Whistleblower activity in recent years has soared in popularity—particularly in the United States, where certain statutes and regulations incentivize the provision of original information leading to a successful enforcement action or prosecution. Often aggrieved employees, whistleblowers have been instrumental in exposing major corporate scandals and holding individuals accountable for grossly intentional violations of the law and regulations broadly applicable to organizations across economic sectors. This blog post highlights some of the more recent whistleblower cases and offers practical advice for compliance professionals with respect to addressing and remediating matters internally before they become the object of a full-scale government inquiry.
SEC Whistleblower Awards
In the fourth quarter of 2021 alone, the United States Securities and Exchange Commission (“SEC”) awarded nearly USD 72M to whistleblowers whose assistance led to the successful resolution of enforcement actions against a multitude of corporations and individuals subject to the SEC’s jurisdiction. For FY 2021 overall, the SEC awarded a whopping USD 564M to 108 individuals—an agency record for awards made since the inception of the program. Increasingly, the whistleblower incentive program established pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), is a steady source of credible information for federal regulators intent on rooting out malfeasance in the domestic securities market by relying on insiders to provide crucial information leading to successful prosecutions. The SEC estimates that it received over 12,200 whistleblower tips in FY 2021—representing a 76% increase overall from the previous fiscal year. In other words, contrary to conventional wisdom, the pandemic seems to have encouraged—rather than discouraged—would-be reporters from coming forward with information concerning corporate misconduct.
Although specific details surrounding SEC whistleblower awards are intentionally shrouded under a veil of secrecy (as required by federal law), the SEC has made public some important details concerning whistleblower recoveries. Among the more notable awards made by the SEC in recent months was an individual award of USD 5M made to a whistleblower who provided critical information and assistance that led to the success of an enforcement action against an organization complicit in a scheme to defraud investors. As a result of that action—announced by the SEC on December 7, 2021—hundreds of millions of dollars were recovered and returned to the victims of the scheme. In a separate action announced a month earlier, the SEC even awarded USD 400,000 to a whistleblower who was complicit in the covered enforcement action. In an order published on November 23, 2021, the SEC justified the award by noting that under the criteria encompassed in Rule 21F-6 of the Securities Exchange Act of 1934, the Claimant’s information alerted enforcement staff to the potential wrongdoing, which in part, prompted Enforcement staff to initiate an investigation. The initial information was then supplemented by “significant ongoing assistance” to SEC Enforcement staff during the investigation phase that enabled the agency to save both time and resources. Finally, the order noted that a significant amount of money was returned to harmed investors and that the Claimant’s “information and cooperation” helped the SEC put an end to a Ponzi scheme that preyed primarily on retail investors.
A substantial monetary award of USD 40M was made by the SEC to two individual whistleblowers in October 2021 for their assistance in another successful enforcement action. The total award of USD 40M was split between the two whistleblowers, the first of whom provided original information that caused the SEC to launch an investigation and continuously assisted SEC staff in exposing otherwise inconspicuous violations of federal securities laws. As a consequence of his cooperation, the first whistleblower received the majority of the USD 40M award—USD 32M in total. The second whistleblower assisted the SEC by submitting new information during the course of the investigation but received a reduced award of USD 8M in light of the fact that the SEC determined that, despite being aware of the information ultimately furnished to that agency, the second whistleblower unreasonably delayed reporting the information.
A record award of USD 114M was also made by the SEC in September 2021 to two additional whistleblowers, one of whom received the staggering sum of USD 110M for providing what the SEC characterized as “substantial independent analysis of publicly available information derived from multiple sources that significantly contributed” to the investigation and subsequent resolution of the enforcement action. In addition, according to the SEC, the primary whistleblower applied “specialized skill and [exerted] unusual effort” to develop an analysis that provided the Commission with important insight into the misconduct at issue. While the second whistleblower also assisted the SEC in the investigation by providing new information, that person did so only after the investigation had commenced and did not provide the same level of detailed cooperation as the first whistleblower. As a consequence, the second whistleblower was awarded only USD 4M for his/her cooperation.
False Claims Act Recoveries
The False Claims Act (“FCA”) also proved to be a significant vehicle for government regulators to expose fraud on the part of organizations and individuals perpetrated against taxpayers and to recover those funds with the assistance of whistleblowers in qui tam actions. In FY 2020, the U.S. Department of Justice (“DOJ”) obtained more than USD 2.2B in settlements and judgments, of which USD 1.6B were recovered under the qui tam provisions of the FCA.
Among the more notable qui tam actions settled by the DOJ in 2021 was a suit filed by a whistleblower against Arriva Medical, LLC and its parent company Alere, Inc. As the largest Medicare mail-order diabetic testing supplier until the company ceased operations in 2017, Arriva habitually caused the submission of false claims to Medicare on account of kickbacks paid to Medicare subscribers in the form of free glucometers and other perquisites. The whistleblower in the Arriva case—a former call center employee—reported that, in exchange for the free glucometers, patients were encouraged to order more of their diabetes supplies from Arriva. As a consequence of its illegal actions, Arriva entered into a settlement agreement with the DOJ that called for the payment of USD 160M, of which the call center employee who initiated the qui tam action received over USD 28.5M.
In a similar vein, the DOJ entered into a September 2021 settlement agreement with a group of South Carolina health providers, laboratories, and testing facilities owned by a single individual by the name of Daniel McCollum. According to the settlement agreement reached in that case, the group of health care service providers furnished illegal financial incentives to medical providers who were encouraged to utilize their services in contravention of both the Stark Law and Anti-Kickback Statute. Specifically, the facilities in question induced referrals of urine drug tests through the use of such incentives. In addition, several of the entities owned by McCollum billed federal health care programs for unnecessary urine drug tests. A total of five whistleblowers—namely, Donna Rauch, Muriel Calhoun, Brandy Knight, Karen Mathewson, and Tracy Hawkins (all former employees of pain management clinics owned or operated by McCollum)—stand to receive a portion of the USD 140M penalty imposed on the entities collectively. As of the date of this article, the exact allocation of the whistleblower awards has yet to be announced.
FCA activity in 2021 also involved several actors in the defense industry, with Illinois based contractor Navistar Defense LLC agreeing to pay a USD 50 million settlement to resolve allegations that it falsified commercial invoices to induce the United States Marine Corps to buy its products at significantly inflated prices. The commercial invoices—all of which were fraudulent and not reflective of any actual transactions between Navistar and any third-party suppliers—were purportedly submitted to the government to justify Navistar’s prices for the manufacture of a suspension system developed specifically for armored vehicles. The whistleblower in the Navistar case—a former government contracts manager by the name of Duquoin Burgess—received over USD 11M for his role in exposing Navistar’s extensive fraud.
A USD 25M settlement was also reached with Boeing subsidiary Insitu, Inc., a manufacturer of Unmanned Aerial Vehicles (“UAVs”) for its use of refurbished materials in the production of UAVs for several branches of the US military. According to a DOJ press release announcing the settlement, Insitu, Inc. acquired seven non-competitively bid defense contracts by falsely claiming that new materials would be used to produce the UAVs at issue. In fact, the government alleged that Insitu officials had planned all along to use recycled material in an effort to inflate their profit margins under the contracts in question at the expense of the American public. In the Insitu case, the whistleblower was a former executive by the name of D R O’Hara who was intimately acquainted with the misconduct at issue. O’Hara subsequently received over USD 4.6M for his role in exposing Insitu’s fraudulent conduct.
Key Takeaways and Lessons Learned
In each and every whistleblower case mentioned in this article, employees or third parties with intimate knowledge of the organization’s illegal activities exposed that conduct by resorting to external reporting to regulatory authorities. Although many of the details of these cases are unknown, it is an indisputable fact that the quality of internal reporting systems—in the form of hotlines, anonymous online submissions, or otherwise—are largely determinative of whether currently concerned individuals will eventually morph into external whistleblowers. As such, all organizations must be concerned with the quality and effectiveness of their existing internal reporting systems. As both DOJ Guidelines—and industry practice—emphasize, periodic testing of the organization’s intake, triage, investigation, disposition and remediation efforts is an essential ingredient in its overall compliance posture. To the extent organizations have not conducted testing of these features, it should plan on conducting such comprehensive assessments now since whistleblower complaints—the popularity of which has soared in recent years—show absolutely no signs of abating. A focus on the efficacy of internal reporting mechanisms alone, however, is far too myopic. In many cases, organizations focus on the quality of the intake system itself to the exclusion of other equally important considerations. Testing each part of the internal report resolution process is the most effective means of ensuring that employee and third-party concerns are appropriately addressed and rectified before they become the subject of an external investigation and/or unwanted regulator scrutiny.
Second, each case illustrates the importance of building a culture that fosters adherence to ethical norms and legal requirements. In each and every instance, the companies implicated in misconduct were involved in schemes perpetrated by multiple individuals and in the most egregious cases, by members of the company’s own leadership team. This makes adopting a clear, plain-language code of conduct, communicating employee expectations, and providing associated training imperative. Such training should be complemented by consistent messages from leadership emphasizing an organization’s zero-tolerance for infractions of the company’s policies or the law. Discipline, too, must be consistent across the organization to ensure that bad behavior is not overlooked or swept under the proverbial rug simply because a senior official is involved.
Finally, companies should consider creating incentive programs of their own that reward good behavior. A person who reports serious misconduct that is ultimately substantiated after a thorough internal investigation should be heralded and compensated for bringing the incident to light rather than shunned as a traitor. The degree to which employees adhere to the organization’s code of conduct and other expectations and policies should also be incorporated into annual evaluations and should be a material factor in determining an employee’s eligibility for promotion. A repeated record of infractions—no matter how trivial—could be an indicator that the individual is not suitable for a leadership position. Conversely, evidence that an employee understands and consistently adheres to a company’s rules and regulations, can be a desirable characteristic in a senior manager.
By following these rudimentary recommendations, organizations can significantly mitigate the potential that its employees will circumvent internal compliance procedures and become media darlings as sensationalized reports of the organization’s misconduct—and the bravery of the whistleblower who exposed it—proliferate.