- The CFTC’s whistleblower program could go bust thanks to a high-dollar payout.
- Whistleblowers earn millions by providing inside knowledge about people defrauding the government.
- Whistleblower cases are rising as government agencies are expected to do more with fewer resources.
- See more stories on Insider’s business page.
Editor’s note: This story was originally published on March 29, 2021 and later updated to include news about the CFTC’s whistleblower program.
When Swedish billionaire Thomas Sandell reached a $105 million tax evasion settlement with New York State earlier this year, one lucky anonymous tipster walked away with $22 million.
But big payouts like these, which reward people for sharing tips about fraud with government agencies, are jeopardizing the programs that incentivize tipsters to come forward in the first place.
The Commodity Futures Trading Commission’s whistleblower program is in jeopardy over a proposed $100 million payout to a former Deutsche Bank executive, which would deplete its funds, the Wall Street Journal reported May 11.
The ex-Deutsche Bank executive provided information to the CFTC and Justice Department that the bank manipulated the London Interbank Offered Rank, or Libor. The whistleblower’s tip led to $2.5 billion in settlements from the bank in 2015, including $800 million to the CFTC.
When whistleblower information leads to settlements, the tipsters can earn a percentage of the financial penalties paid by wrongdoers. But the CFTC can only replenish its whistleblower fund when it drops below $100 million, the Journal reported. In the meantime, the money goes to the U.S. Treasury.
Since many of the CFTC’s settlements are much smaller — around $5 million or less, the Journal reported — a blockbuster payout can drain the agency’s whistleblower payment pool much faster than it can be replenished.
Massive whistleblower payments are rare across the board, but the tipsters behind them are responsible for bringing some of the most infamous financial fraud in recent years to light. Despite the cost, experts don’t see the programs going away anytime soon.
US whistleblower laws date back centuries.
A whistleblower is someone who shares credible information about financial fraud, criminal activity, unsafe working conditions, or other improper conduct with a government agency. If the information leads to a settlement, whistleblowers earn a percentage of the financial penalties paid by wrongdoers. While the process can take years, tipsters stand to earn millions of dollars for their valuable information.
The US government has granted some protections to whistleblowers since 1778, and the False Claims Act — signed to law by President Abraham Lincoln in 1863 — paved the way for whistleblowers to share information about people trying to defraud government programs. Also known as the Lincoln Law, the False Claims Act allows private citizens, usually anonymously, to file cases against alleged fraudsters on behalf of the government.
Nearly 75% of the $2.2 billion False Claims Act settlements and judgments reported by the federal government in 2020 came from whistleblower complaints.
In the financial world, the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), and the Commodity Futures Trading Commission (CFTC) have all built whistleblower programs over the last 20 years.
Whistleblower tips have uncovered some of the most notable cases of financial fraud in recent years. UBS in 2009 paid a massive $780 billion settlement for helping wealthy American customers evade taxes, and Merryl Lynch in 2018 paid a $415 billion settlement for misusing billions of dollars of customer funds. The whistleblowers who tipped off authorities in those cases made $104 million and $83 million, respectively.
Whistleblowers are among the most effective and efficient law enforcement tools.
Sandell, the Swedish billionaire, dodged his New York tax liability through an elaborate scheme in which he moved to London and opened a new Florida office in order to pretend his hedge fund wasn’t operating in New York, according to the state’s attorney general.
The settlement was reached in February, but it took years to get there. New York began its investigation in 2018 after an anonymous whistleblower, known only as “Tooley LLC,” filed a False Claims Act case against Sandell. The case is a textbook example of the public-private law enforcement partnerships enabled by the Civil War-era law, according to Tooley’s lawyer, Randall Fox. “It shows how persons with useful information can multiply the government’s resources to help uncover and prove frauds that otherwise may never have been revealed,” he said after the settlement was announced.
New York has recovered nearly $600 million from tax evasion cases since it started allowing tax False Claims Act claims in 2010. Those who blew the whistle earned more than $100 million, according to the firm representing Tooley. And that’s just tax cases in the Empire State.
The Securities and Exchange Commission has doled out more than $700 million to tipsters since the agency launched its own whistleblower program a decade ago. Individual payments have ballooned in recent years: the SEC issued a $114 million whistleblower award last year—its largest-ever payment. Other agencies, like the IRS and CFTC, have paid whistleblowers record highs of $104 million in 2012 and $30 million in 2018, respectively.
“Whistleblowers are the most effective and efficient law enforcement tool in the modern era,” Jordan Thomas, who helped create the current SEC whistleblower program and now leads law firm Labaton Sucharow’s team of whistleblower attorneys, told Insider. “Whistleblowers are so efficient, they’re basically auxiliary law enforcement folks who identify wrongdoing and provide evidence.”
Whistleblowing is a long game.
Getting a whistleblowing payout isn’t easy. It can be a stressful job and can take years of quietly waiting.
While various laws protect whistleblowers from retaliation, sharing a confidential tip is still a “very risky proposition” for employees who want to stay employed because there’s no truly-safe roadmap, according to Wharton School professor Janice Bellace.
Lodging an anonymous complaint can also mean spending years in the shadows while government agencies investigate your workplace or peers.
The SEC, for example, said it usually takes between two and three years to investigate fraud claims. After the agency takes action, it takes even longer for a whistleblower to apply for an award; for the agency to review their claim; and for the whistleblower to appeal if they’re not satisfied the award matches their contribution to the case.
“People who blow the whistle really have to have the long game in mind and keep a long-term mindset, knowing they won’t get paid anytime soon,” said Thomas. He stressed that it’s not enough for a potential tipster to have information — it has to be detailed and correct, and the whistleblower needs courage as well as personal and professional allies who can support them through the lengthy process.
Thomas estimates that less than 1% of SEC whistleblower cases are eventually successful, meaning the tipster gets paid.
Even though the process can be long and arduous, Thomas doesn’t expect whistleblowers to go away anytime soon. Government agencies are under-resourced and exceedingly rely on them, he said.
“The IRS is doing fewer audits of wealthy people than ever before while working with 1950s-level resources,” he said.
Whistleblowing is also a boon for the lawyers that represent anonymous tipsters. Most whistleblower lawyers work on contingency, meaning they front the costs for trial prep and litigation and are then paid a portion of the whistleblower’s award. Contingency fees vary, but successful whistleblowers can expect to pay their lawyers 30-40% of their award.
State-based whistleblowing opportunities are growing.
The False Claims Act allows whistleblowers to bring claims against people defrauding the federal government, and federal agencies like the IRS, SEC, and CFTC use whistleblowers to investigate financial crimes. But state governments have also begun to see the value of whistleblowing.
In addition to New York, 20 other states will work with whistleblowers to combat multiple types of fraud under the False Claims Act, and another eight states will use the law for healthcare fraud cases.
New York is also part of a growing group of states that allow False Claims Act cases related to tax fraud.
That’s what happened in Sandell’s case. New York’s attorney general said the state might not have ever known about his tax evasion without the whistleblower’s help. The tipster’s law firm, Kirby McInerney, worked with state authorities on the investigation after “Tooley’s” lawsuit was filed.
Fox, the whistleblower’s lawyer, said in an email that the case moved at “record speed,” taking 28 months from complaint to settlement instead of the seven to 10 years estimated by the IRS program.
Erika Kelton, a whistleblower lawyer and partner at the law firm Phillips & Cohen, said the opportunity to work directly with the prosecution is an important element of state and local False Claims Acts. With federal agency whistleblower programs, whistleblowers do not initiate a lawsuit and there isn’t a complaint filed in court. Tipsters who bring information to the IRS, for example, typically aren’t involved in the agency’s investigation, according to Kelton.
“The IRS really freezes out whistleblowers because cases take forever to be resolved, the agency is tight-lipped about the status of the investigation, and the IRS doesn’t take advantage of the expertise of the whistleblowers or the attorneys who represent them,” Kelton said.
This means tax-fraud whistleblowers will increasingly look for ways to bring their tips to New York law enforcement to be more involved in the investigation process. Tipsters can work with a state in addition to passing along the information to the IRS, Kelton said.
Fox added that New York provided a blueprint for other states to incentivize tax whistleblowers, which will “increase their tax revenues, encourage compliance among those who realize that violations will be caught, and promote fairness for the taxpayers who follow the rules.”
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