Could the Dodd‑Frank whistleblower program give the False Claims Act a run for its money?

Erika Kelton is a partner at Phillips & Cohen in Washington, D.C.

She’s a pro at bringing whistleblower cases.

She has a couple of billion dollar plus False Claims Act qui tam cases under her belt.

Pfizer $2.3 billion.

Glaxo $3 billion.

But a significant amount of her caseload is now SEC/CFTC and tax cases.

“I would say over the past couple of years, the new matters we’ve filed have probably broken down to about 60‑70 percent False Claims Act, and the remainder split between SEC/CFTC and IRS whistleblower submissions,” Kelton told Corporate Crime Reporter in an interview last week.

“Dodd‑Frank was signed into law in July 2010,” Kelton says. “From the time of enactment, there was an overwhelming response by people in financial services, corporate accounting, and those concerned about foreign bribery practices.”
“Pretty quickly, we started getting inquiries – inquiries concerning the broadest variety of matters that you can imagine.”

“These included allegations of mischarging on equity and other securities trades and improper accounting practices – a la Enron. Many Foreign Corrupt Practices Act (FCPA) cases. Price manipulation cases on the commodities side.”

“What we found is that both the SEC and the CFTC have created whistleblower offices that are very open to these cases.”

“They are eager to investigate these cases. And they have done a fantastic job of developing an openness and culture within the SEC and CFTC enforcement staff that is whistleblower friendly.”

“Creating that type of culture is a challenge for any government enforcement agency – whether it is the Justice Department, IRS, SEC or CFTC.”

“It’s not just the tone at the top – which is great at the SEC and CFTC. Then SEC chairwoman Mary Schapiro was a big advocate for whistleblower enforcement. And the SEC’s head of enforcement – Robert Khuzami and the deputy, Steve Cohen – were really invested in making it a success.”

“But the prosecutors and investigators in the field have to buy in and understand that whistleblowers can really help them do their job. That is what I have found both on the CFTC and SEC side. There really hasn’t been much of a period of skepticism or coldness.”

“There has been much more of an embrace of whistleblowers from the beginning.”

“I credit people like SEC whistleblower office head Sean McKessy, CFTC whistleblower office head Vince Martinez and folks like Robert Khuzami and Steve Cohen, as well, who have educated and worked with staff on how to work with whistleblowers and what whistleblowers can bring.”

The SEC whistleblower office reported receiving 3,001 tips in 2012. But the SEC has settled only one whistleblower case so far.

“But it’s been roughly two years into having this statute,” Kelton says. “And about 18 months since the whistleblower office was created. It’s my sense that the SEC cases are moving far more quickly than either tax or a typical qui tam case.”

“The fact that they did get their first settlement and recovery within a year of when the whistleblower office was set up, and then they awarded the maximum 30 percent – that was encouraging. Yes, it was a small amount. But still, they did move quickly on that matter.”

“I don’t know this, but it is my sense that we will be seeing more settlements and awards from the SEC this year.”

How will Mary Jo White’s arrival at the SEC impact the whistleblower program?

“She had experience with qui tam whistleblower cases when she was U.S. Attorney for the Southern District of New York, which has a heavy securities fraud caseload,” Kelton says.

“She is familiar with the value and quality of information whistleblowers bring.”

“We had the so‑called yield burning matter with that office when she was U.S. Attorney which was against several dozen Wall Street banks, and which recovered over $200 million.”

“That case was a terrific example of the kind of productive collaboration that can occur between the whistleblower team and prosecutors – in that instance, there was an ongoing collaboration with the whistleblower, SEC, IRS and Department of Justice.”

“The U.S. Attorney in any office sets the tone of how welcoming they are to whistleblowers. And that was a good example.”

“Mary Jo White’s experience with False Claims Act whistleblowers will be a positive for the SEC program. And I think the SEC program will continue to grow and strengthen under her.”

“Two and a half years into the SEC’s whistleblower program, you have the buy in from folks on the ground. And you have a structure for dealing with whistleblowers and whistleblower claims. It is working incredibly well.”

“Mary Jo White wasn’t working with whistleblowers as her clients at Debevoise. But she will understand quickly, if she doesn’t already, how much whistleblowers will bring to the SEC’s enforcement mission.”

The SEC whistleblower law is not a qui tam law. How does that change the game?
“Dodd‑Frank is not a pure qui tam law,” Kelton said. “Nor is the IRS whistleblower program. That means that you make a submission to the agency. You do not file a case in the federal court, or state court – as you do with the federal or state False Claims Act.”

“There is no mechanism through which the whistleblower can pursue the case if the government declines to pursue it. There is no articulated procedure or oversight by the courts, as there is under the False Claims Act.”

“There is no deadline, if you will, on intervening or making an intervention decision, or a requirement that the government go back to the courts to get additional time for the seal. There is none of that.”

“It definitely is different. There is much less control or ability to influence the outcome. On the other hand, when you have agencies that are welcoming and open, the way that the SEC and CFTC have been in the past couple of years, there definitely is an opportunity to help the effort along.”

“There is a reluctance to get into full blown collaboration, such as the shoulder to shoulder document review we do with the Justice Department. That may happen in the future.”

“But I have had SEC cases where the client has assisted the investigators and attorneys in reviewing documents and helping them understand the documents.”

“There is not the depth of collaboration that we have in a true qui tam case. But there is openness to some level of collaboration. And as the success of the programs become evident, that collaboration will grow.”

The IRS has a reputation of not being friendly to whistleblowers. Is that changing?
“There is real interest, particularly at the IRS whistleblower office, in improving that program,” Kelton says. “There are some institutional barriers that work in the opposite direction. Part of that is the culture of the institution itself. It has not been historically a whistleblower friendly agency.”

“There are real problems with transparency, where the whistleblower and counsel find it difficult to get any information about the status of a matter. And there is a real resistance in working in any kind of collaborative way. I’m not talking at the qui tam level, but just engaging with the whistleblowers, most of whom are extremely knowledgeable and can help the IRS shortcut their investigations.”

“But there has been a real reluctance to engage. The regs and guidance at the IRS allow for these collaborative agreements to be entered between whistleblower counsel and the IRS to facilitate collaboration.”

“But even though requests have been made internally, the chief counsel’s office has not approved a single one.”

“The IRS whistleblower office was established February 2007. Now it’s February 2013. That’s six years. And that’s stunning. In all of those years, we haven’t had a single agreement that allows a single whistleblower to work collaboratively with the IRS.”

[For the complete transcript of the Interview with Erika Kelton, see 27 Corporate Crime Reporter 5(12), February 4, 2013, print edition only.]