Tag: DOJ

Walgreens Settles for $106.8 Million Over FCA Violations

On September 13, the US Department of Justice (DOJ) announced that Walgreens Boots Alliance Inc. and Walgreen Co. (collectively, Walgreens) agreed to pay $106.8 million to resolve allegations of violating the False Claims Act (FCA) and state statutes. The allegations pertain to billing government health care programs for prescriptions that were never dispensed. The government alleged that from 2009 until 2020, Walgreens submitted claims to federal health care programs for prescriptions that were processed but never picked up by beneficiaries. This resulted in Walgreens receiving 10s of millions of dollars for prescriptions that were never actually provided to health care beneficiaries.

Under the resolution, Walgreens agreed to enhance its electronic pharmacy management system to prevent future occurrences and self-reported certain conduct. In addition, Walgreens refunded $66,314,790 related to the settled claims, which allowed Walgreens to receive credit under the DOJ’s guidelines for taking disclosure, cooperation, and remediation into account in FCA cases.

Under the settlement agreement, the federal government received $91,881,530, and the individual states received $14,933,259 through separate settlement agreements. The settlement will resolve three cases pending in the District of New Mexico, Eastern District of Texas, and Middle District of Florida under the qui tam, or whistleblower, provision of the FCA. Whistleblowers Steven Turck and Andrew Bustos, former Walgreens employees, will receive $14,918,675 and $1,620,000, respectively, for their roles in filing the suits.

The DOJ’s press release can be found here.

CVS Health Subsidiary Settles FCA Allegations for $60 Million

On September 16, Chicago company Oak Street Health, a subsidiary of CVS Health, agreed to pay $60 million to resolve allegations that it violated the FCA by paying kickbacks to third-party insurance agents in exchange for recruiting seniors to Oak Street Health’s primary care clinics from September 2020 through December 2022.

According to the DOJ, in 2020, Oak Street Health developed a program called the Client Awareness Program. Under the program, which was developed to increase patient membership, seniors who were eligible for Medicare Advantage received marketing messages designed to generate interest in Oak Street Health. Upon receipt of these messages, third-party insurance agents organized three-way phone calls with Oak Street Health employees for the interested seniors. Oak Street Health paid agents around $200 per beneficiary referred or recommended as part of this service. Instead of basing referrals and recommendations on the best interest of the seniors, these payments allegedly encouraged agents to base referrals and recommendations on Oak Street Health’s financial interests.

The DOJ’s press release can be found here.

Dunes Surgical Hospital Settles for $12.76 Million Over FCA Violations

On September 16, South Dakota companies Siouxland Surgery Center LLP, d.b.a. Dunes Surgical Hospital, United Surgical Partners International Inc. (USPI), and USP Siouxland Inc. agreed to pay approximately $12.76 million to settle FCA allegations related to improper financial relationships between Dunes and two physician groups. Since July 1, 2014, USPI has maintained partial ownership of Dunes through USP Siouxland, a wholly owned subsidiary of USPI. Following an internal investigation, Dunes and USPI disclosed the arrangements at issue to the government.

From at least 2014 through 2019, Dunes allegedly made financial contributions to a nonprofit affiliate of a physician group whose physicians referred patients to Dunes. According to the complaint, those payments allegedly funded the salaries of referring employees. Other allegations include that Dunes provided a different physician group with below-market-value clinic space, staff, and supplies. The DOJ alleged that these arrangements violated both the Anti-Kickback Statute and the Stark Law, which are “designed to ensure that decisions about patient care are based on physicians’ independent medical judgment and not their personal financial interest.”

Following Dunes’ and USPI’s internal compliance review and independent investigation, the companies promptly took remedial actions and disclosed such arrangements to the DOJ. The companies also provided the government with detailed and thorough written disclosures and cooperated throughout its investigation, resulting in cooperation credit for the companies.

Under the settlement, Dunes and USPI will pay $12.76 million to the federal government for alleged violations of the FCA, and approximately $1.37 million to South Dakota, Iowa, and Nebraska for their share of the Medicaid portion of the settlement.

The DOJ’s press release can be found here.

California Man Convicted for Paying Illegal Kickbacks for Patient Referrals to Addiction Treatment Facilities

On September 11, a federal jury convicted Casey Mahoney, 48, of Los Angeles, for paying nearly $2.9 million in illegal kickbacks for patient referrals to his addiction treatment facilities in Orange County, California. The facilities involved are Healing Path Detox LLC and Get Real Recovery Inc.

According to court documents and evidence presented at trial, Mahoney paid illegal kickbacks to “body brokers” who referred patients to his facilities. These brokers appeared to pay thousands of dollars in cash to patients to induce them to procure treatment at Mahoney’s facilities. Mahoney allegedly concealed these illegal kickbacks through sham contracts with the body brokers. The contracts purportedly required fixed payments and prohibited payments based on the volume or value of patient referrals, when in reality, payments were negotiated based on patients’ insurance reimbursements and the number of days Mahoney could bill for treatment. Mahoney also allegedly laundered the proceeds of the conspiracy through payments to the mother of one of the body brokers, falsely characterizing them as consulting fees.

The Eliminating Kickbacks in Recovery Act formed the basis of the charges against Mahoney. He was convicted of one count of conspiracy to solicit, receive, pay, or offer illegal remunerations for patient referrals, seven counts of illegal remunerations for patient referrals, and three counts of money laundering. He is scheduled to be sentenced on January 17, 2025, and faces a maximum penalty of five years in prison for the conspiracy charge, 10 years in prison for each illegal remuneration count, and 20 years in prison for each money laundering count.

The DOJ’s press release can be found here.

© 2024 ArentFox Schiff LLP

by: D. Jacques Smith, Randall A. Brater, Michael F. Dearington, Nadia Patel, Hillary M. Stemple, and Rebekkah R.N. Stoeckler of ArentFox Schiff LLP

For more news on FCA Violations visit the NLR Criminal Law Business Crimes section.

DOJ, FTC, DOL, and NLRB Join Forces and Announce Memorandum of Understanding on Labor Issues in Merger Investigations

On August 28, the US Department of Justice (DOJ) Antitrust Division, which enforces the US antitrust laws including the Sherman Act and Clayton Act, and the Federal Trade Commission (FTC), which enforces the Federal Trade Commission Act and other laws and regulations prohibiting unfair methods of competition (together, Antitrust Agencies), along with the US Department of Labor (DOL) and National Labor Relations Board (NLRB) (together, Labor Agencies), announced that they entered into a Memorandum of Understanding on Labor Issues in Merger Investigations (MOU).
The MOU took effect on August 28 and expires in five years, unless it is extended or terminated upon written agreement of each of the agencies.

Purpose of the MOU

The MOU outlines a collaborative initiative between the signatory agencies to assist the Antitrust Agencies with labor issues that may arise during the course of antitrust merger and acquisition (M&A) investigations, commenced under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). The HSR requires that parties to certain large M&As provide information to the Antitrust Agencies prior to the transaction’s consummation, which allows these agencies to analyze the anticipated transaction(s) and provide greater certainty to the parties regarding potential antitrust concerns.

From a labor perspective, these investigations may aim to evaluate whether the effect of a merger or acquisition could substantially lessen competition for labor. The stated goal of this MOU is to protect employees and promote fair competition in labor markets. Specifically, the MOU outlines methods by which the Labor Agencies may aid or advise the Antitrust Agencies on potential labor issues identified during the course of these evaluations. These methods include the following.

1. Labor Information Sharing

The MOU outlines various ways in which the Antitrust Agencies may work with the Labor Agencies to gather information used to evaluate potential impacts of M&As on labor markets. These include:

  1. Soliciting information from relevant worker stakeholders and organizations.
  2. Seeking the production of information and data with respect to labor markets.
  3. Searching publicly available sources of information made available by the Labor Agencies.
  4. Seeking production of non-public information and data related to labor markets from the Labor Agencies.

2. Providing Training and Technical Assistance

Labor Agencies agree to provide technical assistance and training to personnel from the Antitrust Agencies related to subject matter under their jurisdictions. For example, the NLRB will train personnel from Antitrust Agencies on labor-related issues such as the duty to bargain in good faith, successor bargaining obligations, and unfair labor practices. Additionally, the Antitrust Agencies may seek technical assistance on labor and employment law matters in merger reviews, including in the resolution of labor market merger investigations.

3. Collaborative Meetings

The Labor Agencies and Antitrust Agencies will seek to meeting biannually to discuss the implementation and coordination of activities outlined in the MOU.

This MOU expands upon collaborative efforts amongst the agencies and builds upon several MOUs executed in 2022 and 2023. MOUs between the DOJ and DOL, DOJ and NLRB, DOL and FTC, and FTC and NLRB all indicate that the purpose and scope of the agreements are to “strengthen the Agencies’ partnership through greater coordination in information sharing, coordinated investigations and enforcement activity, training, education, and outreach.”

Takeaways

This multi-agency agreement further emphasizes the current administration’s focus on protecting employees from alleged unfair methods of competition. This MOU is further evidence that antitrust regulators are looking at antitrust enforcement from a new perspective. Traditionally, Antitrust Agencies evaluated proposed M&As to identify potential risks of harm to consumers through the reduction of options or increased prices. Now, Antitrust Agencies appear to have turned their focus towards anticompetitive behaviors that may harm employees.

Employers interested or involved in an M&A deal should conduct thorough internal reviews to ensure compliance with both labor-related and fair competition laws. In the event of a review by the DOJ or FTC, employers should partner with experienced labor and employment lawyers to navigate through these investigations.

© 2024 ArentFox Schiff LLP
For more on Merger Investigations, visit the NLR Mergers Acquisitions section

DOJ Implements New Whistleblower Reward Program

Companies who submit healthcare claims to private payors, provide financial services to customers, interact with domestic or foreign public officials, or otherwise operate in highly regulated industries should take note that the Department of Justice (DOJ) has taken another significant step in its ongoing effort to encourage new whistleblowers with information about potential corporate criminal malfeasance to report that information to the government. On August 1, 2024, the DOJ announced its long awaited Corporate Whistleblower Awards Program. The program seeks to fill “gaps” in existing whistleblower programs by providing awards of up to 30% of forfeited proceeds for reporting criminal conduct that is not otherwise covered by an existing system for awarding whistleblowers. The silver lining for companies is that the program incentivizes the whistleblowers to cooperate with the company’s internal compliance function. DOJ also provides for a presumptive declination of criminal charges for companies that self-report to DOJ within 120 days of the time the issue is first raised internally by the whistleblower, providing strong incentives for companies to investigate issues quickly.

The program represents the DOJ’s latest effort to increase the number of voluntary self-disclosures of corporate criminal activity. In January 2023, the DOJ announced its revised Corporate Enforcement and Voluntary Self Disclosure Policy, which sought to expand the incentives for companies to voluntarily self-disclose misconduct, cooperate with DOJ investigations, and take prompt and full remedial measures. The policy’s primary incentive was the prospect of a presumed declination for companies who followed its mandates.

As we discussed in a previous post, efforts to increase voluntary self-disclosures continued in April 2024 when the DOJ launched a Pilot Program on Voluntary Self Disclosures for Individuals. That initiative expanded the scope of potential whistleblowers by including those complicit in wrongdoing, granting them eligibility for immunity from prosecution in return for reporting the activity. In substance, that structure incentivized both individual wrongdoers and the corporations for whom they worked to be the first to report criminal activity. By pitting the would-be whistleblowers and the companies against each other, the DOJ effectively constructed a prisoners’ dilemma where the government stood to benefit regardless of which party acted first.

The program is a different verse from the same hymnal. It offers a different (but more traditional) incentive for whistleblowers – the opportunity for financial reward – while maintaining the goal of increasing the number of voluntary self-disclosures. The program seeks to achieve that objective by motivating those who are aware of misconduct, but perhaps are otherwise unable to qualify for a bounty under the current framework or otherwise uninterested in reporting the activity without a personal benefit.

The Basic Framework

Under the program, eligible individuals who voluntarily provide original information to the government in certain areas of focus and cooperate with the resulting investigation stand to receive 30% of any criminal or civil forfeitures over $1 million in accordance with a defined payment priority. The program lays out a basic structure for determining whether an individual is entitled to an award, but also affords the DOJ substantial discretion in deciding whether to make such awards, and in what amount. The key elements are:

  • Areas of focus – The program identifies four subject matter areas: 1) violations by financial institutions, their insiders and agents involving money laundering, fraud, and fraud against or non-compliance with regulators; 2) foreign corruption and bribery and violations of money laundering statutes; 3) domestic corruption violations including bribes and kickbacks paid to domestic public officials; and 4) healthcare offenses involving private or non-public healthcare benefit programs and fraud against patients, investors or other non-governmental entities in the healthcare industry, or other violations of federal law not covered by the federal False Claims Act (FCA).
  • Eligible individuals – The program excludes several categories of individuals, including those eligible to report under other whistleblower programs and those who “meaningfully participated” in the criminal activity reported (although those who played a “minimal role” can still participate).
  • “Original information” – Essentially, independent non-public knowledge or analysis in the individual’s possession is considered “original” information. Notably, information can be deemed “original” if it “materially adds to the information that the Department already possesses.” Information that the individual has already reported through the company’s internal whistleblower, legal or compliance procedures can still be deemed “original,” provided the individual also reports that information to the government within 120 days of reporting internally. Privileged information is not considered “original” unless the crime, fraud or other exception to state attorney conduct rules apply.
  • “Voluntary” submission – The information must be reported before the DOJ or any federal law enforcement or civil enforcement agency initiates any inquiry relating to the subject matter.
  • “Cooperation” – Individuals who report must also cooperate fully with the DOJ’s investigation, including by participating in interviews, testifying before a grand jury or at trial, producing documents and, if requested, working in a “proactive manner” with federal law enforcement. This could include clandestine activities to gather evidence, such as recording phone calls or wearing a wire.
  • Criteria for determining amount of award – The program lists several factors that could militate in favor of increasing or decreasing the whistleblower’s financial award. Increases may be justified by the significance of the information provided, by the nature and extent of assistance provided, and, notably, by participation in internal compliance programs. Decreases may be appropriate where the reporting individual was a minimal participant in the underlying activity, or where the individual unreasonably delayed reporting, interfered with the company’s internal compliance and reporting systems, or had management or oversight responsibilities over the offices or personnel involved in the conduct.
  • Payment priority – When the victim is an individual, he or she must first be compensated “to the fullest extent possible” before a whistleblower can recover. When the victim is a corporate entity or government agency, the whistleblower jumps the line and is compensated first.
  • Relationship to the Corporate Enforcement and Voluntary Self Disclosure Policy – While the program incentivizes whistleblower reports to the DOJ, a simultaneous amendment to the self-disclosure policy provides that “if a whistleblower makes both an internal report to a company and a whistleblower submission” to the DOJ, companies who self-report that conduct within 120 days of the internal report “will still qualify for a presumption of a declination[.]” This amendment underscores the DOJ’s focus on increasing self-disclosures, inasmuch as it effectively removes the need for them to be truly “voluntary.” A company that receives a complaint through its whistleblower program may still be eligible under the self-disclosure policy even if the individual has already reported the conduct to the DOJ, but it has a limited time to investigate and decide whether to self-report the conduct.

Key Takeaways

Reading the tea leaves, we see several potentially significant takeaways for companies evaluating the program’s likely impact.

  1. As a starting point, companies should evaluate whether and to what extent their operations create new reporting opportunities under the program, and thus necessitate action. That process should involve answering the following questions:
    • Does the company operate in one of the areas of focus? If so, the program creates new opportunities and incentives for whistleblowers, and the company must assess whether it is prepared to address an increase in reports and to recognize that a reporter may have already disclosed information to the DOJ.
    • Is the company publicly traded? If so, the company is already subject to the Sarbanes-Oxley Act (SOX), which should mean that systems are already in place to receive, investigate and determine whether to take action, including potentially making a voluntary self-disclosure. The program provides an opportunity to reassess the efficacy of those systems but should not necessarily require the creation of new ones. Note that even those companies with existing whistleblower programs should consider the need to expand those systems to cover new areas of focus. For example, a company with a SOX whistleblower policy should consider the need to expand its scope to cover domestic corruption violations, which may not otherwise be covered.
    • Does the company submit claims to government payors? If so, it is already subject to the FCA and should already have a system in place to analyze internal compliance concerns. If that system focuses on or prioritizes issues regarding government payors, the company should expand its focus to include claims and conduct regarding private payors, which may now be subject to whistleblower bounties under the program.
  2. For privately held companies operating in the areas of focus that are not subject to the FCA, the program necessitates a thorough and candid assessment of the risk the program creates. Depending on the extent of that danger, companies should consider the following measures:
    • Create, or enhance as necessary, internal reporting mechanisms to receive and evaluate whistleblower reports.
    • Publicize the company’s expectation that employees should promptly report concerns internally about potential violations of law or company policy, making clear that no retaliation will result from reports made in good faith.
    • Design a process for investigating whistleblower reports based on their nature and seriousness. Establish criteria for identifying those that can be investigated by HR, those that require the involvement of in-house counsel, and those that must be handled by outside counsel. If there is any possibility of criminal exposure, ensure an appropriate investigation is conducted and concluded in time to allow the company to determine whether to self-report in the 120-window for a presumptive declination.
  3. All companies should have in place a system for quickly and accurately evaluating whether to voluntarily self-disclose violations. This process is a multi-factor calculus that considers a range of factors, including primarily the merits of the underlying information and the amount of financial loss or gain that resulted. While decision-making in this context varies by situation, one essential element remains constant: the need for accurate information regarding the nature, scope and effect of the underlying conduct.

Only time will tell exactly how the program will impact the number and nature of whistleblower reports. But companies can take practical steps now to gauge whether and to what extent they are likely to be affected and begin installing the measures necessary to minimize the risk that might otherwise result.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section

DOJ Launches Corporate Whistleblower Awards Pilot Program

The Department of Justice (“DOJ”) released its Corporate Whistleblower Awards Pilot Program on August 1, 2024. This initiative, which is expected to last three years, aims to enhance corporate crime detection, expand enforcement and prosecution efforts, and encourage reporting by incentivizing whistleblowers with the potential of significant payouts. Going forward, companies should pay close attention to DOJ’s  statements  and  guidance  and assess their existing compliance program to ensure that they are encouraging internal reporting and have procedures in place to quickly investigate, remediate, and potentially disclose misconduct.

For years, the Securities and Exchange Commission, Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network have maintained whistleblower programs. When announcing the DOJ’s Pilot Program last March, Deputy Attorney General Lisa Monaco said these programs, while successful, do not address “the full range of corporate and financial misconduct” that DOJ prosecutes. Monaco emphasized that DOJ’s new program aims to fill the gaps in the existing patchwork. The Pilot Program goes into effect immediately.

Impacting the Pilot Program is DOJ’s recent  amendment  to its Corporate Enforcement and Voluntary Self-Disclosure (“VSD”) Policy. Under the amendment, a company that receives an internal report of misconduct from a whistleblower and reports that misconduct to DOJ within 120 days is eligible for a presumption in favor of declining prosecution. To be eligible for the presumption, the company must also cooperate fully and commit to remediation of the wrongdoing. Along with the whistleblower awards program, this amendment provides DOJ with more tools to encourage companies to strengthen internal reporting systems and to incentivize voluntary self-disclosure of corporate crimes and misconduct.

Foreign and domestic companies should reassess anti-corruption, trade compliance, and other compliance programs and should consider revising existing programs as needed to encourage internal reporting of concerns regarding potential non-compliance with company policies and applicable laws.

Covered Violations 

To qualify for an award, the information provided by a whistleblower must be related to one of the following types of criminal conduct:

  • Violations by financial institutions, their insiders, or agents, including schemes involving money laundering, anti-money laundering compliance violations, registering of money transmitting businesses, fraud statutes, and fraud against or non-compliance with financial institution regulators.
  • Foreign corruption and bribery violations under the Foreign Corrupt Practices Act, the Foreign Extortion Prevention Act, or money laundering statutes.
  • Violations related to the payment of bribes or kickbacks to domestic (U.S.) public officials.
  • Federal health care offenses not covered by the False Claims Act, including federal health care offenses and related crimes involving private or other nonpublic health care benefit programs and health care fraud schemes involving private insurance plans.

Eligibility and Rewards 

  • Whistleblowers may be eligible for an award under the Pilot Program if, alone or jointly with other individuals, the whistleblower provides DOJ with original information, in writing, which leads to criminal or civil forfeiture exceeding $1 million in connection with a successful prosecution, criminal resolution, or civil forfeiture action. The whistleblower must cooperate fully with DOJ’s investigation.
  • Whistleblowers must provide truthful, original, non-public information about corporate misconduct to qualify for potential compensation under the program.
  • Whistleblowers may report suspected misconduct internally before reporting to DOJ but are not required to do so in order to be eligible under the pilot program. If the whistleblower reports the alleged misconduct internally through company reporting channels, they must subsequently report it to DOJ within 120 days. A whistleblower may therefore choose to go directly to DOJ without first reporting through internal channels.
  • Information will not be considered original if it was obtained through communications subject to attorney-client privilege, or if the whistleblower’s principal duties include compliance or audit responsibilities. Whistleblowers who work for third-party firms conducting or supporting internal investigations will also not be eligible for any rewards.
  • Whistleblowers that would be eligible for an award through another U.S. whistleblower, False Claims Act qui tam, or similar program will not be eligible for an award under the Pilot Program if they report the same misconduct. However, DOJ encourages whistleblowers to submit information to multiple programs to allow DOJ and other agencies to decide which program is best suited to address the alleged misconduct.

Whistleblowers are eligible for an award even if they initially report information through their employer’s internal reporting procedures. However, the whistleblower must also report the same information to DOJ within 120 days of making an internal report. Whistleblowers may receive up to 30 percent of the first $100 million in net proceeds forfeited, and up to 5 percent of net proceeds between $100 million and $500 million. There is no award on net proceeds forfeited above $500 million. The maximum potential award is set at $35 million. The payment of any award is subject to DOJ’s discretion. DOJ will take into consideration, among other things, the significance of the information provided and the whistleblower’s cooperation and level of assistance. A whistleblower’s level of culpability, unreasonable delay in reporting, and interference with internal compliance and reporting systems may decrease award amounts. A whistleblower is not eligible for payment if they meaningfully participated in the misconduct or criminal activity. DOJ may, however, determine that a whistleblower is eligible if he or she played a minimal role and any misconduct was “sufficiently limited” in scope.

VSD Policy Amendment 

The VSD Policy amendment provides that, where a whistleblower makes both an internal report and a report to DOJ, a company may qualify for a presumption of declination under the VSD Policy even if the whistleblower reports the misconduct to DOJ before the company does. The company, however, must report the conduct to DOJ within 120 days of receiving the internal report  and  before DOJ contacts the company about the misconduct. Thus, the “declination window” may be shorter than 120 days, as DOJ could reach out before then. The amended VSD Policy and the Pilot Program effectively require companies to swiftly investigate and disclose misconduct to avoid steep penalties and prosecution.

What Companies Can Do Now 

The Pilot Program will be administered by the Criminal Division’s Money Laundering and Asset Recovery Section (“MLARS”). MLARS has taken a leading role in prosecuting foreign corruption and other international crimes in recent years but will likely expand its role into domestic corruption and national security issues as a result of its mandate here. MLARS will certainly place increased focus on the seizure and forfeiture of money.

Companies can take proactive steps to mitigate risk by re-evaluating their voluntary self-disclosure decision making and to improve existing compliance policies and procedures.

A few steps companies can take include:

  1. Clear Policies and Procedures: 
    • Establish clear guidelines and encourage employees to report misconduct.
    • Communicate these policies to all employees through training sessions, handbooks, and regular reminders.
  2. Anonymous Reporting Channels: 
    • Provide confidential or anonymous reporting channels (such as hotlines or online platforms).
  3. Non-Retaliation Assurance: 
    • Assure employees that they will not face retaliation for reporting.
    • Implement strong anti-retaliation policies and enforce them consistently.
  4. Leadership Support: 
    • Leadership should actively promote a culture of integrity and transparency.
  5. Incentives and Recognition: 
    • Consider offering incentives for early reporting or successful outcomes.
    • Recognize and appreciate employees who report misconduct.
  6. Training and Awareness: 
    • Regularly train employees on recognizing red flags and reporting procedures.
    • Foster awareness about the importance of reporting for the company’s well-being.
  7. Testing of Internal Controls: 
  • Ensure that existing compliance policies and procedures are working and are accurately identifying risks and detecting potential misconduct.
  1. Voluntary Disclosure: 
  • Review and strengthen internal investigation policies and procedures.
  • Conduct thorough, timely investigations into alleged misconduct.
  • Companies have 120 days or less to review internal complaints and reports of misconduct and to disclose to DOJ to qualify for declination under the amended VSD Policy.
© 2024 Blank Rome LLP
For more on Whistleblower Award Programs, visit the NLR Criminal Law Business Crimes section

The DOJ’s New Corporate Whistleblower Awards Pilot Program: A Victory for Wall Street – A Setback for Accountability

On August 1, 2024, the U.S Department of Justice announced the rules governing its new corporate whistleblower program. Unfortunately for whistleblowers, the Justice Department based its new program on proposals long advocated by the U.S. Chamber of Commerce and Wall Street special interests.

These Wall Street-friendly features contain most of the major elements of a long dreamed of “wish list” sought by the very companies that have been successfully prosecuted as a result of whistleblower disclosures. This wish list includes: making the payment of awards discretionary, capping the amount of awards, blocking the best informants from coverage, pushing whistleblowers into internal compliance programs instead of having them report directly to the government, and placing a major caveat on the right to file anonymous claims.

In adopting this Wall Street wish-list, the Justice Department ignored the empirical data demonstrating that programs which reject these proposals, such as the Dodd-Frank Act, have proven to be the most successful fraud-detection whistleblower laws.

New Program Announced

Deputy Attorney General (DAG) Lisa Monaco first announced the DOJ’s decision to establish  a new whistleblower award program during her keynote remarks at the American Bar Association’s 39th National Institute on White Collar Crime on March 7. She recognized the importance of paying monetary awards to whistleblowers and how such programs have created massive opportunities to pursue major fraud prosecutions:

“Ever since Dodd-Frank created whistleblower programs at the SEC and the CFTC, those agencies have received thousands of tips, paid out many hundreds of millions of dollars, and disgorged billions in ill-gotten gains from corporate bad actors.”

“These programs have proven indispensable — but they resemble a patchwork quilt that doesn’t cover the whole bed. They simply don’t address the full range of corporate and financial misconduct that the Department prosecutes.

“So, we are filling these gaps.”

Monaco detailed that the Pilot Program would use existing statutory authorities under the little-used Asset Forfeiture Whistleblower Award Law, 28 U.S.C. § 524, as a basis for paying whistleblower awards. This law, in existence since 1984, was, for years, ignored by the DOJ. For example, in FY 2023, the United States obtained $3.4 billion from asset forfeitures but only used $13 million to compensate whistleblowers or informants. All whistleblower payments were made by the Drug Enforcement Authority ($12 million) or the FBI ($1 million)).

The failure to pay whistleblowers from the Fund has contributed to the Fund’s massive balance. As of the end of FY 2023, the Fund had $8.5 billion in assets. The Justice Department’s annual Asset Forfeiture Fund report confirmed that whistleblower-initiated cases were a major driving force in adding billions to the Fund. The report identified income from the Danske Bank money laundering case as the largest contributor to increasing the Fund’s assets. As Danske Bank itself admitted, that scandal, and the resulting enforcement actions were initiated by a whistleblower report, and the DOJ admitted that $1.2 billion was deposited into the Fund from that case.

Significantly, Congress entrusted the Justice Department to establish rules for paying whistleblowers or other informants. Unlike other whistleblower award laws such as the False Claims or Dodd-Frank Acts, Congress did not establish mandatory guidelines limiting the ability of the Department to compensate whistleblowers. Instead, the Justice Department could establish progressive and pro-whistleblower regulations to fully achieve the goals behind establishing the Fund. As explained by the Justice Department, the Fund is supposed to be “an essential component of the Department’s efforts to combat the most sophisticated criminal actors and organizations – including terrorist financiers, cyber criminals, fraudsters, human traffickers, and transnational drug cartels.”

Thus, whistleblower advocates were optimistic when the DAG announced the DOJ’s intent to use its authority under the Asset Forfeiture Fund to build a new corporate whistleblower program. Not only had the DAG acknowledged the success of the Dodd-Frank model for incentivizing informants, but the DOJ also clearly understood the international nature of many of the crimes resulting in asset forfeiture (including the DOJ’s acknowledgment that the Fund was created to combat “transnational drug cartels,” “human traffickers” and “terrorist financiers”). Advocates hoped that the Justice Department would incorporate policies outlined in the United States Strategy on Countering Corruption into the new program. Under this Strategy, the United States pledged to act in “solidarity” with whistleblowers and bolster human rights defenders, investigative journalists, and other key players in the worldwide fight against corruption.

After the DAG’s announcement,, the Justice Department engaged in “listening sessions” to “gather information” so they could “design a thoughtful, well-informed program.” Numerous whistleblower experts met with the Justice Department team crafting the new program and provided input. Additionally, written guidance was provided by leading whistleblower law firms, a former SEC Commissioner with expertise on the Dodd-Frank whistleblower law, and all the major whistleblower advocacy groups, including 23 international anti-corruption organizations, the National Whistleblower Center, Transparency International (USA), The Anti-Fraud Coalition (TAF), and the Government Accountability Project. These persons and groups endorsed a framework modeled on the Dodd-Frank Act consistent with the legal structure explained in the paper “Why Whistleblowing Works: A New Look at the Economic Theory of Crime.” 

The groundwork was set for the creation of a highly effective, transnational anti-corruption whistleblower program, that was designed to close gaps in existing laws, and use the billions in assets sitting in the Asset Forfeiture Fund to incentivize reporting and ensure that whistleblowers were properly compensated.

What Happened? The DOJ Adopts Proposals Advocated by Anti-Whistleblower Corporate Lobbyists

For years, the U.S. Chamber of Commerce and numerous corporations (many of which have pleaded guilty to committing frauds) have lobbied against highly successful qui tam whistleblower award laws. They actively lobbied to water-down both the Dodd-Frank and False Claims Act. Given the unquestionable effectiveness of these qui tam laws, the Chamber and its numerous members that were found to have committed frauds promoted tactics that would impede the ability of whistleblowers to use the laws or obtain compensation.

In December 2010, the Chamber urged the SEC to implement proposed rules that would have crippled the Dodd-Frank Act, but the SEC rejected those proposals. In 2013, the Chamber issued a comprehensive report, entitled “Fixing the False Claims Act,” which likewise urged Congress to enact legislation that would cripple the False Claims Act. Congress ignored these proposals.

However, the Justice Department adopted the main proposals advocated by the Chamber, all of which have been discredited by empirical evidence. By following the lead of the Chamber of Commerce, Justice ignored guidelines Congress incorporated into the leading whistleblower award laws, and instead yielded to the lobbying power of Wall Street.

MANDATORY AWARDS

All of the successful whistleblower award laws require the government to pay qualified whistleblowers a mandatory award if they adhere to the criteria established by law or regulation. The mandatory nature of the award laws is the single most important feature of every successful whistleblower qui tam law. The most successful whistleblower laws in the United States require the payment of an award, not less than 10% and not more than 30% of the monies collected by the United States. Thus, whistleblowers are not compensated by taxpayer funds, but instead monies obtained from the fraudsters they report are used to pay the awards.

What did Justice Do?

Although the Justice Department had the discretion to follow the precedent under Dodd-Frank, False Claims, and AML laws, it ignored these precedents and created a discretionary program. In other words, the Justice Department can deny a fully qualified whistleblower, for any reason or no reason. There is no appeal. The Justice Department’s written regulations are clear: “The Department’s Award Determination is entirely discretionary, and neither appealable nor subject to judicial review.”

A whistleblower whose information results in hundreds of millions of dollars in recoveries, but who suffers tremendous retaliation, simply has no right to an award.

Not surprisingly, all discretionary whistleblower award laws have failed. Why should a whistleblower risk everything if the government has no obligation whatsoever to live up to its end of the bargain?

LIMITS ON AWARD AMOUNTS

The successful whistleblower award laws have no caps on the amount of an award. Awards are based on the quality of information provided, the cooperation a whistleblower provides to the government, the risks or sacrifices of the whistleblower, and the size of the frauds or crimes the whistleblower uncovers and reports. All awards are tied to the amount of actual recovery collected from the fraudster.

The Chamber of Commerce has tried, for years, to cap or limit the amount of an award. They fully understand that the handful of very large awards drives thousands of whistleblowers to come forward. Large awards publicize the programs, send a message that the government will honor its commitments, and incentivizes well-paid and high-level executives to become whistleblowers. Thus, capping the amount of an award is the number one goal of the corporate lobbyists attempting to weaken or undermine whistleblower rights.

In 2018 the SEC instituted a rulemaking proceeding which would have limited the amount of awards paid to whistleblowers in large cases. The initial proposal was approved in a 3-2 vote (all of the SEC Commissioners more supportive of Wall Street interests voted for limiting the size of awards). The proposal was debated internally within the SEC for two years, and leading whistleblower experts and advocates provided empirical evidence that large awards were a cornerstone to the program, incentivized some of the most important whistleblowers, and had a deterrent effect on wrongdoing.

Based on the objective evidence the Commission, 5-0, withdrew the proposal and rejected a rule that would have limited awards in large cases.

What did Justice Do?

Breaking with 35-years of Congressional legislation and ignoring the empirical evidence concerning the importance of large awards, the Justice Department, in an unprecedented move, decided to cap the amount of awards. This was the most significant victory Wall Street, and the Chamber of Commerce obtained, and it sets a terrible precedent.

Incredibly, the Justice Department instituted a rule that was even more regressive than the proposal made by the Chamber of Commerce. In its report Fixing the False Claims Act, the Chamber advocated changing the False Claims Act’s mandatory minimum 15% award, to a sliding scale that would create a “Graduated Reduction” in a whistleblower’s award. The amount of awards would be slowly reduced, and ultimately whistleblowers would only obtain “1 to 3 percent of amounts recovered above $100 million.”

The Justice Department took an even more extreme position. They adopted the Chamber’s recommendation to gradually reduce the size of an award, but instead of permitting tiny awards in large cases, they decided to zero these awards out, and pay nothing. Under the DOJ criteria, a whistleblower would not be entitled to any compensation based on recoveries that topped $500 million and would be subjected to a 5% cap on recoveries above $100 million. These caps need to be understood in the context of the right of the DOJ to reduce or deny awards at will. The DOJ capped the maximum amount of awards, yet established no minimum award, and provided itself with authority to pay no awards to fully qualified whistleblowers. The Chamber of Commerce never went this far in its proposal to undermine the False Claims Act.

CRIMINAL CULPABILITY

All the existing award laws have addressed the issue of the potential criminal culpability of the whistleblower. The original False Claims Act fully recognized this issue when it was signed into law by President Abraham Lincoln on March 2, 1863. The Senate sponsors of the bill explicitly called for participants in the frauds to step forward and use the law to assist the government in detecting these types of crimes. The Senate sponsor of the original False Claims Act recognized that it “takes a rogue to catch a rogue” and the primary intent of the award laws was to induce persons involved in the criminal conspiracy to turn on their fellow conspirators.

Thus, all successful whistleblower award laws permit participants in the frauds to turn in their co-conspirators and collect an award. This aspect of the law is perhaps the most important tool in incentivizing highly placed whistleblowers to step forward. In the context of asset forfeiture, there are no better sources of who the bad actors are who are hiding their assets than the bankers who opened their accounts. All of the laws prohibit persons convicted of the crime they are reporting from collecting an award. But likewise, all of the laws encourage participants, such as international bankers, to step forward.

What did Justice Do?

The Chamber of Commerce and its corporate allies have long advocated against the primary goal of the qui tam laws, i.e. to induce conspirators to turn on their co-conspirators. The fact that “trusted” persons sitting around a corporate board when the company is discussing paying a bribe sends chills within corporate America. In 2010,, the Chamber of Commerce made its position on this issue perfectly clear: “Exclude culpable individuals from award eligibility . . . corporate employees should not be rewarded if they engage in, perpetuate, or fail to take action to stop internal wrongdoing. Individuals who participated in wrongdoing should be excluded from award eligibility.”

Although Congress has continuously rejected such a broad disqualification, and the SEC explicitly rejected this proposal submitted by the Chamber and numerous corporate allies, the Justice Department has now adopted the essence of this position. Under the DOJ’s rules, the vast majority of participants in any fraud are now blocked from obtaining an award.

The DOJ regulation bars anyone who “meaningfully participated” in the fraud. This would cover the overwhelming majority of the best sources of information, and would give comfort to corporate insiders knowing that their co-conspirators could not obtain an award if they turned them in. The only exception would be for those who had a “minimal role,” i.e. those who would have the least valuable information, such as a secretary who may have mailed a letter related to the fraud. The regulation states: “An individual is not eligible for payment if they meaningfully participated in the criminal activity, including by directing, planning, initiating, or knowingly profiting from that criminal activity” (emphasis in original).

CONFIDENTIAL REPORTING

Dodd-Frank and the new AML whistleblower award law permits confidential and anonymous filing.

What did Justice Do?

Although the Justice Department permits anonymous filings, the regulations require that an anonymous whistleblower be identified whenever the Justice Department requests it. The regulation states: “The Department reserves the right to require information regarding your identity at any time the Department, in its sole discretion, deems it necessary to the prosecution of a case or to meet the Department’s legal obligations, policies, or procedures.”

Thus, DOJ can waive confidentiality and anonymity at-will, unbound by the legal restraints contained in Dodd-Frank and the AML whistleblower laws.

INTERNAL REPORTING

The DOJ’s new program strongly encourages whistleblowers to make internal reports to the very companies they suspect are violating the law. Similarly, the program provides companies who “self-report,” even after whistleblowers disclose violations of law to the government, major benefits and radical reductions in the amount of fines and penalties.

According to the DOJ factsheet:

“DOJ recognizes the value of companies’ internal compliance programs and has designed the pilot program to encourage employees to report misconduct internally before submitting information to DOJ.” (emphasis added).

This focus on encouraging whistleblowers to report to their companies ignored the fact that the very companies that benefit from these internal reports have lobbied and successfully fought in court to strip whistleblowers of protection against retaliation. In other words, the DOJ is encouraging employees to engage in a behavior that is not protected under federal law, and can result in their being fired and harassed, without legal protections.

All whistleblower laws protect employees who report to the government. But the following laws do not:

  • Commodity Exchange Act: No protection for internal disclosures.
  • Security Exchange Act/Foreign Corrupt Practices Act: No protection for internal disclosures.
  • Federal Obstruction of Justice Whistleblower Law: No protection for internal disclosures.
  • Anti-Money Laundering and Sanctions Whistleblower Law: No protection for internal disclosures for any employees who work for FDIC insured institutions or credit unions.
  • Asset Forfeiture Whistleblower Award (Fund): No protection for internal disclosures.

A recent study published in SSRN demonstrated that 92% of all corporate whistleblower retaliation cases arise from employees who make internal disclosure, while only 5% of retaliation cases arise from employees who report to the government, but avoid internal compliance programs.

It is extremely troubling that the DOJ would encourage whistleblowers to engage in behaviors that are not protected under federal law, will result in many of them losing the ability to report confidentially, and that the empirical evidence demonstrates is the most dangerous method for an employee to report concerns.

Moreover, the DOJ ignored the fact that Wall Street, led by the Chamber of Commerce, strongly argued that internal reporting should not be protected under the Dodd-Frank Act. The Chamber succeeded in having the Supreme Court overturn an SEC regulation that protected internal whistleblower disclosures from protection under law and resulted in stripping employees who reported to corporate counsel, corporate boards, corporate audit committees, or corporate compliance programs from all protections against retaliation under Dodd-Frank.

Options for Whistleblowers

The DOJ’s Corporate Whistleblower Awards Pilot Program represents a colossal lost opportunity to use a Fund created by Congress to combat major financial crimes to incentivize and compensate whistleblowers and otherwise encourage human rights defenders to assist in reporting domestic and international corruption. The Fund has billions of dollars that could have been creatively, aggressively and effectively utilized to fill loopholes in current laws and implement the important recommendations of the United States Strategy on Countering Corruption.

However, existing whistleblower award laws, that do not share the defects of the DOJ Pilot Program, can still be used by whistleblowers. Given the broad scope of these laws, much of the negative impact of the Justice Department’s regulations can be mitigated. Dodd-Frank can be used to report foreign bribery by most corporations worldwide; the Anti-money laundering laws can be used to hold banks and financial exchanges accountable, and to report violations of U.S. sanctions; the IRS program can be used to report tax evasion and permits awards for IRS investigations related to asset forfeiture; and finally, the Commodity Exchange Act can be used to report foreign corruption in the international commodities markets.

Employees who report directly to federal law enforcement authorities are also fully protected under the federal obstruction of justice laws. Under the obstruction law passed as part of the Sarbanes-Oxley corporate reform law, employers who fire employees for reporting to federal law enforcement are subjected to fines and up to ten years in prison.

These numerous (and highly effective) laws do not contain the problems that undermine whistleblower rights under the DOJ Pilot Program, and they should be used whenever available.

Conclusion

The Justice Department adopted proposals long sought after by Wall Street special interests and the Chamber of Commerce and created a program that delivered on the corporate wish-list for undercutting the effectiveness of whistleblower award programs. By making the program discretionary, capping the amount of awards, blocking the best informants from coverage, and placing a major caveat on the right to file anonymous claims, the Justice Department’s program runs counter to the significant amount of empirical evidence concerning the specific policies and procedures necessary to operate a successful program. Worse still, it creates a dangerous precedent for future whistleblower laws.

To understand just how terrible discretionary programs with compensation caps are and why Congress has repeatedly rejected them since 1986, one need only look at older and discredited award programs.

For example, between 1989 and 2010, the SEC had a discretionary award program covering whistleblowers who disclosed insider trading. The SEC Inspector General reviewed that program and found that it was a total failure and was unable to stop frauds like the ENRON scandal or frauds associated with the 2008 financial collapse.

The Inspector General described the program and its operation over its eleven years of existence as follows:

“All bounty determinations, including whether, to whom, or in what amount to make payments, are within the sole discretion of the SEC.”

“Since the inception of the SEC bounty program in 1989, the SEC has paid a total of $159,537 to five claimants.”

Thus, in July 2010, Congress repealed this discredited law and passed Dodd-Frank, which has mandatory award laws, no caps, and no discretion to deny qualified whistleblowers compensation.

The old IRS law and the False Claims Act of 1943 had similar problems, and both laws were amended to make the payment of awards mandatory, eliminate all caps, and end the discretion of government agencies to deny awards. All of the modern award laws also permit whistleblowers to challenge any denial in court.

The Justice Department had the discretion to create a highly effective program based on the Dodd-Frank Act. They dropped the ball. Now Congress needs to fix the mess Justice created.

In the meantime, whistleblowers should continue to use the highly effective award laws: the False Claims Act, the Dodd-Frank Act, the AML Whistleblower Improvement Act and the Foreign Corrupt Practices Act. Whistleblowers should also take advantage of the strong protections offered under the federal obstruction of justice statutes by reporting concerns directly to law enforcement.

The Justice Department did get one thing right. As part of its pilot program, Justice ruled that whistleblowers who are covered under the existing highly effective whistleblower laws cannot obtain any awards under the pilot program. Intentionally or not, this was the best advice Justice could give to whistleblowers: Make sure you use the existing laws and not rely on the pilot program.

Copyright Kohn, Kohn & Colapinto, LLP 2024. All Rights Reserved.
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section

U.S. Sues TikTok for Children’s Online Privacy Protection Act (COPPA) Violations

On Friday, August 2, 2024, the United States sued ByteDance, TikTok, and its affiliates for violating the Children’s Online Privacy Protection Act of 1998 (“COPPA”) and the Children’s Online Privacy Protection Rule (“COPPA Rule”). In its complaint, the Department of Justice alleges TikTok collected, stored, and processed vast amounts of data from millions of child users of its popular social media app.

In June, the FTC voted to refer the matter to the DOJ, stating that it had determined there was reason to believe TikTok (f.k.a. Musical.ly, Inc.) had violated a FTC 2019 consent order and that the agency had also uncovered additional potential COPPA and FTC Act violations. The lawsuit filed today in the Central District of California, alleges that TikTok is directed to children under age 13, that Tik Tok has permitted children to evade its age gate, that TikTok has collected data from children without first notifying their parents and obtaining verifiable parental consent, that TikTok has failed to honor parents’ requests to delete their children’s accounts and information, and that TikTok has failed to delete the accounts and information of users the company knows are children. The complaint also alleges that TikTok failed to comply with COPPA even for accounts in the platform’s “Kids Mode” and that TikTok improperly amassed profiles on Kids Mode users. The complaint seeks civil penalties of up to $51,744 per violation per day from January 10, 2024, to present for the improper collection of children’s data, as well as permanent injunctive relief to prevent future violations of the COPPA Rule.

The lawsuit comes on the heels of the U.S. Senate passage this week of the Children and Teens’ Online Privacy Protection Act (COPPA 2.0) and the Kids Online Safety Act (KOSA) by a 91-3 bipartisan vote. It is unknown whether the House will take up the bills when it returns from recess in September.

Copyright © 2024, Hunton Andrews Kurth LLP. All Rights Reserved.
For more on COPPA, visit the NLR Communications Media Internet section

Top Competition Enforcers in the US, EU, and UK Release Joint Statement on AI Competition – AI: The Washington Report

On July 23, the top competition enforcers at the US Federal Trade Commission (FTC) and Department of Justice (DOJ), the UK Competition and Markets Authority (CMA), and the European Commission (EC) released a Joint Statement on Competition in Generative AI Foundation Models and AI products. The statement outlines risks in the AI ecosystem and shared principles for protecting and fostering competition.

While the statement does not lay out specific enforcement actions, the statement’s release suggests that the top competition enforcers in all three jurisdictions are focusing on AI’s effects on competition in general and competition within the AI ecosystem—and are likely to take concrete action in the near future.

A Shared Focus on AI

The competition enforcers did not just discover AI. In recent years, the top competition enforcers in the US, UK, and EU have all been examining both the effects AI may have on competition in various sectors as well as competition within the AI ecosystem. In September 2023, the CMA released a report on AI Foundation Models, which described the “significant impact” that AI technologies may have on competition and consumers, followed by an updated April 2024 report on AI. In June 2024, French competition authorities released a report on Generative AI, which focused on competition issues related to AI. At its January 2024 Tech Summit, the FTC examined the “real-world impacts of AI on consumers and competition.”

AI as a Technological Inflection Point

In the new joint statement, the top enforcers described the recent evolution of AI technologies, including foundational models and generative AI, as “a technological inflection point.” As “one of the most significant technological developments of the past couple decades,” AI has the potential to increase innovation and economic growth and benefit the lives of citizens around the world.

But with any technological inflection point, which may create “new means of competing” and catalyze innovation and growth, the enforcers must act “to ensure the public reaps the full benefits” of the AI evolution. The enforcers are concerned that several risks, described below, could undermine competition in the AI ecosystem. According to the enforcers, they are “committed to using our available powers to address any such risks before they become entrenched or irreversible harms.”

Risks to Competition in the AI Ecosystem

The top enforcers highlight three main risks to competition in the AI ecosystem.

  1. Concentrated control of key inputs – Because AI technologies rely on a few specific “critical ingredients,” including specialized chips and technical expertise, a number of firms may be “in a position to exploit existing or emerging bottlenecks across the AI stack and to have outside influence over the future development of these tools.” This concentration may stifle competition, disrupt innovation, or be exploited by certain firms.
  2. Entrenching or extending market power in AI-related markets – The recent advancements in AI technologies come “at a time when large incumbent digital firms already enjoy strong accumulated advantages.” The regulators are concerned that these firms, due to their power, may have “the ability to protect against AI-driven disruption, or harness it to their particular advantage,” potentially to extend or strengthen their positions.
  3. Arrangements involving key players could amplify risks – While arrangements between firms, including investments and partnerships, related to the development of AI may not necessarily harm competition, major firms may use these partnerships and investments to “undermine or coopt competitive threats and steer market outcomes” to their advantage.

Beyond these three main risks, the statement also acknowledges that other competition and consumer risks are also associated with AI. Algorithms may “allow competitors to share competitively sensitive information” and engage in price discrimination and fixing. Consumers may be harmed, too, by AI. As the CMA, DOJ, and the FTC have consumer protection authority, these authorities will “also be vigilant of any consumer protection threats that may derive from the use and application of AI.”

Sovereign Jurisdictions but Shared Concerns

While the enforcers share areas of concern, the joint statement recognizes that the EU, UK, and US’s “legal powers and jurisdictions contexts differ, and ultimately, our decisions will always remain sovereign and independent.” Nonetheless, the competition enforcers assert that “if the risks described [in the statement] materialize, they will likely do so in a way that does not respect international boundaries,” making it necessary for the different jurisdictions to “share an understanding of the issues” and be “committed to using our respective powers where appropriate.”

Three Unifying Principles

With the goal of acting together, the enforcers outline three shared principles that will “serve to enable competition and foster innovation.”

  1. Fair Dealing – Firms that engage in fair dealing will make the AI ecosystem as a whole better off. Exclusionary tactics often “discourage investments and innovation” and undermine competition.
  2. Interoperability – Interoperability, the ability of different systems to communicate and work together seamlessly, will increase competition and innovation around AI. The enforcers note that “any claims that interoperability requires sacrifice to privacy and security will be closely scrutinized.”
  3. Choice – Everyone in the AI ecosystem, from businesses to consumers, will benefit from having “choices among the diverse products and business models resulting from a competitive process.” Regulators may scrutinize three activities in particular: (1) company lock-in mechanisms that could limit choices for companies and individuals, (2) partnerships between incumbents and newcomers that could “sidestep merger enforcement” or provide “incumbents undue influence or control in ways that undermine competition,” and (3) for content creators, “choice among buyers,” which could be used to limit the “free flow of information in the marketplace of ideas.”

Conclusion: Potential Future Activity

While the statement does not address specific enforcement tools and actions the enforcers may take, the statement’s release suggests that the enforcers may all be gearing up to take action related to AI competition in the near future. Interested stakeholders, especially international ones, should closely track potential activity from these enforcers. We will continue to closely monitor and analyze activity by the DOJ and FTC on AI competition issues.

©1994-2024 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
For more on AI Competition, visit the NLR Communications Media Internet section.

Federal Agencies Have Placed a Heightened Priority on Whistleblowers and Speedy Cooperation

As new areas of the law emerge, driven in part by technology and the free flow of information, federal agencies are becoming more aggressive with a tried and true carrot-and-stick approach to law and regulatory enforcement.

In a recent PLI panel on government enforcement priorities in May 2024, Brent Wible, Chief Counselor, Office of the Assistant Attorney General, Department of Justice (DOJ or Department); Daniel Gitner, Chief of the Criminal Division, US Attorney’s Office for the Southern District of New York (SDNY or the Office); and Antonia Apps, Director of the New York Regional Office of the Securities and Exchange Commission (SEC or Commission) shared their thoughts, priorities and practices in 2024 enforcement and beyond.

All of the government lawyers stressed that the DOJ and enforcement agencies are open and are actively encouraging whistleblowers with new incentives and programs. To that end, Mr. Gitner from the SDNY stated very directly that corporations need to understand that there is a “need for speed” in corporate self-disclosures. Otherwise, whistleblowers will be closing the door to the benefits of corporate self-disclosures. Put differently, enforcement agencies do not want a corporation to complete lengthy internal investigations before reporting.

A uniform theme and stance taken by all is that whistleblowers are valuable, and bounties will be paid in cash or in deferred prosecution agreements or possibly both. Whistleblowers must be protected. Internal and external whistleblowers should be encouraged.
This article focuses on three whistleblower initiatives—(i) the SEC’s Whistleblower Program, (ii) the SDNY Whistleblower Pilot Program and (iii) DOJ’s Pilot Whistleblower Program for voluntary self-disclosure—and how those programs may impact a corporation’s response to whistleblowers, internal investigations, and disclosures.

SEC 21F WHISTLEBLOWER PROGRAM

Since its inception more than a decade ago, the SEC’s Whistleblower Program is widely viewed as successfully incentivizing whistleblower reports of violations of the securities laws. In its 2023 fiscal year, the SEC received more than 18,000 tips from whistleblowers and issued the most awards to whistleblowers ever in one year, totaling nearly US$600 million. That year, the Commission also issued its largest ever award of US$279 million to a single whistleblower.1

What is the SEC’s Whistleblower Program?

Section 21F of the Securities Exchange Act of 1934, codified as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires the SEC to pay awards to whistleblowers who provide information to the SEC about violations of federal securities laws.2 Accordingly, the SEC has issued a series of rulemakings implementing Section 21F to create its whistleblower program. To qualify as a whistleblower, an individual must voluntarily provide the SEC with original information in writing about a possible violation of federal securities law that has occurred, is ongoing, or is about to occur.3 To qualify for an award, this information must lead to a successful enforcement action with monetary sanctions totaling more than US$1 million.4

“Original” information means that it cannot be found in publicly available sources and is not already known by the Commission, but is instead the product of the whistleblower’s independent knowledge or analysis.5 A submission is “voluntary” if the whistleblower provides it to the SEC before receiving a regulatory request or demand for information relating to the same subject matter. Therefore, a submission of information that is made in response to a request, inquiry, or demand by the SEC, the Public Company Accounting Oversight Board, a self-regulatory organization (such as the Financial Industry Regulatory Authority), or a separate federal or state governmental body does not qualify as a voluntary submission.6 Additionally, a submission that is required under a legal or contractual duty to the Commission is not considered voluntary and is thus ineligible for an award.7

The SEC’s whistleblower rules also include anti-retaliation protections intended to ensure that the incentives provided to whistleblowers for reporting are not outweighed by a fear of reprisal from their employer. Under Rule 21F-17, companies are prohibited from interfering with or impeding a whistleblower’s communications to the SEC about a possible violation of the securities laws, including through enforcement or threatened enforcement of a confidentiality agreement that may be read to prevent whistleblower communications with the SEC.8

The SEC is taking violations of Rule 21F-17 seriously and has increased enforcement activity in this area over the last two years. The Commission brought a number of actions, with significant civil penalties, focused on corporate agreements containing confidentiality language that, according to the SEC, does not provide an express exception for whistleblower communications. The enforcement actions extend to different types of companies, including publicly traded companies, privately held companies, broker-dealers and investment advisers, and to a variety of forms of agreements with employees and customers alike.9

For example, a gaming company paid US$35 million to settle claims that it had violated the whistleblower protection rule by requiring former employees to execute separation agreements that obligated them to notify the company of any request for information received from the Commission, in addition to compliance failures regarding workplace complaints.10 In January 2024, the SEC settled the largest ever standalone Rule 21F-17 case, imposing US$18 million in civil penalties against a dually registered investment adviser and broker dealer for allegedly requiring clients to sign a confidential release agreement—without expressly allowing for direct communications to regulators regarding potential securities law violations—in order to receive certain credit or settlement payments.11 In another case involving US$10 million in civil penalties, the Commission charged a registered investment adviser with a standalone violation of Rule 21F-17 based on employment agreements that contained a confidentiality clause prohibiting external disclosure of confidential company information, without a carve-out for voluntary communications with the SEC concerning possible violations of the securities laws.12 As recently stated by the co-chief of the SEC Enforcement Division’s Asset Management Unit, “Investors, whether retail or otherwise, must be free to report complaints to the SEC without any interference. Those drafting or using confidentiality agreements need to ensure that they do not include provisions that impede potential whistleblowers.”13

SDNY WHISTLEBLOWER PILOT PROGRAM

In February 2024, the SDNY launched a whistleblower pilot program. The purpose of the program is to encourage early and voluntary self-disclosure of criminal conduct by individual participants.14 The program is applicable to disclosures of conduct committed by public or private companies, exchanges, financial institutions, investment advisers, or investment funds involving fraud or corporate control failure or affecting market integrity, or criminal conduct involving state or local bribery or fraud relating to federal, state, or local funds.15 In exchange for a qualifying self-disclosure, the Office will enter into a non-prosecution agreement with the whistleblower.16

Given that a non-prosecution agreement is promised, the SDNY has identified factors to determine whether a whistleblower qualifies for a discretionary non prosecution agreement. The most salient include: whether and to what extent the misconduct is unknown to either SDNY or the DOJ; whether the information is disclosed voluntarily to SDNY and not in response to an inquiry or obligation to report misconduct; whether the whistleblower provides substantial assistance in the investigation and prosecution of culpable individuals, and in the investigation and prosecution of the disclosed conduct; whether the whistleblower truthfully and completely discloses all criminal conduct they participated in and are aware of; whether the whistleblower is a chief executive officer or chief financial officer of a public or private company, who is not eligible for the pilot program; and the adequacy of noncriminal sanctions, such as remedies imposed by civil regulators.

Mr. Gitner said the defense bar is coming around to a non-prosecution carrot for individuals involved in wrongdoing within the corporation. Mr. Gitner said that SDNY seeks early discussions, and the pilot program seems to be driving toward that goal.

DOJ PILOT PROGRAM ON VOLUNTARY SELF-DISCLOSURES FOR INDIVIDUALS

In March 2024, the DOJ announced an upcoming program to reward whistleblowers who report corporate crimes. The new program seeks to bolster existing whistleblower programs established by the SEC (discussed above), the Commodities Future Trading Commission (CFTC), the Internal Revenue Service, and the Financial Crimes Enforcement Network.17 Accordingly, the program will offer rewards to whistleblowers who provide information on misconduct that is not under the jurisdiction of those agencies. In particular, the Department is interested in criminal abuses of the US financial system, foreign corruption cases outside of the SEC’s jurisdiction, and domestic corruption cases. In order to qualify, an individual must provide original, nonpublic, and truthful information that assists the Department in uncovering “significant corporate or financial misconduct” and is previously unknown to the agency.18 Like the SEC and CFTC, the Department does not plan to provide awards for information that is submitted under a preexisting duty or in response to an inquiry.19 Access to the program is only available where existing programs or qui tam actions do not exist. Additionally, the whistleblower in this program cannot be involved in the criminal activity itself. After compensation to victims, the whistleblower will receive a portion of the resulting forfeiture as a reward.20

Interestingly, however, it appears the Department may be moving away from offering monetary awards to whistleblowers. In April 2024, the Department introduced a pilot program that tracks with the SDNY and offers mandatory non prosecution agreements to individuals who provide information on corporate misconduct.21 Under the program, an individual must voluntarily self-disclose original information to the Criminal Division about criminal misconduct that is not previously known to the Department. The information must be “truthful and complete,” meaning it must include all known information relating to the misconduct, including the individual’s own culpability. In particular, the Department seeks information on violations by financial institutions; violations related to market integrity committed by financial institutions, investment advisers, investment funds, or public or private companies; foreign corruption and bribery violations by public or private companies; violations relating to health care fraud or illegal health care kickbacks; fraud or deception against the United States in connection with federally funded contracting; and bribery or kickbacks to domestic public officials by public or private companies. The whistleblower also cannot be a chief executive officer, chief financial officer, or those equivalents of a public or private company; or an elected or appointed foreign government or domestic government official; nor can the whistleblower have a previous felony conviction or a conviction of any kind involving fraud or dishonesty. Irrespective of this program, the Department still has the discretion of offering a non-prosecutorial agreement to individuals who may not meet the above criteria in full, subject to Justice Manual and Criminal Division procedures.22

TAKEAWAYS

The takeaways here for corporate in-house legal departments are:

  • Federal agencies are incentivizing whistleblowers with cash and non-prosecution agreements. It is clear that wrongdoers and witnesses now more than ever have several whistleblower programs from which to choose. As a result, corporations must become more vigilant at detecting wrongdoing and effectively utilizing internal reporting systems. Careful consideration of an early self-disclosure to the appropriate agency may also be warranted. Internal investigations will take a heightened priority to aid the c-suite and board on disclosure decisions.
  • Not only is protecting whistleblowers a priority but encouraging whistleblowers through heightened compliance programs, updated hotlines or other internal reporting programs should be considered. You may also wish to consider offering financial incentives for timely reporting to the corporation’s internal reporting program. All of which will benefit the company in any government disclosure.
  • The enforcement risk for companies under the SEC’s whistleblower rules is real and potentially significant, including with respect to day-to-day business activities (such as entering into client or employee confidentiality agreements) that may not otherwise be recognized as creating regulatory exposure. Companies may wish to revisit their standard contracts and compliance materials to ensure that any confidentiality provisions align with Rule 21F-17.

We acknowledge the contributions to this publication from our summer associate Minu Nagashunmugam.

1 https://www.sec.gov/newsroom/enforcement-results-fy23.

2 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 2.

3 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 2.

4 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 3.

5https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 5.

6 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 5.

7 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 5.

8 https://www.sec.gov/about/offices/owb/reg-21f.pdf, p. 28.

9 The SEC’s Office of the Whistleblower has stated that violations of Rule 21F-17 may be triggered by “internal policies, procedures, and guidance, such as codes of conduct, compliance manuals, training materials, and other such documents.” SEC, Whistleblower Protections (last updated July 1, 2024) https://www.sec.gov/enforcement-litigation/whistleblower-program/whistleblower-protections#anti-retaliation.

10 https://news.bloomberglaw.com/securities-law/sec-biggest-whistleblower-penalty-signals-broad-protection-focus?context=search&index=11

11 In re JP Morgan Sec. LLC, File No. 3-21829 (Jan. 16, 2024), https://www.sec.gov/files/litigation/admin/2024/34-99344.pdf.

12 In re D.E. Shaw & Co., L.P., File No. 3-21775 (Sept. 29, 2023), https://www.sec.gov/files/litigation/admin/2013/34-70396.pdf.

13 SEC Press Release (Jan. 16, 2024), https://www.sec.gov/newsroom/press-releases/2024-7.

14 https://www.justice.gov/d9/2024-05/sdny_wb_policy_effective_2-13-24.pdf

15 https://www.justice.gov/d9/2024-05/sdny_wb_policy_effective_2-13-24.pdf

16 https://www.justice.gov/d9/2024-05/sdny_wb_policy_effective_2-13-24.pdf

17 https://www.justice.gov/opa/speech/acting-assistant-attorney-general-nicole-m-argentieri-delivers-keynote-speech-american

18 https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-keynote-remarks-american-bar-associations

19 https://www.justice.gov/criminal/media/1347991/dl?inline

20https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-monaco-delivers-keynote-remarks-american-bar-associations

21https://www.justice.gov/criminal/media/1347991/dl?inline

22 https://www.justice.gov/criminal/media/1347991/dl?inline

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Copyright 2024 K & L Gates
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section

DOJ Confirms Moving Marijuana to Schedule III; Sidesteps Anticipated Impact on State Cannabis Markets

On May 16, 2024, the Department of Justice (DOJ) initiated the formal rulemaking process to move marijuana to Schedule III of the Controlled Substances Act. The DOJ’s notice of proposed rulemaking unfortunately sidesteps the hard questions about the impact of rescheduling on the existing state adult-use and medical cannabis markets.

Summary of Content

The 92-page notice of proposed rulemaking primarily summarizes and comments on last year’s recommendations by the Department of Health and Human Services to reschedule marijuana, as well as related legal concerns such as compliance with international treaty obligation. The DOJ emphasizes that if marijuana is transferred to Schedule III, “the manufacture, distribution, dispensing, and possession of marijuana would also remain subject to applicable criminal prohibitions under the CSA [Controlled Substances Act],” and that marijuana would remain subject to applicable provisions of the Food Drug and Cosmetic Act.

With respect to the critical question of impact on the cannabis markets, however, the DOJ is silent and merely states that it is “seeking comment on the practical consequences of rescheduling marijuana.”

By way of explanation, the DOJ offers:

“DOJ recognizes this action may have unique economic impacts. As stated above, marijuana is subject to a number of State laws that have allowed a multibillion dollar industry to develop. DOJ acknowledges that there may be large impacts related to Federal taxes and research and development investment for the pharmaceutical industry, among other things. DOJ is specifically soliciting comments on the economic impact of this proposed rule. DOJ will revise this section at the final rules stage if warranted after consideration of any comments received.” (Emphasis added.)

Robust Public Comments Expected

For an industry that has been eagerly awaiting to hear how the DOJ will approach rules that address the interplay between existing state cannabis laws and the complex web of federal laws around Schedule III drugs, the DOJ’s notice is disappointing and may not bode well for a smooth rulemaking process. DOJ will accept public comments for 60 days once the notice of proposed rulemaking has been published in the Federal Register. We can expect robust commentary from cannabis businesses, state regulators, trade organizations and ancillary industries.

Regardless of the outcome of the final rulemaking, it seems apparent that clarity through congressional action is needed more than ever.

International Groups Call for DOJ Whistleblower Program to Incorporate Best Practices

The Department of Justice (DOJ) is in the midst of developing a whistleblower award program. According to Acting Assistant Attorney General Nicole M. Argentieri, “the whole point of the DAG’s 90-day ‘policy sprint’ is to gather information, consult with stakeholders, and design a thoughtful, well-informed program.”

Since the Deputy Attorney General Lisa Monaco announced the policy sprint on March 7, whistleblower advocates in the U.S., including Kohn, Kohn & Colapinto, have consulted with the DOJ, outlining key elements of other successful whistleblower programs which should be incorporated in the DOJ program.

On May 13, a coalition of anti-corruption organizations and law firms from over twenty countries sent a letter to the DOJ emphasizing that an effective DOJ whistleblower program could greatly aid international anti-corruption efforts.

“We, the undersigned organizations, believe that a U.S. Department of Justice whistleblower rewards program has the potential to be instrumental to each of our anti-corruption efforts,” write the organizations.

“However, without careful consideration for the unique risks of international whistleblowers and without the implementation of the best-practice protocols identified above, this program could be damaging for international whistleblowers, and their catalytic role in transnational anti-corruption efforts,” the letter continues.

In the letter, the organizations call on the DOJ to incorporate four proven best practices for whistleblower award programs. These best practices mirror those previously called for by Kohn, Kohn & Colapinto. Allison Herren Lee, former SEC Commissioner and currently Of Counsel at Kohn, Kohn & Colapinto, outlined these four elements in a recent article for the Harvard Law School Forum on Corporate Governance.

The four recommendations are:

1. Mandatory Awards of 10-30% of Proceeds Collected

2. Anonymous and Confidential Reporting Channels

3. Dedicated Whistleblower Office

4. Eligibility Requirements which Match the SEC Whistleblower Program

Geoff Schweller also contributed to this article.

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