The Race to Report: DOJ Announces Pilot Whistleblower Program

In recent years, the Department of Justice (DOJ) has rolled out a significant and increasing number of carrots and sticks aimed at deterring and punishing white collar crime. Speaking at the American Bar Association White Collar Conference in San Francisco on March 7, Deputy Attorney General Lisa Monaco announced the latest: a pilot program to provide financial incentives for whistleblowers.

While the program is not yet fully developed, the premise is simple: if an individual helps DOJ discover significant corporate or financial misconduct, she could qualify to receive a portion of the resulting forfeiture, consistent with the following predicates:

  • The information must be truthful and not already known to the government.
  • The whistleblower must not have been involved in the criminal activity itself.
  • Payments are available only in cases where there is not an existing financial disclosure incentive.
  • Payments will be made only after all victims have been properly compensated.

Money Motivates 

Harkening back to the “Wanted” posters of the Old West, Monaco observed that law enforcement has long offered rewards to incentivize tipsters. Since the passage of Dodd Frank almost 15 years ago, the SEC and CFTC have relied on whistleblower programs that have been incredibly successful. In 2023, the SEC received more than 18,000 whistleblower tips (almost 50 percent more than the previous record set in FY2022), and awarded nearly $600 million — the highest annual total by dollar value in the program’s history. Over the course of 2022 and 2023, the CFTC received more than 3,000 whistleblower tips and paid nearly $350 million in awards — including a record-breaking $200 million award to a single whistleblower. Programs at IRS and FinCEN have been similarly fruitful, as are qui tam actions for fraud against the government. But, Monaco acknowledged, those programs are by their very nature limited. Accordingly, DOJ’s program will fill in the gaps and address the full range of corporate and financial misconduct that the Department prosecutes. And though only time will tell, it seems likely that this program will generate a similarly large number of tips.

The Attorney General already has authority to pay awards for “information or assistance leading to civil or criminal forfeitures,” but it has never used that power in any systematic way. Now, DOJ plans to leverage that authority to offer financial incentives to those who (1) disclose truthful and new information regarding misconduct (2) in which they were not involved (3) where there is no existing financial disclosure incentive and (4) after all victims have been compensated. The Department has begun a 90-day policy sprint to develop and implement the program, with a formal start date later this year. Acting Assistant Attorney General Nicole Argentieri explained that, because the statutory authority is tied to the department’s forfeiture program, the Department’s Money Laundering and Asset Recovery Section will play a leading role in designing the program’s nuts and bolts, in close coordination with US Attorneys, the FBI and other DOJ offices.

Monaco spoke directly to potential whistleblowers, saying that while the Department will accept information about violations of any federal law, it is especially interested in information regarding

  • Criminal abuses of the US financial system;
  • Foreign corruption cases outside the jurisdiction of the SEC, including FCPA violations by non-issuers and violations of the recently enacted Foreign Extortion Prevention Act; and
  • Domestic corruption cases, especially involving illegal corporate payments to government officials.

Like the SEC and CFTC whistleblower programs, DOJ’s program will allow whistleblower awards only in cases involving penalties above a certain monetary threshold, but that threshold has yet to be determined.

Prior to Monaco’s announcement, the United States Attorney’s Office for the Southern District of New York launched its own pilot “whistleblower” program, which became effective February 13, 2024. Both the Department-wide pilot and the SDNY policy require that the government have been previously unaware of the misconduct, but they are different in a critical way: the Department-wide policy under development will explicitly apply only to reports by individuals who did not participate in the misconduct, while SDNY’s program offers incentives to “individual participants in certain non-violent offenses.” Thus, it appears that SDNY’s program is actually more akin to a VSD program, while DOJ’s Department-wide pilot program will target a new audience of potential whistleblowers.

Companies with an international footprint should also pay attention to non-US prosecutors. The new Director of the UK Serious Fraud Office recently announced that he would like to set up a similar program, no doubt noticing the effectiveness of current US programs.

Corporate Considerations

Though directed at whistleblowers, the pilot program is equally about incentivizing companies to voluntarily self-disclose misconduct in a timely manner. Absent aggravating factors, a qualifying VSD will result in a much more favorable resolution, including possibly avoiding a guilty plea and receiving a reduced financial penalty. But because the benefits under both programs only go to those who provide DOJ with new information, every day that a company sits on knowledge about misconduct is another day that a whistleblower might beat them to reporting that misconduct, and reaping the reward for doing so.

“When everyone needs to be first in the door, no one wants to be second,” Monaco said. “With these announcements, our message to whistleblowers is clear: the Department of Justice wants to hear from you. And to those considering a voluntary self-disclosure, our message is equally clear: knock on our door before we knock on yours.”

By providing a cash reward for whistleblowing to DOJ, this program may present challenges for companies’ efforts to operate and maintain and effective compliance program. Such rewards may encourage employees to report misconduct to DOJ instead of via internal channels, such as a compliance hotline, which can lead to compliance issues going undiagnosed or untreated — such as in circumstances where the DOJ is the only entity to receive the report but does not take any further action. Companies must therefore ensure that internal compliance and whistleblower systems are clear, easy to use, and effective — actually addressing the employee’s concerns and, to the extent possible, following up with the whistleblower to make sure they understand the company’s response.

If an employee does elect to provide information to DOJ, companies must ensure that they do not take any action that could be construed as interfering with the disclosure. Companies already face potential regulatory sanctions for restricting employees from reporting misconduct to the SEC. Though it is too early to know, it seems likely that DOJ will adopt a similar position, and a company’s interference with a whistleblower’s communications potentially could be deemed obstruction of justice.

The False Claims Act in 2023: A Year in Review

In 2023, the government and whistleblowers were party to 543 False Claims Act (FCA) settlements and judgments, the highest number of FCA settlements and judgments in a single year. As a result, collections under the FCA exceeded $2.68 billion, confirming that the FCA remains one of the government’s most important tools to root out fraud, safeguard government programs, and ensure that public funds are used appropriately. As in recent years, the healthcare industry was the primary focus of FCA enforcement, with over $1.8 billion recovered from matters involving hospitals, pharmacies, physicians, managed care providers, laboratories, and long-term acute care facilities. Other areas of focus in 2023 were government procurement fraud, pandemic fraud, and enforcement through the government’s new Civil Cyber-Fraud Initiative.

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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.

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.’”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.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,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.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

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.

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

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.

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.

17 C.F.R. § 240.21F-17.

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).

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.

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.

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).

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.

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.

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.

Do You Qualify to File an NHTSA Whistleblower Lawsuit?

The National Highway Traffic Safety Administration (NHTSA) recently established a whistleblower program to address safety concerns regarding motor vehicle defects, violations of the Federal Motor Vehicle Safety Standards, and violations of the Vehicle Safety Act. Like other qui tam lawsuits, NHTSA whistleblowers who come forward with valuable information regarding motor vehicle safety violations may be rewarded with significant financial compensation for their bravery.

What Issues Can Be Reported Under the NHTSA Whistleblower Program?

NHTSA whistleblowers may be eligible to receive a financial reward for reporting safety violations, including:

  • Potential vehicle safety defects: Examples include engine failure, defective airbags, and faulty breaks.

  • Noncompliance with Federal Motor Vehicle Safety Standards: These are U.S. federal regulations regarding the design, construction, performance, and durability requirements for motor vehicles sold in America.

  • Violations of the Motor Vehicle Safety Act: This law requires motor vehicle manufacturers to follow certain safety standards to reduce the likelihood of accidents.

  • Violations of any motor vehicle safety reporting requirements

Who Can Become a NHTSA Whistleblower?

According to the NHTSA, any employee or contractor who works for a motor vehicle manufacturer, a motor vehicle parts supplier, or a motor vehicle dealership is eligible to become a whistleblower and receive protections under the Vehicle Safety Whistleblower Act.

Why Should I File a Whistleblower Lawsuit?

Employees with inside information regarding vehicle safety defects or the violation of safety regulations can play a critical role in keeping our nation’s roads safer. Additionally, NHTSA whistleblowers who offer valuable information that leads to a settlement are entitled to a portion of the recovery as a financial reward. Employees of motor vehicle manufacturers who become whistleblowers are also protected from retaliation from their employers and their identities are kept hidden.

How Are NHTSA Whistleblowers Protected?

Under the Vehicle Safety Act, motor vehicle manufacturers, parts suppliers, and dealerships are prohibited from retaliating against an employee for becoming an NHTSA whistleblower or for refusing to participate in actions that violated safety regulations. If retaliation does occur, a complaint should be made to OSHA who will further investigate the complaint.

Additionally, the U.S. Department of Transportation and NHTSA in most cases are not permitted to share any details that would disclose the identity of a whistleblower.

How Are NHTSA Whistleblowers Rewarded?

If a whistleblower shares information regarding safety defects or safety regulation violations that leads to a successful NHTSA whistleblower lawsuit, the whistleblower could be rewarded financially. Whistleblowers may receive between 10 and 30 percent of what the U.S. Department of Transportation collects from the defendant vehicle manufacturer, parts supplier, or dealership. In many cases, whistleblowers who come forward about a corporation’s illegal activities or fraud receive a significant financial reward.

Successful NHTSA Whistleblower Lawsuits

Last year, Kia Motors America agreed to pay civil penalties worth $70 million for failing to issue a timely recall for an engine crankshaft defect in certain vehicles as well as for inaccuracies in defect and compliance reports. According to the NHTSA, the defect could have potentially led to engine stalling.

Hyundai Motors agreed to pay $140 million in civil penalties last year for failing to issue timely recalls regarding a potential fuel leak that could have occurred due to a low-pressure fuel hose. Heat could have caused the fuel hose to crack over time creating an engine fire hazard.

In 2020, Daimler Trucks North America agreed to $30 million in civil penalties for violations of the Vehicle Safety Act related to a number of untimely recalls. One of the recalls involved a brake light failure that could have potentially increased the risk of an accident.

© 2022 by Tycko & Zavareei LLP
For more content about whistleblowers, visit the NLR White Collar Crime & Consumer Rights section.

SEC Issues Three Whistleblower Awards Totaling Over $1 Million

On April 18, the U.S. Securities and Exchange Commission (SEC) issued three separate whistleblower awards totaling over $1 million. Each of the awarded whistleblowers voluntarily provided the SEC with original information that contributed to the success of an enforcement action.

Through the SEC Whistleblower Program, qualified whistleblowers are entitled to awards of 10-30% of the funds collected by the SEC in the relevant enforcement action. The SEC has awarded over $1.2 billion to over 250 individual whistleblowers since issuing its first award in 2012.

One of the awards issued by the SEC on April 18 was a $700,000 award granted to joint whistleblowers. The whistleblowers provided the SEC with original information and the SEC subsequently passed this information along to another agency. The whistleblowers’ information led to the successful enforcement of actions by both the SEC and the other agency. Under the Dodd-Frank Act’s related action provisions, the whistleblowers were entitled to awards based on the sanctions collected in both actions.

According to the award order, in determining the exact percentage to award the whistleblowers, the SEC considered the following: “(i) Claimants’ information prompted Commission staff to begin an examination that led to the Covered Action, (ii) Claimants’ assistance helped focus the examination; (iii) some of the charges in the Commission’s Order were based, in part, on the information submitted by Claimants; and (iv) there was substantial law enforcement interest in the information provided, as it related to an ongoing fraud involving the misappropriation of investor funds.”

The second award from April 18 was for $450,000. The whistleblower in this case first reported the misconduct internally before providing information to the SEC. According to the award order, the whistleblower’s information “significantly contributed to an existing investigation” and “helped streamline the staff’s investigation and saved the staff time and resources.” The whistleblower also provided the SEC with additional assistance including identifying witnesses and specific events of interest.

The final award, a $45,000 award based on sanctions collected to date, was issued to a whistleblower whose information prompted the SEC to open an investigation. According to the award order, the whistleblower “participated in a voluntary interview with Commission staff” and “suffered hardships as a result of the underlying misconduct.”

On April 18, the SEC also issued a whistleblower award denial. The denial covers award claims submitted by two individuals for the same enforcement action which stemmed from an investigation based on a self-report by a company. The SEC found that the individuals did not contribute to the success of the enforcement action.

According to the denial, “[t]he staff responsible for the Covered Action credibly declared, under penalty of perjury, that it neither received nor used any of the information provided by either Claimant during the Investigation or in the Covered Action, nor did it have any communications with the Claimants. Moreover, the information the Claimants provided did not relate to the matters considered in the Investigation.”

Individuals considering blowing the whistle to the SEC should first consult an experienced SEC whistleblower attorney in order to ensure they are fully protected and qualify for the largest possible award.

Geoff Schweller also contributed to this article.

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.
For more articles about whistleblower awards, visit the NLR Financial, Securities & Banking section.

Electronic Medical Record Provider Pays $930,000 in First Civil Cyber-Fraud Initiative Settlement

For the first settlement as part of the Department of Justice’s Civil Cyber-Fraud Initiative, DOJ settled a case against medical services government contractor Comprehensive Health Services, LLC (CHS) for $930,000.  This settlement resolves allegations brought forth in two qui tam lawsuits, where four whistleblowers filed suit on behalf of the government under the qui tam provision of the False Claims Act.  Three of the whistleblowers received $15,000, in addition to attorneys’ fees, and one relator received $127,050 for reporting fraud.

“This settlement serves notice to federal contractors that they will be held accountable for conduct that puts private medical records and patient safety at risk,” said the United States Attorney for the Eastern District of New York.

CHS, as part of the medical services they provided to the U.S. government, was paid to implement a secure electronic medical record (EMR) system as part of contracts with the State Department and Air Force at various U.S. consulate and military locations in Iraq and Afghanistan.  The EMR system housed personal health information and medical records for anyone who received medical treatment at the locations CHS served, including U.S. service members, diplomats, officials, and contractors.  According to the allegations, CHS did not consistently store patients’ medical records on the secure EMR system and indeed left scans on a network drive which non-clinical staff could access.

As part of several contracts to which CHS was a party, CHS was supposed to provide medical supplies, including controlled substances subject to U.S. Food and Drug Administration (FDA) or European Medicines Agency (EMA) approval.  According to the allegations, CHS “knowingly, recklessly, or with deliberate ignorance” submitted claims for payment for controlled substances that they obtained by means not sanctioned by these contracts.  Not only did CHS lack a Drug Enforcement Agency license to export controlled substances, but CHS also obtained controlled substances by having their U.S.-based subsidiary request that a South African physician prescribe controlled substances, according to the allegations.  The South African physician prescribed these controlled substances, absent FDA or EMA approval, and a shipping company from the same country imported the substances to Iraq.

Government contractors are supposed to adhere to the terms of their contracts in order to receive reimbursement from the U.S. government.  This medical services provider ignored procurement guidelines to obtain controlled substances, undermining safety controls and misrepresenting their adherence to contract terms in providing medical services to U.S. military personnel.  The DOJ’s Civil Cyber-Fraud Initiative brings the power of the False Claims Act to bear on contractors whose job is to protect sensitive information and critical systems.  Representing that data is secure when it is, in fact, not is a violation of the False Claims Act and constitutes cyber-fraud.  As the Special Agent in Charge of the U.S. Department of State OIG, Office of Investigations noted, “…this outcome will send a clear message that cutting corners on State Department contracts has significant consequences.”

Whistleblowers raised data privacy concerns to CHS, but the contractor failed to implement better cybersecurity protocols in response to their concerns.  The Department of Justice has rewarded its first whistleblowers as part of the Civil Cyber-Fraud Initiative, and they’re just getting started.

© 2022 by Tycko & Zavareei LLP
For more articles about digital health, visit the NLR Health Care Law section.