both discrimination and claims of retaliation for protected whistleblowing activity, Bonds’ case was considered a “mixed case,” and the district court struggled with the question of jurisdiction under the CSRA, ultimately dismissing the claims citing failure to exhaust administrative remedies. In her appeal to the 4th Circuit, Dr. Bonds argued that mixed cases like hers must be treated as a single unit and heard in combination in either an administrative proceeding or in federal court. The 4th Circuit agreed, granting Bonds and other whistleblowers in her situation the right to a federal jury trial, on both her CSRA discrimination and WPA retaliation claims.

In determining this jurisdictional question, the 4th Circuit cited to a D.C. Circuit case which held in favor of another female whistleblower bringing both discrimination and retaliation claims. In this case, Kiki Ikossi – an electrical engineer at the Navy Research Lab – suffered continuous discrimination by her employer on the basis of age, gender, and national origin, stunting her career progression. Dr. Ikossi fought the misconduct in federal court, where the D.C. Circuit found that interpreting the law to require a whistleblower’s retaliation claims to be held up in administrative proceedings would be adverse to Congress’ intent to have discrimination and retaliation claims settled “expeditiously.” The Court noted that the regulatory structure surrounding mixed cases had become “extremely complicated,” and that access to a judicial forum for complainants of sexual discrimination in the federal workplace was critical to the legislative purpose, otherwise such claims would “languish undecided in the administrative machinery.”

The decisions on mixed case jurisdiction secured by Dr. Ikossi and Dr. Bonds have been cited by numerous other circuit courts, further expanding protections for federal employee whistleblowers facing sex discrimination in the workplace. On the basis of this precedent, Bunny Greenhouse – a high ranking official at the Army Corps of Engineers who discovered and exposed egregious contracting fraud by the Department of Defense – was able to take her case of whistleblower retaliation to federal court in the District of Columbia. Under pressure of a federal trial, the Army agreed to settle the case for nearly $1 million in restitution. After the settlement, Ms. Greenhouse made an impassioned statement: “I hope that the plight I suffered prompts the Administration and Congress to move dedicated civil servants from second-class citizenry and to finally give federal employees the legal rights that they need to protect the public trust.”

Among many other female whistleblowers who have helped to shape the law as it stands today, Dr. Ikossi, Dr. Bonds, and Ms. Greenhouse’s lengthy legal battles paved the way for future whistleblowers of gender discrimination to have their claims heard by a federal jury of peers rather than a politically appointed federal agency. The whistleblowing community is indebted to these women who were willing to take significant personal, professional, and financial risks to expose sex discrimination in the workplace, and to ensure future whistleblowers remain protected.

Copyright Kohn, Kohn & Colapinto, LLP 2023. All Rights Reserved.
For more White Collar Crime and Consumer Rights Legal News, click here to visit the National Law Review

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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© 2010-2023 Allen Matkins Leck Gamble Mallory & Natsis LLP

NFT Endorsed by Celebrities Prompts Class Action

Since the early days of the launch of the Bored Ape Yacht Club (BAYC) non-fungible tokens (NFTs), several celebrities have promoted the NFTs. On Dec. 8, 2022, plaintiffs Adonis Real and Adam Titcher brought a lawsuit against Yuga Labs, creators of the BAYC, alleging that Yuga Labs was involved in a scheme with the “highly connected” talent agent Greg Oseary, a number of well-known celebrities, and Moonpay USA LLC, a crypto tech company. According to the complaint:

  1. Yuga Labs partnered with Oseary to recruit celebrities to promote and solicit sales of BYAC;
  2. Celebrities promoted the BAYC on their various platforms;
  3. Oseary used MoonPay to secretly pay the celebrities; and
  4. The celebrities failed to disclose the payments in their endorsements.

According to the complaint, as a result of the various and misleading celebrity promotions, trading volume for the BYAC NFTs exploded, prompting the defendants to launch the ApeCoin and form the ApeCoin decentralized autonomous organization (DAO). Investors who had purchased the ApeCoin allegedly lost a significant amount of money when the value of the coins decreased.

This case highlights the potential risks that may arise in connection with certain endorsements. In addition to the FTC, the SEC also has issued guidance on requirements in connection with promotional activities relating to securities, which may include digital assets, such as tokens or NFTs. Under SEC guidance, any paid promoter, celebrity or otherwise, of a security, including digital assets, must disclose the nature, scope and amount of compensation received in exchange for the promotion. This would include tv/radio advertisements and print, in addition to promotions on social media sites.

Article By Barbara A. Jones, William B. Mack, and India L. Sneed of Greenberg Traurig, LLP

For more finance legal news, click here to visit the National Law Review.

©2022 Greenberg Traurig, LLP. All rights reserved.