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.

Whistleblower Receives $11 Million for Reporting Pharmaceutical Fraud

September 16, 2022.  The United States Department of Justice settled a case against the pharmaceutical manufacturer Bayer Corporation.  Under the terms of the settlement, Bayer paid $40 million.  A former employee in the pharmaceutical company’s marketing department filed two qui tam lawsuits alleging violations of the False Claims Act.  For reporting fraud, the whistleblower received approximately $11 million, and they pursued both cases after the Department of Justice (DOJ) declined to intervene.

According to the allegations, the pharmaceutical company was paying kickbacks to healthcare providers to “induce them to utilize the drugs Trasylol and Avelox, and also marketed these drugs for off-label uses that were not reasonable and necessary.”  This lawsuit was filed in the District of New Jersey and alleged that the because of these kickbacks, the pharmaceutical company caused submission of false claims to Medicare and Medicaid.  The lawsuit that was transferred to the District of Minnesota entailed the pharmaceutical company knowingly misrepresenting the safety and efficacy of Baycol, a statin drug, and also renewing contracts with the Defense Logistics Agency based on these misrepresentations.  To settle these allegations, Bayer paid $38,860,555 to the United States and $1,139,445 to the Medicaid Participating States.  The Principal Deputy Assistant Attorney General remarked about this settlement, “Today’s recovery highlights the critical role that whistleblowers play in the effective use of the False Claims Act to combat fraud in federal healthcare programs.”

The False Claims Act incentivizes private citizens to report fraud against the government and holds accountable companies that financially benefit from participation in government contracts and government-sponsored programs.  The Department of Justice needs whistleblowers to the be the antidote to pharmaceutical fraud.

© 2022 by Tycko & Zavareei LLP

If You Can’t Stand the Heat, Don’t Build the Kitchen: Construction Company Settles Allegations of Small Business Subcontracting Fraud for $2.8 Million

For knowingly hiring a company that was not a service-disabled, veteran-owned small business to fulfill a set aside contract, a construction contractor settled allegations of small business subcontracting fraud for $2.8 million.  A corporate whistleblower, Fox Unlimited Enterprises, brought this misconduct to light.  We previously reported on the record-setting small business fraud settlement with TriMark USA LLC, to which this settlement is related.  For reporting government contracts fraud, the whistleblower will receive $630,925 of the settlement.

According to the allegations, the general contractor and construction company Hensel Phelps was awarded a General Services Administration (GSA) contract to build the Armed Forces Retirement Home’s New Commons/Health Care Building in Washington, D.C.  Part of the contract entailed sharing the work with small businesses, including service-disabled, veteran-owned small businesses (SDVOSB).  The construction contractor negotiated all aspects of the contract with an unidentified subcontractor and then hired an SDVOSB, which, according to the settlement agreement, Hensel Phelps knew was “merely a passthrough” for the larger subcontractor, thus creating the appearance of an SDVOSB performing the work on the contract to meet the set-aside requirements.  The supposedly SDVOSB subcontractor was hired to provide food service equipment for the Armed Forces Retirement Home building.

“Set aside” contracts are government contracts intended to provide opportunities to SDVOSB, women-owned small businesses, and other economically disadvantaged companies to do work they might not otherwise access.  Large businesses performing work on government contracts are often required to subcontract part of their work to these types of small businesses.  “Taking advantage of contracts intended for companies owned and operated by service-disabled veterans demonstrates a shocking disregard for fair competition and integrity in government contracting,” said the United States Attorney for the Eastern District of Washington, as well as a shocking disregard for proper stewardship of taxpayer funds.

Whistleblowers can help fight fraud and protect taxpayers by reporting government contracts fraud.  A whistleblower can report government contracts fraud under the False Claims Act and become a relator in a qui tam lawsuit, from which they may be entitled to a share of the funds the government recovers from fraudsters.

© 2022 by Tycko & Zavareei LLP

SEC Awards Whistleblower Whose Tip Led to Opening of Investigation

On May 19, the U.S. Securities and Exchange Commission (SEC) issued a whistleblower award to an individual who voluntarily provided the agency with original information that led to a successful enforcement action.

Through the SEC Whistleblower Program, qualified whistleblowers are entitled to an award of 10-30% of the sanctions collected by the government in the enforcement action connected to their disclosure.

The SEC awarded the whistleblower approximately $16,000.

According to the award order, the whistleblower “helped alert Commission staff to the ongoing fraud and his/her tip was a principal motivating factor in the decision to open the investigation.”

In determining the exact percentage of an award, the SEC weighs a number of factors including the significance of the whistleblower’s information, the law enforcement interest in the case, the degree of further assistance provided by the whistleblower, the whistleblower’s culpability in the underlying violation, and the timelines of the disclosure.

According to the award order, the SEC considered that the awarded whistleblower “provided continuing assistance by supplying critical documents and participating in at least one subsequent communication with Commission staff that advanced the investigation.”

The SEC notes that the whistleblower did not initially make their disclosure via a Form TCR. However, the whistleblower qualified for an award because they filed a Form TCR within 30 days of learning of the filing requirement.

Since issuing its first award in 2012, the SEC has awarded approximately $1.3 billion to over 270 individuals. In the 2021 fiscal year, the program set a number of records. The SEC issued a record $564 million in whistleblower awards to a record 108 individuals.

In addition to monetary awards, the SEC Whistleblower Program offers confidentiality protections to whistleblowers. Thus, the SEC does not disclose any identifying information about award recipients.

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

Copyright Kohn, Kohn & Colapinto, LLP 2022. All Rights Reserved.

Calling All Whistleblowers: Department of Justice Launches Office of Environmental Justice

Last week, the United States Attorney General announced the creation of the Office of Environmental Justice (OEJ) within the Department of Justice. The OEJ will manage DOJ’s environmental justice projects and “serve as the central hub for our efforts to advance our comprehensive environmental justice enforcement strategy” and address the “harm caused by environmental crime, pollution, and climate change.”

In his speech, Attorney General Merrick B. Garland remarked that OEJ will “prioritize the cases that will have the greatest impact on the communities most overburdened by environmental harm” in partnership with the Civil Rights Division, Office for Access to Justice, Office of Tribal Justice, and United States Attorneys’ Offices.
Whistleblowers take note: violations of environmental laws (Clean Air Act, Clean Water Act) can be a basis for a False Claims Act case.

In 2019, the DOJ settled a case against a domestic producer of Omega-3 fish oil supplements, fishmeal, and fish solubles for livestock and aquaculture feed. The producer allegedly falsely certified compliance with federal environmental laws on a loan application. Under the terms of the settlement, the fish oil producer paid $1 million. A former employee blew the whistle on their employer’s fishy business and was rewarded $200,000 as part of a qui tam lawsuit.

False certification of environmental law compliance harms taxpayers, workers, residents, and the environment for generations. The Assistant Attorney General of the DOJ’s Civil Division said about the case, “Companies will face appropriate consequences if they misrepresent their eligibility to participate in federal programs and divert resources from those who should receive federal support.” It’s up to employees of manufacturers, contractors, construction companies, power plants, and others who receive government funds to report environmentally hazardous misconduct, so that, as the U.S. Attorney said, “Businessmen and companies that lie to get their hands on taxpayer money will be held accountable for their actions.”

Four Indicted for $16 Million Money Laundering Scheme

Four Indicted for $16 Million Money Laundering Scheme

On March 23, 2022, an indictment was unsealed in the Western District of Arkansas, charging four men for their involvement in wire fraud and money laundering schemes involving fake investment offerings amounting to an alleged $16 million.

According to court documents, the four men allegedly engaged in an investment fraud scheme between 2013 and 2021 in which they falsely represented the nature of their investment offerings and promised large returns, which they could not and did not yield. The indictment also alleges that two of the defendants encouraged victims to send their funds to bank accounts controlled by the other two defendants, and then transferred the money through a complex series of accounts worldwide.

The defendants were charged with wire fraud, conspiracy to commit wire fraud, and conspiracy to commit money laundering. One defendant was further charged with money laundering. If convicted, the men will face up to 20 years in prison for each count. The additional count of money laundering carries an additional sentence of up to 10 years.

The DOJ press release can be found here.

California Man Pleads Guilty To Stealing Government COVID-19 Relief Funds

On March 18, 2022, a California man pleaded guilty in the Central District of California to misappropriating COVID-19 relief funds obtained through the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Under the CARES Act Provider Relief Fund, CARES Act health care providers who were financially harmed by the impact of the COVID-19 pandemic are granted federal funds to provide care to patients suffering from COVID-19. According to court documents, the defendant admitted he owned a hospice agency in North Hollywood that was never operational during the COVID-19 pandemic, yet he received approximately $89,162 designated for the medical treatment and care of COVID-19 patients. The defendant admitted he misappropriated the CARES Act funds by spending them for his personal use and then transferring the funds to family members, including one family member in Armenia, rather than using the funds in any way related to the pandemic relief efforts as required.

As part of his guilty plea, the defendant further admitted that he submitted five Economic Injury Disaster Loan (EIDL) applications to the Small Business Administration (SBA) on behalf of his hospice agency and four other entities he controlled. As a result of his fraudulent applications, the SBA disbursed approximately $428,100 in EIDL funds to the man, which he used for his benefit against EIDL requirements.

The man pleaded guilty to three counts of theft of government property and is scheduled to be sentenced on June 13, facing up to 10 years in prison for each count.

The DOJ press release can be found here.

New Jersey Man Convicted for Fraudulently Obtaining US Visas for Chinese Government Employees

On March 23, 2022, a New Jersey man was convicted by a federal jury of one count of conspiracy to defraud the United States and to commit visa fraud for his participation in a conspiracy to fraudulently obtain United States visas for Chinese government employees.

According to court documents, the defendant was involved in a scheme to fraudulently obtain J-1 research scholar visas for employees of the government of the People’s Republic of China (PRC) to allow them to covertly work for the PRC government while in the United States. The defendant operated an office of the China Association for the International Exchange of Personnel (CAIEP), an agency of the PRC government, in New Jersey that seeks to recruit US scientists, academics, engineers, and other experts for the PRC.

The J-1 research scholar program allows foreign nationals to visit the United States to conduct research at a corporate research facility, library, museum, university, or other research institution. The defendant allegedly worked to obtain a J-1 research scholar visa for a prospective employee based on the false representation that the employee would conduct research at a United States university, to conceal unlawful work of another employee who was present in the United States on a J-1 visa sponsored by a US university. The two employees represented to the US government that they were entering the US for the primary purpose of conducting research at US universities, but their actual purpose consisted of working for the CAIEP. The defendant reported the employee’s arrival to the United States to the US universities, procured a local driver’s license for her and disguised her CAIEP salary as a subsidy for research scholar living expenses to make her presence as a research scholar appear legitimate.

As a result of his conviction, the defendant faces a maximum sentence of five years; he is scheduled to be sentenced on July 11.

The Department of Justice (DOJ) press release can be found here.

UPS To Pay $5.3 Million for False Claims Act Allegations

On March 21, 2022, the DOJ announced that United Parcel Service Inc. (UPS) agreed to pay approximately $5.3 million to settle allegations that the company falsely reported information about the transfer of U.S. mail to foreign posts or other intended recipients under contracts with the U.S. Postal Service (USPS), in violation of the False Claims Act (FCA).

UPS was engaged by USPS to pick up U.S. mail at various locations and deliver it to its international and domestic destinations. As a condition of payment, UPS was required to submit electronic scans to USPS to report when the mail was delivered, and there were specified penalties for mail that was delivered late or to the wrong location. The settlement resolves allegations that scans submitted by UPS were falsified times and that UPS, in fact, transferred possession of the mail.

According to DOJ, this is the fifth civil settlement involving air carrier liability for false delivery scans under the USPS International Commercial Air Contracts, pursuant to which the United States has recovered more than $70 million.

The DOJ press release can be found here.

© 2022 ArentFox Schiff LLP

Biden Administration Issues New Government-Wide Anti-Corruption Strategy

On Dec. 7, 2021, the White House published a government-wide policy document entitled “United States Strategy on Countering Corruption” (“Strategy”). The Strategy implements President Biden’s National Security Memorandum from earlier in 2021, which declared international corruption a threat to U.S. national security.

The Strategy is notable for several reasons:

First, the Strategy focuses not just on the “supply side” of foreign bribery and corruption—that is, companies acting in violation of the Foreign Corrupt Practices Act (FCPA)—but also on the “demand side” of the equation, namely corrupt foreign officials and those who assist them. It promises to pair vigorous enforcement of the FCPA with efforts to hold corrupt leaders themselves accountable, via U.S. money laundering laws, economic sanctions, and visa restrictions.

Second, the Strategy specifically calls out the role of illicit finance in facilitating and perpetuating foreign corruption, promising “aggressive enforcement” against those who facilitate the laundering of corrupt proceeds through the U.S. economy. Professional gatekeepers such as lawyers, accountants, and trust and company service providers are specifically identified as targets of future scrutiny. The Strategy also promises to institute legislative and regulatory changes to address anti-money laundering (AML) vulnerabilities in the U.S. financial system. These promised changes include:

  • Finalizing beneficial ownership regulations, and building a national database of beneficial owners, as mandated by the Anti-Money Laundering Act of 2020.

  • Promulgating regulations designed to reveal when real estate is used to hide ill-gotten gains. Contemporaneously with the White House’s issuance of the Strategy, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an Advance Notice of Proposed Rulemaking (ANPRM), inviting public comment on its plan to apply additional scrutiny to all-cash real estate transactions.

  • Prescribing minimum reporting standards for investment advisors and other types of equity funds, which are currently not subject to same AML program requirements as other financial institutions.

Third, the Strategy calls for a coordinated, government-wide response to corruption, and it contemplates a role not only for law enforcement and regulatory agencies but also for agencies such as the Department of State and Department of Commerce, which is to establish its own new anti-corruption task force. It remains to be seen if the increased scope of anti-corruption efforts called for by the Strategy will result in new or additional penalties for persons and entities perceived as corrupt or as facilitating corruption, but the Strategy may place an additional premium on corporate anti-corruption compliance.

Individuals and entities operating in sectors traditionally associated with corruption and/or AML risk should consider taking the following steps in response to the Strategy. These considerations apply not only to U.S. persons and businesses but also to anyone who may fall within the broad purview of the FCPA, U.S. money laundering statutes, and other laws with extraterritorial reach:

  • Increase due diligence for any pending or future transactions in jurisdictions where potentially corrupt actors or their designees play a role in awarding government contracts. Ensure any payments are the result of arms-length transactions based on legitimate financial arrangements.

  • Professional gatekeepers should become familiar with the particular risks associated with the industries in which they operate. While AMLA made it clear that lawyers, accountants, and real estate professionals will come under increased scrutiny based on the risk profile of their clients, the Strategy increases the likelihood that law enforcement will devote additional resources in this sometimes-overlooked area.

  • Given the increased role the State Department will continue to play in the anticorruption space based on the National Defense Authorization Act and the Strategy, companies doing business in or with countries vital to U.S. foreign policy goals should remember that in addition to the individual leaders of these countries, government institutions and lower-level officials could create risk and will be closely watched. Though the U.S. government often talks about specific government officials, the Strategy appears to take a broader approach.

  • Businesses should continue to examine and reexamine third-party risk with an emphasis on preventing potential problems before they occur. Additional resources and increased cooperation between and among government agencies may lead to additional investigations and enforcement actions, so compliance programs should be updated where necessary.

Article By Kyle R. Freeny and Benjamin G. Greenberg of Greenberg Traurig, LLP

For more white collar crime and consumer rights legal news, click here to visit the National Law Review.

©2021 Greenberg Traurig, LLP. All rights reserved.

SEC Investigating Cyberattacks Used to Find Secret Company Mergers

SEC Investigating Cyberattacks and Insider Trading

According to Reuters, the Securities and Exchange Commission (SEC) is investigating hacks of email accounts of associates and executives that reveal information on potential mergers. The hackers use a technique known as phishing where they craft emails that trick recipients into logging into malicious websites to steal their email logins. These hacks pose a threat because fraudsters can easily use the information to engage in insider trading.

The group, known as FIN4, allegedly targeted a list of 60 companies in biotechnology, medical instruments, hospital equipment, and drugs. Fireeye reported these cyberattacks in February 2014 and found that they were performed to “obtain an edge on the stock trading.” This will continue to be a problem as more businesses move over to cloud computing, which could lead to a significant increase in data breaches.

The SEC’s Office of Compliance Inspections and Examinations released a report on observations relating to cybersecurity and best practices by financial market participants. The observations are offered as guidelines for firms considering how to improve their cybersecurity preparedness and response procedures. The intent is to highlight specific examples of cybersecurity and operational resiliency practices and controls that firms are taking to safeguard against threats, and how they respond in the event of a breach. The SEC “encourages organizations to review their practices, policies, and procedures with respect to cybersecurity and operational resiliency.” Cybersecurity and Resiliency Observations report.

New Technology & Whistleblower Tips Root Out Insider Trading

The SEC relies on technological developments to accomplish its enforcement goals, including identifying and pursuing insider trading cases. In FY 2018, the SEC implemented a Consolidated Audit Trail, intended to enhance, centralize, and update the regulatory data infrastructure available to market regulators. Once fully implemented, the Consolidated Audit Trail will give regulators quicker access to all trade and order data, facilitating the detection of illegal trading practices, such as insider trading.

In addition to technology, the SEC has increasingly relied on whistleblower tips to identify and halt insider trading. Whistleblowers have been instrumental to expose fraud and expose insider trading secrets.

SEC Rewards Whistleblowers for Exposing Insider Trading 

Under the SEC Whistleblower Program, whistleblower are eligible to receive a reward if their original information about insider trading leads to a successful enforcement action with total monetary sanctions of more than $1 million. A whistleblower may receive an award of between 10 to 30 percent of the total monetary sanctions collected. If represented by counsel, a whistleblower may submit a tip anonymously to the SEC.


© 2020 Zuckerman Law

For more on SEC Insider Trading enforcement, see the National Law Review Criminal Law and Business Crimes section.

Are Culpable Whistleblowers Eligible to Receive SEC Whistleblower Awards?

Yes. In many circumstances, culpable whistleblowers are eligible to receive SEC whistleblowers awards (see limitations below). The final rules of the SEC Whistleblower Program recognize that culpable whistleblowers enhance the SEC’s ability to detect violations of the federal securities laws, increase the effectiveness and efficiency of the SEC’s investigations, and provide critical evidence for the SEC’s enforcement actions. In fact, a speech by the former Director of the SEC’s Division of Enforcement highlighted the importance of culpable whistleblowers to the agency’s enforcement efforts:

Finally, I want to say a word about participants in wrongdoing and their ability to be whistleblowers. It is important for participants in misconduct to understand that, in many circumstances, they are eligible for awards and we would like to hear from them. Obviously, culpable insiders with first-hand knowledge of misconduct can provide valuable information and assistance in identifying participants in, transactions relating to, and proceeds of, fraudulent schemes. And, while there are safeguards built into the program to ensure that whistleblowers do not profit from their own misconduct…culpable whistleblowers can still get paid for eligible information they report that falls outside of these limitations.

SEC Whistleblower Awards to Culpable Whistleblowers

The SEC Whistleblower Program’s decision to work with, and award, culpable whistleblowers has proven to be effective in enabling the SEC to discover fraud and protect investors. To date, the SEC has issued several awards to whistleblowers who had some culpability in the violations, including:

  • On August 30, 2016, the SEC announced a $22 million award to a whistleblower who helped the agency “halt a well-hidden fraud” at the company where the whistleblower worked. The accompanying order states that the Commission considered several factors mitigating the whistleblower’s culpability in determining the appropriate percentage, but the whistleblower did not financially benefit from the misconduct.
  • On July 27, 2017, the SEC announced a $1.7 million award to a whistleblower who helped the Commission stop a “serious, multi-year fraud that would have otherwise been difficult to detect.” There were a few mitigating factors in the Commission’s determination of the whistleblower’s final award, including the fact that the whistleblower did not comply with one of the SEC’s rules, an omission which normally requires an award denial. The order stated that “certain unusual circumstances” governed this case, thus the Commission decided to waive that requirement. In determining the award amount, the Commission considered, too, the fact that the whistleblower unreasonably delayed in reporting and ultimately bore “some, albeit limited, culpability” in the fraud.
  • On September 14, 2018, the SEC announced it had reduced a whistleblower’s award to $1.5 million because the Commission found that the whistleblower unreasonably delayed in reporting the fraud, the whistleblower “received a significant and direct financial benefit,” and was culpable in the scheme. The order further details these determining factors, and explains that the whistleblower waited more than a year after learning of the facts to report the fraud and reported to the Commission only after learning of the ongoing investigation.

See additional SEC whistleblower cases that have resulted in multi-million dollar awards.

Limitations on SEC Whistleblower Awards to Culpable Whistleblowers

While the SEC has been clear that it welcomes information from culpable whistleblowers, the SEC Whistleblower Program has specific rules that could disqualify certain whistleblowers from receiving SEC whistleblower awards. In addition, the program has rules that could limit the size of a culpable whistleblower’s future SEC whistleblower award. Importantly, whistleblowers who are concerned about potential liability should consult with experienced SEC whistleblower attorneys before reporting information to the SEC Office of the Whistleblower. Once information is submitted to the SEC, it cannot be withdrawn.

Whistleblowers Cannot Be Convicted of a Criminal Violation

The SEC Office of the Whistleblower will not issue awards to whistleblowers who are convicted of a criminal violation in relation to an action for which they would otherwise be eligible for an award. Moreover, the SEC Whistleblower Program does not provide amnesty to whistleblowers who provide information to the SEC. The fact that a whistleblower reports information to the SEC and assists in an SEC investigation and enforcement action does not preclude the SEC from bringing an action against the whistleblower based upon their own conduct in connection with violations of the federal securities laws. If such an action is determined to be appropriate, however, the SEC will take the whistleblower’s cooperation into consideration. As noted in the speech of the former Director of the SEC’s Division of Enforcement: “There are also other potential benefits for culpable whistleblowers — in appropriate circumstances, we will take their cooperation under the whistleblower program and in our investigation into consideration in deciding what remedies, if any, are appropriate in any action we determine should be brought against the whistleblowers for their role in the scheme.”

Culpable Whistleblowers Cannot Benefit from Their Own Misconduct

Under the SEC Whistleblower Program, the SEC will issue awards to whistleblowers who provide original information that leads to enforcement actions with total monetary sanctions in excess of $1 million. A whistleblower may receive an award of between 10-30 percent of the monetary sanctions collected. Since 2011, the SEC Whistleblower Office has issued nearly $400 million in awards to whistleblowers. The largest SEC whistleblower awards to date are a $50 million award, a $39 million award, and a $37 million award.

While the SEC is permitted to issue awards to culpable whistleblowers, the rules of the SEC Whistleblower Program do not allow whistleblowers to benefit from their own misconduct. Specifically, for purposes of determining whether the $1 million threshold has been satisfied or calculating the amount of an award, the SEC will not count any monetary sanctions that the whistleblower is ordered to pay or that are ordered to be paid against any entity whose liability is based substantially on conduct that the whistleblower directed, planned, or initiated.

Culpability May Decrease the Size of an Award

In determining the percentage of monetary sanctions to award a whistleblower, the SEC considers various factors that may increase or decrease the size of a whistleblower’s award. One of the factors that may decrease the size of an award is the whistleblower’s culpability in the securities law violation. When making this determination, the SEC may consider the following factors:

  • the whistleblower’s position or responsibility at the time the violations occurred;
  • if the whistleblower acted with scienter, both generally and in relation to others who participated in the violations;
  • if the whistleblower is a recidivist;
  • the egregiousness of the fraud committed by the whistleblower;
  • whether the whistleblower financially benefitted from the scheme; and
  • whether the whistleblower knowingly interfered with the SEC’s investigation.

Notably, while culpability may reduce a whistleblower’s award percentage, any whistleblower who qualifies for an award under the SEC Whistleblower Program – including culpable whistleblowers – will receive at least 10% of the monetary sanctions collected in the enforcement action.


© 2020 Zuckerman Law

For more on whistleblower rules, see the National Law Review Securities & SEC laws section.

Real Estate Promoter Carlton Cabot Arrested – Is He the Worst Fraudster in Modern History?

The name Carlton Cabot was once synonymous with tenant in common (TIC) real estate projects. Cabot claimed to have raised hundreds of millions of dollars and public records show that he promoted approximately 18 large real estate projects nationwide.

The entire concept of TIC financed projects began in 2002 after the IRS issued a revenue ruling allowing investors to defer capital gains from the sale of real estate involving an “exchange” of properties. (These are sometimes called 1031 exchanges because of section 1031 of the Internal Revenue Code.) For the first time, the IRS said individuals could pool their gains and invest in larger projects.

Unfortunately, along with legitimate developers came a number of scam promoters. Overnight, a new industry was born. Obviously, not all TIC projects are scams but many were.

The first few years of operations saw Cabot building his empire. A golf course in Georgia, a shopping center in Green Bay and an office park in Connecticut are but a few of Cabot’s many TIC financed projects.

The pooled money of the newly created TICs was used to make a down payment and the balance was financed. The borrowers were the TICs but most were told the loans were nonrecourse meaning the lender was only looking to the value of the property and not relying on the TIC members’ credit.

Unfortunately, stockbrokers who had no understanding of the complex loan documents and tax law behind 1031 exchanges sold many of these TIC investment interests including the TIC interests behind Carlton Cabot’s projects. The brokers relied on rosy projections and glossy brochures and other slick marketing materials. Few, if any, read the 1000+ page offering documents. Much higher than average sales commissions didn’t hurt their enthusiasm, either.

Two more factors made these TIC projects the recipe for disaster. First, Carlton Cabot was the master tenant in each of the projects. That gave him the ability to collect rents on behalf of the TICs. Cabot also set up the loan documents so that the mail addressed to the TIC investors was sent to him.

By 2012, we believe that Carlton Cabot was skimming rents. Mortgage payments therefore began being missed. Had the TIC investors known these things, they could have easily cured any default and removed Cabot as the master tenant. Many of the projects had sufficient reserves that could have been used to pay a missed mortgage payment or two.

Unfortunately, Cabot didn’t tell the TICs about his misdeeds. Nor did the lenders, loan trustees or loan servicers. Instead, the TICs often received phony financial statements from Cabot. Even though defaults were occurring everywhere, the TICs had no idea.

By the time the TICs found out, the loans had been accelerated and were in serious default. The TICs went from being investors to owing tens of millions on defaulted mortgages.

The criminal complaint against Carlton Cabot and his manager Timothy Kroll claims that $17 million was stolen from the projects. The feds say some of that money went into Carlton Cabot’s pocket while some was used to pay off and silence the few investors who were beginning to ask questions. We are sure that the money wasn’t going to the mortgage payments, however.

Theft of $17 million is already a serious charge. Because the TICs were forced into default, the problem is much larger. The TICs lost not only the rent payments but also their equity in the property and their investments. For many Cabot victims, the money they lost was their life savings. Worse, they may still be on the hook for any shortfall or deficiency upon foreclosure.

Many of the investors are also quite elderly. Some have died since the various lawsuits began. For those folks, they will never see any justice. The Justice Department says both Carlton Cabot and Timothy Kroll were arrested at their homes. Both men are charged with seven felony crimes including wire fraud, securities fraud, money laundering and conspiracy. Both men face 105 years if convicted on all counts.

We suspect that absent an immediate plea, the charges will increase as the IRS and U.S. Postal Inspection Service continues its investigation.

In announcing the arrests, U.S. Attorney Preet Bharara said, “As alleged, Carlton Cabot and Timothy Kroll conspired to defraud investors out of millions of dollars by misappropriating investor funds, in part to pay for personal luxuries, and they falsified financial statements in an attempt to cover their tracks.  The investigative work of the Postal Inspection Service and the IRS put an end to the alleged scheme.”

Is there hope for investors? Maybe. Investors who purchased from a stockbroker or other financial professional may have a claim against the person who sold or recommended the investment.

Unfortunately, there was such a wave of TIC frauds that many of the broker dealers selling TIC investments are already out of business.

Investors facing foreclosure or the lost of their investment may have valid claims against the servicers, loan trustees, property managers and others who turned a blind eye or actively participated in the crimes. Suing Carlton Cabot is probably not a great idea. We suspect that getting money from him is nearly impossible. Any justice from Cabot will be had if he is convicted and forced to face his victims at sentencing.

In summary, what was once billed as the investment of a lifetime has turned into a life sentence for many victims.  Even if you lost everything, don’t give up. A good fraud recovery lawyer may be able to help defend you against suits from lenders and may even be able to get back some of your lost money from third parties.

ARTICLE BY Brian Mahany of Mahany Law
© Copyright 2015 Mahany Law