In a previous article I explained why the DOJ’s Corporate Whistleblower Awards Pilot Program was fatally flawed. In this article, I address solutions that, if implemented, could breathe life into a program that was dead on arrival.
Those who have read my previous articles will find much that is familiar, but I recommend that readers not skip over my discussion of the flaws; each time I have scrutinized the program, I have found land mines buried even deeper beneath the surface, leading me to expand upon my original critique.
Because these issues are complicated, and because I believe people should not accept the opinion of any pundit without reading the sources for their opinions, it is important that, as you read this essay, you have before you the document that details the program known as the Guidance. In this column, I argue that DOJ has designed a program that will deter whistleblowers from coming forward with information critical to law enforcement efforts to uncover corporate wrongdoing.
DOJ should consider whistleblowers an important part of the team; indeed, a critical ally, who could enable the government to thwart the misdeeds of heretofore untouchable criminal enterprises. Instead, the program treats whistleblowers like criminals.
A few introductory observations. Whistleblowers are anything but snitches. They are often a company’s most loyal employees. Some care deeply for their employer; others are offended that their company is being used to commit a crime. Most go to management hoping that the company will take their allegations seriously, put an end to the unlawful activity, and fire those who have committed crimes. Only when they are ignored, demoted, transferred to another state, or fired do they go to the government. And often it has nothing to do with receiving a reward. Indeed, except for the few mega-million awards, when you consider the financial impact on the whistleblower of losing their job or being blackballed in their industry, and sometimes suffering divorce, depression, or even suicide, what seems like a windfall is frequently a pillar of salt.
Fundamentally, the DOJ created a program to incentivize whistleblowers to risk their livelihoods and jeopardize their families, without considering how its various provisions would be viewed through the eyes of the whistleblower and their counsel. That is the foundational error that undermines everything the DOJ sought to accomplish with this program.
A. There is no certainty that a whistleblower will receive an award.
The Department of Justice offers whistleblowers an opportunity to receive up to $30 million if they provide information that results in a forfeiture of $100 million. In a forfeiture of $10 million the government assures them that they will be paid $3 million. If they provide information to the government and the government collects less than $1 million, the whistleblower gets nothing.
This opportunity is detailed in the Guidance. The Guidance is like a prospectus where the information an investor needs to know is buried in the endnotes. The whistleblower’s disclosure is similar to an investment because, as we discussed above, it can involve financial and personal sacrifice by the whistleblower and their family. We will also see that, in reality, the likelihood of an award is very speculative and the payout may be very small because of all the costs associated with the program. Finally, because this program creates no legally enforceable rights and is not subject to any judicial review, it is akin to an unregulated security. Of course, this is an analogy. But as we will see, it is an apt one.
On page 1, the Guidance discloses that the “payment of an award is in the Department’s discretion.” This is repeated on the second page, where it says, “Awards are issued in the Department’s sole discretion.” Under Section III, page 7, Additional Considerations for Payment of an Award, it says, “Awards are entirely discretionary and an award is not guaranteed,” and “The determination of whether an individual is eligible for an award and the amount of an award is in the sole discretion of the Department.” What does this mean?
On page 8, a whistleblower will see that they “may” be eligible for an award of “up to 30% of the first $100 million in net proceeds” and that “there is a presumption that the Department will award a whistleblower the maximum 30% of the first $10 million in net proceeds forfeited.”
Sounds great, right?
Compare this to awards given in the SEC’s program and qui tam actions bought under the False Claims Act.
In 2011 Congress enacted the whistleblower provisions of the Dodd-Frank Act. In section 922(b), the Act authorized the SEC to pay a whistleblower for information that resulted in the recovery of more than $1 million. That provision states:
(1) IN GENERAL.—In any covered judicial or administrative action, or related action, Commission, under regulations prescribed by the Commission and subject to subsection (c), shall pay an award or awards to 1 or more whistleblowers who voluntarily provided original information to the Commission that led to the successful enforcement of the covered judicial or administrative action, or related action, in an aggregate amount equal to—
(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and
(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.
(Emphasis supplied).
While the SEC has discretion to determine the amount of the award—between 10 percent and 30 percent—the statute uses the word “shall” which means that if the whistleblower qualifies (and like with DOJ’s program, not everyone qualifies), the SEC must give the award. Contrast this with the “sole discretion” and “not guaranteed” language in the Guidance. Moreover, under subsection (f), if the whistleblower believes that the SEC abused its discretion, the whistleblower has the right to appeal to the “appropriate court of appeals.”
To be fair, the DOJ does not have the authority to authorize an appeal from its program, but it could have made its awards mandatory unless the whistleblower did not qualify, a circumstance the whistleblower and their attorney would know before they came forward to the government.
Consider now awards given under qui tam actions brought pursuant to the federal False Claims Act, 31 U.S.C. §§ 3729 – 3733. A qui tam is a lawsuit filed by a private individual on behalf of the government to recover money obtained fraudulently. According to the DOJ:
If the government intervenes in the qui tam action, the relator is entitled to receive between 15 and 25 percent of the amount recovered by the government through the qui tam action. If the government declines to intervene in the action, the relator’s share is increased to 25 to 30 percent. Under certain circumstances, the relator’s share may be reduced to no more than ten percent.
Here Congress used the phrase “is entitled” meaning that the DOJ is required to reward the whistleblower, known as the “relator,” unless the person is otherwise disqualified.
Solution: One positive feature of the Pilot Program is that it contains a presumption that a whistleblower will be entitled to the maximum 30% for recoveries up to $10 million. The DOJ should add language that says:
With the exception of those who participated in criminal activity, there exists a presumption that a whistleblower will receive from 15% to 30% for recoveries between $10 million and $100 million depending upon the contribution they made to the success of the forfeiture or other recovery.
B. There is no certainty that there will be sufficient money to pay an award to a whistleblower after all the victims are compensated for their losses.
Assuming that the whistleblower is deemed entitled to an award, the money the whistleblower receives will come from the “net proceeds” from a forfeiture. Here is the real devil in the details. What are “net proceeds”? The Guidance defines net proceeds as:
net forfeited funds after any mandatory, non-discretionary transfers, expenses and costs associated with forfeiture, and applicable costs associated with investigation and prosecution of seizure and forfeiture.
Not great, but defensible.
And where the government or a corporation is the victim:
the whistleblower will be eligible for an award before the government or entity victim is compensated post-forfeiture through remission, mitigation, or restoration.
(Guidance p. 8) (emphasis supplied).
Terrific. BUT,
Where the Department has identified individual victims of the underlying scheme with pecuniary losses that are eligible for compensation and has also determined that the whistleblower is eligible for an award, the Department will first compensate qualifying individual victims to the fullest extent possible. A whistleblower award will not be available until qualifying individual victims are compensated fully, as allowed under the law.
(Guidance p. 8) (emphasis supplied).
So, if the victim is Medicare or the Department of Defense or Wells Fargo the whistleblower can be reasonably certain that they will receive up to 30% of what the government collects (less the government’s expenses), but if the victims are the customers of Wells Fargo, there may not be any money left over after all the victims are compensated for their losses.
There is absolutely no legal requirement that money obtained through forfeiture be paid to victims of a crime. Forfeiture is a criminal penalty, not restitution. While the government has the discretion to permit money and assets obtained through forfeiture be distributed to victims in a procedure known as restoration, victims have no right to receive such payment; it is solely within the discretion of the government.
But here is the kicker, even in the circumstances noted above, where the whistleblower is entitled to be compensated before any monies are returned to the government or a corporation, in many instances the defendant has squandered all their ill-gotten gains and there is nothing left to be forfeited. This is particularly so because, unlike an SEC action or a qui tam lawsuit, where the corporation and its officers are continuing to engage in their business pursuits unaware that the evidence of their misconduct has been disclosed to the government, a federal forfeiture occurs after a civil or criminal action has been brought against a defendant which can be years after allegations have surfaced and a lawsuit has been decided or the person or entity prosecuted.
Even in cases where there is enough money to satisfy the forfeiture, the whistleblower is still unlikely to ever see an award. Let us say that the government recovers $10 million but $9.1 million is needed to reimburse the government for its expenses and to make the victims whole. That means that the net proceeds are under $1 million, so the whistleblower gets zilch despite being the sin qua non of the forfeiture.
Whistleblowers are going to depend upon their lawyers to give them assurances that there is a strong likelihood that they will be compensated for the sacrifices they must make to report corporate wrongdoing to the government. But no whistleblower attorney can give such advice. Quite the opposite, many whistleblower attorneys will tell their clients that an award is very uncertain.
Solution: Require that the whistleblower receive their award from the monies obtained through forfeiture before any victim receives compensation. Unlike the situation where payments to victims wipe out any award to a whistleblower, if the whistleblower receives 25% of a forfeiture, there is still 45% left to compensate victims, assuming DOJ exercises its authority to compensate victims, which it might not.
C. Disqualification of whistleblowers who are “eligible” for an award under another program is an irrational disincentive to disclose information to the DOJ.
DOJ doesn’t want to be on the hook to pay a whistleblower if they are “eligible” for an award under a different program. (Guidance, p. 2). This is a curious provision. It would make sense if the DOJ did not want to be required to provide a windfall to a whistleblower who had already received money from the SEC or the CFTC or the IRS, but refusing to consider information from a whistleblower because they are “eligible” for such an award from another agency is self-defeating.
The reason is that even if a whistleblower were eligible for an award from one of these other agencies, the likelihood that anyone will even see their information may hover just above 0. Consider the SEC’s lauded whistleblower program, which has recovered over $6 billion and not long ago paid one whistleblower $279 million. Since 2011, more than 80,000 tips have been received by the SEC, but only 379 whistleblowers received a reward for their information. Few of the recoveries occurred without the assistance of counsel. Given the number of tips the SEC receives each year (this year 18,000), and the size of the agency (less than 5,000 persons as compared to over 100,000 for DOJ), the SEC depends upon a cadre of lawyers—whistleblower experts—to act as gatekeepers, providing a means for the SEC to determine which claims are worth pursuing. [Note: This is inside baseball. You are not going to find the SEC admitting this.] The point is, many whistleblowers are “eligible” for an SEC award but will never have their information considered because it is buried under an avalanche of other tips, or they cannot find an attorney willing to go to bat for them with the agency because of the time and expense required. But the DOJ has the personnel and authority to conduct far more investigations and whistleblower counsel will not have to present a case on a silver platter the way they must with other agencies.
Next, consider the False Claims Act. A qui tam action can be very expensive. These are contingency cases. This is why qui tam lawyers turn away over 90% of the cases brought to them. Potential recoveries may not be sufficient for counsel to recoup their expenses, not to mention compensate them for their time.
Typically, the attorney will contract with the relator to receive a percentage of their award, and, in addition, are entitled by statute to be compensated for their fee from the defendant. But unlike a personal injury plaintiff, a relator is not entitled to recover the value of all of the damages caused by the defendant. Most relators receive 18% of what the government recovers, so counsel does not receive, say 30% of $1 million, but only 30% of $180,000. Thus, while a whistleblower may have sufficient information to bring a claim on behalf of the United States, an attorney may conclude that the potential recovery is too small to make it worthwhile for the attorney to bring a lawsuit. Without an attorney, a whistleblower cannot bring a lawsuit under the FCA.
To address this problem, the Guidance recommends that the whistleblower make their disclosure to all agencies at the same time so that the Department can determine their eligibility. But this doesn’t address the problem at all because their lawyers will conclude that they are not eligible for an award under DOJ’s program because they are theoretically eligible under a different program.
Solution: Take this provision out entirely.
D. Cooperation—the ultimate disincentive.
The Pilot Program treats whistleblowers like criminals:
Cooperation: An individual must cooperate with the Department in its investigation of related conduct and criminal or civil actions. This includes but is not limited to providing truthful and complete testimony and evidence, whether in interviews, before a grand jury, or at any trial or other court proceeding; producing documents, records, and other evidence when called upon by the Department; and, if requested, working in a proactive manner under the supervision of, and in compliance with, United States law enforcement officers and agents.
(Guidance p. 6).
What this means is that a law-abiding citizen who comes forward with information about a crime by a criminal enterprise or a company must, if asked, testify at a public trial or wear a wire and record conversations with criminals.
Thus, while the Pilot Program claims that it will maintain the confidentiality of the whistleblower (Guidance p. 12), it does so only up to a point. By contrast, the SEC is required by statute to ensure that the identity of the whistleblower remains confidential except under limited circumstances.
There are not enough clichés to describe how incredibly short-sighted and wrong-headed and maybe even immoral such a condition is. What lawyer in their right mind would allow their client to become a whistleblower when to do so could place their client’s wellbeing in jeopardy?
Solution: The government’s interest is to be able to prove their case. This means that the government needs witnesses to testify and physical or documentary evidence to corroborate the testimony of their witnesses. Documents are particularly important in white-collar prosecutions.
But today, it is rarely necessary for DOJ to take a corporation to trial. Most cases are disposed of by way of a Deferred Prosecution Agreement, which allows the government to avoid a criminal conviction if the wrongdoer pays the government a lot of money and behaves themselves for some period of time.
Rarely then does the government need to cover all the bases by ensuring that the whistleblower be available to be a witness in the unlikely event that a case goes to trial.
Even if the government is prosecuting members of a criminal conspiracy, over 99% of defendants plead guilty. Only a tiny fraction of cases ever go to trial.
Nor is it likely that the whistleblower’s testimony would even be needed if the case went to trial. The Pilot Program is primarily designed for whistleblowers who are innocent of any involvement in the criminal activity they somehow stumbled upon. Their information may have been critical in identifying a company or individuals engaged in unlawful conduct and providing documents to support that contention. But by the time a company or a person is charged with a crime, the government will have the cooperation of persons who were deeply involved in the criminal conduct who know the whole story.
In the hypothetical case that a whistleblower is a make-or-break witness, the whistleblower should be able to just refuse to be a witness. Losing a case is a small price to pay for the greater good that would result from a truly effective program.
E. Can it be fixed? Yes. Will it? Not likely.
This program could be easily fixed. And if fixed it could be an effective tool for uncovering federal crimes involving financial institutions, bribery to foreign and domestic public officials, and health care providers.
I am not sanguine about the chances that DOJ will make these changes. Although DOJ announced this initiative with great fanfare, ego, politics, and face stand in the way of any admission that the program requires changes.
It is a shame because this is the best idea DOJ has had in the last 35 years to fight corporate crime.
