Whistleblower Bounties Will Prevent Future Fraud and Scandals

By Lianna Brinded

This article was published on April 15, 2013 in the UK’s International Busines Times.

Guttman says the UK has a lot to learn from the US on whistleblower incentives. The only way to prevent large scale scandals, such as Libor fixing and major financial fraud demonstrated by the collapse of Enron, is by installing bounty programmes that reward those who risk their careers to flag up wrongdoing, says one of the world’s most prominent whistleblower attorneys.

Speaking with the IBTimes UK, Reuben Guttman of Guttman, Buschner & Brooks PLLC says that the only way for any country to prevent financial fraud or wrongdoing from spiralling to large scale scandals is by replicating the US programmes and rewards systems for whistleblowers.

“When it comes to complex fraud, such as with UBS client tax evasion or Libor fixing, the only way prosecutors are able to have a solid lead and case, is when insiders come forward with the information,” says Guttman.

“The reality is, the regulators do not have or will not have the resources to investigate and find these forms of information by themselves and many complex fraud cases can be prevented from becoming huge scandals at the detriment to the consumer, shareholder or government, if the right incentives are in place for people who risk their career and employer retaliation,” he adds.

In the US, there are a number programmes, such as ones with the US Internal Revenue Service (IRS) and the Securities Exchange Commission (SEC) coupled with the protection through the Dodd-Frank Act, since 2010.

The programmes allow whistleblowers to not only be rewarded for information, depending on the significance of information and how much it results in recovery for the government or shareholders, but also protects them employer retaliation, such as dismissal or being investigated themselves.

UK To Learn From the US?

According to the SEC’s 2012 Annual Report on the Dodd-Frank Whistleblower Program, the agency received more than 3,000 tips from all 50 states and from 49 countries in a year.

The UK’s Financial Conduct Authority (FCA), previously the Financial Services Authority, has a “whistleblower programme”, but has no reward system for information and various clauses in the law allow companies to skate around the “unfair dismissal” of an employee, as a result of whistleblowing.

“You can bulk enforcement staff at the regulators but you can never beef it up enough to efficiently investigate and enforce compliance,” says Guttman. “For example, the SEC has maybe around one examiner for every $12bn in assets, and it could triple or even quadruple the amount of staff to look into this amount of assets but you would still be massively understaffed. The idea is that you want to basically get to the fraudulent activity before it has a devastating impact on the economy, such as with Tyco, WorldCom and Enron. When Enron collapsed there was a mass loss of jobs and impact on many companies that had dealings with them, but this situation could have been averted if people came forward with information,” he adds.

Guttman has had his fair share of complex litigation and class action cases that have involved the help of whistleblowers.

Serving as lead counsel on several cases, Guttman helped recover $1.6bn for the US government last year in Meredith McCoyd v. Abbott Labs and also represented one of the four main whistleblowers in a case against GlaxoSmithKline that returned over $3bn to the government.

In addition, he represented whistleblower Lynn Szymoniak whose qui tam case, a writ whereby a private individual who assists a prosecution can receive all or part of any penalty imposed, involving fraudulent mortgage assignments, was resolved as part of the government’s $25bn settlement with some of the world’s largest banks.

“Rewarding whistleblowers work and the UK could learn from the US system. This is the biggest difference between us. The reality is that we will be in dire straits if we didn’t have these people coming forward and one of the main issues why people do not blow the whistle elsewhere is because of the huge financial and reputational risk to themselves without the necessary protection or reward,” says Guttman.

“We depend on private institutions for everything, from energy, finance and healthcare but we expect the public institutions to protect us on very little resource. We have a host of corporations that have leaders that are more like temporary caretakers that operate on boosting margins and gains in the short term. But companies cut corners and it is at the detriment to the consumer, the shareholders and the government,” he adds.

Preventing Widescale Disaster

Guttman said the BP’s oil spill in the Gulf of Mexico could have been averted if people working at BP had told the relevant authorities about the levels of safety or “corner cutting” the energy firm was conducting, which eventually led to one of the biggest environmental disasters in history.

Similarly, he says the scope and scale of banks attempting to manipulate the world’s most important interbank lending rates could have also been quashed, if the right environment for whistleblowing was installed.

“Whistleblowing is critically important to avert disaster but to also allow transparency, enforcement and learning curves for the regulators to prevail,” says Guttman.

After Barclays, UBS and RBS became the first three banks to settle with a number of US and UK authorities over Libor fixing, the UK has held a raft of hearings to determine the culture and controls that led to the environment where traders were able to manipulate the lending rate for years.

At the beginning of this year, one of the most senior US financial services regulators Thomas Curry encouraged UK politicians to introduce rewards whistleblowers.

The Office of the Comptroller of the Currency said US regulators greatly benefited this incentive in place as it led to the regulator uncovering wrongdoing and misbehaviour at the banks and other financial institutions.

Looking for Market Integrity in China

Economic forces globally are driving conformity in a wide range of practices, says Reuben Guttman of Guttman, Buschner & Brooks PLLC.

In Hong Kong’s financial district, high end stores like Cartier, Rolex and Burberry outnumber fast food chains like McDonalds and KFC, while up north on Nanjing Xi Lu road in Shanghai, that city’s bustling version of Fifth Avenue, has become a haven for the world’s most high end retailers. With political and cultural difference tempered by economic goals, Hong Kong and mainland China are searching for mechanisms to create greater integrity in financial markets and generally maintain China as a place for investment.

New research

The CFA Institute, a global association of 115 thousand financial analysts, released the results of its Global Market Sentiment Survey of its members at a conference recently held in the city. Although seventeen percent of respondents said that China would provide the best investment opportunity in 2013 – second only to the United States with 32 percent, a majority do not expect the global economy to expand this year and believe that the currently level of integrity for global markets is poor. Over half of the members cited concerns about the ethical culture within financial firms as the source of this lack of integrity, but respondents in Europe and China differed greatly about the most serious ethical issue in the coming year. Respondents in Europe cited the mis-selling of products by financial advisors, but respondents in China cited market fraud and the integrity of financial reporting as substantially greater concerns.

Responding to concerns

Hong Kong appears to be aggressively seeking out ways to respond to these concerns and strengthen investor confidence by providing rights of redress. With the encouragement of the Hong Kong government, the Financial Dispute Resolution Centre has been launched. The FDRC provides rights of redress for small investors with losses up to 500 thousand Hong Kong dollars, or roughly the equivalent of 75 thousand US dollars and 50 thousand British pounds sterling. Hong Kong is also looking at implementing a class action law that will allow investors to aggregate their claims to pursue securities fraud cases.

Bringing conformity

Interest in these changes, at least in Hong Kong, is running high. An investor conference sponsored by the CFA and the International Investor Education Foundation drew nearly 200 participants at the city’s Four Seasons Hotel at the International Financial Center on Hong Kong Island. Speakers included Anthony Neoh, former Chief Advisor to the China Securities Regulatory Commission (CSRC), Paul Smith, Managing Director Asia Pacific, CFA Institute, and Sou Chiam, CEO, Financial Dispute Resolution Centre Ltd. Whatever the outcome of the discussions at this conference, one thing is clear: economic forces in this global economy are driving conformity of financial practices, ethics, and perhaps regulation.

The new global legal norms

As multinationals move around the globe, legal systems are cross-pollinated. China is a case in point, says Reuben Guttman who has just returned from an event in Shanghai dealing with securities dereliction.

On a Saturday afternoon this month, I was part of a team of four faculty members from Emory University Law School’s Center for Advocacy and Dispute Resolution participating in a training dialogue with Shanghai  financial fraud prosecutors. The topic of the training was investigation and prosecution of insider trading cases.

The session was conducted as part of an ongoing relationship between Emory Law School, a nationally ranked law school based in Atlanta, Georgia and Shanghai Jiao Tong’s KoGuan Law School, a nationally ranked law school in China.

Crossing a river one stone  at a time

This was my sixth visit to China and with each visit I learn more about the culture and how cultural and language differences impact the application of law. While China has laws that mirror those in the United States, procedure, interpretation and the lack of a common law tradition make legal analysis and compliance enforcement complex. On an earlier visit to China I learned the saying, “You cross a river one stone at a time.” This two hour session on a Saturday afternoon was best described as a step on the first stone toward a path that may lead to greater commonality in approaches toward addressing securities dereliction.

Economic reality is the driver

While US law schools and legal institutions frequently send delegations to China to talk about western legal traditions as part of what are commonly referred to as Rule of Law programmes, the Emory-KoGuan programme, with an emphasis on investigation of facts and advocacy,  is something different.  Its securities fraud training component particularly shows it to be a programme  driven by economic reality.

With investment opportunities in China growing, both the Chinese and their US counterparts see a need to invest in mechanisms to strengthen market integrity.  At the same time, more and more Chinese companies are reaching across the ocean to trade their stock on US exchanges –  making familiarity with US securities laws and accounting practices an economic necessity. Chinese companies that issue stock on US exchanges are of course subject to the full panoply of securities laws including fraud on the market cases brought by private investors.

A two way street

Education is a two way street.   As  much as the Emory-KoGuan programme  is about sharing the US experience, it also presents an opportunity to learn about the Chinese legal system, keeping in mind that cultural differences may give different meanings to words that are precisely translated. This is no longer just an intellectual exercise for curious academics who have trekked back and forth to China.

A physical presence is a must

Back in the United States a few weeks ago, the Chief Judge of the Delaware Chancery Court, Leo Strine, had some choice advice for counsel representing the interests of corporate directors of a coal company doing business in China.  In a hearing on a matter In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013), the Chancery Court noted:

‘If you’re going to have a company domiciled for purposes of its relations with its investors in Delaware and the assets and operations of that company are situated in China that, in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.

If the assets are in Russia, if they’re in Nigeria, if they’re in the Middle East, if they’re in China, you’re not going to be able to sit in your home in the US and do a conference call four  times a year and discharge your duty of loyalty. That won’t cut it. There will be special challenges that deal with linguistic, cultural and others in terms of the effort that you have to put in to discharge your duty of loyalty.’

Cross-pollination

Compliance enforcement is no longer just a question of understanding the laws within a geographic boundary and asking a limited range of questions about corporate compliance. Rather, it is a much deeper task as the Delaware Chancery Court noted.

Moreover, as multinational corporations transact business globally, they subject themselves to foreign laws.  Compliance with those laws may be a condition of compliance with laws at home, particularly where corporate articles of incorporation proscribe engagement in unlawful conduct or representations are made to securities regulators about overall legal compliance.

While cultural and political differences may still set nations apart, multinational corporations and cross-border legal enforcement seem to be leading to what can perhaps be characterized as cross-pollination of legal systems. Making sense of the new global legal norms may very well be the role played by the Emory-KoGuan relationship in the days ahead.

Justice Takes Side of Landis

Washington, DC — It looks like the false claims case against Lance Armstrong, which was brought by Floyd Landis, will finally see the light of day.

It is reported that the United States Department of Justice has decided to intervene in the case against Armstrong.

Landis, who brought suit as a whistleblower under the Federal False Claims Act, alleged that Armstrong participated in a scheme to cause the United States Postal Service to wrongfully pay out money to his Tour de France teams.

The apparent decision by the United States Department of Justice to intervene on behalf of Landis means that the government will take responsibility for prosecuting what at least now is a civil matter. It also means that the seal will finally be lifted on the case and litigation, to a large degree, will occur in proceedings that are more transparent then they have been.

As a technical matter, the case brought by Landis still remains under seal even though it was leaked out to a New York newspaper.

The government decision on intervention also probably means that efforts to resolve the case short of full-blown litigation failed.

Unless this matter is resolved in the early stages of litigation, Armstrong will undoubtedly have to participate in court mandated discovery and even submit to a deposition. Unless the court seals the record, the public is likely to hear more about this matter with bloggers salivating about the prospect of reading Armstrong testimony.

Still looming over Armstrong is the prospect of a criminal indictment. The Government’s decision to pursue the false claims case certainly does not rule out that prospect. The United States Department of Justice often pursues both civil and criminal allegations in what are known as parallel proceedings or investigations.

For now, one thing is sure; the false claims case against Lance Armstrong is about to get more interesting.

 

Doping and How we Play the Game

Now that Lance Armstrong has admitted that he doped, fans across the globe must be wondering what was he thinking?  Perhaps he surmised that breaking anti-doping rules is just a part of the game.

One thing that Lance Armstrong probably did not anticipate was a Federal statute known as the False Claims Act which encourages private citizen whistleblowers with monetary bounties when their efforts are successful. Undoubtedly, he also did not anticipate that his own teammate, Floyd Landis, would sue him under that statute as we now know because a copy of that lawsuit, filed under court seal, has leaked out.

As to whether breaking the rules of a sport is part of the game, the truth is that youth in sports leagues across the United States are actually schooled on the calculus of breaking the rules.  Young Squirt hockey players encased in equipment that makes them look like skating trolls are taught that it is OK to trip an opponent who is about to score a goal because the two-minute penalty is a reasonable cost to pay to keep a point off the board.  Pint-sized hoopsters learn that fouling an opponent is a reasonable part of a last ditch strategy to get the ball back with moments left in a close game.

Off the field of play, our youth revel in stories about professional athletes who pushed the edge of the envelope, even crossing the line, during the course of their careers. Didn’t Hall of Fame Pitcher Gaylord Perry write a book called “Me and the Spitter?”  In the 1972 hockey series where Team Canada played the Soviets, a turning point came when Canadian center Bobbie Clarke swung his stick, breaking the ankle of Soviet Star, Valarie Kharlamov.  The series turned quickly for the Canadians who eventually won it by a score of 4-3 with one tie.  Canada won the series 4-3 with one tie, and Clarke, who is actually a very nice guy, became a national hero and a member of the Hockey Hall of Fame.

Unfortunately, when our youth turn into adults and trade up their sports equipment for Neiman Marcus suits and their playing turf for corporate board rooms, they sometimes seem to have remembered the economic calculus they learned at a young age.  Will I be caught and what is the penalty?

Why not fire the worker who complains of national origin discrimination when the worst case scenario is a back pay award measured at $11 an hour?  Or why spend hundreds of thousands of dollars to make a workplace safe when most violations of the Occupational Safety and Health Act are never caught and OSHA fines rarely exceed five digits?  Or better yet, why not overstate a company’s earnings in order to inflate the stock price so executives can be paid large bonuses when the worst case scenario is that the corporation may be hit with a securities fraud class action that may be hard to prove and will be settled by the corporation anyway?  Alright, no one ever said the calculus works all the time.  Enron’s Jeffrey Skilling, who no longer has the luxury to get in a car and stop by a news stand to buy this paper, probably could tell you that.

Americans love to talk about how team sports builds character.  Perhaps for this reason our national obsession with the use of performance enhancing drugs is similarly bound up in the notion that fair play and sportsmanship is part of that character building thing.  Several baseball players, whose careers were in some ways tied to steroids, were recently denied entrance into the Hall of Fame.  Imagine placing these players in the same Hall with others who did not have such an unfair advantage.

Few noticed that at the same time, the gate to the Hall was opened for Jacob Ruppert, the one-time owner of the Yankees.  Ruppert, like other owners of his era, ran a segregated baseball team enforcing rules which actually violated federal anti-discrimination laws enacted after the Civil War. He must have correctly assumed that no one in the 1920’s would step forward and enforce, or at least successfully enforce, the Civil Rights Act of 1866.  Yet, as to the notion of a level playing field, I wonder how many home runs Babe Ruth would have hit had he faced some of the elite black pitchers of his time.

For athletes like Armstrong and the baseball players who have been tainted by charges of doping, their predicaments must be extremely frustrating.  How can breaking the rules of the game lead to so much trouble particularly where some of the corporate sponsors knew or should have known that doping may have played a role in repeated Tour De France wins or 70 home run years.  No doubt those same sponsors, which made millions off the endorsements, did the calculus they too learned as squirts.  Though they may complain now, did they really care if Armstrong was doping as long as consumers were buying Armstrong endorsed apparel?

Unfortunately, Armstrong may have broken more than just the rules of the game if he made false representations to the United States Postal Service in order to secure $30 million in funding for his Postal Service Team.  Prosecutors have no doubt combed through documents to determine whether compliance with the rules of the game, including refraining from performance-enhancing drugs, was a condition of funding.  Did Armstrong make a false representation to the government either directly or indirectly to get funding?  Did he cause a false representation to be made to get federal money?

For his part, Armstrong probably never calculated the possibility that a whistleblower could step forward and initiate a lawsuit against him in the name of the government. The False Claims Act, which was passed by Congress in 1864, is at least one law of that era that is having an impact on sports.  The Act allows individuals with knowledge of activity which causes the wrongful expenditure of government dollars the standing to file a lawsuit in the name of the government. If the suit is successful, the whistleblower, known as a relator, can actually be awarded up to 30 percent of the recovery. These types of lawsuits remain under seal while the Department of Justice conducts an investigation.  For Armstrong, the stakes are high because the law requires the return of three times actual damages to the government which means a potential $90 million price tag for Armstrong if he loses. Worse yet, these suits often trigger parallel criminal investigations for mail or wire fraud or false statements to federal agents. A previous Justice Department inquiry was dropped early last year.

Yet, at the end of the day, the big issue is what we do about the age-old calculus which has sent the message to our youth that it is OK to break the rules if the price is worth it and there is even the possibility of not being caught.  Is it enough to say, as Lance Armstrong has learned, that sometimes it is not just about breaking the rules of the game — not to mention that even teammates can be whistleblowers?

Original blog post: https://www.statesman.com/article/20130128/NEWS/301289669

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