Fraudsters lobby to muzzle whistleblowers Commentary: Corporations have proven they can’t police themselves

Whistleblower Articles

Last October, representatives from Pfizer Inc., Tyco International Ltd., Citigroup Inc. and other major companies met with officials from the Securities and Exchange Commission to share their views on rules implementing the Dodd-Frank whistleblower law. Not surprisingly, they want the rules watered down.

What these companies have in common is that they each have been involved in a massive corporate scandal that victimized consumers or shareholders. Had a whistleblower come forward early, their wrongful conduct could have been averted.

Despite their checkered past, these corporations apparently have no shame in seeking to limit the government’s ability to catch future wrongdoers. Having this rogues’ gallery advise the SEC on policing corporate misdeeds is akin to Dillinger, Capone and Babyface Nelson meeting with J. Edgar Hoover to share their views on criminal law enforcement.

In practically every financial scandal that has rocked the corporate world, whistleblowers have been ignored or punished for their attempts to ward off catastrophe. Recognizing the critical role that whistleblowers can play in preventing harm before it reaches catastrophic proportions, Congress passed special whistleblower provisions in the Dodd-Frank law. Those new provisions include bounties for whistleblowers who provide valuable information to the SEC that leads to the recovery of sanctions against wrongdoers. The SEC has issued proposed regulations to implement the new law.

It is those regulations that have set off a flurry of corporate lobbying. Claiming that they can police themselves and do not need whistleblowers reporting wrongdoing to the government, corporations are now lobbying hard to cut back on Dodd-Frank. In particular, they want the SEC to structure regulations that require whistleblowers to use internal corporate compliance programs first.

The essence of their argument is that big corporations can police themselves and provide adequate forums for employees to report wrongdoing. This position may be true, for say, a report of an employee who is stealing from the cash register of a big-box store. But this does not make sense where the company is following a corporate policy of stealing from consumers or cheating shareholders or investors. A corporation simply cannot police itself when its senior officials are the culprits.

By definition, securities fraud requires intentional conduct at the most senior levels of a corporation. Therefore, a whistleblower who must use internal compliance procedures faces a hopeless task of relying on an internal process that in all likelihood was designed as an impediment to anyone reporting pervasive wrongdoing.

Pfizer PFE -0.92% , Tyco TYC -1.29% and Citigroup C -5.99% are poster children for the proposition that internal compliance cannot address pervasive fraud or fraud committed at the senior levels of a corporation.

As a result of wrongful conduct that was not halted by its internal compliance program, Citigroup recently settled fraud claims with the SEC for $75 million, and was bailed out by taxpayers to the tune of $45 billion. Its wrongful conduct diminished the value of the corporation between October 2007 and January 2009 by more than $225 billion. Tyco paid $3 billion to settle shareholder claims, and its former chief executive and chief financial officer are in prison. Tyco shareholders lost $130 billion in value during a six-month period in 2002.

In 2009, Pfizer paid the largest criminal fine ever — $2.3 billion — to settle claims of Medicare and Medicaid fraud with the federal and state governments. The pharmaceutical giant not only had a vaunted internal compliance program, but also was already subject to two federal government corporate integrity agreements, which were the result of past derelictions of law. Pfizer had twice managed to convince federal and state officials that internal compliance should be left to the company. The third time around, multiple whistleblowers had no choice but to go to federal officials with claims that the company had illegally marketed multiple drugs including at least one to children.

How strong were the whistleblowers’ claims against Pfizer? In a ruling against Pfizer in the case, U.S. District Court Judge Jed Rakoff noted that “to put it bluntly, the allegations of the Complaint evidence misconduct of such pervasiveness and magnitude, undertaken in the fact of the board’s own express formal undertakings to directly monitor and prevent such misconduct, that the inference of deliberate disregard by each and every member of the board is entirely reasonable.”

Undoubtedly, they had a hard time getting the company to right its wrongful conduct through internal procedures, especially where it was making $171 billion (during the period of alleged wrongdoing) from the drugs encompassed by the whistleblower claims. Pfizer was doing so well that just from 2007-2008 its CEO, Jeffrey Kindler, took home almost $28 million.

The lesson of these cases is clear. Where the highest officials in the corporation perpetrate the wrongdoing, internal compliance cannot work. From Enron to Pfizer, consumers, shareholders and the economy as a whole have suffered too much harm from promises of unworkable compliance programs. The SEC must stand up for whistleblowers and ignore the complaints of these egregious offenders.

FIRST PERSON: Don’t Muzzle the Whistleblowers

Whistleblower Articles

RIPPING OFF THE U.S. government has reached epidemic proportions. The Department of Justice estimates that fraud costs the Medicare system alone between $30-$60 billion annually. But instead of fines and jail time, fraudsters are frequently rewarded with more government business. And if the U.S. Chamber of Commerce and its allies have their way, these fraudsters will gain enhanced legal protection.

The U.S. Supreme Court recently heard oral arguments in a critical case testing the right of citizens to bring suit in the name of the United States in order to recover damages from corporations or individuals that have cheated the government. By taking up the case known as Schindler Elevator, the high court is looking into whether a private citizen can secure information from a Freedom of Information Act request and use that information to form the basis of a qui tam or False Claims Act whistleblower lawsuit. The chamber also wants the court to rule that ignoring government contract requirements that the contractor deems unimportant should not be considered cheating the government.

The whistleblower in Schindler brought his case under the False Claims Act, which has proven to be an enormous benefit to the U.S. government and taxpayers. It effectively deputizes the eyes and ears of private citizens. And it provides added incentive to individuals to police corporate malfeasance by requiring the government to pay bounties from proceeds recovered through False Claims Act litigation.

A slew of recent cases demonstrate the benefit of whistleblower litigation. Settlements of suits totaling hundreds of millions of dollars with Pfizer, GlaxoSmithKline, and Bristol- Myers were all cases initiated by whistleblowers.

From pharmaceutical fraud to defective military hardware, over $20 billion has been recovered since 1986 through cases started by whistleblowers under the False Claims Act. In each case the wrongdoer violated, or caused to be violated, a contract or regulation that conditioned on receipt of government funds. And lest anyone think the law can be gamed, Congress put in express limits on is usage: no whistleblower suit can be based on news media coverage, a congressional hearing or government audits or reports.

In the Schindler case, a Vietnam veteran, who alleged that his employer was not according proper affirmative action consideration to veterans, used information from such a FOIA request to confirm what he believed were violations of government contract requirements.

The Supreme Court is being asked by big businesses to expand the congressional limits so that whistleblower suits based on information secured through a Freedom of Information Act request would be barred by statute. This makes no sense and is contrary to the express terms of the law. If the whistleblower knows enough to request the information and has the ability to demonstrate how the government has been defrauded, there is no reason to preclude litigation which will expose fraud on the government and restore dollars to the Federal Treasury.

Moreover, the Chamber of Commerce, along with the American Hospital Association and the Pharmaceutical Manufacturers and Research Association, also are using the Schindler case to argue that whistleblower suits based on an implied certification theory – where the contractor upon receipt of government money impliedly certifies compliance with the contract terms – should not be allowed to proceed at all.

Curiously, the Chamber of Commerce – whose web site purports to favor promotion of American jobs – disagrees with an application of the False Claims Act which would allow for enhanced compliance with, for example, “Buy American” obligations that are written into government contracts. In its “friend of the Court” brief in Schindler, the triumvirate of big business protectors deemed such obligations that are conditions of receiving taxpayer dollars “legal technicalities.”

While many of their members undoubtedly subsist on hefty government paydays, they complain that “contractors . . . are required to submit certifications related to everything from how they dispose of hazardous materials to their affirmative action plans and they frequently enter into contracts requiring compliance with other statutory and regulatory provisions.” One example provided in their brief is a certification that Medicare providers abide by “Medicare laws and regulations.” Imagine that!

The Chamber and its friends do not dispute that these are indeed obligations; they merely question the audacity of a law that would cause them to honor their commitments. By their lights, it is okay to place what they perceive to be merely technical legal requirements into a government contract as long as taxpayers have no direct ability to enforce those obligations.

Doing business with the government is a privilege and not a right. Compliance with government contracts and regulations is part of the deal. Those who enjoy this privilege should live up to its terms whether it means using products made in America, maintaining safe working conditions for employees, paying workers a living wage, or complying with environmental laws and regulations. In simple terms, those enjoying the benefit of government funds must honor all of their commitments to the government.

It’s clear from the Chamber’s arguments in Schindler that big business interests are looking for loopholes in their obligations to the government as well as to taxpayers. That makes the importance of the False Claims Act and other whistleblower laws all the more important in supporting honest practices and compliance with government contracting laws.

Pharmaceutical Regulation in the United States: A Confluence of Influences

Reuben Guttman Articles, Whistleblower Articles

Background

Pharmaceuticals, like other consumer products distributed in the United States, are subject to regulation and scrutiny from multiple sources. Legislative oversight and statutory pronouncement, regulatory mandate and oversight, judicial review, and non-governmental organization (NGO) and media oversight directly and/or indirectly impact the conduct of pharmaceutical manufacturers. In addition, stakeholders including pharmaceutical company shareholders, employees of pharmaceutical companies, and those entities that ultimately bear the costs of paying for drugs – known as third-party payors –also influence the conduct of drug manufacturers.

For example, the securities markets that price stock rely, in part, on representations that drug companies make about the integrity of their products. Public misrepresentations to regulatory bodies and/or consumers also play out indirectly as misrepresentations to shareholders resulting in additional liability for companies and those individuals who run them. Accordingly, shareholders – the owners of the pharmaceutical companies – have an interest in ensuring not only the integrity of products sold to consumers, but the integrity of public statements about their products.

Through their retirement plans, Pharmaceutical Regulation in the United States: A Confluence of Influences1 pharmaceutical company employees invest in their employer and, to some degree, stand in the same shoes as shareholders except that they have rights of redress under United States Pension laws. Product recalls result in diminished stock value and lost savings for employees who invest in their companies.

Third-party payors, including labor union health and welfare funds, State Medicaid and employee health and welfare funds, and the federal Medicare system, have also had an immense impact with regard to the conduct of the pharmaceutical industry.

To say that any one of these influences is the real source of regulation would paint an incomplete picture. It is the totality of these influences, and their interplay with each other, that either impact or have the potential to impact manufacturer conduct.

Read the full article . . .

Corporate Integrity Agreements: Asking the Companies to Police Themselves, Please

Dr. Caroline Poplin Articles, Reuben Guttman Articles, Whistleblower Articles

I. Introduction

The use of a corporate integrity agreements (“CIA”) in resolving the prosecution of pharmaceutical and medical companies is commonplace. As part of a deferred prosecution agreement, the U.S. Department of Justice, or the U.S. Department of Health and Human Services, Office of Inspector General, will ask the defendant corporation to enter into a CIA to police its behavior and, in part, ensure compliance with the terms of the settlement.

II. Background on Corporate Integrity Agreements

Since the mid-1990s, CIAs have accompanied the federal government’s enforcement efforts in the field of health care regulations, and to recover funds lost to fraud and abuse. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) significantly enhanced the resources and capabilities of federal agencies involved in these efforts, including the OIG.

For example, the website of the HHS states: “The Office of Inspector General (OIG) often negotiates compliance obligations with health care providers and other entities as part of the settlement of Federal health care program investigations arising under a variety of civil false claims statutes. A provider or entity consents to these obligations as part of the civil settlement and in exchange for the OIG’s agreement not to seek an exclusion of that health care provider or entity from participation in Medicare, Medicaid and other Federal health care programs.” (FN 2)

In the years that followed the mid-1990s, OIG has entered into more than one thousand CIAs and similar agreements, including many with pharmaceutical and drug companies. (FN 3) CIAs were originally structured around the core elements of the Federal Sentencing Guidelines of 1995. After an early period of taking a rigid approach to the agreements, OIG began recognizing over time that there was a need for greater awareness about compliance and sanctions, as well to encourage self-regulation through the adoption of ongoing compliance programs. OIG also sought to create an atmosphere conducive to self-disclosure by offering concessions to those who came forward.

In 1997, OIG announced that in determining the level of sanctions, penalties and exclusions, it would take into account any reasonable efforts made by a company’s management to avoid and detect any misbehavior within their operations. In 1998, it published a detailed self-disclosure protocol. By 2000, seven segment-specific compliance program guidance documents were issued, providing suggestions on how providers could design internal controls to monitor adherence to applicable statutes, regulations and program requirements. OIG also began issuing fraud alerts, advisory opinions, advisory bulletins and work plans to make its concerns and expectations more transparent.

III. Structural Limits of the Corporate Integrity Agreements

A. Purposes of the CIA

The CIA details the duties of various compliance positions within the corporation; requires the adoption of certain written standards, including a code of conduct, and policies and procedures related to compliance topics; and implements a minimum number of hours of employee training in compliance. (FN 4) The company’s compliance officer might be assigned to uphold the CIA, or sales representatives are sometimes tasked with reporting violations.

However, too often the CIA assumes the corporation’s internal compliance officer, or sales representatives, who are assigned a role in the CIA, will prove as objective as a third-party might, or as effective as the law requires. The fines for violation of the CIA may pale in comparison to the business pressures to engage in a banned practice, and may not deter the corporation in the future from a repeat of the wrongdoing that initiated the CIA.

B. Pfizer CIA for Illegal Promotion of Drugs

A review of the Pfizer deferred prosecution is illustrative. On September 9, 2009, the U.S. Department of Justice announced that Pfizer, Inc., and a subsidiary, agreed to pay $2.3 billion to settle the largest health care fraud case in the history of the Department of Justice, to resolve criminal and civil liability arising from the illegal promotion of certain pharmaceutical drugs.

According to the press release, a Pfizer subsidiary pled guilty to a felony for its promotion of Bextra, and settled civil charges, as follows: “In addition, Pfizer has agreed to pay $1 billion to resolve allegations under the civil False Claims Act that the company illegally promoted four drugs – Bextra; Geodon, an anti-psychotic drug; Zyvox, an antibiotic; and Lyrica, an anti-epileptic drug – and caused false claims to be submitted to government health care programs for uses that were not medically accepted indications and therefore not covered by those programs. The civil settlement also resolves allegations that Pfizer paid kickbacks to health care providers to induce them to prescribe these, as well as other, drugs.” (FN 5)

The settlement implemented a CIA, and monitoring program to be run by the company’s internal compliance officer. The press release states: “As part of the settlement, Pfizer also has agreed to enter into an expansive corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services. That agreement provides for procedures and reviews to be put in place to avoid and promptly detect conduct similar to that which gave rise to this matter.” (FN 6)

Nowhere in Pfizer’s CIA, or any document accompanying the CIA, is disclosure made of the breadth and depth of the allegations surrounding Pfizer’s alleged marketing violations, notwithstanding that 11 drugs were encompassed by whistleblower complaints, including Geodon, which was allegedly marketed to children. Likewise, there was no complete disclosure to the medical community about what misrepresentations were made concerning the safety and efficacy of these drugs.

C. CIAs Rely on Internal Monitoring by the Company

An analysis of several CIAs reveals four obvious problems in their structure and allocation of responsibility. First, the agreements give credit for the company having a voluntary compliance program, designed to ensure compliance with the law. Second, the company appoints its own compliance officer and review committee. Third, as discussed, the agreements leave the corporate integrity obligations to the defendant company’s compliance officer, who reports to an internal compliance committee. Finally, the penalties set forth in the CIA are modest, typically $2,500 per day for a violation, but some violations are as low as $1,000.

As shown in Table 1, below, the company compliance officer is placed in charge of CIA compliance, among other examples of internal monitoring, in each of the nine CIAs analyzed, dating from 2003 to 2010, specifically: (1) SmithKline, (2) Medtronic, (3) Aventis, (4) Merck & Co., (5) Eli Lilly, (6) Pfizer, (7) Biovail, (8) Boston Scientific, and (9) AstraZeneca.

IV. Conclusion

A review of CIAs indicate that they do not address the actual evidence uncovered during lengthy investigations of fraud. The following points are noteworthy:

  1. the CIAs do not address bonus plans which compensate sales representatives for off-label promotion;
  2. the CIAs do not categorically proscribe the role of marketing personnel in the selection of outside speakers;
  3. the CIAs do not require companies to disclose, for the period of alleged wrongdoing, alleged kickbacks paid to doctors or speakers at promotional conferences;
  4. the CIAs do not provide for an independent monitor to investigate the claims of whisteblowers;
  5. in some cases, CIAs actually allow for marketing personnel to play a role in compliance monitoring;
  6. the CIAs, in some cases, make ensuring compliance with the underlying settlement agreement the responsibility of the company’s internal compliance officer; and
  7. finally, the CIAs do not require release of information maintained at the FDA which would provide the medical community with the transparency of information needed to protect patient safety.

Table 1. Corporate Integrity Agreements with Selected Pharma / Medical Companies, 2003-2010: Compliance Responsibility Assigned to Company
Sorted by date…

# Date Company Requirements
1 2003 SmithKline 1. Gives credit for simply complying with the law. “Prior to the Effective Date, SKB voluntarily established a comprehensive Compliance Program.” CIA, Sect. I, at 1.2. SKB appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 5.3. Leaves corporate integrity obligations to SKB compliance officer. “The compliance officer is, and shall continue to be, responsible for overseeing the development of and coordinating the implementation of policies, procedures, practices designed to ensure compliance with the requirements set forth in this CIA and with federal health care program requirements for US pharma.” CIA, at 3.4. Penalty for non-compliance $2,500 per day. CIA, at 23.
2 7/4/06 Medtronic, Inc. 1. Gives credit for simply complying with the law. “Medtronic represented to the OIG that, prior to the effective date of this CIA, Medtronic established a voluntary compliance program.” CIA, Sect. I, at 1.2. Medtronic appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 3-6.3. Leaves corporate integrity obligations to Medtronic compliance officer. “To the extent not already accomplished, within 120 days after the Effective Date, the Medtronic Compliance Officer shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA.” CIA, Sect. III(A)(1)(a), at 4.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(5); $1,000 – $5,000 per day penalties for other violations. CIA, Sect. X(A)(6)-(8), at 30-31.
3 8/30/07 Aventis, Inc. 1. Gives credit for simply complying with the law. “Prior to the Effective Date, API established a voluntary compliance program applicable to its United States operations.” CIA, Sect. I, at 1.2. Aventis appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 4.3. Leaves corporate integrity obligations to Aventis compliance officer. “The U.S. Corporate Compliance Officer shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements.” CIA, Sect. III(A)(1), at 4.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(2)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, X(A)(5)-(7), at 28-29.
4 2/5/08 Merck & Co., Inc. 1. Gives credit for simply complying with the law. “Prior to the Effective Date, Merck voluntarily established a comprehensive Compliance Program.” CIA, Sect. I, at 1.2. Merck appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 5.3. Leaves corporate integrity obligations to Merck compliance officer. “The Compliance Officer is responsible and shall continue to be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements.” CIA, Sect. III(A)(2), at 5.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, X(A)(5)-(7), at 28-30.
5 1/14/09 Eli Lilly 1. Gives credit for simply complying with the law. “Prior to the Effective Date of this CIA[], Lilly established a voluntary compliance program applicable to all Lilly employees.” CIA, Sect. I, at 1.2. Eli Lilly appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 5.3. Leaves corporate integrity obligations to Eli Lilly compliance officer. “The Chief Compliance Officer shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements and FDA requirements.” CIA, Sect. III(A)(1), at 4.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, Sect. X(A)(5)-(7), at 40-42.
6 8/31/09 Pfizer, Inc. 1. Gives credit for simply complying with the law. “Prior to the Effective Date, Pfizer established a compliance program and initiated certain voluntary compliance measures.” CIA, Sect. I, at 1.2. Pfizer appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 4.3. Leaves corporate integrity obligations to Pfizer compliance officer. “The Chief Compliance Officer shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements and FDA requirements.” CIA, Sect. III(A)(1), at 4.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, Sect. X(A)(5)-(7), at 52-53.
7 9/11/09 Biovail 1. Gives credit for simply complying with the law. “Prior to the Effective Date, Biovail initiated certain voluntary compliance measures and established a voluntary compliance program designed to address its U.S. operations and compliance with Federal health care program and FDA requirements.” CIA, Sect. I, at 1.2. Biovail appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 5.3. Leaves corporate integrity obligations to Biovail compliance officer. “The Chief Compliance Officer shall be primarily responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program and FDA requirements.” CIA, Sect. III(A)(1), at 4.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, X(A)(5)-(7), at 28-29
8 12/22/09 Boston Scientific 1. Gives credit for simply complying with the law. “Prior to the effective date of this CIA Boston Scientific established a voluntary compliance program.” CIA, Sect. I, at 1.2. Boston Scientific appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 5.3. Leaves corporate integrity obligations to Boston Scientific compliance officer. “The Chief Compliance Officer shall be primarily responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements.” CIA, Sect. III(A)(1), at 5.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, X(A)(5)-(7), at 35-36.
9 4/27/10 AstraZeneca, L.P., and AstraZeneca Pharmaceuticals, L.P. 1. Gives credit for simply complying with the law. “Prior to the Effective Date, AstraZeneca initiated certain voluntary compliance measures and established a voluntary compliance program designed to address its U.S. operations and compliance with Federal health care program and FDA requirements.” CIA, Sect. I, at 1.2. AstraZeneca appoints its own compliance officer and review committee. CIA, Sect. III(A)(1), (2), at 5.3. Leaves corporate integrity obligations to AstraZeneca compliance officer. “The Compliance Officer shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements set forth in this CIA and with Federal health care program requirements.” CIA, Sect. III(A)(2), at 5.4. Penalty for non-compliance $2,500 per day. CIA, Sect. X(A)(1)-(4); $1,000 – $5,000 per day penalties for other violations. CIA, X(A)(5)-(7), at 52-53.

Footnotes:

1. Reuben A. Guttman is a founding partner at Guttman, Buschner and Brooks PLLC in Washington, DC.
2. Department of Health and Human Services, Office of Inspector General Web site (http://oig.hhs.gov/fraud/ cias.asp).
3. See, e.g., U.S. Dept. of Health and Human Services, Office of Inspector General, “Corporate Integrity Agreements Document List” (http://oig.hhs.gov/fraud/cia/cia_list.asp).
4. E. Basile et al., “Boston Scientific Corporate Integrity Agreement,” FDA and Life Sciences Client Alert, King & Spalding, Jan. 8, 2010, at 1.
5.  Press release, “Justice Department Announces Largest Health Care Fraud Settlement in Its History,” U.S. Dept. of Justice, Sept. 2, 2009.
6. Id.

Blowing the Whistle on Securities Fraud Means Money for Whistleblowers

Dr. Caroline Poplin Articles, Reuben Guttman Articles, Whistleblower Articles

The Dodd- Frank Wall Street Reform and Consumer Protection Act: The SEC Whistleblower Provision

On July 15, 2010 the Senate voted 60-to-39 to adopt the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). President Obama signed the bill into law on July 21, 2010.

Under the new legislation, the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting a new Section 21F, which includes provisions dealing with whistleblower incentives and protection.

Under Section 21F the voluntary submission of “original information” relating to a violation of the securities laws to the Securities and Exchange Commission (“SEC”) that leads to the successful enforcement of a judicial or administrative action, and that results in monetary sanctions exceeding $1,000,000, will entitle the whistleblower to an award equal to not less than 10 percent, but not more than 30 percent, of the total amount of the monetary sanctions collected from the action.1 In contrast with the provision included in the False Claims Act (“FCA”), the whistleblower may not bring an action before the Court pursuant to Section 21F of the Act in the event that the SEC decides not to pursue judicial or administrative action.

The term “whistleblower” includes any individual who provides, or two or more individuals who jointly provide, information relating to a violation of the securities laws to the SEC, in a manner established by rule or regulation by the SEC. The SEC has 270 days after the date of enactment of the Act to issue final regulations implementing section 21F of the Securities Exchange Act of 1934.2

Of particular interest is the broad definition of “original information” that may be presented by the whistleblower. Public information may be included, provided that the information leading to the SEC action is derived from the independent analysis of the whistleblower. The original information cannot be exclusively derived from an allegation made in a judicial or administrative hearing, in a governmental report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. Likewise, the information is not “original information” as defined by the Act if it is known to the SEC from any other source, unless the whistleblower is the original source of the information.

While the Act provides whistleblower protection against retaliation, the information may be offered anonymously if the whistleblower is represented by counsel. The identity of the whistleblower will be disclosed to the SEC prior to the payment of the award.

All information provided by the whistleblower, unless and until required to be disclosed to a defendant in connection with a proceeding instituted by the SEC or by certain entities specifically identified,3 shall remain confidential and privileged and shall not be subject to civil discovery, or other legal process, and shall not be subject to disclosure under the Freedom of Information Act.

The award is not limited to the information submitted after the enactment of this Act. Rather, if the violations of securities laws have been reported by the whistleblower prior to the enactment of the Act, the whistleblower has a right to collect the award if the monetary sanctions are collected by the SEC after the date of enactment of the Act or if related to a violation for which an award under this section could have been paid at the time the information was provided by the whistleblower.

[1] The final determination of the amount of the award is in the discretion of the SEC, but among the criteria to be evaluated in determining the amount weigh is given to the degree of assistance provided by the whistleblower and any legal representative of the whistleblower, thus granting significance to the expertise and ability of whistleblower’s counsel. Additional criteria in the determination of the amount of the reward are the significance of the information provided by the whistleblower to the success of the covered judicial or administrative action, the programmatic interest of the SEC in deterring violations of the securities laws by making awards to the whistleblowers, and additional relevant factors as the SEC may establish by rule or regulation. The determination is discretional, but it may be appealed, except the determination of an award, if the award was made in accordance with subsection (b), which provides for a bounty of not less than 10, but not more than 30, percent of the total amount of the monetary sanctions that are recovered.

[2] The Act does not provide that loss causation is a required element of the action and does not specify how the SEC will calculate the monetary sanctions. The SEC final regulations implementing section 21F of the Securities Exchange Act of 1934, however, may contain provisions on those issues.

[3] The SEC in its discretion may determine if the information may be disclosed to certain entities, if necessary to accomplish the purpose of the Act and protect the investors. The information, which will not lose its confidential and privileged status, may be made available to: (i) the Attorney General of the United States; (ii) an appropriate regulatory authority; (iii) a self-regulatory organization; (iv) a State attorney general in connection with any criminal investigation; (iv) a State attorney general in connection with any criminal investigation; (v) any appropriate State regulatory authority; (vi) the Public Company Accounting Oversight Board; (vii) a foreign security authority; and (viii) a foreign law enforcement authority. With respect to foreign authorities, the information shall be maintained “in accordance with assurance of confidentiality” as the SEC determines appropriate.

Reuben Guttman is a founder partner in Guttman, Buschner and Brooks PLLC. in Washington, D.C.

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