There is the lottery and then there is being a corporate whistle-blower. It seems both pay out a jackpot, but the latter is a quicker path to riches, even when the recipient turns out to be a wrongdoer as well.
This was my first thought when perusing the year-end statistics on whistle-blower awards.
It was a banner year for whistle-blowers. They were paid $435 million over all, and an additional $170 million is to be shared among three whistle-blowers in a case involving Bank of America.
According to the Justice Department, these payments were made in connection with the nearly $6 billion recovered under the False Claims Act, which allows individuals to sue to collect money fraudulently taken from the government. More than half the total, $3.1 billion, was from banks that engaged in fraudulent mortgage practices, with the bulk of the rest, $2.3 billion, coming from Medicaid and Medicare fraud cases.
False Claims Act litigation was not the only federal program to contribute to a boom in the whistle-blower industry. The Dodd-Frank financial overhaul law created another program for the Securities and Exchange Commission and federal securities fraud. This year, the program received 3,620 complaints and made nine awards. The largest was a $30 million award to an anonymous foreign national. The S.E.C. program requires it to keep the foreign national’s identity secret, so we don’t know much more than the award amount. We don’t even know the company that was involved. The only fact we know is that the S.E.C. decided to award this amount despite finding that the foreign national had “unreasonably delayed” reporting the fraud, harming more people in the process.
The Justice Department also reported more than 700 so-called qui tam actions filed by whistle-blowers. In the meantime, law firms are racing to build whistle-blower practices. In many of these cases, a firm will represent the whistle-blower on contingency of about a third of any award paid.
To many, the rise of the whistle-blower is a fantastic development. With the government overworked and understaffed, whistle-blowers offer valuable assistance. They report wrongdoing that the government has not discovered, and they also know how the system operates because they work in the industry. Whistle-blowers can therefore explain new complex financial instruments to government officials who are one step behind and may not even know the instruments exist. These people in particular give the government a leg up in bringing litigation against banks related to the financial crisis, allowing the government to appear to be dealing with recalcitrant banks.
This explains the government’s eager embrace of whistle-blowers and mega-size payments. Its view appears to be that these awards are the price of doing business and are no different from the contingency fees paid to lawyers in private securities fraud cases. The difference here is that the money goes to someone who actually finds the misconduct, rather than the lawyers themselves.
The departing attorney general, Eric H. Holder Jr., called recently in a speech at New York University School of Law for an increase in payments to whistle-blowers under the Financial Institutions Reform, Recovery and Enforcement Act, which permits the authorities to file civil actions against individuals for criminal violations. The Justice Department has relied heavily on this little-known law to pursue cases against banks related to their conduct leading up to the financial crisis. Yet unlike the S.E.C.’s whistle-blower statute and the False Claims Act, the whistle-blower awards under Firrea are limited to $1.6 million.
For Mr. Holder, this was not enough. He called for raising it to the threshold of the other whistle-blower statutes — 10 to 30 percent of the total judgment or settlement.
Traditionally, blowing the whistle brought either fame or infamy. Karen Silkwood and Frank Serpico both became the subject of movies, but they suffered mightily for their efforts. They did not become rich. But in the new era, whistle-blowing can make you wealthy.
And perhaps that might be one of the many problems with the new whistle-blower era.
Whistle-blowing has always made people uncomfortable. People who do it are “snitches” or “traitors.” Whistle-blowers are also stigmatized and their career prospects diminished, to say the least. Not only that, the government itself has had an uneasy relationship with whistle-blowers. Edward J. Snowden, the former National Security Agency contractor who leaked classified documents, calls himself one, as does Linda Tripp, who tipped off investigators to Monica Lewinsky’s affair with President Clinton.
The government has decided that there are good whistle-blowers, and the law is intended to compensate them for the adversity they face.
Yet an award of millions of dollars may be too much. Instead of incentivizing the reporting of criminal conduct and fraud, the laws may be turning everyone into entrepreneurs looking for a possible case in their own companies.
This leads to another problem with whistle-blowing. It rewards bad people.
In one of the recent Bank of America cases, Robert Madsen was a real estate appraiser at LandSafe, a subsidiary of the bank. He participated in what amounted to widespread appraisal fraud involving 14 homes. He then developed a conscience and filed the whistle-blower action, which led to an award of $56 million, based on the bank’s $16 billion settlement of investigations into its sale of toxic mortgage securities. As Matt Levine of Bloomberg View wrote, the payment amounted to “$56 million for 14 water damaged houses! That’s a cool $4 million per house.” Mr. Levine continued, “Is it too obvious and cynical to point out the optimal course of conduct here, from a strictly personal-financial perspective? (That is: Sign up to do bad stuff. Do bad stuff. Call the F.B.I. Profit.)”
Mr. Madsen was an amateur compared to Bradley Birkenfeld, a former private banker at UBS who was paid $104 million for helping win a $780 million fine in 2009 from the bank, which was accused of helping its United States clients avoid taxes. This payment was under an Internal Revenue Service program for reporting tax cheats. Mr. Birkenfeld admitted that he had placed diamonds in a toothpaste tube to smuggle them on behalf of an American client and served almost two and a half years in prison for also helping United States citizens dodge taxes before receiving more than $100 million for his efforts.
I view all this as akin to robbing a bank and then turning in your colleagues to get a cut of the money you stole.
In other words, the current structure of whistle-blower compensation may not only be too much, it may create perverse incentives and reward wrongdoing.
Then there is the issue of transparency. When the S.E.C. can hide the identity of a whistle-blower and still award that person more than $30 million despite an “unreasonable delay,” taxpayers would probably want to know more facts. Yet that is all we will ever know. The S.E.C. by law can refuse to report more and indeed has an obligation not to disclose the whistle-blower’s identity. The Freedom of Information laws do not apply. And so the public cannot even assess whether this is a good or bad award.
Not all whistle-blowing is bad. But perhaps the government might want to think about the reward structure it put into place and how it affects both workplace conduct and the people who report wrongdoing. Huge awards may be necessary, but they may also be creating an incentive for people to try to hit the lottery while committing their own misdeeds with little government accountability for the riches the United States bestows.