Dodd-Frank Whistleblower Program Makes its Annual Report to Congress

The Whistleblower Program was instituted in August of 2011 with the purpose of incentivizing people with inside, original information about potential securities law violations to come forward and share that information with the SEC. In order to incentivize whistleblowers, the Whistleblower Program may award whistleblowers an amount between 10% and 30% of the monetary sanctions collected. The Whistleblower Program recently released its 2015 annual report to Congress.

Some interesting things from the report are the following:

The Hospital Room Incident: Did Lance Armstrong Pay Off Doctors to Remain Silent?

While it has been several months since we posted about the Lance Armstrong investigation (see this link for previous posts), the case against Armstrong continues to grow. A recent article in the Daily Camera discusses what is known as “The Hospital Room Incident.” This article discusses why the U.S. Government subpoenaed his medical records from the Indiana University School of Medicine. Allegations are that Armstrong paid off his doctor to remain silent through a donation to his medical school.

Individuals Causing the 2008 Housing Crisis Receive No More Than a Slap on the Wrist

Following the 2008 housing crisis, several of the banks involved paid large settlement fines. JPMorgan Chase was one of those banks. The Justice Department used evidence from an anonymous whistleblower in the prosecution, but until recently the whistleblower remained anonymous. Matt Taibbi recently released an article in Rolling Stone describing why the whistleblower, Alayne Fleischmann, has gone public with what she knows. Ironically, the Justice Department wasn’t committed to bringing “justice” to those individuals who contributed to the fall of the economy through fraudulent activities. In fact, Attorney General Eric Holder said the following:

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large.”

What is the Justice Department doing if they aren’t bringing justice to those responsible for major crimes? When Fleischmann realized that much of what she reported to the SEC and the Justice Department was not being fully pursued, she decided she had to go public with what she knew.

Uncovering Pharmaceutical Fraud

In a previous post, I mentioned a research paper that was published in The Lancet that made claims that a certain vaccine caused autism. The idea went viral, and the amount of vaccinations decreased, which resulted in many children suffering needlessly with the measles and other preventable diseases. Claims in the paper were eventually proven false, and The Lancet retracted the paper. However, although there may not be a causal link between vaccines and autism, there does appear to be alleged fraudulent activity occurring on the side of the pharmaceutical companies to cover up and enhance the results of their vaccines.

A recent Huffington Post article discusses three court cases filed by whistleblowers against Merck, a pharmaceutical company, saying that they “fraudulently misled the government and omitted, concealed, and adulterated material information regarding the efficacy of its mumps vaccine in violation of the FCA [False Claims Act].” One of the court cases describes Merck’s misconduct as follows:

Reporting Fraud: An Uphill Battle, Especially in China

We often hope to see the people committing fraud receiving punishment. Unfortunately, this is not always the case. A recent New York Times article by Floyd Norris reports that Kun Huang spent two years in a Chinese prison – not because he committed fraud, but because he detected it. The consequences for reporting fraud are not generally quite as severe as they were for Mr. Huang, but they do often include ridicule and other challenges for many whistleblowers. While reporting fraud is an uphill battle, especially in China, it is definitely one that is worth fighting.

Lance Armstrong Investigation: I can't believe it's come to this....

Here we are, nearly three and a half years after Floyd Landis's first confession came out and I posted that I was 99.9% confident that pro cyclists had been doping for the past 15-20 years. I ended that first post by saying "Sadly, what would be surprising to me is if someone who is dominating pro cycling such as Alberto Contador was actually not doping!" Of course, soon after that, Alberto failed a doping test in the Tour de France and was suspended from racing.

Since that first post, there have been many posts to follow (this makes number 150 with the label of Lance Armstrong Investigation) and

Whistleblowing is Paying Off

The WSJ reported this week that the SEC has handed out it's second ever Dodd-Frank award for whistleblowing. the article says that the SEC expects more awards in the future. Here's a quote...

Lance Armstrong Investigation: Fed to Join Landis in Suing Lance, Weisel and Stapleton

This is hot off the press and, from what I can tell, was first published by the Wall Street Journal. Amidst speculation in the past few days that the Department of Justice was not going to join in the whistleblower lawsuit filed by Floyd Landis, the WSJ is saying they are going to join in. This is bad news for Lance, Thom Weisel and Bill Stapleton since Lance has now stated publicly that he was doping. On the other hand, this is good news for Floyd Landis who could end up a multi-millionaire as a result of this lawsuit. Here are some key fraudbytes from the WSJ article:

Whistleblowing Pays

Today's news challenges the notion that whistleblowers always suffer. The IRS awarded $104 million to former UBS banker, Bradley Birkenfeld, for providing information about a tax evasion scheme. Here are a few quotes from Bloomberg:

The Pros and Cons of the Dodd-Frank Whistleblower Bounty

I listened to an interesting debate on this topic at this link. Just click on the audio play arrow right under Bernie's picture...

WikiLeaks versus the SEC

No, (to my knowledge) Wikileaks hasn't released detailing corruption in the SEC.  Instead, Sherron Watkins, the primary whistleblower in the Enron fraud, weighed in on the SEC's new incentives for whistleblowers.  In a panel discussion about whistleblowers held by the New York State Society of Public Accountants, Watkins said the following (via the PaperTrail):

Utah may get more serious about affinity fraud

Utah has had more than it's share of affinity fraud cases over the years. Authorities say that in the past year alone, more than 4,000 Utahns have lost over $1.5 billion due to fraud. In many cases, the fraudsters engage in what is known as "affinity fraud" which refers to any type of fraud involving the exploitation of a relationship of trust. We naturally trust those we go to church with or those who are like us in some way including ethnicity. If exploits that trust to commit fraud, it is referred to using this phrase.

In Utah, the religious community provides an easy target for someone who wants to commit fraud. As such, fraud perpetrators build trust among a group of individuals in a social setting such as at church and then they exploit those relationships by getting people to invest in bogus business opportunities. Affinity fraud was involved in many fraud cases including Bernie Madoff's famous $50 billion Ponzi scheme. In that case, the Jewish community was exploited by Bernie.

Affinity fraud has been found in every religious community but also exists in other communities such as racial or ethnic groups. A large Ponzi scheme in Florida involved affinity fraud among the Haitian community. The deaf community also has been exploited by fraud perpetrators who developed relationships of trust and then exploited them to commit fraud.

Today's Deseret News reports that one Utah State Senator is sponsoring legislation to increase the penalties for any Utahn who is found to exploit relationships of trust. The article summarizes the proposed bill as follows:

The bill, which would modify the Utah Uniform Securities Act, would exact harsher penalties on those who use "undue influence" to "exploit the trust, dependence or fear of another person or gain their confidence" and "deceptively" influence their decisions. Harsher penalties would apply, as well, if the fraud victim is a "vulnerable adult." The bill would enable prosecutors to file second-degree felony charges in such cases.

The article also explains that, in addition to this bill, Sen. Ben McAdams is proposing other legislation to provide incentives for people to "whistle blow" by bringing forth information about questionable business deals. The article doesn't go into detail about the incentives but, if it resembles federal legislation, it may provide whistle blowers with some percentage of penalties that are collected by the state when a fraud case is uncovered.

I'm all for both of these bills. I have had people come to me and tell me their story about how they lost their life savings because a trusted friend exploited that relationship. It's not uncommon for these individuals to be near or in their retirement years and then to find they have lost much or all of their assets. These are tragic stories that tear your heart out to hear about.

I personally hope this legislation will help lock some of these perpetrators up for a long time!

Tension Between Corporate and Government Whistleblowing Programs

Whistleblowing is considered the most effective method of detecting large corporate frauds. For example, Cynthia Cooper and Sharon Watkins are famous whistleblowers who spilled the beans on the frauds at WorldCom and Enron, respectively. Unfortunately, the corporate world, and society in general, hasn't always treated whistleblowers as heroes. In fact, many whistleblowers are blamed for the negative effects of fraud (such as job layoffs) when fraud comes to light. For example, Cynthia Cooper experienced this and speaks about being shunned by the people in her town after she brought WorldCom's massive fraud to light. Basically, society seems to perpetuate the Kindergarten stigma of being a "tattle tale" and, as a result, they shoot the messenger when it comes to reporting fraud.

Since Enron and WorldCom, many government regulations have been established to provide incentives to whistleblowers. The Sarbanes-Oxley Act requires internal whistleblowing programs at publicly traded companies while the False Claims Act and, more recently, the Dodd-Frank Bill provide incentives for whistleblowers to tell government officials about fraud. The False Claims Act applies to acts that defraud the Federal Government while the Dodd-Frank Bill applies to any public company who commits fraud and involves basically any fraud that is regulated by the federal government. As we've discussed before, the government incentives can lead to millions in rewards to an individual who blows the whistle if the government collects more than $1 million from the company.

The WSJ has an interesting article that talks more about the tension these regulations have led to. Basically, SOX has led public companies to have internal whistleblowing systems while Dodd-Frank leads whistleblowers to go outside the company to blow the whistle. Unfortunately, I'm not sure there are any easy answers since it seems both programs are important. The internal program is needed for smaller amounts (frauds that lead to less than $1 million in fines to the Federal Government don't apply to the Dodd-Frank Act) while it seems that whistleblowers of large frauds may not be treated fairly at a corporate level, especially if top management is involved.

I guess there are no simple and profitable solutions for preventing and detecting fraud in a business environment that is ethically bankrupt. In my opinion, as long as families fail to instill ethical values in the home, the forecast for this tension and cost is not looking good. If society continues to deteriorate because families fail to instill ethical values in the home, regulation will either cripple business or fraud will become more rampant.

U.S. Justice Department May Join The Fun in the Lance Armstrong Investigation

The WSJ reported today that Floyd Landis filed a whistleblower lawsuit under the Federal False Claims Act. This act encourages whistleblowers to report when the government has been defrauded. Similarly, I blogged before that the recently passed Dodd-Frank bill also encourages whistleblowers for cases subject to litigation by the SEC. As it turns out, whistleblowers are the number one way that fraud is detected and the government has decided to reward whistleblowers for coming forward. In this case, if the government sues Lance or the former U.S. Postal Team for fraud and is able to collect then Floyd will get 30% of the money. Of course, Landis will have to hire a legal team to make his case so government incentive is justified in my view.

Predictably, the reaction from the Armstrong PR campaign was twofold: First, why is the U.S. government spending money investigating a philanthropist athlete who races his bike on foreign soil. Second, this shows that Floyd Landis is a money grubbing liar like we've been saying all along. However, the Justice Department may not be listening. Here is why.

Dodd-Frank and Whistle-blowing to the SEC

I just read an interesting post in the NY Times about how the new Dodd-Frank financial regulations bill will provide an incentive for whistle-blowers to give information about various frauds to the SEC. Apparently, deep in the bowels of the 2,500 page Dodd-Frank bill that overhauls our financial regulatory system is a provision that requires the SEC to award whistle-blowers 10-30% of monetary sanctions collected by the SEC that exceed $1 million.

 The NY Times post also said that while the amount of the award must range from 10-30% of the sanctions, the exact amount awarded is up to the discretion of the SEC. Also, the whistle-blower must meet certain conditions in order to collect under Dodd-Frank.  Here is what the post said about the requirements:

Was Harry paranoid?

Fortune magazine has excerpts from an interesting interview with Harry Markopolos, the guy who tried to blow the whistle on Bernie Madoff. Harry is definitely an interesting personality. He talks about having to be undercover these days since he's now famous. He also talks about looking under his car for bombs because he feared Madoff may try to kill him. At one point the interviewer asks him if he was being overly paranoid. He explains that his wife was expecting twin boys and he wanted to make sure they had a father. Well, nobody said being a fraud examiner and a whistleblower was easy or without risks!

Who Blows the Whistle on Corporate Fraud?

A forthcoming study in the Journal of Finance focuses on improving our understanding of fraud detection methods.  The authors discuss their paper at the Harvard Law School Corporate Governance Blog.  Here is a sampler of their discussion:

The main result emerging from our analysis is that in the United States fraud detection relies on a wide range of, often improbable, actors. No single one of them accounts for more than 20 percent of the cases detected. These findings suggest that to improve corporate governance abroad one needs to adopt a broader view than implied by the legal or private litigation approaches to corporate governance.

... 

The second main result is that the incentives for the existing network of whistleblowers are weak. Auditors, analysts, and employees do not seem to gain much and, in the cases of employees, seem to lose outright from whistleblowing. The two notable exceptions regarding who benefits from whistleblowing are journalists involved in large cases and employees who have access to a qui tam suit.

A natural implication of our findings is that the role of monetary incentives should be expanded. We find that the use of monetary rewards provides positive incentives for whistleblowing. As the evidence in the healthcare industry shows, such a system appears to be able to be fashioned in a way that does not lead to an excessive amount of frivolous suits.