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  • District court dismisses FCA claims against student loan collectors

    Courts

    On February 11, the U.S. District Court for the District of Columbia dismissed a relator’s False Claims Act claims, which alleged that a group of prime private student loan debt collectors (defendants) defrauded the federal government of funds intended for small businesses in relation to contracts to service student loans with the Department of Education (Department). The 2015 lawsuit filed by the relator accused the defendants of, among other things, allegedly concealing that “the purportedly small business subcontractors were affiliated with ‘co-conspirator’ larger businesses, ‘making them ineligible to be claimed as small businesses by the prime contractors on the [Department’s private collection agency] task orders.’” The relator also claimed that the defendants convinced the Department to award contracts and provide bonuses they did not deserve. According to the relator, the defendants made claims that hinged “on the factual allegation of undisclosed affiliation and associated submission of false claims and/or misrepresentations concerning business size.”

    In the order, the court determined, among other things, that the relator fell short of alleging the specific facts necessary to convince the court that the defendants engaged in fraudulent inducement and implied certification. The court held that “despite [the relator’s] contrary contentions, [the relator’s] pleading does not establish with the requisite particularity the time and place of the false misrepresentations, what constitutes the allegedly false claim for each discrete defendant, and what, precisely, ‘was retained or given up as a consequence of the fraud.’” Specifically, the court stated that the relator “fail[ed] to connect several critical dots in the alleged scheme, leaving the [c]ourt unclear as to what, precisely, was allegedly actionably false and/or fraudulent.” However, the court allowed the relator leave to file an amended complaint, stating that “because the allegation of further facts might cure the identified deficiencies (although the [c]ourt has its doubts, given the length of the investigation and [the relator’s] counsel’s central role in the investigation), the [c]ourt sees no reason to deviate from the general rule [allowing leave].”

    Courts False Claims Act / FIRREA Student Lending Whistleblower Department of Education Debt Collection

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  • Two whistleblowers earn SEC awards totaling $322,000

    Securities

    On January 22, the SEC announced that it had awarded a total of $322,000 to two whistleblowers in two separate enforcement actions. According to the SEC’s press release, the whistleblowers “played a crucial role in helping the Commission protect Main Street investors,” and “assisted the SEC in returning money to harmed investors.” One whistleblower provided information that reportedly helped the agency “shut down an ongoing fraudulent scheme that was preying on retail investors,” and was awarded $277,000 (see award order here). The other whistleblower, a harmed investor, assisted the agency to “shut down a fraudulent scheme targeting retail investors.” The whistleblower was awarded $45,000 (see award order here). Since 2012, the SEC whistleblower program has awarded roughly $387 million to 72 whistleblowers.

    Securities Agency Rule-Making & Guidance Whistleblower SEC Enforcement Regulator Enforcement

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  • SEC monetary sanctions in whistleblower program top $2 million for 2019

    Securities

    On November 15, the SEC announced it issued its fiscal year 2019 whistleblower program annual report to Congress, which states that since the program’s inception, the SEC has ordered over $2 billion in total monetary sanctions in enforcement actions that resulted from information brought by meritorious whistleblowers. As for FY 2019, the SEC received over 5,200 whistleblower tips, with over 300 tips relating to cryptocurrencies, and awarded approximately $60 million in whistleblower awards to eight individuals. Since the program’s inception, the SEC has awarded approximately $387 million to 67 whistleblowers. The report acknowledges that FY 2019 was an “unusual year” due to the lapse in appropriations, referring to the government shutdown from the end of December 2018 through most of January 2019, and includes a summary of the six actions leading to the eight awards of FY 2019. The report notes that the agency anticipates final rules to be adopted in FY 2020 related to the July 2018 proposed amendments to the whistleblower program (covered by InfoBytes here). The proposed amendments, among other things, address the Supreme Court ruling in Digital Realty Trust, Inc. v. Somers (covered in a Buckley Special Alert) and authorize the SEC to adjust an award’s percentage as appropriate to advance the goals of rewarding and incentivizing whistleblowers.

    On the same day, the SEC announced a collective award of over $260,000 to three whistleblowers who submitted a joint tip “alerting the agency to a well-concealed fraud targeting retail investors,” which led to a successful enforcement action. The order does not provide any additional details regarding the whistleblower or the company involved in the enforcement action. With this new action, the SEC has now awarded approximately $387 million to 70 whistleblowers.

    Securities SEC Whistleblower Enforcement Fintech Cryptocurrency

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  • 2nd Circuit denies three petitioners seeking whistleblower awards for SEC settlement

    Courts

    On November 8, the U.S. Court of Appeals for the Second Circuit denied petitions from three whistleblowers seeking awards following a $55 million settlement between the SEC and a global financial institution, which the SEC previously denied. According to the opinion, multiple individuals disclosed information to the SEC during an investigation into the financial institution’s financial statements. In 2015, the SEC reached a settlement with the institution, and nine whistleblower claimants filed applications to receive awards based on the information they provided. The SEC granted the applications for two claimants and denied the rest. The three individuals involved in this action were denied the awards because the SEC concluded that the individuals “did not provide ‘original information that led to a successful enforcement action,’” as required by the Securities and Exchange Act’s whistleblower provisions. Specifically, for the two named individuals, the SEC determined that it had already received the information they provided through an individual known as “Claimant 2,” who had previously submitted an expert report prepared by the two individuals to the SEC. The appellate court agreed with the determination made by the SEC, concluding that “their [] submission did not significantly contribute to the success of the [] action; Claimant 2ʹs submissions did.” The appellate court noted that the individual’s expert report did not qualify for Rule 21F‐4’s “original source exception,” which was designed to treat information submitted to another federal agency as though it had been submitted to the SEC directly.

    As for the third, unnamed individual, the appellate court also denied the petition, concluding that the unnamed individual’s interpretation of the whistleblower program would “disincentivise whistleblowers from curating their submissions.” Specifically, the SEC asserted that the unnamed individual “‘appeared to be very disjointed and had difficulty articulating credible and coherent information concerning any potential violation of the federal securities laws’” and “‘brought with him to the meeting a wet brown paper bag containing what he claimed to be evidence.’” The SEC further noted that the documents were “jumbled and disorganized” and ultimately used similar information brought by a subsequent whistleblower. The appellate court noted that “[a] whistleblower might still be rewarded for being the first to bring incriminating information to the SECʹs attention, but only if that information is contained in a credible, and ultimately useful submission.”

    Courts SEC Whistleblower Second Circuit Appellate

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  • SEC charges online auction portal with violating whistleblower protection laws

    Securities

    On November 4, the SEC announced the filing of an amended complaint in an action against an online auction portal and its CEO (collectively, “defendants”), along with the CEO’s wife as a relief defendant. The original complaint, filed in May, alleged that defendants operated a $23 million fraudulent securities offering and misappropriated investor proceeds. The amended complaint adds, among other things, a new count for “Impeding: Rule 21F-17 of the Exchange Act,” alleging that the defendants took actions to impede individuals from communicating with the SEC and other agencies regarding misconduct at the company by conditioning the return of investor money on signing agreements with confidentiality clauses purportedly prohibiting the reporting of potential securities law violations to law enforcement agencies. The SEC seeks preliminary and permanent injunctions, disgorgement plus prejudgment interest, and penalties.

    Securities SEC Whistleblower

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  • Fifth Circuit affirms dismissal of reverse-false-claims action in benefits payment fraud matter

    Courts

    On October 7, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a whistleblower’s reverse-false-claims action because it was barred by the False Claims Act’s (FCA) public-disclosure provision and the alleged scheme was not plead with sufficient detail. The relator, a former fraud investigator for the Department of Veterans Affairs Office of the Inspector General, alleged that the 15 financial institution defendants “avoided their regulatory obligation to return government-benefit payments they received for beneficiaries they knew to be deceased.” According to the relator, the defendants must have known of the beneficiary deaths because the Social Security Administration sends death notification entries to all receiving depository financial institutions. However, the district court determined that defendants provided documents showing the information had already been publicly disclosed and the relator was not the original source of the information (which would have been required to maintain a claim with respect to information that has already been publicly disclosed) because he obtained the information through his employment as a fraud investigator. As such, the court permanently dismissed the complaint on the grounds that the relator relied on public disclosures, and that the complaint failed to plead the allegations with sufficient detail.

    On appeal, the 5th Circuit agreed that the complaint could not survive the FCA’s public disclosure bar, explaining that the public-disclosure bar is met if the following elements apply: (i) the disclosure is public; (ii) the disclosure contains “‘substantially the same allegations’” as in the complaint; and (ii) the relator is not the “‘original source’” of the information. In addition, the appellate court agreed that the complaint lacked sufficient factual matter to satisfy federal rules of civil procedure, and concluded that further amendments would be futile because there are no claims left to amend.

    Courts Whistleblower Appellate Fifth Circuit False Claims Act / FIRREA

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  • New York launches online whistleblower submission system

    State Issues

    On October 2, New York’s Office of the Attorney General launched an online, open-source whistleblower submission system designed to enable witnesses to report information without compromising their identity. The N.Y.A.G. Whistleblower Portal allows whistleblowers to securely and anonymously submit information, while protecting individuals’ identity, location, and information provided. Whistleblowers will also be able to engage in two-way anonymous communications with the attorney general’s office through the portal. According to the press release, the attorney general’s office “is the first governmental agency in the United States to offer whistleblowers the capability to directly transmit documents and send and receive communications electronically without their identity being traceable.”

    State Issues State Attorney General Whistleblower

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  • CFTC awards $7 million to whistleblower for CEA action

    Securities

    On September 27, the Commodity Futures Trading Commission (CFTC) announced a whistleblower award of approximately $7 million to an individual who reported information that led to a successful Commodity Exchange Act (CEA) enforcement action. The associated order notes that five claimants submitted whistleblower award applications to the CFTC in response to the covered action, but the CFTC provided the award only to claimant one, as that individual voluntarily provided the original information to the Commission. The order does not provide any other significant details about the information provided or the related enforcement action. The CFTC has awarded over $90 million to whistleblowers since the enactment of the Whistleblower Program under the Dodd-Frank Act, and their information has led to more than $730 million in sanctions to date.

    Securities CFTC Whistleblower Dodd-Frank

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  • 3rd Circuit: FCA does not guarantee an in-person hearing before dismissal

    Courts

    On September 12, the U.S. Court of Appeals for the Third Circuit held that the False Claims Act (FCA) does not guarantee relators an automatic in-person hearing before a case can be dismissed. According to the opinion, a relator filed a qui tam action against a Delaware non-profit organization, asserting claims on behalf of the United States and the State of Delaware under the FCA and the Delaware False Claims Act (DFCA), alleging the organization received funding from state and federal governments by misrepresenting material information. Delaware and the federal government declined to intervene and, three years later, both moved to dismiss the case. Both governments argued that the relator’s allegations were “factually incorrect and legally insufficient.” The district court granted the motions without conducting an in-person hearing. The relator appealed, arguing that the FCA guarantees an automatic in-person hearing before a case can be dismissed.

    On appeal, the 3rd Circuit disagreed with the relator. The appellate court noted that the government “has an interest in minimizing unnecessary or burdensome litigation costs,” and, once the government moved to dismiss, the burden shifted to the relator to prove that dismissal would be “fraudulent, arbitrary and capricious, or illegal.” The appellate court concluded that the relator failed to do so, and rejected his argument that he should have been allowed to introduce evidence during a hearing to satisfy his burden. While the FCA and the DFCA state that a relator has an “‘opportunity for a hearing’ when the government moves to dismiss,” it is the relator’s responsibility to avail himself or herself of this opportunity, according to the appellate court. The court concluded that the FCA and DFCA do not guarantee an automatic in-person hearing and, because the relator failed to request a hearing and his motions failed to prove the dismissal was fraudulent, arbitrary, capricious, or illegal, the district court did not err in dismissing the action.

    Courts Whistleblower Relator Qui Tam Action False Claims Act / FIRREA Appellate Third Circuit

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  • SEC awards $1.8 million to whistleblower

    Securities

    On August 29, the SEC announced that it had awarded more than $1.8 million to a whistleblower who provided “critically important” information and assistance to a “programmatically significant enforcement action.” The SEC’s order noted that without the whistleblower’s tip, the violations would have been difficult to identify because the misconduct happened abroad. The order does not provide any additional details regarding the whistleblower or the company involved in the enforcement action. Since the program’s inception in 2012, the SEC has awarded approximately $387 million to 66 whistleblowers.

    Securities SEC Whistleblower

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