If you want to see how the SEC’s whistleblower program may look in a few years, all you need to do is take a look at the False Claims Act and the role that whistleblowers play in the enforcement of the act.
Whistleblowers are the most important tool in the government’s FCA enforcement arsenal. They are authorized by qui tam provisions (meaning “he who prosecutes for the king”), which permit a private complainant, or relator, to bring a case on behalf of the United States government to recover payments induced by fraud. As an incentive, the FCA allows the relator to receive up to 30 percent of the amount recovered by the government. Qui tam settlements now constitute about 70 percent of all FCA recoveries. The number of pending qui tamactions has increased steadily every year.
Employees who learn about any potential fraud can initiate an FCA action. There are plenty of lawyers who practice in this area and are willing to help the whistleblower on a contingency basis in the hope of a big payoff, consisting of a portion of the recovery and statutorily-mandated attorneys’ fees.
A relator is required to file its suit under seal and to serve the government with the complaint, along with disclosure of all material evidence and information in the possession of the relator in connection with the alleged false claims. Once served with the complaint and information, the government has a 60-day period to investigate the complaint and decide whether it wants to intervene in the action. The government typically delays a decision whether to intervene while it investigates the allegations made by the relator.
If the government chooses to intervene, it exercises primary responsibility for the case, and the relator has limited control over the action. If the government declines to participate, the relator may pursue the action without the government’s assistance.
The same rules and standards regarding liability and calculation of damages and penalties apply in a qui tam action as under a normal FCA action. Upon a successful recovery by the government, a relator is entitled to share in the damages, in the range of 15 to 30 percent of the recovery.
The case law surrounding relators is very well developed. The relator bar is sophisticated. Unlike the SEC whistleblower program, the Justice Department and the courts are familiar with the law and practices surrounding False Claims Act cases.
As the SEC whistleblower program matures, it is likely to operate in much the same fashion as the False Claims Act except that the SEC will need to develop specific practices and procedures for handling whistleblower complaints. For right now, the SEC has a very broad field of discretion as to how it operates the whistleblower program. The False Claims Act involves a supervising court from the very start – once the complaint is filed – and the Justice Department is under scrutiny from the beginning in its handling of the complaint.
The SEC should be very careful with its new authority. Already it engendered a controversy when a whistleblower claimed his identity was mistakenly disclosed during an SEC deposition.
As time goes on, the SEC should develop more specific protocols so that the industry can rely on established practices when dealing with the SEC and a whistleblower. If the SEC is not careful, it could end up with allegations of inconsistent treatment of whistleblowers and disparate handling of whistleblower complaints. Such claims could unravel the SEC’s whistleblower program.
About the Author
Michael Volkov is a shareholder at the national law firm of LeClairRyan. His practice focuses on white collar defense, corporate compliance, internal investigations and regulatory enforcement matters, and he is a former federal prosecutor with almost 30 years of experience in a variety of government positions and private practice. He can be reached at email@example.com
Successfully represented three officers of a multinational company in two separate criminal antitrust investigations involving a criminal antitrust investigation in the District of Columbia and the Southern District of New York.
Defended pharmaceutical company before the Food and Drug Administration and Senate Finance Committee relating to application for approval of generic drug.
Conducted internal investigation which exonerated company against allegations of false statements in submissions to the FDA and against improper conduct alleged by Senate Finance Committee.
Represented company before the US State Department on alleged violations of ITAR which lead to voluntary disclosure and imposition of no civil or criminal penalties.
Advised several multinational companies on compliance with anti‐corruption laws, and design and implementation of anti‐corruption and anti‐money laundering compliance programs.
Advised hospitals, pharmaceutical companies and medical device companies on compliance issues relating to Stark law and Anti‐Kickback law and regulations.
Conducted due diligence investigations for large multinational companies for anti‐corruption compliance of: potential third party agents, joint venture partners and acquisition targets in Europe, Africa, Asia and Latin America.
Represented individual in white collar fraud case in Alexandria, Virginia and secured dismissal of criminal charges and expungement of criminal record.
Represented company before Congress and Executive Branch in effort to modify Justice Department regulations concerning use of federal funds.
Advised and assisted World Bank in review of global corruption policies, enforcement programs and corruption investigations and prosecutions.