Whistleblower litigation under the Securities and Exchange Commission is relatively new. In its short history, there haven’t been many cases filed. For the second time in its existence, the SEC has rewarded several whistleblowers for reporting wrongdoing. The three unnamed whistleblowers were each awarded five percent of a recovery for stepping forward and reporting their knowledge of fraud. The awards to the whistleblowers stem from the overall funds recovered by the SEC due to the information obtained from the three whistleblowers.
The whistleblowers’ information assisted the SEC’s enforcement action against Locust Offshore Management LLC, a fraudulent hedge fund, managed by Andrey C. Hicks. Hicks, who pled guilty for his involvement in the sham hedge fund, was sentenced to 40 months in prison. The SEC alleges that while Locust Offshore Management falsely claimed it would sell shares to an investment fund, instead it pocketed the money it solicited. The whistleblowers alerted the SEC to the fraud and that led to a judgment against Locust and Hicks for $7.5 million.
I believe the SEC whistleblower program will result in a great deal of litigation. Most experts believe the program will move forward at a much faster rate. SEC whistleblowers with helpful information about SEC violations amounting to more than $1 million are able to obtain a percentage of the government’s recovery as an award. The Dodd-Frank legislation increased the award percentage for whistleblowers to between 10 percent and 30 percent. Additionally, Dodd-Frank added protections from employer retaliation on employee whistleblowers. That’s a very good thing and was badly needed.
As we have previously reported, the SEC whistleblower program is new, beginning in August 2011. The first award occurred a year later in August 2012 and from all accounts it appears the new program will take off from here. The first whistleblower obtained $50,000 fee which was 30 percent of the recovery for stepping forward. The Obama administration has made it a priority to prosecute fraudsters who leech funds from the federal government. President Obama has made it clear that whistleblowers play a key role and are a huge asset in recovering hundreds of millions of dollars for the government.
It should be noted that in addition to the SEC whistleblower program, whistleblowers can also help prosecute government fraud through the False Claims Act. In order to qualify as a whistleblower under the False Claims Act, a person must have direct knowledge of a false claim being submitted to the federal or state government for payment. False Claims Act cases are being filed for a variety of fraudulent schemes against the government. The health care industry, specifically Medicare and Medicaid, are commonly defrauded and are ripe for a False Claims Act lawsuit. Additionally, many government contractors, especially defense contractors, have defrauded the federal government during the past 10 years as the War on Terror continues.
Any person considering filing a False Claims Act lawsuit should know that their suit will be under seal for potentially several months or even years until the government decides whether it wants to intervene in the case. Also, the False Claims Act forbids employers from retaliating, harassing or threatening employees for reporting fraud to the government. Finally, the possibility of earning 15-25 percent of the government’s recovery is a positive incentive for whistleblowers to step forward, tell the truth, and expose fraud. It is in the taxpayers interest that whistleblowers speak out against fraud being committed against the federal government.
As we have reported previously, many states have adopted state versions of the False Claims Act. Most fraudulent schemes are very complex and only insiders know the intricate details of the fraud. Unfortunately, through the years a great deal of fraud against the government went unreported and undetected. That has changed, which is a good thing. It is not a requirement that the whistleblower be an employee of the company defrauding the government, so long as the whistleblower has direct knowledge of the fraud committed. That’s important to know since lots of folks have believed the whistleblower had to be an employee.
Lawyers in our firm continue to vigorously investigate fraud against both the federal and state governments and encourage anyone who knows of fraudulent activities to step forward. Potential whistleblowers have the right to not be retaliated against for doing the right thing and reporting the fraud they have witnessed. Anyone considering doing the right thing and blowing the whistle are strongly urged to seek legal advice before doing so. Lawyers at Beasley Allen are very familiar with the federal False Claims Act and its state counterparts and can guide whistleblowers along the process. If you have any information and would like to speak with an attorney, contact Andrew Brashier, a lawyer in our Consumer Fraud Section, at Andrew.Brashier@beasleyallen.com, or at 1-800-898-2034 or 334-269-2343.
Source: WSJ.com