Jul 12, 2013

Houston Criminal Attorney: The Dodd-Frank Act and Whistleblowers

While conducting research on ecological issues in the early 1970's, author and activist Ralph Nader coined the term "whistleblower" for citizens who expose misconduct occurring within an organization. Prior to that the press had used terms such as "informers" or "snitches", which carried obviously negative connotations. Attitudes towards whistleblowers still vary widely; they may be seen either as selfless martyrs for public interest, or as traitors solely pursuing personal glory and fame. Nonetheless, whistleblowers perform a vital role in helping the government maintain public safety, corporate transparency and financial regulation.
Most whistleblowers are internal whistleblowers, employees who report misconduct by a fellow employee or superior within their company. External whistleblowers report misconduct to outside persons or entities such as attorneys, the media, law enforcement agencies or specific watchdog groups.
In some cases whistleblowers have been subjected to criminal prosecution in reprisal for reporting wrongdoing; because of these repercussions faced from the organizations or groups they have accused, specific laws have been enacted to protect whistleblowers acting in the interest of the government or public. Private organizations such as the National Whistleblowers Center have also formed legal defense funds and support groups to assist whistleblowers.

The False Claims Act: 

The False Claims Act (31 USC § 3729) is the foundation of the U.S. whistleblower system. It is the most widely used statute employed by whistleblowers to report on corporate fraud and misconduct, and the model for other federal and state whistleblower provisions.
In the midst of the American Civil War, the Union Army found itself facing a horde of unscrupulous contractors passing off rancid food, ailing livestock and defective weapons. Recognizing that the embattled government lacked the capabilities to control the widespread fraud on its own, Congress passed the first US law adopted specifically to protect whistleblowers, the False Claims Act (also known as the "Lincoln Law") on March 2, 1863.
This law establishes liability when any person or entity improperly receives payments from -or avoids payment to- the Federal government (tax fraud is excepted). Importantly, it revived the thirteenth-century English legal tradition of qui tam (derived from a Latin phrase meaning "he who sues on the King's behalf as well as his own"); allowing a private citizen (known as a "relator") to not only bring a lawsuit on the government's behalf, but also to be rewarded with a percentage of any proceeds recovered by the government.
The False Claims Act prohibits: 
  • Knowingly presenting, or causing to be presented a false claim for payment or approval; 
  • Knowingly making, using, or causing to be made or used, a false record or statement material to a false or fraudulent claim; • Conspiring to commit any violation of the False Claims Act; 
  • Falsely certifying the type or amount of property to be used by the Government; 
  • Certifying receipt of property on a document without completely knowing that the information is true; 
  • Knowingly buying Government property from an unauthorized officer of the Government, and; 
  • Knowingly making, using, or causing to be made or used a false record to avoid, or decrease an obligation to pay or transmit property to the Government. 
The most commonly used provisions are the first two, prohibiting the presentation of false claims to the government and the fabrication of records to get a false claim paid: these cases frequently involve situations in which a corporation or individual overcharges the federal government for goods or services. Other typical cases entail failure to test a product as required by government specifications, or selling defective products. The key factor in determining whether conduct is covered by the False Claims Act is whether that conduct caused the government to suffer a financial loss.

The False Claims Act was amended in 1943, (most notably to reduce the relator's share of recovered proceeds) but its qui tam provisions were largely ignored until an increase in military spending during the Reagan presidency. Amid widespread reports of $1,000 bolts, $7,000 coffee pots and other outrageous abuses by government contractors, the law was amended in 1986 to impose fines of up to $10,000 for each false claim. The amendment also tripled damages on wrongdoers, rewards whistleblowers with up to 30 percent of the government's recovery, and includes significant anti-retaliation protections for employees who blow the whistle.

Yet despite being the primary tool used by the government and whistleblowers to combat fraud, the False Claims Act is limited in scope: primarily, it only applies when the fraud or misconduct has caused the government to lose money. Other congressional Acts which have been passed to strengthen protection for federal whistleblowers include the Lloyd–La Follette Act (5 U.S.C. § 7211) of 1912 which confers job protection rights on federal employees who criticize their superiors, and similar protections included in subsequent federal environmental, health and safety laws.
The Sarbanes–Oxley Act (Pub.L.107–204,116,Stat.745), also known as SOX, was enacted in 2002 in reaction to a number of major corporate and accounting scandals and Section 1107 provides criminal penalties for retaliation against whistleblowers. Until recently however there was no real financial incentive or legal protection available to encourage whistleblowers to expose other types of fraud; i.e., frauds such as those perpetrated against private investors.

The Dodd-Frank Act: 

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111–203, H.R. 4173) was signed into law by President Barack Obama on July 21, 2010 as a response to the late-2000s recession, implementing the most significant changes to U.S. financial regulation since the Great Depression. This Act made changes in the American financial regulatory environment that affect all federal financial regulatory agencies along with virtually every part of the nation's financial services industry.
Dodd-Frank proposed eight areas of regulation, primarily:
  • Regulation of credit cards, loans and mortgages is consolidated under The Consumer Financial Protection Bureau. 
  • Establishment of the Financial Stability Oversight Council to oversee Wall Street. 
  • Establishment of the Volcker Rule banning banks from using or owning hedge funds for the banks' own profit. 
  • Requiring that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC).
  • Requiring hedge funds to register with the SEC and provide data about their trades and portfolios so the SEC can assess overall market risk. 
  • Creation of an Office of Credit Ratings at the SEC to regulate credit ratings agencies. 
  • Creation of a new Federal Insurance Office under the Treasury Department, which identifies insurance companies that create risk to the entire system. 
  • Allowing the Government Accountability Office(GAO) to audit the Fed's emergency loans during the financial crisis. 

The Dodd-Frank Act also includes important whistleblower provisions in section 922, largely modeled after the False Claims Act; however, a compelling difference between the False Claims Act and the Dodd-Frank whistleblower provisions is that Dodd-Frank does not require the fraudulent activity be committed against the government.
In fact, although the False Claims Act allows whistleblowers to pursue a qui tam action even if the government chooses not to intervene, Dodd-Frank does not supply whistleblowers with the “private right of action” required to bring a lawsuit on behalf of the United States government. If the government opts not to pursue a case under the Dodd-Frank Act, the whistleblower’s claim is terminated.

Whistleblowers are required to provide information that is not publicly known, but Dodd-Frank also rewards SEC whistleblowers who provide unique analysis based completely on public information. For example, if fraud can be demonstrated using public statistics or information a citizen can qualify to become a whistleblower. In further contrast to the False Claims Act, which only rewards the first whistleblower filing a complaint, whistleblowers who provide meaningful information assisting the government in combating securities fraud under Dodd-Frank may be rewarded regardless of whether they were the first to file. Dodd-Frank whistleblowers do not file formal complaints in a federal court, but within the appropriate agency. For example, securities violations are filed with the SEC and commodities violations are filed with the CFTC.
The Dodd-Frank whistleblower provisions also take important steps to protect citizens who report securities fraud with an anti-retaliation provision which prohibits “... adverse action against a whistleblower arising out of disclosures protected under Sarbanes-Oxley; the Securities Exchange Act of 1934; and any other law, rule, or regulation subject to the jurisdiction of the SEC.” 

Filing a whistleblower claim: 

Common examples of fraud or misconduct that may be targeted by a whistleblower claim may include:
  • Billing the government for products or services not provided, or that are defective, mislabeled or otherwise different from the products or services the government contracted. 
  • Failing to report government over-payments. 
  • Obtaining government funds using false certifications of compliance or through violations of law.
  • Selling or marketing drugs outside of the FDA approved uses. 
  • Accounting fraud 
  • Fraud or manipulation of trading in securities or commodities, or the improper sale of securities, bonds, or commodities. 

In order to file any whistleblower claim you must have evidence of fraud or other misconduct that directly causes a financial loss to the government (under the False Claims Act and related statutes), a financial loss to investors from securities or commodities fraud (under the Dodd-Frank Act), or harm to specific employees or the public at large (under various other laws designed to protect the environment, financial markets, health and safety and consumer welfare).

 While a whistleblower does not need to have witnessed the case of fraud or misconduct personally, they must have concrete and specific evidence: suspicions or beliefs are not sufficient. Documentation supporting a claim greatly increases the likelihood that authorities will take it seriously. In some cases public information may be used to support a whistleblower claim, but it must be information that the government does not already possess and could not otherwise obtain from any public source or its own records.

Time is an essential factor in filing a whistleblower claim. The "first to file" rule will preclude any claim if one has already been filed based on the same facts, but multiple whistleblowers may file a joint claim or separate claims based on different evidence. The claim must also be brought within the statute of limitations: generally within six years of the violation under the False Claims Act and within three years of the violation under the Dodd-Frank Act. For violations of the various state FCA and industry specific laws, claims usually must be reported anywhere from 30 days to 6 years after the violations depending on the particular statutes.

In order to take full advantage of the law and to protect yourself from possible risk, it is essential for any prospective whistleblower to have legal representation before going forward with a claim. Parnham and McWilliams can help ensure that your claim is competently and efficiently prosecuted, that you receive the maximum reward available, and that all of the protections afforded to you under the whistleblower laws are implemented. If you feel that you have relevant information relating to corporate wrongdoing and would like to learn more about whistleblower representation, please visit parnhamandmcwilliams.com or contact our Houston offices at (713) 224-3967 for a free consultation.

The National Whistleblower Center
OSHA's Whistleblower Protection Program
US Merit Systems Protection Board: Whistleblower Appeals
Securities and Exchange Commission: Office of the Whistleblower
US Commodity Futures Trading Commission whistleblower program

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