Category Archives: Whistleblowers Blog

Our man at the IBA, Reuben Guttman, is most impressed by a law professor from Washington University who is teaching the world from a booth in the convention centre.

BOSTON, MASS — It is day two of the International Bar Association’s Convention here and Washington University Law Professor Michael Koby is sitting in a chair at Washington University’s booth in a cavernous convention hall.

A Global Epicentre

In front of Koby is his notebook computer and above him — for all to see — is a large flat screen television with Koby’s face and the faces of his students from across the globe. Amidst Convention chaos, Koby is teaching a civil procedure class to students in Brazil, China, Japan, Mexico and other countries across the globe. Koby proudly points out that one of his students is a member of the Parliament in India.

50 students from 21 countries.

Washington University is a prime sponsor of this 2013 IBA Convention and it came here to promote its online LLM Program in the US and comparative law for students who reside outside of the US. The program is less than one year old but it already has 50 students from 21 countries. And with a commitment as a prime sponsor for the 2013 IBA Convention, officials at Washington University must see a bright future for their LLM program.

Top shelf program

In the United States, Washington University Law School, located in St. Louis, is one of the nation’s top ranked law schools according to rankings by US News and World Report. Koby says that the school did not want to risk its reputation on anything other than a “top shelf program.” Small class size and the participation of the law school’s full time faculty is a hallmark of the Washington University offering. And rather than recruit students just out of law school, Washington University is looking for individuals who have a solid legal practice but absent Skype technology would not have the opportunity to study at a US law school.

The Skype technology brings students to St. Louis – or Boston – without boarding an airplane.

Students must be proficient in English and they must also undergo a Skype interview says Koby. Where US law schools’ overseas endeavors can be high cost and risky, the Washington University strategy is premised on the Skype technology which brings students to St. Louis – or Boston – without boarding an airplane. Whether other law schools will follow the Washington University lead remains a question. But here in Boston where Harvard has reigned as king of legal training, Washington University is leaving its mark.

The US may be closed for business but the IBA is well and truly open. Reuben Guttman reports from the 2013 IBA Convention in Boston.

The International Bar Association is open for business

BOSTON, MASS — The United States government is shut down, but the International Bar Association is open for business here with its 2013 Annual Convention. With a few exceptions, the shutdown has had no impact on the convention. The dinner meeting of the IBA Arbitration Committee – originally scheduled for the John F Kennedy Library and Museum — had to be rescheduled. The faculty is run by the federal government. Other events scheduled for state, city and private venues remained unaffected.

Pharma giants are under the watchfully eye of investigators in China.

At the meeting of the anti-corruption committee, China’s bribery investigation of the pharmaceutical giant, GlaxoSmithKline took center stage. Wenjie Qian of Chance Bridge Partners in Beijing said that the GSK investigation is just the beginning of China’s efforts at taking a lead in battling corruption. She indicated that pharma giants, Roche, Novartis and Merck are under the watchfully eye of investigators in China. And she said that others industries including auto, telecommunications and hi-tech will soon be under the scrutiny of the State Administration for Industry and Commerce (SAIC). Ms Qian also said that whistleblowers are playing a critical role in compliance enforcement in China.

Whether investigations in China will lead to prosecutions elsewhere – particularly under the US Foreign Corrupt Practices Act – remains an open question.

Where did all the dollars go? Despite the US federal closure, the SEC is paying an anonymous whistleblower $14 million nor has it disclosed the scheme. More information is needed, says Reuben Guttman.

WASHINGTON, DC — On the first day of the federal government shutdown, the United States Securities and Exchange Commission was sufficiently open for business to announce that a $14 million bounty would be given to an undisclosed whistleblower who reported an undisclosed scheme by an unnamed defendant.

The real story is not what was said, but what was not said.

I suppose that this is just one of these cases where the real story is not what was said, but what was not said. In thinking through what would be an appropriate analogy, I tried — but failed – to recall a time when a US prosecutor issued a press release saying “undisclosed criminal placed in prison for 15 years for undisclosed crime against undisclosed victim.”

Compliance programmes

Compliance enforcement is about deterrence by highlighting conduct that merits punishment. A compliance programme works when those contemplating crossing the boundaries into the areas of illegal activity see that others are punished for similar conduct. Surely, the public parade of insider trading prosecutions in the United States must have sent a message of deterrence to at least a few people willing to share tidbits of insider information with their friends and relatives.

Of course the other premise of transparency in enforcement is that where citizens understand what types of conduct violate the law, they have a perspective to evaluate questionable activity in their environment in order to determine whether the alleged misdeeds should be reported to regulatory authorities. Undoubtedly, transparency is also of value to defense lawyers who need information to counsel their clients on compliance with the law.

The US SEC doesn’t have the resources to make sure that publicly traded companies are not paying gratuities to officials in the farthest reaches of the globe.

None of this has anything to do with the merits of a bounty programme. In an era where multi-national corporations, some larger than small countries, transact business across the globe, regulators need help to enforce compliance with the law. The United States Food and Drug Administration will most likely never have the resources to monitor the 3,000 drug trials being conducted in China. The US SEC, with one examiner to every $12 billion in assets that it oversees, will never have the resources to make sure that publicly traded companies are not paying gratuities to officials in the farthest reaches of the globe in order to secure more business. The United States Environmental Protection Agency will certainly never have the resources to monitor supply chains in China, India and Bangladesh to ensure that components shipped into US markets are not contaminated with toxic materials.

Challenges of compliance enforcement

It is precisely because of the contemporary challenges of compliance enforcement that whistleblowers have become central to the compliance enforcement process. They come with diverse backgrounds, technical skills, language proficiencies and cultural sensitivities. They are a resource that regulators need to tap.

Those who criticize the bounty system argue that corporate internal compliance programs should be left to their own devices. The cold truth is that internal compliance programs do not work when the wrongful conduct permeates the corporation and officials at the highest levels are bonused based on revenue streams generated from unlawful conduct. Enron, Tyco and WorldCom undoubtedly all had compliance programs.

The concept of paying the bounty has integrity.

A bounty system rewards whistleblowers who have taken the time, worked with competent counsel, and enlisted appropriate experts to put together presentations to regulators that jump start cases. When the system works, as it has with the US government’s collection of $4 billion last year under the US False Claims Act, the compliance enforcement system is greatly enhanced. No doubt, there is room for improvement but the concept of paying the bounty has integrity.

Improving the system

Now to the question of improving the system. The SEC’s whistleblower programme is to some degree in its early stages. As they say in the United States, the jury is still out on whether it will be as successful as other bounty programs, including the False Claims Act, provided for by US law.

There may be in certain circumstances rationale for not disclosing the identity of an SEC whistleblower. One can imagine a situation where the whistleblower is not a US citizen and is outside the protective reach and enforcement of US anti-retaliation laws. On the other hand, when announcing these awards, the SEC should be clearer in divulging the name of the defendant and the scheme that lead to the resolution. This “lessons learned” component is central to compliance enforcement.

Once the government reopens for business, maybe this is something it should think about.

Reuben Guttman practices with Guttman, Buschner & Brooks PLLC in Washington DC.

Defense contractors have been shielded from whistleblower actions in the US. Until recently, that is, says Reuben Guttman.

Rarely does the United States hold its defense contractors accountable in noticeable ways. Though there has been a lot of action under the Federal False Claims Act (FCA), the statute that allows whistleblowers to bring suit against wrongdoers in the name of the government, many of the big dollar recoveries in recent years have been against pharmaceutical companies. Yet, after years of litigation, on June 17, the United States District Court for the Southern District of Ohio awarded the United States over $473 million in damages against United Technologies Corporation (UTC).

False statements

The Court previously found that UTC’s predecessor in interest, Pratt and Whitney (Pratt), violated the False Claims Act (FCA) when it made three false statements in its multiyear contract offer to produce F-15 and F-16 fighter jet engines. Yet, the Court held that the government suffered no damages as a result of this violation and that the government’s common law claims were precluded by previous litigation in front of the Board of Contract Appeals. The United States Court of Appeals for the Sixth Circuit upheld the finding of liability, but ordered the District Court to re-evaluate its damages calculation and held that the common law claims were not precluded.

Evaluating damages

When re-evaluating its damages calculation, the District Court undertook a three step process. First, it determined what the government eventually paid each year of the Fighter Engine Contract.

Secondly, to determine what the government should have paid each year, the District Court determined the market to be a government-regulated market and adopted the government’s accounting expert’s testimony that the Court should remove the amounts the government proved it paid as a result of UTC’s fraud in each of the contract years and add back any amounts UTC proved in each year as an offset.

Finally, the District Court determined whether the total amount of damages should be reduced by the reductions in the price of the warranty on the engines that were made in Pratt’s best and final offer.

The District Court held that United Technologies could not prove any offsets and so it accepted the government expert’s analysis of the amounts the government paid as a result of the fraud. It also held that the total amount of damages should not be reduced by the warranty price reductions because the warranty price was arrived at through an arms-length negotiation.

Statute of limitations

As a consequence of the FCA’s statute of limitations, six years from the date of government knowledge of the elements of the claim but in no event more than 10 years, the District Court calculated the damages for the first three and a half years as common law damages and applied the interest rates published by the Treasury in the Current Value of Funds Rate. As for the years that were not barred by the FCA’s statute of limitations, the District Court accepted the government’s election of the FCA’s remedy of treble damages plus penalties.

The tolling rule

And what about the tolling rule? In 2013, in a case US ex rel. Carter v. Halliburton Co, the United States Court of Appeals for the Fourth Circuit held that the Wartime Suspension of Limitations Act (WSLA) applied to cases brought under the False Claims Act. The WSLA tolls the statute of limitations during times at which the United States is at war. If the WSLA were applied to this case, it is possible that the FCA’s treble damages could apply to all of the years in the Fighter Engine Contract, but this is unlikely.

The Supreme Court has held that the WLSA applies only to offenses committed after the triggering clause and before the termination of hostilities in another case United States v. Smith. The Fighter Engine Contract covered the years 1985 to 1990 and FCA treble damages were applied to all violations after March 3, 1989. The violations that occurred between 1985 and March 1989 occurred prior to a WSLA “triggering event” – such as the Gulf War that started in 1991; as a result the WSLA tolling provisions likely do not apply.

Notwithstanding that the WSLA was not applied, the District Court’s damage awards follow the Sixth Circuit’s instruction that “damages under the [FCA] typically are liberally calculated to ensure that they ‘afford the government complete indemnity for the injuries done it.’’