QUI TAM AND WHISTLEBLOWER LITIGATION AND PROTECTIONS FROM RETALIATION

Transcription

1 AND PROTECTIONS FROM RETALIATION MARK KLEIMAN Law Office of Mark Kleiman 2907 Stanford Avenue Venice, CA (310) American Bar Association Labor & Employment Law Conference November 2-5, 2011 Seattle, Washington

2 TABLE OF CONTENTS I. Introduction... 1 II. The Federal False Claims Act... 2 A. FCA History and Provisions... 2 B. Revisions to the FCA under FERA... 3 C. Revisions to the FCA under PPACA... 3 D. Dodd-Frank s Changes to the FCA s Anti-Retaliation Provision... 3 E. Current Version of FCA Anti-Retaliation Provision... 3 III. Whistleblower Protections in SOX... 4 A. Potential Whistleblowers... 4 B. Protected Activities... 4 C. Remedies for Retaliation... 5 D. Procedure and Forum... 5 E. Statute of Limitations... 5 F. Burden of Proof for Retaliation... 5 G. Enforceability of Release... 5 H. Available Award... 5 I. Original Source Requirement... 5 J. Award Factors... 5 K. Effect of Bad Conduct of Whistleblower... 5 L. Government s Role... 5 M. Potential Award to Defendant... 5 IV. IRS Whistleblower Law... 6 A. Potential Whistleblowers... 6 B. Protected Activities... 6 C. Remedies for Retaliation... 6 D. Procedure and Forum... 6 E. Statute of Limitations... 6 i

3 F. Burden of Proof for Retaliation... 6 G. Enforceability of Release... 6 H. Available Award... 6 I. Original Source Requirement... 6 J. Award Factors... 6 K. Effect of Bad Conduct of Whistleblower... 7 L. Government s Role... 7 M. Potential Award to Defendant... 7 V. Financial Services Whistleblower Protections... 7 A. Potential Whistleblowers... 7 B. Protected Activities... 7 C. Remedies for Retaliation... 8 D. Procedure and Forum... 8 E. Statute of Limitations... 8 F. Burden of Proof for Retaliation... 8 G. Enforceability of Release... 8 H. Available Award... 8 I. Original Source Requirement... 8 J. Award Factors... 8 K. Effect of Bad Conduct of Whistleblower... 8 L. Government s Role... 8 M. Potential Award to Defendant... 8 VI. ARRA Whistleblower Protections... 8 A. Potential Whistleblowers... 8 B. Protected Activities... 8 C. Remedies for Retaliation... 9 D. Procedure and Forum... 9 E. Statute of Limitations... 9 F. Burden of Proof for Retaliation... 9 ii

4 G. Enforceability of Release... 9 H. Available Award... 9 I. Original Source Requirement... 9 J. Award Factors... 9 K. Effect of Bad Conduct of Whistleblower... 9 L. Government s Role... 9 M. Potential Award to Defendant... 9 VII. SEC Whistleblower Provisions... 9 A. Potential Whistleblowers... 9 B. Protected Activities C. Remedies for Retaliation D. Procedure and Forum E. Statute of Limitations F. Burden of Proof for Retaliation G. Enforceability of Release H. Available Award I. Original Source Requirement J. Award Factors K. Effect of Bad Conduct of Whistleblower L. Government s Role M. Potential Award to Defendant VIII. CFTC Whistleblower Provisions A. Potential Whistleblowers B. Protected Activities C. Remedies for Retaliation D. Procedure and Forum E. Statute of Limitations F. Burden of Proof for Retaliation G. Enforceability of Release iii

5 H. Available Award I. Original Source Requirement J. Award Factors K. Effect of Bad Conduct of Whistleblower L. Government s Role M. Potential Award to Defendant IX. Conclusion Appendix Federal Whistleblower Retaliation and Award Provisions iv

6 I. Introduction Between January 2009 and June 2011, the federal government recovered more than $7.3 billion in civil settlements and judgments under the federal False Claims Act, 31 U.S.C et seq. (FCA). Department of Justice (DOJ) press release, June 10, 2011, html. More is in the pipeline: as of January 2011, there were 1,341 qui tam cases under seal for which the government had yet to reach a decision on intervention. Letter to Senator Grassley from HHS and DOJ, January 24, 2011, ds/file/doj-hhs-joint-letter-to-grassley(1).pdf. In June 2011, the Congressional Budget Office estimated that the federal government will recover between $3 and $4 billion annually in civil fraud judgments over the next ten years. Congressional Budget Office Cost Estimate, June 15, 2011, In fact, it has been suggested that [t]here are at least ten False Claims Act settlements in the works that are likely to top a billion dollars each. Corporate Crime Reporter, June 15, 2011, aud htm. In short, the FCA has been wildly successful in recovering funds for the government since the inclusion of qui tam or whistleblower award and protection provisions in From 1986 through fiscal year 2010, over $27 billion has been collected by the federal government as a result of FCA actions. DOJ press release, November 22, 2010, html. Not surprisingly, the success of the FCA in recovering billions of dollars stolen from the government as a result of fraud and false claims has led to the enactment of additional whistleblower award provisions. In addition, changes have been made to strengthen the FCA and the whistleblower provisions of the Sarbanes-Oxley Act, 18 U.S.C. 1514(A) (SOX). The recent trend toward more expansive whistleblower protections and incentives had its roots in the massive corporate scandals of a decade ago: Enron, Arthur Anderson, WorldCom and Tyco. Public outrage over the greed and corruption exhibited by these companies led to the passage of SOX in 2002, which included whistleblower provisions to protect 1 employees who reported corporate fraud from retaliation by their employers. The Deficit Reduction Act of 2005, Pub. L. No , 6031, 120 Stat. 4, (2006) (DRA), added 42 U.S.C. 1909, encouraging states to enact their own False Claims Acts by granting to states with FCAs that meet federal standards an additional 10% portion of any federal Medicaid funds recovered through Medicaid-related actions brought under FCAs. As a result, Texas, which pays approximately 40% of Medicaid expenditures in the state (the federal government pays the remainder), can retain 50% of the recoveries under its current DRA-compliant statute, instead of 40%. At present, 28 states plus Washington, D.C. (as well as New York City, Chicago and Allegany County (Pittsburgh), Pennsylvania) have enacted state FCAs with functioning qui tam provisions. The False Claims Act Legal Center, State False Claims Acts, Six of the state FCAs apply to Medicaid fraud only, including Texas s FCA, the Texas Medicaid Fraud Prevention Act, Chapter 36, Texas Human Resources Code (TMFPA). Since 2001, Texas has recovered over $325 million under the TMFPA, and the first TMFPA case ever tried in Texas, which was tried earlier this year, resulted in a $182 million judgment in favor of the State (the judgment is being appealed). In 2006, Congress enacted a new whistleblower law for federal tax fraud, supplementing a scheme of discretionary awards of up to 15% with one that provides mandatory awards of 15% to 30% to whistleblowers who provide specific and credible information to the IRS which results in the collection of taxes, penalties, interest or other amounts in excess of $2 million from a noncompliant taxpayer. The next wave of corporate whistleblower protections was introduced with the massive infusion of government funds into the private sector after the meltdown of the financial and housing markets. In 2008, the Troubled Asset Relief Program (TARP), also known as the bailout, involved a direct transfer of federal funds into major financial institutions. The government set up a hotline and website for the reporting of fraud by those receiving TARP funds, which fraud is generally actionable under the FCA. In 2009, the stimulus or American Recovery and Reinvestment Act (ARRA), Pub. L. No , 123 Stat. 115 (2009), was passed to provide funds to revitalize the economy and create jobs. Section 1553 of ARRA, known as the McCaskill Amendment, is an

7 anti-retaliation provision that protects whistleblowers who report fraud, waste or mismanagement of ARRA funds. Also in 2009, the Fraud Recovery and Enforcement Act (FERA) passed, which included changes and clarifications of the FCA. In 2010, two additional pieces of legislation, each with whistleblower provisions, were enacted: health care reform, the Patient Protection and Affordable Care Act, Pub. L. No , 124 Stat. 119 (2010) (PPACA); and financial reform, the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No , 124 Stat (2010) (Dodd-Frank). PPACA included changes to the FCA, and Dodd-Frank strengthened some existing whistleblower provisions (in SOX as well as the FCA) and added two new whistleblower incentive programs: one related to the SEC and the other for claims to the Commodities Futures Trading Commission (CFTC). Also in 2010, the IRS made changes to its whistleblower claims process through amendments to the Internal Revenue Manual, which changes are intended to improve its whistleblower program. This paper will provide an overview of these whistleblower protection and incentive programs and recent changes resulting from legislation, rules and regulations and critical cases. II. The Federal False Claims Act A. FCA History and Provisions The FCA was inspired by a wave of fraud by contractors against the federal government during the Civil War. Signed into law by President Lincoln, and originally known as Lincoln s Law, it was intended to impose sanctions against contractors sufficient to provide a disincentive to overbilling or otherwise defrauding the government. It was amended in 1986 to include qui tam whistleblower award and protection provisions, and has been amended three times in the last several years, by FERA, PPACA and Dodd-Frank. The FCA provides that those who knowingly submit, or cause another person or entity to submit, false claims for payment of government funds can be held liable for the government s damages plus civil penalties. The qui tam provisions allow persons with evidence of fraud against government contracts and programs to sue on behalf of and in the name of the government in order to recover for the government, a portion of which recovery may be awarded to the whistleblower. There is no limitation on the type of person or entity that may be liable under the FCA; 2 individuals, business entities and nonprofit entities that make false claims for government funds are all potential targets for liability. The qui tam plaintiff is referred to as the relator, or more commonly as a whistleblower. In addition to receiving an award or bounty in the form of an assignment of a portion of the government s recovery, successful relators are entitled to the direct payment by the defendants of their attorneys fees, costs and expenses. The government has the right to intervene in qui tam cases, and such cases are required to be filed under seal in order to allow the government the opportunity to investigate and determine whether or not to intervene. The initial seal period is 60 days, but the seal may be (and generally is) extended by the court at the request of the government on a showing of good cause, sometimes for years during periods of investigation, and at times, inactivity when the government s resources are focused elsewhere. If the government declines to intervene, the government remains the real party in interest, but the relator may litigate the case on behalf of the government. If the government intervenes, it serves as the lead plaintiff, but the relator remains a party plaintiff. See appendix for additional provisions. If successful, the government is entitled to recover treble actual damages plus civil penalties of $5,500 to $11,000 for each false claim. If the government intervenes in the litigation and is successful, the relator is entitled to a relator s share of 15% to 25% of the government s recovery. If the government declines to intervene, but the litigation results in a recovery for the government, the relator s share is 25% to 30%. The relator s share is paid from the government s recovery, but the defendants are separately responsible for paying relators attorneys fees, costs and expenses. The FCA also includes an anti-retaliation provision, 3730(h), providing relief from retaliatory actions taken against those acting in furtherance of a potential action under the FCA. The Texas TMFPA also includes an anti-retaliation provision, B. Revisions to the FCA under FERA FERA s enactment in 2009 strengthened the FCA by broadening the range of conduct that can be subject to false claims prosecution by including the submission of a false claim (even if not presented directly to the

8 government, and even if not paid) and the knowing use of false records or statements related to a false claim. In addition, under FERA s expanded definition of what constitutes a claim, the false invoice or statement no longer must be presented directly to the government in order to establish liability; it is sufficient for the money to be spent on the government s behalf. FERA also amended the anti-retaliation provision of the FCA, 3730(h), to expand the scope of coverage beyond employees, to include contractors and agents, and to protect relators associated others from retaliation, and to expand the scope of protected activity from acts in furtherance of a prosecution under the FCA, to include efforts to stop 1 or more violations of the FCA. Finally, FERA clarified that the Attorney General has the right to delegate authority to issue civil investigative demands (CIDs). As a result of this change, during the fourth quarter of 2010 alone, DOJ attorneys requested authority to issue over 500 CIDs, which is more than six times the number of CIDs requested during the two preceding years combined. Statement of Assistant Attorney General for the Civil Division Tony West before the Senate Committee on the Judiciary, January 26, 2011, -testimony html. This amendment also makes it clear the DOJ has the right to share information received from a CID with any qui tam relator if the Attorney General or designee determine it is necessary as part of any false claims act investigation. C. Revisions to the FCA under PPACA The PPACA included changes to the FCA that were not limited to health care fraud, but instead apply to all FCA actions. These changes include a revision of the public disclosure bar which barred jurisdiction of a court of a relator s case if an action was based upon a public disclosure, unless the relator was an original source of the information. After numerous troubling decisions construing this bar broadly, the PPACA revised it. The revised public disclosure bar is not a jurisdictional bar, and provides for dismissal if substantially the same allegations or transactions alleged by the relator were publicly disclosed in certain federal sources or the media, unless the relator is an original source of information. However, the revised provision does not require dismissal if the government opposes dismissal. The revised provision also broadened the definition of original source to include those who have knowledge that is independent of and 3 materially adds to the publicly disclosed allegations or transactions. In order to satisfy original source requirements under the revised provision, a relator must have voluntarily disclosed to the government the information on which his or her claim is based prior to a public disclosure, or if his or her knowledge is independent of and materially adds to the publicly disclosed allegations, he or she must have voluntarily provided the information to the government prior to filing the action. The PPACA also made a critical amendment to the federal Anti-Kickback Statute, 42 U.S.C. 1320a- 7b that impacts FCA cases. This amendment inserted language stating that a claim that includes items or services resulting from a violation of this section constitutes a false or fraudulent claim for the purposes of the [False Claims Act]. PPACA 6402(f)(1). D. Dodd-Frank s Changes to the FCA s Anti- Retaliation Provision Dodd-Frank 1079B further strengthened the FCA s anti-retaliation provision. It broadened the scope of protected conduct, and added a uniform threeyear statute of limitations (after the Supreme Court held that limitations should be determined by review of comparable state law limitations in Graham Cnty. Soil & Water Conservation Dist. v. U.S. ex rel. Wilson, 130 S. Ct (2010)). E. Current Version of FCA Anti-Retaliation Provision After the amendments in 2009 and 2010, the FCA s anti-retaliation provision, 3730(h), Relief from retaliatory actions, provides: (1) In general. Any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor, or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop 1 or more violations of this subchapter. (2) Relief. Relief under paragraph (1) shall include reinstatement with the same seniority status that employee, contractor, or agent would have had but for the discrimination, 2 times the amount of back pay, interest on the back pay,

9 III. and compensation for any special damages sustained as a result of the discrimination, including litigation costs and reasonable attorneys' fees. An action under this subsection may be brought in the appropriate district court of the United States for the relief provided in this subsection. (3) Limitation on Bringing Civil Action. A civil action under this subsection may not be brought more than 3 years after the date when the retaliation occurred. Whistleblower Protections in SOX SOX provides a detailed, comprehensive set of rules and regulations for publicly traded companies, designed to prevent shareholder and accounting fraud. While SOX includes a whistleblower provision in 806 to protect employees from retaliation if they report corporate fraud, it does not include any whistleblower awards or incentives. SOX originally applied only to publicly traded companies, but recent amendments in Dodd-Frank expanded the SOX whistleblower protections to subsidiaries and affiliates. However, one potent SOX anti-retaliation provision applies to all persons and entities, for profit or nonprofit: 1107, amending 18 U.S.C This amended section provides that any person who knowingly, with intent to retaliate, takes an action harmful to anyone, including interference with the lawful employment or livelihood of a person, for providing a law enforcement officer with truthful information relating to commission or possible commission of any federal offense, shall be fined or imprisoned not more than ten years, or both. A. Potential Whistleblowers Dodd-Frank 929 clarified the scope of coverage to include those subsidiaries and affiliates of publiclytraded entities for which financial information is included in consolidated financial statements, and ensures that the anti-retaliation provisions of 806 of SOX apply to employees and certain independent contractors of these subsidiaries and affiliates as well as the publicly-traded entities. These clarifications were made to correct the Department of Labor s prior interpretations, which limited 806 to publicly-traded entities and their employees. Dodd-Frank 922(b) further extended SOX whistleblower protection to employees and contractors of nationally recognized statistical rating organizations. 4 B. Protected Activities An employee engages in protected activities when he or she complains, internally or to regulators, that the company has violated a federal rule or law relating to fraud on shareholders; complaints of violations of state law or regulations are not protected. See, Allen v. Stewart Enterprises, Inc., ARB No , AU Nos S0X-60 to 62 (ARB July 27, 2006). Some common activities are generally not protected. For example, an employee is not protected when making general inquiries about the company s financial losses or accounting or reporting errors. See, e.g., Fraser v. Fiduciary Trust Co., Int'l, No. 1:04-cv , 2009 WL (S.D.N.Y. Aug. 25, 2009). Similarly, an employee s complaints about violations of a company s internal policies and ethical standards, or failure to follow generally accepted accounting practices are not protected by SOX. See, e.g., Day v. Staples, Inc., 555 F. 3d 42 (1st Cir. 2009). While the employee must reasonably believe the employer is engaged in fraud or a violation of securities laws, however, he need not be right in that belief. As long as the employee s belief is reasonable, the employer cannot retaliate against the employee for speaking out, even if the belief ultimately proves to be wrong. See id. On May 25, 2011, the DOL Administrative Review Board (ARB) issued a very significant en banc decision on the whistleblower provision of SOX that significantly strengthens the statute by clarifying the broad scope of protected conduct. The ARB s opinion in Sylvester v. Parexel International LLC, ARB No , ALJ Nos SOX-039, 042 (May 25, 2011), represents a substantial departure from the narrow construction of SOX in prior opinions by the ARB. The Parexel opinion holds that (1) a complainant need only express a reasonable belief of a violation to engage in SOX-protected activity; (2) the reasonable belief standard requires an examination of the reasonableness of a complainant s beliefs, but not whether the complainant actually communicated the reasonableness of those beliefs to management or the authorities; (3) protected activity need not describe an actual violation of law; (4) a whistleblower complaint concerning a violation about to be committed is protected as long as the employee reasonably believes that the violation is likely to happen; such a belief must be grounded in facts known to the employee, but the employee need not wait until a law has actually been

10 broken; (5) a whistleblower communication is protected where based on a reasonable, but mistaken, belief that the employer s conduct constitutes a violation of one of the six enumerated categories of law under SOX 806; (6) the violation may be one which, standing alone, is prohibited by law but does not necessarily rise to the level of immediate shareholder fraud; instead, the violation may be merely one step in a process leading to shareholder fraud; and (7) a complainant can engage in protected activity under 806 even if he or she fails to allege or prove materiality, scienter, reliance, economic loss, or loss causation. C. Remedies for Retaliation Remedies available to successful SOX whistleblowers include reinstatement with back pay and benefits, front pay, compensatory damages, and litigation costs, including attorneys fees. D. Procedure and Forum A complainant must file a written SOX whistleblower complaint with any Occupational Safety and Health Administration (OSHA) office within 180 days after the conduct. OSHA will investigate and issue a preliminary determination. Either party may appeal the preliminary determination to an Administrative Law Judge (ALJ), within 30 days after a negative preliminary determination. If a final decision is not issued within 180 days thereafter, the complainant may file a de novo action in federal court, where, because of a provision in Dodd-Frank 922(c), the complainant has a right to a jury trial. Whether before the ALJ or federal court, a full range of pre-trial discovery is available. E. Statute of Limitations Section 922 of Dodd-Frank increased the statute of limitations for SOX whistleblower claims from 90 days to 180 days, and provides that a filing within 180 days after the date on which the employee becomes aware of the retaliatory action is timely. The contributing factor standard can be met through direct evidence (such as a warning that reporting fraud would result in termination) or circumstantial evidence (such as close timing between the protected activity and the adverse action). G. Enforceability of Release Dodd-Frank 922(c) invalidates any agreement, policy form, or condition of employment, including a pre-dispute arbitration agreement that has effect of waiving rights and remedies available to SOX whistleblowers. H. Available Award No award is available for reporting fraud or violations of SOX. I. Original Source Requirement J. Award Factors K. Effect of Bad Conduct of Whistleblower L. Government s Role Investigation and preliminary determination by OSHA, with appeal to a Department of Labor (DOL) ALJ. M. Potential Award to Defendant F. Burden of Proof for Retaliation To prove a SOX whistleblower retaliation claim, the employee must show that his or her protected activity was a contributing factor in the employer s decision to take adverse action against him or her. The protected activity does not have to be the sole reason, or even a significant reason for the adverse action, but simply has to play some role in the employer s decision. 5

11 IV. IRS Whistleblower Law In 2006, a new IRS Whistleblower Law, 26 U.S.C. 7623(b), was passed to supplement a discretionary award program which had not been particularly successful. To date, it appears that only one award has been paid under the new 2006 IRS Whistleblower Law; prior law provided for discretionary awards, and the average time for an award was seven years from the date of the claim. It may be too early to gauge the success of the new law. In June 2010, the IRS released new Internal Revenue Manual (IRM) provisions concerning IRS whistleblower claims, available at The new portions of the IRM provide information about how IRS intends to make awards, and the relationship between the information provided, the recovery and the award. Form 211 is available at and more information about the IRS whistleblower program is available at A. Potential Whistleblowers Any person who provides specific and credible information about nonpayment or underpayment of federal taxes to the IRS whistleblower office that results in successful collections of taxes, penalties, interest and other amounts in dispute in excess of $2 million is eligible for an award. The whistleblower must report on IRS Form 211. If the taxpayer is an individual, he or she must have annual gross income of more than $200,000 per year for the years at issue. B. Protected Activities There are no anti-retaliation provisions in the IRS Whistleblower Law. C. Remedies for Retaliation D. Procedure and Forum Form 211 is submitted to the IRS Whistleblower Office, which investigates and pursues the taxpayer if it determines that the claim has merit. If litigation 6 ensues, the whistleblower is not a party to the litigation. If the IRS decides not pursue the taxpayer, the whistleblower has no remedy. If the IRS recovers from the taxpayer and the whistleblower is dissatisfied with the amount of the award, he or she may appeal the amount of the award to Tax Court. E. Statute of Limitations The whistleblower must file his or her claim within three years of the filing of an incorrect tax return, or within six years if the tax return understates income by at least 25%. No time limitations apply to false tax returns filed with the intent to commit tax evasion. F. Burden of Proof for Retaliation G. Enforceability of Release H. Available Award If the collection of taxes, penalties, interest and other amounts in dispute exceeds $2 million, and other qualifications are met, the IRS will pay 15% to 30% of the collected proceeds to the whistleblower. If the $2 million threshold is not met or if the taxpayer is an individual with a gross income of under $200,000, the IRS will pay up to 15% at its discretion, and the total award is capped at $10 million and is not appealable. I. Original Source Requirement If a complaint is based principally on disclosure of specific allegations from judicial or administrative hearings, a governmental report, hearing, audit or investigation, or from the news media, unless the whistleblower was the original source of the information, a reduced award of up to 10% may be awarded. J. Award Factors Awards will be paid only from collected proceeds, after all appellate rights are exhausted. The IRS states that awards will be paid in proportion to the value of information furnished voluntarily with respect to proceeds collected, including penalties, interest, additions to tax and additional amounts. The amount of award is to be based on collected proceeds if IRS determines that

12 the information submitted by the whistleblower substantially contributed to the Service s detection and recovery of tax. Awards will be paid only if the IRS takes an administrative or judicial action based on information provided by the whistleblower. The IRS is currently considering what collected proceeds means and whether it can include offsets to refunds and other savings. K. Effect of Bad Conduct of Whistleblower Under section 7623(b) (3), if the whistleblower planned and initiated the actions that led to the underpayment or the violation of law, the award may be reduced. If the whistleblower is convicted of criminal conduct arising from his or her role in planning and initiating the action, an award shall be denied. However, those who participate in the tax fraud, then report it to the IRS, may be eligible for an award if they did not plan and initiate the fraud and are not convicted in a criminal proceeding related to the underpayment or nonpayment of taxes. L. Government s Role The IRS Whistleblower Office, with the assistance of field agents, investigates and the IRS pursues the taxes, including through litigation if necessary. Once proceeds are collected, if they meet the $2 million threshold, the IRS determines the amount of the award, within the 15% to 30% range. The whistleblower may appeal the amount of the award to the Tax Court if he or she is dissatisfied. M. Potential Award to Defendant V. Financial Services Whistleblower Protections Dodd-Frank 1057 created 12 U.S.C. 5567, a specific whistleblower protection program for those working in the financial services industry to encourage them to come forward with information related to fraudulent conduct in the sale or marketing of consumer financial products or services. This program does not include incentives or awards for reporting fraud, but to the extent the fraud involves government funds, such as those provided by TARP, the provisions of the FCA apply. A. Potential Whistleblowers 7 Those employees of entities that engage in offering or providing of consumer financial products or services, who perform tasks related to the offering or providing of a consumer financial product or service. Affiliates that provide a related material service to the employer (such as the design, maintenance and/or operation of the financial product or service, or for the processing of related transactions) are also covered. Covered services and employment include property appraisals, financial advisory services, credit counseling, credit rating, real estate settlement and loan underwriting. B. Protected Activities This law is generally intended to protect those who expose wrongdoing in the financial services industry. It specifically prohibits persons or service providers covered under Title X of the Dodd-Frank Act from terminating or otherwise discriminating against any covered employee (or authorized representatives of covered employees) by reason of the fact that such employee or representative has: (1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the [Bureau of Consumer Financial Protection (Bureau)], or any other State, local, or Federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau; (2) testified or will testify in any proceeding resulting from the administration or enforcement of any provision of this title or any other provision of law that is subject to the jurisdiction of the Bureau, or any rule, order, standard, or prohibition prescribed by the Bureau; (3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law; or (4) objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any law, rule, order, standard, or prohibition, subject to the jurisdiction of, or enforceable by, the Bureau.

13 C. Remedies for Retaliation An employee who prevails under this section is entitled to reinstatement or front pay, back pay with interest, compensatory damages, attorneys fees, and litigation costs, expressly including expert witness fees. D. Procedure and Forum The covered employee must file a timely complaint with the Secretary of Labor. OSHA initiates an investigation within 60 of the filing of the complaint, and informs the person(s) named in the complaint of the allegations and provides an opportunity for written response. The Secretary of Labor may order relief upon a finding of reasonable cause that retaliation occurred. Parties may file objections to the Secretary s written determination no later than 30 days after issuance, and request a hearing. The complainant has a right to a de novo action in federal court if no final order has issued within 210 days after the complaint was filed. Either party can request a jury. E. Statute of Limitations 180 days after the unlawful retaliation. F. Burden of Proof for Retaliation The employee has the burden of proving, by a preponderance of the evidence, that his or her protected conduct was a contributing factor in an alleged adverse employment action. The employer must prove by clear and convincing evidence that it would have taken same action even in the absence of the protected activity G. Enforceability of Release A whistleblower s rights and remedies may not be waived by any agreement, policy, form, or condition of employment, and a pre-dispute agreement requiring arbitration is not valid or enforceable. H. Available Award I. Original Source Requirement J. Award Factors 8 K. Effect of Bad Conduct of Whistleblower L. Government s Role DOL is charged with investigating and issuing a decision. M. Potential Award to Defendant The DOL may award the employer attorneys fees of up to $1000 if it finds the claim was frivolous or brought in bad faith. VI. ARRA Whistleblower Protections The ARRA provided a $787 billion stimulus spending package, intended to stimulate the U.S. economy. Senator Claire McCaskill (D-Mo), introduced and Congress passed 1553, the McCaskill Amendment, to provide extensive whistleblower protections. These protections were intended to ensure that employees of private contractors and state and local governments receiving stimulus funds would report fraud, waste and other violations without fear of reprisal. No awards or incentives were provided. A. Potential Whistleblowers Potential whistleblowers under the McCaskill Amendment are employees of non-federal entities, including private contractors and state and local governments that have received payments from federal stimulus funds. B. Protected Activities Protected activities include more than the usual complaints of fraud, extending to reports of mismanagement and waste. Such reports may be made to the Recovery Accountability and Transparency Board, an inspector general, the comptroller general, a regulatory or law enforcement agency, the head of a federal agency or their representatives, a court or grand jury, a person with supervisory authority over the employee, or a member of Congress. The reports include reports of anything the employee reasonably believes is evidence of gross mismanagement or an agency contract or grant of covered funds, gross waste of covered funds, a

14 substantial and specific danger to the public health or safety related to the use of such funds, and abuse of authority related to the use of such funds, or a violation of law, rule or regulation related to an agency contract or grant awarded or issues related to covered funds. Protected disclosures also include duty speech disclosures made during the ordinary course of an employee s job duties. C. Remedies for Retaliation Relief can include reinstatement with previous seniority and benefits, compensatory damages and back pay, and attorneys fees and litigation costs. D. Procedure and Forum The complainant files a complaint with the appropriate inspector general (IG), who will investigate and submit a report of findings within 180 days. No later than 30 days after receiving the IG report, the head of the appropriate agency must determine whether the employee was subjected to prohibited retaliation, and may order relief. If the head of the agency denies relief in whole or in part, or fails to issue a decision within 210 days, the complainant may bring a de novo action in federal court, and either party can request a jury trial. E. Statute of Limitations No statute of limitations is specified. F. Burden of Proof for Retaliation The employee must show his or her disclosure was a contributing factor to the reprisal (termination, demotion or other discrimination). Circumstantial evidence is specifically allowed, including evidence that the official behind the reprisal knew of the employee s disclosure or timing issue that would lead a reasonable person to conclude that the disclosure was a contributing factor to the reprisal. G. Enforceability of Release An employee s rights and remedies cannot be waived by any agreement, policy or condition of employment. Pre-dispute arbitration agreements are not valid or enforceable, with the exception of arbitration provisions in collective bargaining agreements. H. Available Award I. Original Source Requirement J. Award Factors K. Effect of Bad Conduct of Whistleblower L. Government s Role The complaint is filed with the appropriate inspector general, who will investigate and submit a report of findings. M. Potential Award to Defendant VII. SEC Whistleblower Provisions After the Bernie Madoff scandal, 922 of Dodd- Frank amended 15 U.S.C. 78 et seq., to create a new SEC whistleblower program. The previous SEC whistleblower program was limited to insider trading complaints and awards were capped at 10%. After a lengthy comment period and much conflict, the SEC released final rules implementing the new SEC whistleblower program on May 25, A. Potential Whistleblowers Potential whistleblowers include employees of public companies and their private affiliates and subsidiaries whose reports lead to the recovery of monetary sanctions in excess of one million dollars. The Act specifically excludes a number of categories of people, such as those who have a pre-existing duty to report to SEC, and lawyers, compliance and internal audit personnel in most instances. The 305-page rules appear at 17 CFR Parts 240 and 249 [Release No ; File No. S ], and may be accessed at RULES-305pages.pdf. B. Protected Activities Protected activities include providing information about violations to the SEC; initiating, testifying in, assisting in any SEC investigation or action; or making disclosures under SOX or any laws, rules or 9

15 regulations under the SEC s jurisdiction, as long as whistleblower has reasonable belief that the information relates to a possible securities law violation. C. Remedies for Retaliation Available remedies include reinstatement with seniority; the recovery of up to double back pay, with interest; and attorneys fees and other related litigation expenses. D. Procedure and Forum Retaliation actions may be filed directly in federal court. Whistleblower claims must be filed with the SEC Whistleblower Office. The final rules provide a right to appeal, within 30 days after final decision, to an appropriate court of appeals, the determination of an award (whether whistleblower should receive any award), but there is no right to appeal the amount of an award, as long as it falls within 10% - 30% range. E. Statute of Limitations Retaliation complaints can be filed directly in federal court within 6 years after the date of the violation, or within 3 years after the date material facts were known or should have been known to the complainant, but in no event more than 10 years after the violation occurred. F. Burden of Proof for Retaliation The whistleblower must make a prima facie case that the protected conduct was a contributing factor in alleged unfavorable personnel action. The employer must show by clear and convincing evidence that it would have taken the same action absent the protected conduct. Critically, the whistleblower must have made a report to the SEC in order to be eligible for a retaliation claim. G. Enforceability of Release Pre-dispute arbitration agreements are unenforceable, except those included in collective bargaining agreements. It is unlawful to interfere with a whistleblower s efforts to communicate with the SEC, and threatening to enforce a confidentiality agreement is considered interference with such efforts. H. Available Award 10 For the voluntary provision of original information that leads to collected monetary sanctions of greater than one million dollars, the SEC must make an award in an aggregate amount equal to not less than 10% and not more than 30% of such sanctions. It should be noted that the House Appropriations Committee recently cut the SEC s fiscal 2012 budget request by $222.5 million, to the amount of the prior year s appropriation, despite the expansion of the SEC s responsibilities under Dodd-Frank. Cynics suggest that this is an attempt to gut the whistleblower program. I. Original Source Requirement There is a requirement that original information be provided in order to receive an award. Original information is defined as information that is derived from the independent knowledge or analysis of a whistleblower; is not known to the SEC from any other source; and is not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. The whistleblower s information must significantly contribute to the investigation. J. Award Factors In making an award, the SEC is to consider the significance of the information provided, the extent of the whistleblower s assistance, and other relevant factors listed in the Rules. Voluntary participation in an entity s internal compliance is a factor that can increase the award, and interference with internal compliance is a factor that can decrease an award. K. Effect of Bad Conduct of Whistleblower No award will be provided if the whistleblower has been convicted of a crime related to the reported violations or if the provided information is false or fraudulent. Culpable whistleblowers will not be paid awards based upon monetary sanctions they pay or that entities pay based substantially on conduct the whistleblower directed, planned or initiated. L. Government s Role The SEC determines whether to prosecute securities fraud based upon the whistleblower s information; the SEC s monetary recovery forms the basis for an award. The SEC also determines the amount of the award, within the available range.

16 M. Potential Award to Defendant VIII. CFTC Whistleblower Provisions Whistleblower awards and protections in 748 of Dodd-Frank, codified in 7 U.S.C. 26, the Commodities Exchange Act (CEA), resemble, but do not mirror, those related to the SEC. These provisions created an incentive program and a private right of action for whistleblowers reporting fraud to the Commodities Futures Trading Commission (CFTC). A. Potential Whistleblowers Potential whistleblowers include any person who voluntarily provides original information to the CFTC that leads to successful enforcement through judicial or administrative action by the CFTC, resulting in monetary sanctions in excess of $1 million. B. Protected Activities Protected activities include providing information to the CFTC in accordance with the whistleblower program, or assisting in any CFTC investigation or judicial/administrative action, based upon or related to the whistleblower s provision of information. C. Remedies for Retaliation Available remedies are reinstatement, back pay and interest, compensation for special damages, litigation costs, expert witness fees, and reasonable attorneys fees. D. Procedure and Forum Retaliation actions can be brought in federal district court. Appeals of award determinations of the CFTC may be filed with the appropriate court of appeals not more than thirty days after the CFTC issues its award determination E. Statute of Limitations Whistleblowers must bring anti-retaliation actions within two years of an adverse personnel action. F. Burden of Proof for Retaliation 748 of Dodd-Frank renders any agreement, policy form, condition of employment, or pre-dispute arbitration agreement null and void to the extent it requires arbitration of a dispute. H. Available Award For the voluntary provision of original information, the CTFC must award in an aggregate amount equal to not less than 10% and not more than 30% of the collected monetary sanctions. I. Original Source Requirement Original information means: information that is derived from the independent knowledge or analysis of a whistleblower; is not known to the CTFC from any other source; and is not exclusively derived from an allegation made in a judicial or administrative hearing, in a government report, hearing, audit, or investigation, or from the news media, unless the whistleblower is a source of the information. J. Award Factors The award is in the discretion of the CFTC, but is to be guided by the significance of the whistleblower s information to the success of the action, the degree of whistleblower s assistance, the CFTC s programmatic interest in deterring the violations, and other relevant factors as established by rule or regulation of the CFTC. K. Effect of Bad Conduct of Whistleblower Awards are disallowed if the whistleblower is convicted of a criminal violation related to the action that produced the award, if the information submitted is based on facts previously submitted by another whistleblower, or if the whistleblower fails to submit information in required form. L. Government s Role The CFTC investigates complaints and issues awards, but has no role in retaliation complaints. M. Potential Award to Defendant The burden of proof is not specified. IX. Conclusion G. Enforceability of Release 11 The whistleblower protection and incentive statutes passed by Congress in recent years have

17 provided a patchwork of schemes to encourage the reporting of fraud and wrongdoing, particularly when public funds are at risk. There are significant differences among the statutory schemes in the scope of protected conduct, burden of proof, procedural requirements, remedies and incentives. The Appendix summarizes the primary features of the statutes discussed in this paper, and is intended to assist practitioners in identifying issues that will require additional research. 12

18 ABA LABOR & EMPLOMENT LAW AND PROTECTIONS FROM RETALIATION SEATTLE, WASHINGTON 2011 FEDERAL WHISTLEBLOWER RETALIATION AND AWARD PROVISIONS Statutory authority/ amendments and effective dates Potential whistleblowers FCA SOX IRS Financial Services ARRA (Stimulus) SEC Commodities 31 U.S.C et seq.; 18 U.S.C. 1514A 26 U.S.C. 7623(b) anti retaliation (2002, amended by (12/20/06, with new provisions at 3730(h) 929A and 922 of Internal Revenue (amended by FERA, Dodd Frank, 2010) Manual provisions 2009; 6402(f)(1) of issued in June 2010) PPACA, 2010; and 1079B of Dodd Frank, 2010) Any employees, contractors, agents, or associated others (FERA expansion) Employees and independent contractors of publicly traded companies clarified by Dodd Frank to include subsidiaries and affiliates whose financial information is included in consolidated financial statements; Dodd Frank 922(b) extends protection to employees and contractors of nationally recognized statistical rating organizations Anyone who reports on Form 211 federal tax fraud of at least $2 million (if taxpayer is individual, taxpayer must have gross income of at least $200,000 for years taxes owed) 12 U.S.C. 5567, added by 1057 of Dodd Frank, 2010, prohibits retaliation against whistleblowers who expose wrongdoing in financial services industry. (In addition, the FCA applies to false claims for TARP (gov t bailout) funds.) Employees who perform tasks related to the offering or provision of a consumer financial product or service and engage in a protected act The McCaskill Amendment, 1553 of the American Recovery and Reinvestment Act, 2009, includes extensive whistleblower protections. (In addition, the FCA applies to false claims for government stimulus funds.) Employees of nonfederal entities, including private contractors and state and local governments that receive payments from stimulus funds. 15 U.S.C. 78u 6, added by 922 of Dodd Frank, 2010, to create a new SEC whistleblower program (Rules eff. 8/12/11: 17 C.F.R. parts 240, 249); previous SEC whistleblower program was limited to insider trading and capped at 10% Employees of public company, private affiliates or subsidiaries, but excluding a number of categories of people, such as those who have a pre existing duty to report to SEC, and lawyers, compliance and internal audit personnel in most instances (see Rules for specific exclusions). Threshold for recovery: monetary sanctions in excess of $1 million 7 U.S.C. 26, added by 748 of Dodd Frank, 2010, created an incentive program for CFTC whistleblowers and creates a private right of action for those whistleblowers who experience retaliation (no final rules yet) Any person who voluntarily provides original information to the CFTC that leads to successful enforcement through judicial or administrative action by the CFTC, resulting in monetary sanctions in excess of $1 million. 1

19 ABA LABOR & EMPLOMENT LAW AND PROTECTIONS FROM RETALIATION SEATTLE, WASHINGTON 2011 FCA SOX IRS Financial Services ARRA (Stimulus) SEC Commodities Protected activity Lawful acts in furtherance of a potential FCA action or other efforts to stop 1 or more violations of the FCA (expanded by 1079B of Dodd Frank) Remedy for retaliation Reinstatement with seniority; double back pay with interest; and special damages including loss of future income, costs and attorneys fees Complaining, internally or to regulators, of conduct that the whistleblower reasonably believes constitutes a violation of federal law (expanded by DOL ARB en banc decision in Sylvester v. Parexel Int. LLC, ARB No , ALJ Nos SOX 039, 042 (May 25, 2011)) Reinstatement with back pay and benefits, front pay, compensatory damages, and litigation costs, including attorneys fees; retaliation for providing a law enforcement officer truthful information relating to the commission or possible commission of any Federal offense is itself criminal; this provision is not limited to publicly traded cos. Generally exposing wrongdoing in financial services industry, including providing info to the employer or government about a violation of law; testifying, filing or causing to be filed a proceeding; and objecting to or refusing to participate in activity reasonably believed to be in violation of law. Reinstatement with seniority; back pay with interest; special damages including litigation costs and attorneys fees Blowing the whistle on mismanagement and waste to the Recovery Accountability and Transparency Board, an inspector general, comptroller general, state or federal regulatory or law enforcement agency, head of a federal agency, court or grand jury, supervisor or member of Congress. Reinstatement with seniority and benefits, compensatory damages and back pay, and attorneys fees and litigation costs Providing information to SEC; initiating, testifying in, assisting in any SEC investigation or action; or making disclosures under SOX or any laws, rules or regulations under the SEC s jurisdiction, as long as whistleblower has reasonable belief that the information relates to a possible securities law violation Reinstatement with seniority; up to double back pay, with interest; and attorneys fees and other related litigation expenses Providing information to the CFTC in accordance with the whistleblower program, or assisting in any CFTC investigation, judicial or administrative action based upon or related to the whistleblower s provision of information Reinstatement, back pay and interest, compensation for special damages, litigation costs, expert witness fees, and reasonable attorneys fees 2

20 ABA LABOR & EMPLOMENT LAW AND PROTECTIONS FROM RETALIATION SEATTLE, WASHINGTON 2011 Procedure/choice of forum FCA SOX IRS Financial Services ARRA (Stimulus) SEC Commodities Federal court (for state Provide relevant info to FCAs, see forum IRS using Form 211; if provisions, i.e., Texas the IRS uses the info to Medicaid Fraud prosecute or settle tax Prevention Act fraud, WB will be provides for venue in eligible for award. Travis County district Only appeal right is on courts) the amount of the award, if IRS recovers from taxpayer. File a written complaint with OSHA, which will investigate and issue a preliminary determination. Either party may appeal to ALJ, within 30 days of negative determination. If DOL fails to issue a final decision within 180 days, employee may file in federal court and Dodd Frank provided that employee is entitled to a jury trial. File a complaint with DOL within 180 days after unlawful retaliation; OSHA investigates and informs accused person and provides opportunity for written response. Investigation initiated within 60 days. Secretary of Labor may order relief upon finding of reasonable cause that retaliation occurred. Parties may file within 30 days and request a hearing. Right to bring de novo action in federal court if no final order has issued within 210 days after the complaint was filed. File complaint with appropriate inspector general, who will investigate and submit a report of findings within 180 days. No later than 30 days after receiving IG report, head of appropriate agency must determine whether employee was subjected to prohibited retaliation, and may order relief. If head of agency denies relief in whole or in part, or fails to issue a decision within 210 days, complainant may bring a de novo action in federal court, and either party can request a jury trial. Retaliation actions may be filed directly in federal court; whistleblower claims filed with SEC whistleblower office final rules provide right to appeal, within 30 days after final decision, to an appropriate court of appeals the determination of an award (whether whistleblower should receive anything), but no right to appeal the amount of an award, as long as it falls within 10% 30% range. Retaliation actions brought in federal district court. Appeals of award determinations of the CFTC may be filed with the appropriate court of appeals not more than thirty days after the CFTC issues its award determination. 3