DOJ’s Corporate Whistleblower Awards Pilot Program: Fatally flawed, DOA
With great fanfare, the Department of Justice has published its official Guidance on the Corporate Whistleblower Awards Pilot Program, which is intended to:
[I]ncentivize those with information about corporate criminal wrongdoing to report original information about criminal conduct that might otherwise go undetected or be difficult to prove.
And
[M]otivate corporations to create more robust compliance programs that detect and deter criminal conduct, including by encouraging internal reporting of complaints.
The Guidance notes that “the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Financial Crimes Enforcement Network have also established successful whistleblower programs” but “agencies’ whistleblower programs do not cover the full scope of corporate crime the Department investigates and prosecutes, leaving gaps that the Department now seeks to fill.” (Guidance p. 1).
The Pilot Program is far more complicated and restrictive than the SEC’s whistleblower program which is the model other agencies have looked to because of its great success in recouping billions of dollars. Unfortunately, the SEC is a very small agency and has only been able to follow up on a small fraction of the tips it has received since its program’s inception. Given its proven effectiveness, with resources that are dwarfed by the DOJ, one would have expected that the DOJ would have created a program much like it. The DOJ however, chose to reinvent the wheel.
Law360, Lexology, LinkedIn, Bloomberg Law, and a host of other legal media have been peppered with client “advisories" describing the program in detail, and providing "takeaways" which almost unanimously contend that there will be a marked increase in the number of whistleblower disclosures to DOJ, criminal investigations, and enforcement actions. All call for a reevaluation of corporate integrity programs to ensure that reports of unlawful conduct are promptly investigated, and if called for, disclosed to the DOJ.
This article takes issue with these findings and recommendations. I will explain why by taking the reader through the Guidance and addressing the program’s flaws in order as they appear. Consequently, it would be helpful for the reader to have the Guidance to refer to. The reader can find it at: https://www.justice.gov/criminal/media/1362321/dl?inline
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, or demoted, or 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 they did.
1. There is no certainty that a whistleblower will receive an award.
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, the 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 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. [1]
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. 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.[2]
Again, Congress used the word shall. Thus, the DOJ is required to reward the whistleblower, known as “relator” unless the person is otherwise disqualified.
2. 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:
a. Net proceeds are defined 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.
So far, so good. And where the government or a corporation is the victim:
c. Where a federal, state, local, tribal, territorial, or foreign government agency or corporate entity is the victim of the criminal scheme with a pecuniary loss, the whistleblower will be eligible for an award before the government or entity victim is compensated post-forfeiture through remission, mitigation, or restoration.
(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.
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, 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.
Now, the program's creators may protest that they had no other choice, that the victims had to be compensated first. Fine. But from the standpoint of the whistleblower, that justification is irrelevant. If they can't be sure that there will be enough money left over to properly compensate them for the risks they are taking, it doesn't matter why the program can't guarantee that they will be paid. And no competent lawyer is going to be able to give them any assurances to the contrary.
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 defendant has been convicted of a crime, which can be years after allegations have surfaced and the person or entity prosecuted.
3. Disqualification of whistleblowers who are “eligible” for an award under another program is an irrational disincentive to disclosure of 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 is self-defeating.
The reason is that even if a whistleblower were eligible for an award from one of these other agencies, they may not be able to make a disclosure to these entities. 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 ever received a reward for their information.[3] Many of these tips were made without the assistance of counsel. Few of the recoveries occurred without the assistance of counsel. Given the number of tips, and the size of the agency, the SEC depends upon a cadre of qui tam lawyers to act as funnels providing a way 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, that 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. But they could find a lawyer who would present their information to the DOJ.
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. Moreover, only about 20% of qui tam actions are successful. More technically, a whistleblower may disclose significant information to the government detailing fraudulent activity by a healthcare provider but be knocked out of court because the whistleblower lacked evidence that the defendant filed a false claim.
So while a whistleblower might in theory be eligible to be a qui tam relator in a False Claims Act law suit, such suits cannot be brought without an attorney, and no attorney may be willing to bring such a case. But bringing a whistleblower to the DOJ does not entail incurring significant up-front expenses, and a far greater range of attorneys are qualified to represent a whistleblower in a disclosure to the DOJ than are qualified to handle an FCA case.
To address this problem, the Guidance recommends that the whistleblower make its disclosure to all agencies at the same time so that the Department can determine its eligibility. But as demonstrated above, all this does is deter the whistleblower from making any disclosure to the Department because the Department will decide that they are eligible to receive a reward under another program even though this eligibility is just an illusion.
4. 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 except under limited circumstances.[4]
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 where to do so could place their client’s wellbeing in jeopardy?
5. Can it be fixed? Yes. Will it? No.
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. Fixing the mindset of the lawyers at the DOJ, well that is an entirely different kettle of fish.
[1] Section 3730(d).
[2] https://www.justice.gov/sites/default/files/civil/legacy/2011/04/22/C-FRAUDS_FCA_Primer.pdf
[3] https://www.phillipsandcohen.com/sec-whistleblower-program/
[4] Dodd-Frank, Section 922(h).