by Stephen Kohn
19. Persons Not Qualified to File a Claim. Almost any person is eligible to file a whistleblower claim. The class of excluded persons is very limited. According to IRS regulations, the IRS will not process whistleblower claims filed by: employees of the Department of Treasury; persons working for federal, state, or local governments if they are “acting within the scope of his/her duties as an employee” of the government; persons “required by Federal law or regulation to disclose the information”; and persons “precluded” from disclosing the information under other federal laws.
20. Power of Attorney. A whistleblower who wants to be represented by counsel must sign and file a “Power of Attorney,” IRS Form 2848. Without this form the IRS will not talk to your attorney or send your attorney any information.
Tax Whistleblowing Comes of Age
The IRS whistleblower law fundamentally changed tax compliance. The reason is simple. A comprehensive fraud detection study by the University of Chicago Booth School of Business confirmed the obvious: “A strong monetary incentive to blow the whistle does motivate people with information to come forward.” This was the simple truth recognized by President Abraham Lincoln when he signed America’s first whistleblower reward law over 150 years ago.
PRACTICE TIP
The IRS qui tam law is codified at 26 U.S.C. § 7623. The internal IRS rules governing the rewards provision is located in Part 25 of the IRS Manual, available at www.irs.gov. Rules for filing claims are also codified at 26 C.F.R. Part 301.7623-1.
• Whistleblower 14106-10W v. Commissioner of the IRS, 137 Tax Court No. 15 (December 8, 2011) (decision of the Tax Court permitting whistleblower to remain confidential in Tax Court proceedings).
• Whistleblower 13412-12W v. Commissioner, T.C. Memo. 2014-93 (May 20, 2014) (setting forth procedures for requesting anonymity in tax court proceedings).
• Whistleblower 21276-13W v. Commissioner, 147 Tax Court No. 4 (August 3, 2016) (broad interpretation of “related action” rule permitting whistleblowers to obtain rewards based on tax-related criminal proceedings).
• Whistleblower 21276-13W v. Commissioner, 144 Tax Court No. 15 (June 2, 2015) (whistleblower can qualify for a reward if initially provides information to other government agencies instead of the IRS Whistleblower Office).
• Whistleblower 11099-13W v. Commissioner, 147 Tax Court No. 3 (July 28, 2016) (whistleblowers can conduct discovery in tax court as to why the IRS denied a reward).
RULE 8Get a Reward! Securities and Commodities Fraud
In the summer of 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The nation was still reeling from the devastating impact of the Great Recession of 2008 and 2009, in which “millions of Americans” lost their jobs, “lost their homes,” and “lost their retirement(s).” In large part, the Recession was fueled by misconduct on Wall Street, including outright frauds, the most notorious of which was the Bernard Madoff Ponzi scheme that resulted in over $20 billion in losses to thousands of innocent investors, many of whom lost their life savings.
But as with so many other scandals, it turned out there were whistleblowers with inside information who either tried to call attention to the frauds (and were ignored) or who were too afraid to step forward. The Senate Banking Committee, in devising a long-term fix to the obviously broken Wall Street regulatory system, heard extensive testimony on the role of whistleblowers in detecting and preventing frauds.
The senators listened to the testimony of Harry Markopolos, who had tried for years to expose the Madoff Ponzi scheme. They studied objective statistical data on fraud-detection methods and concluded that “whistleblower tips were 13 times more effective than external audits” in “uncover[ing] fraud schemes.” The committee understood that “whistleblowers often face the difficult choice between telling the truth and the risk of committing ‘career suicide.’ ” It was clear that the key to rooting out fraud in the financial services sector of the economy was a strong whistleblower protection program that would financially incentivize employees who had the courage to step forward with information and protect those employees from retaliation. Based on the record, even the Securities and Exchange Commission’s own top cop, Inspector General David Kotz, recommended a whistleblower rewards program.
Congress listened. When the final two-thousand-page Dodd-Frank Act was finally passed, a whistleblower incentive program was at the heart of a new enforcement regime. Two new qui tam provisions were signed into law.
The two laws cover trillions of dollars in market transactions. One law established a qui tam under the Commodity Exchange Act (CEA). The second qui tam was attached to the Securities Exchange Act (SEA). In addition, the reward law also covers violations of the Foreign Corrupt Practices Act, as that law is administered in part by the SEC. See Rule 9. These two new qui tam provisions are sweeping in scope and cover a significant portion of the U.S. economy.
The SEA is the signature law regulating finances in the United States, including all trades conducted on various stock exchanges, such as the New York Stock Exchange and the NASDAQ, and all securities sold in the United States, including stocks, bonds, and debentures.
The CEA is similar to the securities law, but instead of covering the sale of securities, it covers the sale of commodities—the “futures trading” of fungible goods and assets, such as agricultural products (grain, animal products, fruits, coffee, sugar), energy (crude oil, coal, electricity), natural resources (gold, precious gems, plutonium, water), commoditized goods (generic pharmaceuticals), and financial commodities (foreign currencies and securities).
By incorporating qui tam incentive provisions into the fabric of these two extremely broad regulatory statutes, Congress sent a clear message: Employees were expected to play a critical role in protecting investors and consumers from financial fraud.
“There have always been mixed feelings about whistleblowers and many companies tolerate, at best, their existence because the law requires it. . . . [I]t is past time to stop wringing our hands about whistleblowers. They provide an invaluable public service, and they should be supported. And, we at the SEC increasingly see ourselves as the whistleblower’s advocate.”
Mary Jo White, Chair, Securities and Exchange Commission
These two qui tam laws are substantially identical. They are modeled on the federal False Claims Act and the 2006 IRS whistleblower rewards law. Under these new qui tam laws, qualified whistleblowers are entitled to rewards of “not less than 10 percent” and “not more than 30 percent” of the total amount of money collected by the government as a “monetary sanction” against companies or individuals who violate either of the two laws (and numerous other federal laws that are incorporated by reference into these two laws). Like the IRS qui tam provision, the laws only cover major frauds, and the incentives are paid only if the total amount collected by the government exceeds $1 million.
The “monetary sanctions” upon which the reward is based include not only direct fines paid to the Commissions, but interest, penalties, and monies paid as part of a “disgorgement.” The disgorgement payments can be massive, as they are the mechanism by which the Commissions require a “wrongdoer” to “disgorge” its “fraudulent enrichment.” These sanctions are measured by the amount of a wrongdoer’s ill-gotten gains and often are many times larger than actual fines or penalties. Sanctions also include monies placed in the SEC-administered “fair funds,” i.e., the funds set aside to benefit investors who were “harmed” by the violations.
Both qui tam laws also contain strong antiretaliation provisions, prohibiting employers from firing employees who file qui tam actions or engage in other protected activities. Employees can file their retaliation claims directly in federal court. Under the SEA antiretaliation provision, wrongfully discharged workers are entitled to double back pay.
Anonymous Whistleblowing
The Dodd-Frank Act added a new feature, unique in American whistleblower law: Whistleblowers are permitted to file
their qui tam claims to the government anonymously. This is a major breakthrough and provides extra protection to whistleblowers heretofore unknown under any other employee protection law.
Employees are permitted to act through an attorney intermediary and provide their information to the government without ever having to reveal their names. Thus, there is no risk that the government will inadvertently disclose the identity of the whistleblower to their bosses, and the whistleblower can map out his or her disclosures in confidence with an attorney. Whistleblowers can consciously, carefully, and intelligently figure out, in advance, how to disclose the frauds in a manner that will reduce the risk that the industry will identify the “skunk at the picnic.”
Anonymous whistleblowing not only benefits the employee who fears retaliation, but it can be exploited by the commissions as an investigative tool. If the whistleblower remains undetected by management, he or she is in an invaluable position to obtain further information about a possible cover-up or even information that could result in a criminal obstruction of justice charge.
Although the whistleblower can remain anonymous throughout the investigatory process, at the very end of the proceeding, after a decision is made to compensate the whistleblower, the government must verify the whistle-blower’s eligibility as an original source before the check is placed in the mail. Even then, the disclosure of information on the whistleblower should remain strictly confidential and exempt from public release.
Twenty-Five Steps to Filing a Wall Street Qui Tam
It is important to keep in mind that Congress enacted two separate financial qui tam laws: one for securities and the other for commodities. Except for the office where a qui tam is filed, these laws were drafted by Congress in a virtually identical manner. Here are the basic rules for both laws:
1. Who Can File: “Any individual” or “2 or more individuals acting jointly.” In addition to the stereotypical whistleblower (i.e., a company insider), the Dodd-Frank Act also permits “analysts” to file reward claims. An analyst is not a traditional original source, but is a person who puts together public or secondary information in a manner that permits the commissions to learn that a violation has occurred.
2. Where to File: Claims under the Commodity Exchange Act must be filed with the Commodity Futures Trading Commission. Claims under the Securities Exchange Act must be filed with the Securities and Exchange Commission. Under both qui tams, claims must be filed “in a manner established by rule or regulation” by the respective commission. The specific filing procedures of the SEC and CFTC are published on the websites of each of the Commissions. There are very specific forms that must be completed in order to qualify for a reward.
3. Anonymous Filings: One of the critical advances in the two Wall Street qui tam laws was authorizing whistleblowers to make anonymous filings. When initiating a qui tam, an employee or other source of information must decide whether to file the claim in his or her own name or anonymously. If he or she decides to file anonymously, the employee/source must, under the law, hire an attorney to act as his or her intermediary with the SEC and/or the CFTC (referred to collectively as the “Commissions”). Thus, the employee can vet the insider information confidentially with counsel of his or her own choosing and decide what information should be provided to the Commissions. In weighing what (and how) to present information to the Commissions, the employee can seek to simultaneously present the strongest case of fraud (in order to increase the chance that the government investigators will aggressively pursue the claim), while at the same time masking the identity of the source of information. The statute permits a whistleblower to have maximum confidentiality with maximum impact.
4. Strictly Follow the Commissions’ Rules: The Commissions have the authority to deny whistleblower rewards simply because the applicants failed to file the claim in the manner proscribed by the Commissions. The laws contain the following reward disqualification: “No award” “shall be made” “to any whistleblower who fails to submit information to the Commissions in such form as the Commissions may, by rule or regulation, require.” Both Commissions have published extremely detailed rules of procedure governing the whistleblower rewards program. They are published on the Commission websites and codified at 17 C.F.R. Parts 240 and 249 (SEC) and 17 C.F.R. Part 165 (CFTC). Thus, any person seeking to obtain a reward under the CEA must review the most recent version of the whistleblower rules published by the CFTC. Any person seeking to obtain a reward under the SEA must review the most recent version of the whistleblower rules published by the SEC. Regardless of which qui tam is filed, employees must ensure strict compliance with these rules. Even if you believe that the rule is inconsistent with the substantive or procedural rights contained in the Dodd-Frank Act, whistleblowers still should file claims as mandated in the Commission rules, and if a claim is denied, challenge the rules in court.
5. Basis for Qualifying for a Reward: Rewards are permitted if the individual “voluntarily” files “original information” to the respective Commission that leads to the “successful enforcement” of the SEA or CEA, in a “covered judicial or administrative action” or a “related action” (including a settlement). The enforcement action (or settlement) must result in “monetary sanctions exceeding $1 million.” Monetary sanctions include all monies ordered to be paid to the Commissions, including fines, penalties, interest, and monies collected as part of a “disgorgement” of ill-gotten profits.
6. Disclosures Must Be “Voluntary”: To qualify, whistleblowers must “voluntarily” provide their information to the proper Commission. If the employee is compelled to provide the information, for example if the employee is subpoenaed to testify before a grand jury, the Commission may argue that the disclosure was not voluntary and consequently deny the application for a reward. It is in the best interest of any person who seeks a reward to voluntarily cooperate with government investigators and provide their information in the proper form on a purely voluntary basis.
7. The Whistleblower’s Information Must Be “Original”: In order to qualify for a reward, the information provided to the Commission by the whistleblower must meet the definition of “original information.” For information to be considered “original,” it must be “derived from the independent knowledge or analysis” of the whistleblower. This requirement is similar to the original source requirement under the False Claims Act.
8. Public Disclosure Bar: Like the FCA, the securities and commodities qui tam statutes are intended to encourage the disclosure of information to the government that is not already known to the government. The laws consequently prohibit whistleblowers from obtaining a reward under two circumstances. First, rewards are denied if the Commission is already aware of the information provided by the whistleblower, “unless the whistleblower is the original source of the information.” Second, if the whistleblower “exclusively” derives his or her information from an “allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from the news media,” unless the whistleblower is “a source of the information.” The qui tam law is designed to encourage employees (or other individuals) who have inside information or original analytical skills to step forward and blow the whistle to the Commissions. If information is already known to the government or is already in the public domain, what is the purpose of paying a reward for information that the government knows or can obtain from a Google search?
9. Amount of Reward: If the whistleblower’s disclosure qualifies for a reward, the individual who filed the claim is entitled to a reward. This payment is required under law, and the refusal of the government to make the payment can be challenged in court. The range of the reward is also set by statute. The whistleblower (either individually or, if more then one, collectively) must receive “not less than 10 percent” and “not more than 30 percent” of the total amount of “monetary sanctions” actually collected by the government as a result of the covered administrative or judicial
actions, any monies obtained from “related” actions, and any money recovered as a result of a settlement.
10. Determination of Amount of Reward: The Commissions have wide discretion on determining the amount of the reward (i.e., whether to grant the whistleblower 10 percent, 30 percent, or some percentage in between). In setting the percentage award, the Commissions must weigh the following factors: (a) the “significance of the information provided”; (b) the “degree of assistance provided by the whistleblower” or his or her attorney; (c) the “programmatic interest” of the Commissions in “deterring violations” of law by “making awards to whistleblower”; and (d) other factors that the Commissions may establish by “rule or regulation.”
11. First to File: Like the FCA, the Dodd-Frank Act qui tam contains a “first to file” rule. Rewards are paid to the first whistleblowers to individually or jointly file the claim. If a whistleblower is the second person to file an identical claim, his or her claim could be denied. Claims are considered related under this disqualification if they are “based on the facts underlying the covered action submitted previously by another whistleblower.” In practice, the harsh results mandated by the first to file rule are sometimes avoided, as both the original whistleblower and the government often recognize the efficacy of encouraging other employees with additional evidence in support of the initial claim to step forward. The law also permits whistleblowers who “contribute” new information to an ongoing investigation to qualify for a reward. This exception is not contained in the False Claims Act. But the law places a premium on the first employee(s) who files a claim, and the old adage “if you snooze you lose” applies to the Dodd-Frank Act qui tams. Bottom line: Don’t miss the bus. File first.
