July 29th, 2010
One small provision tucked into the Dodd-Frank Wall Street Reform and Consumer Protection Act may have very significant and costly consequences for corporations. Though it hasn’t received as much public attention and discussion as higher profile provisions of the Act, the Act includes a whistleblower provision that rewards individuals who assist the Securities and Exchange Commission (SEC) in uncovering securities violations, including violations of the Foreign Corrupt Practices Act (FCPA). Whistleblowers who provide information regarding any type of violation of Federal securities laws that would lead to an SEC enforcement action of greater than a million dollars are entitled to recovery. For a whistleblower, the payoff is an award of at least 10 percent and up to 30 percent of the fines collected worldwide as a result of violations of FCPA based upon a number of criteria, including the significance of the information provided, the degree of assistance provided, the “programmatic interest” of the SEC in deterring violations of the securities laws by making awards and such additional relevant factors as the SEC may establish by rule or regulation. Such a remuneration would mean that in cases that result in a $100 million payoff, the whistleblower receives at least $10 million and perhaps as much as $30 million. There is the potential now for whistleblowers to be enticed by lucrative fees they will receive for providing information to the government.
Excluded from participation in the program is any whistleblower who, at the time the whistleblower acquired the original information submitted to the SEC, was a member, officer, or employee of a specifically indicated regulatory agency, the Department of Justice, a self-regulating organization, the Public Company Accounting Oversight Board, or a law enforcement agency. Further, a whistleblower is not eligible to be compensated under certain defined circumstances.
The new legislation has broad implications across the financial and corporate sectors and gives increased power and reach to the SEC. The SEC and the Department of Justice in the past few years have been active in the area of Foreign Corrupt Practices Act matters. As of the signing of the bill, the SEC has greater ability to extract information from employees of corporations and others involved with those employees. Congress believes, based on prior enforcement actions, that some of the best evidence and information the SEC can use in enforcement action is from those knowledgeable employees tucked inside a company.
In major accounting fraud cases such as WorldCom and AIG, the total sanctions in those enforcement actions were in the hundreds of millions of dollars. In cases such as this, the corporate insider whistleblower would have a very large reward at the end of the process. The types of cases and the potential recoveries involved have actually greatly expended and increased as a result of the Dodd-Frank Act whistleblower provisions.
Since there are over 500 public companies and over 1,500 financial sector companies headquartered in Texas, this new movement by the SEC may mean such businesses need to re-evaluate and improve their internal compliance structure to prevent any violations of federal and state securities laws.
Whistleblowers are allowed to anonymously provide information through counsel, but must identify themselves prior to receiving any award.
It should be noted that this Dodd-Frank Act also creates a private right of action for whistleblowers against employers who discharge, suspend, threaten, harass, or discriminate against a whistleblower, and makes favorable changes regarding whistleblower laws under the Sarbanes Oxley Act Section 1514a, such as extending the limitation period and providing for a jury trial in federal court.
Tags: accounting fraud cases, Consumer Protection Act, dallas whistleblower attorney, Department of Justice, Dodd Frank, Dodd-Frank Wall Street Reform, FCPA, federal court, federal securities laws, Foreign Corrupt Practices Act, fraud cases, Public Company Accounting Oversight Board, Sarbanes Oxley Act Section 1514a, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission, state securities laws, whistle blower, whistleblower, Whistleblower Awards, whistleblower case, whistleblower provisions, whistleblowers, whistleblowing case
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July 22nd, 2010
A large percentage of the United State’s enormous annual spending goes to development and implementation of new weapons systems, facilities, equipment, supplies, and logistical and technical services through the procurement of government contracts. Such government contracts frequently involve military defense contracts such as B-1 Bombers, military tanks and vehicles, military fire power and uniforms, and extends to areas such as computer technology and food services for our troops. Defense contractor fraud remains one of the most prominent areas of false claims litigation under the Federal False Claims Act. In April 2009 TRW Inc.’s efforts to stop a scientist from revealing his research findings about faulty electronic components the company sold to the government for military and intelligence-gathering satellites were the basis for a whistleblower lawsuit that Northrop Grumman Corp. settled for $325 million. It was the largest settlement ever paid by a defense contractor in a whistleblower case and the second largest ever paid involving defense contractor fraud.
The whistleblower was awarded $48.7 million for his work and the work of his attorneys on the case. The Federal False Claims Act requires the government to award whistleblowers 15 to 25 percent of the amount the government recovers as a result of whistleblower cases.
A false certification of regulatory and statutory compliance, necessary to obtain a contract, can render false all claims for payment under that contract. A contractor’s failure to meet contract performance requirements and failure to provide goods and services in conformance with federal statutes and regulations may be sufficient to violate the False Claims Act.
Presentation of a claim to the Government for payment, when the failure to abide by contract requirements has not been disclosed to the Government, is deemed equivalent to false certification of compliance with such laws and regulations. Therefore, if a claim for payment is submitted and the contract requirements have not been fulfilled in all respects, if federal funding is conditioned on compliance, gives rise to a False Claims Act case. Claims may be false, even though goods or services otherwise fulfill contract specifications.
Defense contractor fraud remains one of the most prominent areas of false claims litigation. Billions of dollars have been recovered from defense contractors, mainly as a result of whistleblowers. Some common ways in which defense contractors have tried to defraud the government are as follows:
1. Cross-charging. This occurs when a defense contractor improperly shifts costs and expenses from one defense contract to another in order to boost its profits.
2. Improper Product Substitution. Contracts frequently request the contractor use a specific grade or quality of product or part. There are often requirements that the products be new or made in the United States. Defense contractors often attempt to save costs by substituting cheaper or substandard parts.
3. Improper Cost Allocation. Under this scheme the defense contractor will improperly allocate or shift cost from private businesses or foreign governments onto the cost-plus contracts they have with the United States government.
4. Worthless or Substandard Products or Services. In this case the defense contractor with knowledge or through reckless neglect, delivers products that do not perform as promised.
5. Inflation or Costs and Charges. In a cost-plus contract, the government pays the defense contractor a set price plus a percentage of the contractor’s costs for producing the product. In this scheme the contractor improperly inflates their costs and charges to increase revenue the company earns from the U.S. government.
6. Violations of the Truth-In-Negotiations Act. Weapons systems and equipment can be extremely complex. Much of the time, there is only one company in the world producing a particular weapon system or piece of equipment. The government has no choice but to purchase the particular weapon system or piece of equipment from a single supplier. Because other competitors are not bidding, the government has no way of knowing if it is paying a fair price. The Truth-In-Negotiations Act is designed to prevent this problem by requiring defense contractors to disclose all relevant information about its costs to the government in such situations. Defense contractors may sometimes attempt to inflate their costs and expenses because they have no competitor bidding for the contract.
Tags: compliance, contractor fraud, contractors to disclose, cost-plus contract, Cross-charging, dallas whistleblower attorney, Defense contractor fraud, defraud the government, false certification, False Claims Act, False Claims Act case, false claims litigation, Improper Cost Allocation, Improper Product Substitution, Substandard Products, Substandard Services, Truth-In-Negotiations, Violations of the Truth-In-Negotiations Act, whistleblower, whistleblower case, whistleblower cases, whistleblower lawsuit, Whistleblowing, worthless products
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