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Outside Whistleblowers Are Critical To Exposing Fraud

Outside Whistleblowers Are Critical To Exposing Fraud

Zachary Arbitman

Benjamin H. McCoy

Tejinder Singh

Nicomedes Herrera

Law360
10.14.2020

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Published: 10.14.2020

When people think of whistleblowers, they tend to imagine people inside organizations who see wrongdoing and speak up. Many important whistleblowers undoubtedly fit that description.

But if our initial impression misleads us into believing that only insiders count as whistleblowers, we will overlook the many people and organizations that have uncovered massive government and corporate fraud that otherwise would have remained hidden.

Such outside whistleblowers include industry experts, competitors, public interest organizations, data miners and concerned citizens, to name a few. Although they may not have an insider’s vantage point, outside whistleblowers often bring resources, experience and perspective that traditional insiders lack.

Indeed, outsiders are the only type of whistleblowers who realistically can be expected to detect and report some frauds. Their contributions are just as important as those of insiders.

Unfortunately, some courts view claims by outsiders with suspicion. But Congress has long understood the value that outsiders bring.

This is why Congress enacted whistleblower statutes — including the False Claims Act and the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, and Internal Revenue Service whistleblower laws — that permit and welcome claims from outsiders.

Law enforcement officials likewise have recognized the valuable contributions outsiders have made to detecting fraud. Over the years, claims brought by outside whistleblowers have recovered billions of dollars for the government, and promoted accountability and fairness in the marketplace.

Keeping the doors open to such whistleblowers is thus critical to fraud detection and enforcement.

In considering questions about the proper scope of whistleblower laws, the choice between inside and outside whistleblowers is a false one. We can and should encourage both.

There are some misdeeds that only insiders can spot because the misconduct is completely invisible to the outside world. In other cases, outsiders may be the ideal whistleblowers because, for example, they cannot be deterred by wrongdoer threats of retaliation, nor benefit from the fraud as knowledgeable insiders may. The bottom line is that more whistleblowers means more fraud detection and more resources toward enforcement.

Whistleblower laws encourage claims by outsiders.

The False Claims Act and the major national whistleblower programs — at the SEC, the CFTC and the IRS — permit claims by whistleblowers with no personal connection to the alleged fraud. Thus, any person can file an action pursuant to the False Claims Act.[1]

The statute includes limited exceptions — for example, members of the armed forces may not sue other members based on conduct that arose during their service.[2] But there are no categorical limitations on who can sue, and there is not even a suggestion that eligible whistleblowers should be limited to insiders.

Indeed, the U.S. Court of Appeals for the First Circuit recently emphasized in U.S. v. PharMerica Inc. that “corporate insiders are not the only individuals who qualify as [FCA] relators or original sources under the law.”[3]

Similarly, an SEC whistleblower may be any individual who, alone or jointly with others, provides the commission with information relating to a possible violation of federal security laws — including any security rules or regulations — that has occurred, is ongoing or is about to occur.[4]

And a CFTC whistleblower is any individual or individuals acting jointly who provide information relating to a violation of the Commodities Exchange Act.[5]

Under the SEC and CFTC whistleblower programs, a whistleblower must be an individual, whereas under the False Claims Act companies may also qualify.[6]

Finally, the IRS whistleblower program applies to those “who provide actionable information about others who underpay their taxes.”[7] Like the SEC and the CFTC whistleblower programs, an IRS whistleblower cannot be a corporate entity. Rather, it must be a person acting in their individual capacity.[8]

But in none of the statutes are eligible whistleblowers limited to insiders.

This is intentional. The legislative history of the False Claims Act, which is the original whistleblower statute and a template for the others, is particularly instructive.

When Congress sought to bolster the statute, it was: to encourage any individual knowing of Government fraud to bring that information forward. In the face of sophisticated and widespread fraud … only a coordinated effort of both the Government and the citizenry [would] decrease this wave of defrauding public funds.[9]

Over a period of decades, the False Claims Act’s architects have been emphatic that the False Claims Act seeks to ensure that any qui tam relator who comes forward with legitimate information revealing a fraud that the government otherwise would not have found can proceed.[10] Thus, Congress contemplated that people who use their education, training, experience or talent to uncover a fraudulent scheme from publicly available documents can pursue a qui tam action under the False Claims Act.[11]

Law enforcement officials overseeing the SEC whistleblower program have agreed that high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders.[12] The CTFC has similarly noted that an individual doesn’t have to be an insider to receive a whistleblower award, and that an expert analysis of market data is valuable to the agency.[13]

Outside whistleblowers have brought valuable claims.

Outside whistleblowers have not disappointed the faith placed in them by Congress and the regulatory agencies. Indeed, outsiders historically have brought tremendously valuable claims to the government’s attention. There is no official database cataloging recoveries by outsiders, but we are personally aware of dozens of cases resulting in billions of dollars in government recoveries brought by outsiders.

Several significant False Claims Act settlements in recent years have resulted from competitor-initiated qui tams. For example, in 2017, pharmaceutical manufacturer Sanofi Aventis U.S. brought an action against Mylan Inc. and Mylan Specialty LP for misclassifying the EpiPen as a generic drug to avoid paying higher Medicaid rebates.[14]

This case ultimately settled for $465 million.[15] As one of Mylan’s competitors, Sanofi had both the expertise and the motivation to bring and pursue the action when no insider apparently was able or willing to do so.

More famously, Harry Markopolos uncovered Bernard Madoff’s fraud years before anybody in the government did when he was asked by a competitor to create a product to rival Madoff’s. Markopolos made multiple complaints to the SEC warning of Madoff’s Ponzi scheme.

Had the SEC listened at the time, investors could have saved billions. The Madoff affair prompted a reckoning at the SEC: The agency acknowledged that in many cases, outsiders would know more about the cutting edge of finance — and therefore the most dangerous new fraud risks — than the regulators. Today, the SEC readily acknowledges the importance of outside whistleblowers.

Effective outsiders are not limited to competitors. In U.S. v. Verizon Communications Inc., the relator was a telecommunications consultant who sued wireless carriers for overcharging the government.[16] The government recovered $93.5 million. The court, noting the relator’s critical contributions, said “the Government had no recognition, prior to the filing of [the] lawsuit,” that it was being overcharged.[17]

In 2009, an outsider businessman filed a qui tam after uncovering, through independent investigation, that the defendant was supplying faulty lab tests to the government.[18] The case settled for $302 million.[19]

Likewise, in 2015, a data miner and a cardiac nurse together identified a widespread scheme to install medically unnecessary implantable cardioverter defibrillators — an expensive and potentially dangerous medical device.[20] The relators’ investigation and lawsuit led to 70 settlements involving 457 hospitals, and recoveries exceeding $250 million.[21]

Victims of fraud also make powerful whistleblowers. This past November, the SEC awarded a total of $260,000 to three whistleblowers who contributed to a successful enforcement action involving a fraud on retail investors.[22] While the SEC did not release specific information concerning the scheme and involved parties, it noted that the whistleblowers were some of the victims of the scheme.[23]

Similarly, consumer whistleblowers — including individual health care beneficiaries and sophisticated private payors — have brought whistleblower actions under the False Claims Act when they determined that providers were engaged in fraud.

For example, insurers administer private, employer-sponsored and Medicare Advantage plans that may suffer losses from the same healthcare schemes defrauding the government. Whistleblower actions allow these outsiders to seek redress not only for their own injuries, but for society as a whole.

Public interest groups advocating on behalf of consumers may also serve as whistleblowers. In U.S. v. Westchester County, the relator was a public interest organization alleging that a county had violated its fair housing obligations.[24] The case settled for $62.5 million and helped establish the False Claims Act as a tool to address housing discrimination.

Outside whistleblowers are a critical piece of the fraud enforcement puzzle.

As the foregoing examples illustrate, outside whistleblowers often have deep knowledge, industry data and financial incentives that may lead them uncover fraud in their field. In many cases, outsiders may be in a better position than insiders to spot and attempt to redress fraud.

For example, outsiders cannot be deterred by the retaliation — including harassment, loss of work and sabotaged opportunities — that insiders often face. Moreover, many potential inside relators will have participated in the fraud, and they may be reluctant to come forward for fear of implicating themselves. Outsiders, on the other hand, are not similarly inhibited.

Outside whistleblowers may also have superior resources and expertise that allow them to spot fraud and pursue meritorious cases. If fraudulent conduct is spread across an organization, it is entirely possible that an insider will have a hard time seeing it.

But outsiders with uniquely detailed, expert knowledge of ordinary practices in their field can examine data and behavior patterns to determine if a defendant’s conduct is anomalous in a way that suggests fraud — and follow up to substantiate those suspicions.

Against these virtues, critics often complain that outside whistleblowers act opportunistically by seeking bounties. This criticism is simply baffling.

Outsiders typically devote considerable resources to developing and presenting their claims — all of which come out of their pockets and those of their counsel. Moreover, the only way for a whistleblower — whether an insider or outsider — to earn a so-called bounty is to prove the defendant engaged in serious misconduct.

It makes no sense for defendants who broke the law to escape liability for their misdeeds solely because the person who caught them was an outsider.

The identity of the whistleblower has no bearing on the strength of the claim against the defendant, and insiders have no greater moral entitlement to a bounty than an insightful outsider. And although whistleblower awards must be substantial to incentivize whistleblowers to bring claims, these awards are inevitably a small fraction of the amount returned to the government or to investors.

For example, in the False Claims Act context, whistleblowers have received about $7.4 billion in awards since 1987. But the government has received over $44.7 billion in recoveries from qui tam cases — or about $6 for every dollar paid to whistleblowers.[25]

Putting the economics aside, there is nothing unseemly about trying to make a living by stopping fraud. That is what attorneys and investigators who work for the government do — and everybody agrees these public servants are doing noble and important work. Indeed, Congress expressly hoped that every individual who knew about fraud would come forward.

The need to encourage both inside and outside whistleblowers is especially acute today. Fraud tends to run rampant in times of crisis when government expenditures are ever-increasing, and corporate financial straits are evermore dire. Outsiders have a critical role to play today, and the courts should recognize as much, just as Congress and the regulatory agencies have.

Zac Arbitman is a senior associate at Youman & Caputo LLC.

Benjamin H. McCoy is a partner at Fox Rothschild LLP.

Tejinder Singh is a partner at Goldstein & Russell PC.

Nicomedes Sy Herrera is a partner at Herrera Purdy LLP.

The opinions expressed are those of the authors and do not necessarily reflect the views of the firms, their clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] 31 U.S.C. § 3730(b).

[2] 31 U.S.C. § 3730(e)(1).

[3] U.S. ex rel. Banigan v. PharMerica Inc. , No. 18-1487, 2020 WL 813258, at *10 n.17. (1st Cir. Feb. 19, 2020).

[4] 17 CFR 240.21F-2.

[5] 7 U.S.C. § 26(a)(7).

[6] 17 CFR 240.21F-2; 7 U.S.C. § 26(a)(7).

[7] Kasper v. Commissioner of Internal Revenue , 150 T.C. 8, 15–16 (U.S. Tax Ct., 2018).

[8] 26 U.S.C. § 7623.

[9] See S. Rep. No. 99-345, at 2 (1986).

[10] See, e.g., S. Rep. No. 110-507, at 5 (2008).

[11] See 145 Cong. Rec. E1546-01 (daily ed. July 14, 1999), 1999 WL 495861, at *E1547 (remarks of Rep. Howard Berman & Sen. Charles Grassley).

[12] SEC, SEC Awards Whistleblower More Than $700,000 for Detailed Analysis (Jan. 15, 2016), https://www.sec.gov/news/pressrelease/2016-10.html.

[13] CFTC, CFTC Announces Whistleblower Award Totaling More Than $2 Million (Mar. 4, 2019), https://www.cftc.gov/PressRoom/PressReleases/7882-19.

[14] DOJ, Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates.

[15] Id.

[16] United States ex rel. Shea v. Verizon Communications, Inc., 844 F. Supp. 2d 78, 80 (D.D.C. 2012).

[17] Id. at 83.

[18] Phillips & Cohen, Businessman Exposed Problems with Quest Subsidiary’s Blood Test Kids; Led to $302 Million Settlement (Apr. 15, 2009), https://www.phillipsandcohen.com/businessman-exposed-problems-questsubsidiarys- blood-test-kits-led-302-million-settlement/.

[19] Id.

[20] DOJ, Nearly 500 Hospitals Pay United States More Than $250 Million to Resolve False Claims Act Allegations Related to Implantation of Cardiac Devices (Oct. 30, 2015), https://www.justice.gov/opa/pr/nearly-500-hospitals-pay-united-states-more-250-million-resolve-false-claims-act-allegations.

[21] Id.

[22] Law360, SEC Awards $260K To Trio Of Whistleblowers (Nov. 19, 2019), https://www.law360.com/articles/1220446/sec-awards-260k-to-trio-of-whistleblowers.

[23] Id.

[24] U.S. ex rel. Anti-Discrimination Center of Metro New York, Inc. v. Westchester County, No. 06-cv-2860-DLC (S.D.N.Y.); Relman Colfax, Case Profiles — Anti-Discrimination Center v. Westchester County, https://www.relmanlaw.com/cases-westchester.

[25] See U.S. Dep’t of Justice, Fraud Statistics 3 (2020), https://www.justice.gov/opa/press-release/file/1233201/download.

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