SEC Whistleblower Program Begins Paying Awards

Steve Berman on Aug. 31, 2012 | 0 comments

2012 is quickly shaping up to become The Year of the Scandal on Wall Street – a tall order considering the run of disrepute we’ve seen over the past decade. One would think that just four years since the financial crisis that nearly brought our country to its knees, we would have learned some lessons about greed, malfeasance and outright fraud perpetrated on the American people by major financial institutions and publicly traded companies.

One would think. But that’s not the way it is playing out.

Take JPMorgan Chase. In May, it stunned investors when it announced the investment house had suffered a $2 billion loss in trading of complex derivatives called credit-default swaps. If the term credit-default swap sounds familiar, that’s because credit-default swaps on home loans played a leading role in causing the recession. I would have hoped JPMorgan’s traders learned their lesson the first time around.

Then, a week later, Facebook effectively botched the largest IPO in recent memory, seeding more uncertainty and doubt with already skittish investors. From the start, the offering was delayed and plagued by trading delays and other technical difficulties. Shortly after the IPO, Facebook’s stock began to fall, finally settling near 50 percent of its initial value.

Even worse, news reports suggested that Facebook’s lead underwriters reduced forecasts for earnings, but rather than making information public, selectively disclosed the information to key investors. Those claims will now be tested in court in a class-action lawsuit filed on behalf of investors who were allegedly left out of the loop.

Now to June: several regulatory agencies announced more than $450 million in fines against Barclays Bank for attempting to manipulate the London Interbank Offered Rate, or Libor, a key benchmark used to set interest rates on loans in the United States and internationally. While this sounds ethereal and complex, the scandal most likely affected the interest rates the average US consumer paid on mortgages, car loans or even credit cards, costing us billions of dollars in inflated interest rates.

These three scandals suggest that our financial sector is still plagued by corruption, patronage, and secrecy, the factors that brought our economy to the brink just a few years ago.

Once we staggered back from that near economic collapse, lawmakers clamored that we needed to do more in terms of oversight, arming organizations like the SEC with the tools necessary to hold these rogue actors in check.

It was good in theory, but doomed in practice.

The truth is that – no matter how well intentioned the policies – the SEC lacks the funding and personnel to prosecute even a small fraction of the fraud on Wall Street, let alone prevent it. Metaphorically, they are outgunned, and outnumbered.

I am hopeful, however, because the SEC now has a new tool to prosecute fraud – millions of honest, well-intending Americans.

The SEC’s new whistleblower program, established last year, offers rewards to those who report fraud and wrongdoing to the agency. These rewards can be significant, totaling up to 30 percent of the funds the government recovers after an SEC enforcement action.

And the program is working - after many appeals and procedural hurdles, the SEC finally announced the first whistleblower award under the program. The whistleblower, who chose to remain anonymous, will receive $50,000 as a reward for providing information regarding violations of the securities laws.

That might not seem like a lot of money in the grand scheme of things, but the announcement is much more than that – it is the proof-of-concept, a warning if you will, to every CEO that is considering using creative accounting to explain away a loss, or brokerage-house executive who is pondering trading on information he or she received sub-rosa. The warning is that if you plan to commit fraud, you better be very good at covering your tracks because now instead of just having to fool an understaffed agency, now you need to deceive every honest person in your organization who now has the power and the incentive to hold you accountable.

My prediction is two-fold.

First, I believe we will see a spate of announcements regarding prosecutions of bad actors, all resulting from tips from whistleblowers. This new program will shine the light of public scrutiny, and scurry they will.

Second, I firmly believe that, thanks to this program, we will see a slow but steady improvement in the behavior by Wall Street, in large part because of this virtual oversight.

Whistleblowers should be cautious, however. I would advise any potential whistleblower to speak with an experienced attorney before talking with the SEC. The SEC is receiving several tips each day, and a private whistleblower attorney can help develop your claim so that the SEC is more likely to take your case.

You can learn more about our whistleblower practice at

Toyota Owners Forced to Continue Driving Ticking Time Bombs

Steve Berman on Jun. 1, 2012 | 0 comments

In the critically acclaimed novel Catch-22, a World War II pilot asks his squadron’s doctor about the sanity of another pilot, who continues to fly suicidal missions day after day with no fear of death.

The doctor confirms that the pilot must be insane and therefore should be grounded from any future missions. However, there is a catch. The pilot must ask to be grounded, but “anyone who wants out of combat isn’t really crazy, so I can’t ground him. That’s Catch-22.”

I was recently reminded of Catch-22 when a judge issued a ruling in our case against Toyota. In the case, we allege that a defect in the electronic throttle system and other part failures in most Toyota models cause sudden, unintended acceleration, or SUA, resulting in deadly car wrecks and crashes. We have asked the court to award damages to Toyota owners so that they can replace their defective vehicles and we seek an order requiring Toyota to install a fail-safe mechanism that can prevent SUA.

The judge’s decision uses reasoning right out of the novel. The trial court ruled that Toyota owners in Florida and New York may not sue Toyota until they have personally experienced SUA.

SUA often leads to serious injuries or even death. Like the pilot in Catch-22, the Court’s reasoning seems to be that drivers must continue to risk their lives driving a defective vehicle that is likely to accelerate suddenly out of control at any moment. Only after the car is wrecked and the driver injured can they challenge Toyota for selling them a defective product.

Now that’s a Catch-22.

Between 2000 and 2010, The National Highway Traffic Safety Administration (NHTSA) reported 89 deaths and 57 injuries attributed to unintended acceleration in Toyota vehicles. It’s difficult to understand Judge Selna’s decision in that context. How can we tell Toyota drivers in Florida and New York to roll the dice every time they drive their cars, risking serious injuries and even death? How can one say a car that has a risk of SUA is worth the same as a car that has a much lower risk and has better fail-safe features in the event SUA occurs?

Consider just one story of a driver who experienced SUA. On April 19, 2008, Guadalupe Alberto of Flint, Michigan, drove her 2005 Toyota Camry to work, a routine drive she had taken hundreds of times before.

She had never received a speeding ticket in all of her years of driving, but on that day, Ms. Alberto’s Toyota suddenly accelerated out of control, jumping a curb and flying through the air before crashing into a tree. She died instantly.

According to the Court’s reasoning, Ms. Alberto would have had no legal claim against Toyota until she experienced SUA. In other words, until it was too late.

For its part, Toyota has issued several recalls to “fix” the SUA problem, blaming sticky pedals and defective floor mats, but has denied that there is any defect in the electronic throttle system. All the while internally Toyota has replicated SUA in customers’ cars and acknowledged the cause as “ECM failure” or “ECU failure” or cause “unknown”.

A recent story on CNN’s Anderson Cooper lent additional proof to our theory. CNN’s investigators found an internal document, written in Japanese, which appears to note a SUA problem discovered in a test vehicle during pre-production trials. According to one translation commissioned by CNN, the document notes that the test vehicle experienced “sudden unintended acceleration due to wrong judgment made by the full speed range Adaptive Cruise Control (ACC) System.”

Even more alarming, Toyota did not share this document with the National Highway Traffic Safety Administration (NHTSA), who conducted an official investigation into SUA.

Beyond the immediate impact on Toyota owners in New York and Florida, the court’s decision will set an unfortunate precedent for similar cases in the future.

For instance, a video recently went viral on Youtube showing a 2010 Chrysler Jeep suddenly light on fire. In the video, the driver reacts quickly, swerving off the road to avoid running a red light.

The driver’s video explains that this is a known defect, but Chrysler has failed to respond to the problem. According to the precedent set by Judge Selna’s Toyota decision, Jeep owners who fear for their lives must wait for their cars to light on fire before they can take legal action against Chrysler.

In my view, the decision misses the entire point of our lawsuit. Car owners should not be forced to drive a ticking time bomb and wait until they are seriously injured in an accident. They deserve justice now, including compensation for the replacement of their defective and unsafe vehicles.

We intend to appeal this ruling and we will continue to fight for justice for Toyota owners throughout the United States. You can learn more about this litigation at

Whistleblower Earns $14 Million Reward in Case against Bank of America

Steve Berman on May. 29, 2012 | 0 comments

In 1998, I worked with a number of very talented attorneys general to hold Big Tobacco accountable for the damage it caused to millions of Americans through years of deception, improper marketing and a number of other nefarious tactics. Until this coordinated effort, no one – not attorneys general nor the civil justice system – could lay a glove on Big Tobacco. They had a virtual army of attorneys and lobbyists, and mountains of cash to fund their effort to avoid accountability.

And it worked, for a while.

But thanks in part to a courageous whistleblower, former Brown & Williamson executive Jeffrey Wigand, Big Tobacco finally had its day of reckoning, and eventually agreed to an omnibus settlement of $206 billion – the largest settlement ever at the time.

Mr. Wigand publicly spoke out and said what we all knew, but couldn’t prove – that the tobacco companies knew cigarettes are addictive and lethal. He also explained that companies were using additives known to increase the risk of cancer and increasing the amount of nicotine in order to make them even more addictive.

Yet, in coming forward, Mr. Wigand took a monumental risk. He also paid a price for what he did; he found himself in a series of legal battles and the victim of a smear campaign orchestrated by his former employer. His wife divorced him and his two daughters left with her.

And as he attempted to shine the light of public scrutiny on Big Tobacco, he soon found that light reflected back at him. He had to defend himself and his accusations at every turn, in the media and in the courtroom.

Of course, Mr. Wigand was ultimately vindicated and is now heralded as a hero and a champion of the public interest. Hollywood told his story in the movie “The Insider” starring Al Pacino and Russell Crowe.

His story showcases the risks and rewards that are part of being a whistleblower. David can beat Goliath, but that doesn’t make the prospect of taking on Goliath any less scary. When challenged over big issues, corporations have the power and resources to fight vigorously and delay justice for years.

Still, I think the situation for whistleblowers is improving in this country. There is a renewed sense, driven in part by the disastrous behavior we all saw on Wall Street before the financial crisis, that whistleblowers should play an important role in deterring corporate fraud.

Consider the United States Congress, who took Wall Street’s malfeasance to heart and passed the Dodd-Frank Financial Reform bill, which includes two new whistleblower programs. Under the programs, individuals who report violations of securities or commodities trading and reporting laws may receive up to 30 percent of any fines or penalties the government collects.

Another longstanding law passed during the American Civil War called the False Claims Act protects whistleblowers who report fraud committed against the government. Congress recently strengthened this law to catch more fraud and protect additional whistleblowers. Those who present a valid legal claim and recover the government’s money are entitled to a reward. We represent a whistleblower under the False Claims Act, and like Mr. Wigand, he has fought a long, costly battle against powerful corporate interests.

Our client, a former employee at appraisal company Landsafe named Kyle Lagow, blew the whistle on Countrywide Financial, now owned by Bank of America, for what he believed to be widespread appraisal, appraisal review and underwriting fraud. First, he blew the whistle to the highest levels of the company. When they wouldn’t listen, he filed a lawsuit. He alleged that Countrywide and home developing giant KB Homes, among others, used a number of tactics to inflate the appraised values of homes and set up a sham review process.

Accurate home appraisals are important for many reasons. For one thing, they serve as a check on greedy home developers or bankers hoping to cash in on interest payments from an overvalued mortgage.

They are also very important for the Federal Housing Administration (FHA), a federal agency that helps low- and moderate-income homebuyers afford homes by insuring loans. Under the program, if a house goes into foreclosure, the government steps in, pays the bank the remaining amount due on the mortgage and takes ownership of the property. In order to qualify a loan for FHA endorsement, underwriters must follow strict guidelines, including guidelines about proper appraisals. If appraisals are inaccurate and a loan goes bad, the government is forced to pay an inflated price. This helps people who might otherwise have a hard time affording a home secure a loan, but it goes without saying that the government has to be really careful about what loans they insure.

What Lagow alleged was a pattern of violating the most important rules to qualify for FHA endorsement, including inflating appraisals across the entire country. He claimed that when the real estate market collapsed and homes began to go into foreclosure in record numbers, the government was forced to overpay for the full cost of the mortgages.

Lagow’s first sign that something was deeply wrong at Landsafe and Countrywide came in early 2005, when he had a meeting with the new LandSafe president, Todd Baur, who expressed interest in having Lagow’s team of appraisers work on large multimillion dollar properties. Lagow questioned the decision, noting that such properties require specialized experience and an incredible attention to detail to produce accurate appraisals. He felt that his appraisers simply weren’t ready for such a challenge, but Baur disregarded his concerns and pushed ahead with the project.

This was the first symptom of a much wider problem. What Lagow came to notice at both Landsafe and Countrywide was a culture that disregarded the most important rule of proper appraisals; to be neutral, appraisals must be completely independent of the lending side of the equation.

Instead, Landsafe and Countrywide executives, Lagow alleged, sought to break down the federal regulations that separate appraisers and bankers, creating an environment ripe for corruption. He attested that President Baur instructed Landsafe managers that the appraisal unit needed to change and that its role was to facilitate the closing of loan deals negotiated by Countrywide.

Lagow claimed that he saw the potential for corruption fully realized when a joint venture was announced between KB Homes, one of the nation’s largest home developers, and Countrywide. He recruited appraisers to work on KB Homes’ properties, only to see his staff turned away and told that the homebuilder would decide who would perform appraisals.

Lagow claimed that KB Homes was given the power to turn away any appraiser who refused to certify as accurate whatever inflated price the developer was trying to push on a homebuyer. If you think that sounds like a rigged system, you’re right.

An extreme example of this policy in practice was found in Houston. Lagow alleged that he uncovered a scheme in which only a single appraiser was given every single KB Homes project in the city. That appraiser somehow managed to do more than 400 appraisals per month.

We’ve all heard about robo-signing lenders who claimed to have a handful of workers reviewing thousands and thousands of pages of mortgage paperwork each day. It is hard to believe those workers actually paid very much attention to each case they reviewed, and it is even harder to believe that an individual conducting 400 appraisals in a month could possibly do a full and fair analysis of the properties’ values.

What is even more shocking, but makes perfect sense when you consider KB Homes’ and Countrywide’s motives, is that Lagow claimed this appraiser was paid far more than most appraisers, $450 per appraisal. That sure sounds like a quid pro quo to me: endorse inflated appraisals and be paid an above-market rate for the trouble.

Of course, there were upstanding appraisers who refused to cooperate. As he dug deeper, Lagow claimed he discovered explicit blacklisting of those appraisers whose conscience and professional integrity prevented them from participating in inflating home appraisals.

In 2007, for instance, Lagow claimed that an appraiser he recruited precisely because the appraiser had high ethical standards told Lagow that he had been told if he refused to change his appraisals, he would be no longer assigned to KB Homes properties. Lagow alleged that the appraiser in question refused to sacrifice his integrity, and was ultimately blacklisted not only from KB Homes, but from all Countrywide projects.

Lagow continued to raise these concerns with management, but to no avail. Instead, he was instructed to keep all ethical concerns out of writing.

At the same time, he was fighting a battle to obtain the documents necessary for his appraisers to even do their jobs effectively. He claimed that KB Homes and Countrywide refused to provide final sales documents. By withholding these documents, Lagow’s appraisers were forced to use other, less accurate price listings to determine how much a home had sold for.

This is important, because one of the biggest factors in appraising a home is the answer to the question, “What have comparable homes in the same area sold for recently?” Lagow believed that KB Homes was clandestinely reducing home prices at the 11th hour in order to secure a deal, but reporting the original, higher prices for the public data. This, Lagow claimed, corrupted the data his appraisers were forced to use and encouraged inflated appraisals. Despite repeated requests for the documents, Lagow claimed KB Homes and Countrywide did not provide them.

As Lagow dug deeper and allegedly found more illegal activities, he became more desperate to convince senior executives at the company to hear him out. The more vigorously he raised the alarm, however, the more he was marginalized and his job responsibilities were reduced.

Finally, he was contacted by a senior loan officer, who asked him to “review” appraisals in order to find “missed” value. As far as Lagow was concerned, this was a direct request to participate in a conspiracy to commit fraud. He noted that because no one had given his team the appropriate documents, any analysis would not support a change in the appraisals.

Lagow claimed that this did not stop the scheme. He noticed over the next two years that if an appraisal came in too low for Countrywide and KB Homes’ taste, it would mysteriously disappear from the files. Then, a new appraisal with a higher value would just as mysteriously appear and the loan would go through.

Finally, in absolute desperation, he sent two emails to the CEO of Countrywide, Angelo Mozilo. Shortly after, he was fired, told the company wanted to move “in a different direction.”

Like tobacco whistleblower Jeffrey Wigand, Lagow suffered over the next several years. Unable to find a job and suffering from cancer, his house went into the foreclosure process. His wife and five kids also suffered the punishment for having reported fraud, experiencing poverty and hardship.

Lagow did not give up, however. He contacted our law firm and filed a lawsuit under the False Claims Act. The government has resolved a $1 billion settlement with Bank of America, based in part on Lagow’s claims and evidence.

There is light at the end of the tunnel for Lagow, as he will receive a $14 million reward for his part in the case. The reward is well deserved.

The importance of whistleblowers today cannot be understated. Lagow’s courage, tenacity and willingness to walk through fire to expose wrongdoing are the defining virtues of a good citizen. His sacrifices humble all of us, and should push us to all think more deeply about how we can contribute to the public good.

Surprise Attack: Capital One's Balance Transfer Program

Steve Berman on Jan. 10, 2012 | 0 comments

On Christmas Day, 1776, with morale at an all-time low, George Washington famously crossed the Delaware River, launching a surprise attack on the British and their German mercenaries in Trenton, New Jersey.

The rout of the British forces and their Hessian mercenaries was a pivotal victory for Washington’s forces, and according to many historical scholars, a pivotal moment in turning the tide in terms of morale and recruiting.

Washington was credited with the victory thanks to his genius in perfectly timing the attack. He crossed the Delaware on Christmas night, and hit Trenton at 8:00 a.m.

The enemy, tired from a long night of celebrating, were not prepared for the sudden and unexpected attack. Washington’s forces quickly won the ensuing battle.

Fast forward 235 years, and I have to wonder if credit-card giant Capital One had the same thing in mind when they came up with their balance-transfer scheme – catch consumers where they weren’t looking and when they least expected a surprise.

I am talking about the Capital One Balance Transfer scheme.

Capital One’s program was offered as a means for consumers to transfer debts from one creditor to another. In principal, this can be advantageous to consumers by helping them to consolidate debts, or even save money by locking in lower interest rates.

Capital One promised cardholders a zero percent Annual Percentage Rate (APR) for the first year after a balance was transferred. At the same time, the company allegedly told its cardholders that when it came to normal purchases on their cards, they could avoid interest payments so long as they paid the balance on time each month.

On the surface, this program sounds appealing to consumers. For instance, students might use it to reduce the compounding interest on their debt for a year.

However, the way the program actually worked in practice made it very unappealing to cardholders.

Suppose a recent college graduate who has $10,000 in student debt decided to transfer that debt to Capital One. Once the debt was transferred, the cardholder’s account reflected two balances. The first balance was the student debt. The second balance, known as the “purchase balance” was the normal credit card debt incurred by using a Capital One card for normal purchases.

Now suppose that after transferring the debt, the cardholder spent $700 over the course of a month, resulting in a $700 purchase balance. The cardholder received a credit card bill and paid $700 to cover the card’s balance and prevent interest charges.

The next month, to the cardholder’s surprise, the credit card bill reflected a $700 reduction in the student loan debt, but no payment on the credit card debt. Instead, the bill showed interest charges on the balance that the cardholder believed they had paid off.

In other words, instead of applying the payments to the credit card, Capital One applied the payment to the larger, interest-free loans, resulting in interest charges. In some cases, these charges may be as high as 13 percent.

This came as a shock to many Capital One cardholders, who must have felt like the British at Trenton; caught completely unaware, despite paying their bill on time.

We believe that Capital One’s program is deceptive and that the company failed to accurately communicate how the program would work to cardholders.

That is why we have filed a class-action lawsuit on behalf of cardholders, alleging that the company violated several consumer protection laws in various states.

Our case will continue to move forward and we hope to force Capital One to pay back cardholders who allege they were deceived by the program.

The lesson for consumers is that you should always ask questions about credit card offers and do your best to read the fine print. If you pay close attention, you can spot some of the more obvious scams.

I sincerely hope that the Consumer Financial Protection Bureau, a new federal agency charged with exposing these scams, will act aggressively in the future.

Unfortunately, though, simply being vigilant is not a foolproof way to avoid scams and credit card companies are adept at exploiting loopholes to bypass regulators. Sometimes, when a credit card company is particularly skilled at deceiving cardholders, legal action may be the only option to recover lost funds.

Whistleblowers an Effective Tool to Catch Tax Cheats

Posted by Steve Berman on Sep. 27, 2011 | 0 comments

A few weeks ago, perhaps the most reclusive and storied tax cheat in the modern era was discovered after more than 20 years in hiding. William Millard, the billionaire tech tycoon who founded ComputerLand, a popular retailer during the 1980’s, was found by investigators on Grand Cayman Island in the western Caribbean.

Millard reportedly went missing in 1990, when he and his family left Saipan. The local government, who claims he still owes millions in taxes, has been trying to track him down ever since. In the meantime, his outstanding tax bill has climbed past $100 million.

The arrogance of such behavior aside, Millard’s case is fascinating because he was able to stay hidden from the authorities for so long. One would assume that, at some point, someone would spot him and turn him in. After all, he was hardly hiding very effectively; authorities tracked him down to a large mansion, not exactly the best hideout.

Millard’s case reflects two key issues that governments face when collecting tax revenues. First, it can sometimes be hard to prove a violation and track down the tax cheat. Second, and this is the larger issue in the Millard case, complicated offshore structuring and strategic use of loopholes can make assets difficult to find.

Michael Kim, one of the lawyers working on that aspect of the case said, “This is one of the most sophisticated and complicated cases of offshore asset structuring that we have ever seen. He’s had more than 20 years to move money all over the world.”

In such difficult cases, governments need all the help they can get. A crucial resource in these investigations are insiders, especially accountants and auditors at major corporations, who report violations to the government. In order to encourage these whistleblowers to come forward, Congress passed a law in 2006 that rewards them with up to 30 percent of the money collected in a successful enforcement action by the IRS.

This reward can be quite the motivation. Consider that if someone had informed on Millard under the program, he or she might eventually receive $30 million, while at the same time saving taxpayers $70 million.

The Government Accountability Office, or the GAO, Congress’ watchdog and research agency, recently evaluated the program. Five years after the program’s passage it is struggling, according to the GAO’s report.

The scope of the problem is daunting. A number of loopholes have allowed corporate tax cheats to draw out the process for years. In fact, according to the report, two-thirds of the claims submitted in 2007 and 2008 are still in process.

Well-intentioned privacy regulations also stand in the way of the program’s success.

For instance, the GAO found that the IRS fails in many cases to effectively communicate with whistleblowers. In keeping with its strict interpretation of privacy protections, the IRS will not inform whistleblowers on the progress of their claim, for fear of violating the law by releasing information about the violator’s taxes.

The only thing the agency will do, according to the GAO, is confirm that the claim is either open or closed.

If the IRS finally rejects a whistleblower’s claim, no reasons are given, again, for fear of violating regulations governing the release of confidential tax information. After all, if the IRS were to tell the whistleblower that the tip turned out to be inaccurate, that would be disclosing that the IRS conducted an audit.

Even when the IRS does take a case and succeeds in bringing a large tax cheat to justice with the help of a whistleblower reward, the agency does not publicly comment on the reward, again for fear of revealing confidential information.

This information blackout discourages potential whistleblowers from reporting what they know. After all, without a credible example of success and a high probability of a reward, a potential whistleblower is unlikely to risk their career in order to expose the truth.

Yet, it is hard to blame the IRS. They are playing it safe and following the rules, and I would suggest that legislators look at the issue. A balance has to be established between protecting the privacy of alleged tax violators and giving whistleblowers the communication and reassurance they need to come forward.

Perhaps the biggest challenge facing the program is the agency’s limited resources. Implementing some of the reforms suggested by the GAO may not be possible at this time.

Limited resources at the IRS have long been a problem, but with the current cuts being considered, conditions have gone from bad to worse. Earlier this month, the Senate Appropriations Committee voted in favor of a four percent cut to the IRS’ budget. The House Appropriations Committee voted to cut even more.

I would argue that these cuts are ill-advised, not simply because the program is valuable, but because successful prosecution of claims against tax cheats will create revenue, helping to solve our debt problem by closing the over $350 billion gap between what the government is owed and what it collects each year.

The benefits of this program clearly far outweigh the costs, and it is both the taxpayer and the government’s interest to give the IRS the resources it needs.

Even if budget cuts are enacted, there are steps the IRS can take to improve the program. Senator Chuck Grassley (R-IA), the architect of the whistleblower program, recently argued that the IRS is neglecting a crucial tool that can help it to take on more cases without spending more money.

According to the senator: “A key provision of the whistleblower law, and a big part of the success of the False Claims Act provisions that I co-wrote, is to allow the government to leverage the whistleblower’s resources. It’s worrisome that the IRS hasn’t taken advantage of this provision even once. The tax cheats shouldn’t be the only ones who can take advantage of outside legal talent.”

In other words, the IRS can employ private attorneys, who represent whistleblowers, to do research and develop claims for the IRS. This could lighten the load on the agency, help it process more claims and ultimately, catch more tax cheats and collect additional revenue for the treasury.

That’s why, when the government of the U.S. Commonwealth of the Northern Mariana Islands decided to investigate William Millard’s disappearance in hopes of forcing him to pay his outstanding taxes, they hired a private law firm. That firm’s investigation led to a breakthrough that uncovered Millard.

The IRS would do well to remember that it has allies in its battle against tax cheats, both in the form of whistleblowers and their attorneys.

Improving Whistleblower Programs

Posted by Steve Berman on Aug. 29, 2011 | 0 comments

In politics, language is everything. The politicians know that if you frame an issue properly, you are halfway to winning the battle. That’s why we often end up with names for laws that are terribly misleading or otherwise infused with partisan language.

There are many examples of this in the storied and often checkered past of American politics. Ronald Reagan had a delft touch in this; he came up with The Peacekeeper Missile. Two decades later, the Republican Party continued the practice of ‘winning by framing’ when the anti-choice wing introduced a bill banning certain types of abortions by calling the legislation “The Partial Birth Abortion Ban.”

Today, the trend continues. The Patient Care and Affordable Care Act becomes Obamacare. The Patriot Act was a convenient acronym and, to be fair, much easier to say than its full name, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act.

Recently, a piece of legislation called the “Whistleblower Improvement Act of 2011” was introduced in the U.S. House of Representatives. But far from improving whistleblower programs, the legislation would stop them before they get off the ground.

The proposed law would require whistleblowers to report fraud internally first, almost certainly tipping off the wrongdoers and giving them time to destroy evidence. It would also strip protections for whistleblowers whose employers retaliate against them for turning informant.

The bill, introduced by Representative Michael Grimm of New York, is currently being considered by the House Committee on Financial Services. Although it may pass in the House, it is fortunately unlikely to pass in the Democrat-controlled Senate.

One of the programs such a law would undermine is the Commodity Futures Trading Commission’s (CFTC) new whistleblower program, which was finalized last week. The program, nearly identical to the Securities and Exchange Commission’s program, will reward whistleblowers with up to 30 percent of the recovery if they provide information that leads to a successful enforcement action.

This program will help expose fraud in a number of areas and help to prevent another financial disaster like the one we saw in 2008. For one thing, thanks to new mandates from Congress under the Dodd-Frank Financial Reform Bill, the CFTC will have the authority to regulate the swaps market.

The swaps market played an important role in the financial crisis when American International Group (AIG), a massive international insurance company, used swaps to insure the investments of companies that held risky mortgage-backed securities. AIG collected premiums from the holders of this incredibly risky debt, offering to pay its policyholders a specified amount in the event that the loans went bad.

Of course, we know now that these investments included sub-prime loans made by predatory lending institutions that knew, or should have known, that the loans could not be repaid on time. When the loans began to go bad, policyholders put in claims with AIG, which soon found itself bankrupt and in need of a bailout.

If someone at AIG, or any one of the financial institutions it insured, had spoken up earlier to alert the government that they were trading in loans that were almost certain to go bad, the government might not have been forced to bail out the company.

The CFTC also regulates commodity futures markets, in which investors bet on the future price of various goods, such as oil or gold. The potential for fraud in these markets is immense, and a robust whistleblower program will help to deter it.

For instance, when the price of gas began to climb to record levels late this spring, President Obama and the Department of Justice launched an official investigation. The investigation is continuing to look into the role that commodity traders played in raising the price at the pump and whether or not any illegal activities have taken place.

A robust whistleblower program will strengthen this investigation and others like it in the future. It will help deter fraud by raising the risk of an insider turning informant.

Such a tool is even more necessary because the CFTC is chronically underfunded and undermanned. The swaps market alone is worth approximately $600 trillion per year, and that is only one part of the agency’s job. Yet the agency only has a budget of $202 million. Instead of getting a budget increase along with its new responsibilities under Dodd-Frank, a bill recently passed by the U.S. House of Representatives would instead cut its budget by 15 percent.

The whistleblower program will help relieve the burden on the CFTC, allowing it to do its job more effectively, but its limited resources will mean that it can only take on the most well-developed and credible cases brought by insiders.

Private attorneys will be needed to develop clear and actionable claims for the CFTC. At Hagens Berman, we have extensive experience in financial fraud cases as well as traditional False Claims Act qui tam cases. We also have a track record of taking on and defeating some of the largest companies in the United States.

In the coming years, we will be representing whistleblowers that expose fraud in the areas the CFTC regulates, including the derivatives and commodities markets.

That fraud will not be brought to light if Congress dismantles the program, and that’s why, even if the name sounds nice, we can not endorse the Whistleblower Improvement Act.

Creative Destruction and the Ebooks Market

Posted by Steve Berman on Aug. 16, 2011 | 0 comments

In 1982, Clint Eastwood appeared before a congressional committee to testify about the dangers of VCRs. He testified alongside Jack Valenti, then president of the Motion Picture Association of America.

Fearing that the VCR would destroy the film industry, Mr. Valenti argued, “the VCR is to the American film producer and the American public as the Boston Strangler is to the woman home alone.”

Frankly, I think the line would have sounded better coming from Dirty Harry.

Americans bought the VCR despite the film industry’s objections and by innovating and providing high-quality recordings, the film industry benefited from the invention. It also encouraged innovation at theatres, which, having lost some of their power over moviegoers had to find new ways to attract customers.

In 1942, author Joseph Schumpeter coined the term “creative destruction” to explain how new technologies can supplant old ones and radically change an industry. When this happens, established players, usually relying on an older business model, do everything in their power stop innovation and preserve the status quo.

Nothing has caused more creative destruction in recent years than the internet. To name one example, the film industry now fears Netflix at least as much as it ever feared the VCR. So it is hardly surprising that in response to Netflix’ success, the industry is refusing to grant immediate access to new releases, fearing the availability of titles on Netflix will cannibalize rental and DVD sales.

The internet also threatened to change a much older industry; the book publishing business. Advances in display technology have enabled a new wave of devices that allow an entire library of ebooks to be stored in the palm of your hands.

To be fair, this isn’t the first time the book business has undergone such a change. Following the invention of the printing press in the 15th century, a monk and scholar named Johannes Trithemius wrote an essay entitled “In Praise of Scribes.” Trithemius worried that the printing press would not only put scribes out of work, but also make monks lazy. After all, copying the Bible by hand built character.

It should come as no surprise then, that the age-old giants of the book publishing business have concerns over the inevitable transition to ebooks.

In fact, we recently filed a fascinating lawsuit alleging that five of the largest publishers, with a helping hand from Apple, cooked up an illegal agreement to slow down and control the growth of ebooks by fixing prices.

Ebooks have certainly increased in popularity over the last few years, especially since Amazon’s release of the Kindle in 2007. There had been ebooks before then, of course, but the Kindle’s paper-like screen and realistic looking text made it the first device that was truly accessible to mainstream consumers. Reading on the Kindle is as easy as reading a real book.

Following the release of the Kindle, Amazon began offering large discounts on ebooks in order to encourage the adoption of the device. Amazon set a price of $9.99 for all new releases, even if that meant it had to sell some ebooks for a small loss.

This is in line with how books have been sold in the past, under what is called the wholesaler model. Under this model, publishers sell books to retailers like Barnes and Noble or Amazon who then can set a price for the book and resell it to consumers.

The wholesaler model encouraged retailers to compete on price, allowing consumers to bargain-shop for discounted books. While consumers celebrated $9.99 new releases, the publishers worried. If people became used to paying $9.99 for a fiction or non-fiction new release, they might demand low prices in the future.

Worse still, if Amazon became the dominant retailer in the ebook market, they too might pressure the publishers to lower their prices.

At the height of publishers’ anxiety over Amazon’s low prices, Apple was looking to get into the ebook market. With its iPad consumers who already used the iTunes store for music, movies and other media would be able to purchase and read ebooks.

We believe that Apple feared Amazon’s low prices, and worked with the publishers to cook up a plan that would not only force Amazon to raise its prices, but also help publishers to regain some of the power they had lost since the advent of electronic publishing.

Nearly simultaneously last year, five of the largest ebook publishers announced that they had reached a deal with Apple to publish ebooks for the iPad. This deal had two major components. First, it guaranteed that no ebook could be sold for a lower price than on Apple’s iBookstore.

Second, the deal restructured the age-old “wholesaler” model for selling books and instituted a new “agency” model. Under the model, retailers would no longer be able to discount books. Instead, the publishers would set the prices for ebooks, and retailers would be entitled to a pre-determined markup, in this case 30 percent, on each book sold.

Following signing of agreements with Apple, the five publishers approached Amazon and informed the retailer that due to both of these clauses in their contracts with Apple, Amazon would also have to switch to an agency model.

Amazon, faced with losing access to books from five of the six largest publishers, capitulated and agreed to the change.

The new system was clearly not helpful to consumers, as it meant that they could no longer shop for a bargain amongst retailers. Instead, prices at each retailer would be identical. Alongside the elimination of competition between retailers over price, the agency model allowed, we believe, a 30 to 50 percent increase in the price of the ebooks.

Each publisher’s decision to sign an agreement with Apple was not illegal by itself. What would be illegal, however, would be the coordination of five of the largest publishers joining forces to thwart price competition. Given the nearly simultaneous timing of the actions of these five publishers, and the fact that their actions coincided with the launch of the iPad, we believe there was coordination.

Apple’s part in this is troubling as well. The company played a large part in the transformation of our daily lives over the last several decades. If our suspicions are proven true, then it acted to prevent innovation in order to increase its profits.

We have filed suit against Apple and the publishers for violations of the federal antitrust laws. These laws protect consumers from artificially high prices caused by anticompetitive activity. More importantly, though, these laws encourage innovation in the marketplace by preventing competitors from joining forces to slow down market-driven changes.

In addition to our work to preserve innovation by litigating antitrust cases, we recently opened a new intellectual property practice. Our IP practice seeks to protect the rights of inventors, who often face infringement from large corporations with legions of defense attorneys.

Those inventors rely on patents, which provide an incentive for them to innovate, and to continue transforming our world for the better. Their rights as inventors must be respected.

Innovation is the lifeblood of our economy. Whether it is threatened by a large company determined to infringe on an inventor’s patent or by collusion and anticompetitive behavior by a group of companies, we will work tirelessly to preserve it.

I think that even Dirty Harry would agree with that.

A Banana's Shelf Life

Posted by Steve Berman on Jul. 7, 2011 | 0 comments

Bill Gates reportedly once said that “Intellectual property has the shelf life of a banana.”

It’s easy to see why he feels that way. Microsoft files numerous patent applications each year. If one of them doesn’t work out or is outdated by the time it comes to market, there is always another bunch of bananas that haven’t spoiled yet.

One patent is unlikely to make a huge difference for a company like Microsoft.

Individual inventors rarely have that luxury. For them, a single patent application may represent the sum total of a life’s work and fortune. They might spend years developing, refining and testing a single idea. They must consider very carefully before committing their financial resources in the form of filing fees and development costs.

An inventor’s worst nightmare is to use all of their resources patenting and bringing an idea to market, only to have the patent invalidated after the fact.

This point was proven when Microsoft recently argued, and lost, an important case in front of the Supreme Court. In their ruling, the justices refused to reverse a long-standing precedent in patent law, and in so doing, the court protected the rights of small companies and individual inventors.

The case was brought by a small Toronto-based company named I4I. I4I challenged Microsoft’s decision to include pieces of software, to which I4I held the patent, in Microsoft Word. The lower courts initially awarded a $290 million verdict to compensate I4I for Microsoft’s infringement of the patent.

However, Microsoft appealed the decision. Their argument hinged upon the allegation that I4I had used the software in a published product of its own over a year before applying for the patent.

As Bill Gates said so eloquently, new technology can spoil quickly. While the details were disputed, I4I may have feared that their intellectual property would be worth less if they waited. So before fully developing it, they used some preliminary ideas in their own software.

In this case, Microsoft alleged that that I4I’s sale of its software more than a year before filing for a patent invalidated the patent and exonerated Microsoft’s infringement. I4I countered Microsoft’s claim, saying that while it was true they released a piece of software that had elements of or similarities to the patent they ultimately filed, there were also major differences, and those differences meant that the patent they filed was based on new technology.

For decades, courts in the United States have required “clear and convincing evidence” to invalidate an issued U.S. patent. Microsoft sought to change all of that by asking the court to adopt a lighter standard. The standard, which would have required merely a “preponderance of evidence” would have made it easier for Microsoft to invalidate I4I’s patent, and thus escape paying over $290 million in compensation to the company.

The Supreme Court got this one right for a few reasons. First, the court correctly pointed out that the ball really is in Congress’ court. Clear and convincing evidence has been the burden of proof to invalidate a patent both before and after Congress passed the law noting that patents are “presumed valid” in 1952. If the standard is going to be changed, it should be changed by Congress.

Second, patent applications undergo an always long, and often rigorous, approval process to make certain that they are valid. Invalidating the patent without an equally rigorous process would greatly diminish their value. It would place an undue burden upon inventors, especially in a 21st-century economy that demands innovation and invention at a rapidly increasing rate.

Lastly, the court’s decision affirms that even the largest and most well-financed corporations with the best legal teams cannot always get away with patent infringement. It sends a signal to small companies that they can and should continue to innovate, file patents and defend their intellectual property.

Bill Gates was onto something when he pointed out that intellectual property has a short shelf life. That is exactly why it is important to protect the patent claims of small companies and individual inventors.

Whistleblower Program Will Help Expose Fraud

Posted by Steve Berman on Jun. 27, 2011 | 0 comments

In 2002, Time magazine gave its coveted “Person of the Year” award to three women, including Sherron Watkins, who was formerly the vice-president of corporate development at Enron. Before the company went bankrupt, Ms. Watkins helped to expose the company’s illegal accounting practices that brought down the company. After the company tumbled, investors lost tens of billions of dollars, pension holders lost over $2 billion and thousands lost their jobs.

I saw the damages firsthand when my firm worked as co-lead counsel in a case representing former Enron employees. Following the collapse of the company, the employees lost much of their retirement savings. We were able to secure a $220 million settlement for the employees, but that fell well short of what employees had lost; the bankrupt company simply did not have the resources to repay any more.

I often wonder how things might have turned out differently if someone within Enron has spoken up sooner. Back then, there were very few incentives for insiders to stand up and alert the Securities and Exchange Commission, the government agency that oversees securities fraud.

While one might hope that simple human decency would encourage those with knowledge of criminal activity to come forward, the reality is that the risks are often too great. Choosing to stand up and call out the fraud often means the end of an individual’s employment with the company. It also means one is ostracized not only within their company but often within their field.

What was missing from the system then was a positive incentive to convince whistleblowers to come forward. On May 25 the Securities and Exchange Commission (SEC) approved a new program that does just that.

Under the program, any whistleblower that provides original information leading to an SEC enforcement action with penalties totaling at least $1 million can receive up to 30 percent of the recovery.

Given that these cases often involve tens of millions of dollars, this represents quite an incentive.

Perhaps more importantly, the program includes special protections for whistleblowers that will encourage them to come forward and tell what they know. It is now illegal for an employer to retaliate against a worker who provides information to the SEC.

The program is part of the agency’s response to the financial crisis. Imagine if in 2006, insiders at various hedge funds had told regulators when they saw risky mortgage-backed securities being packaged in with safer investments. At the same time, the investors were mislead about the nature and risk of their investments.

If a credible whistleblower program had existed then, someone might have alerted regulators. Given the size of the fraud being committed, a whistleblower would have been able to make millions and society would have benefited by stemming at least some of the damage that ultimately brought the entire financial system down. Instead, insiders kept quiet, bet against the risky investments and stood idly by while investors on main street lost everything.

Again, while I wish that the fear of prosecution or simple human decency might drive insiders to inform regulators about fraudulent activities, the recent financial crisis demonstrates that these factors are simply not enough.

I think the SEC’s decision is an appropriate response to the financial crisis. First of all, it will help the SEC do its job more efficiently and effectively.

It is no secret that SEC is chronically overburdened and underfunded. The Dodd-Frank Wall Street Reform Bill signed into law by President Obama last July required that the SEC hire an independent consultant to assess the organization’s strengths and weaknesses and make recommendations on how to make the organization stronger. The consultant’s final report, which was released in March, concluded that the SEC needed at least an additional 400 additional employees to handle its current workload.

Instead of increasing funding, however, the U.S. House of Representatives passed a budget resolution in April that would decrease the SEC’s budget by $212 million. SEC Chair Mary Schapiro testified at a Senate hearing that this would mean cutting the SEC’s 3,800-member staff by 1,000.

All of this might sound like a hopeless situation, but the new whistleblower program should help relieve the burden on the SEC, allowing it to act more nimbly. The expected payout will encourage whistleblowers to work with investigators and attorneys in drafting their claim to the SEC.

Those investigators and attorneys will also help save the SEC time by more fully developing the legal case before the whistleblower files a claim. For instance, SEC enforcement official Stephen Cohen disclosed that a whistleblower in a large case recently came forward with enough evidence and direction to save the agency at least six months of time investigating.

The program will also encourage insiders to expose fraud to the light of public scrutiny. In fact, shortly after President Obama signed the Dodd-Frank bill, which authorized the creation of the program, the SEC saw a dramatic uptick in the number of high-quality tips reported. Before the bill passed, the SEC normally received about two dozen high-quality tips per year. Since the bill passed, the SEC has reported receiving one or two per day.

Perhaps most importantly, the program will deter future fraud. The increased risk of being caught will encourage large corporations and financial institutions to steer clear of illegal activities, saving investors and consumers millions in the long run.

There are some pitfalls with the SEC’s approach however, that whistleblowers should be careful to avoid.

The SEC is already overloaded with more cases than it can handle, so it will be looking only to pursue new cases that are thoughtful, well-reasoned and immediately actionable. Thus, whistleblowers will have to make sure to do the appropriate research and investigative leg work to present a clear and actionable claim to the SEC.

Professional investigators and attorneys who have experience in both whistleblower and securities law will play a crucial role in helping whistleblowers develop a claim that gets the SEC’s attention.

At Hagens Berman, we have extensive experience in both areas. We’ve won some of the largest settlements in decisions in securities law, unlike most other whistleblower firms, who have little or no experience in the area.

I’ve seen firsthand the impact that securities fraud can have on investors, employees and others. The SEC’s whistleblower program will help the agency deter malfeasance and prosecute violators, helping us to avoid another financial crisis.

Bill Gates' Towel Boy

Posted by Steve Berman on May. 19, 2011 | 0 comments

Several years ago, Scott Adams, the author of “Dilbert,” published a comic strip that has stuck with me throughout the years.

In the strip, Dilbert buys a new piece of Microsoft software. So excited to see what the software has to offer, he neglects to read the license agreement. He soon learns that there is a clause buried in the text of the massive agreement that mandates the user of the software must become Bill Gates’ towel boy for life.

Funny, sure, but if you spend time looking at the law, and the evolution of the law in this area, you will see more truth in this than humor.

Every day, busy consumers are confronted with agreements and contracts for the most mundane services and products. Online consumers routinely scroll through user agreements on software and websites without reading the text.

Consider the contracts consumers are given when purchasing a cell phone; do the cell phone providers really expect purchasers to wade through the pages of small type? Are the sales staff equipped to answer questions about the terms, or to explain the nuances of the arbitration clauses? Most would say “no” to both of these questions.

A few years ago, Vincent and Liza Concepcion, a Californian couple, purchased a new cell phone from AT&T. The phone was advertised as “free,” so the couple was understandably confused when they received a bill for $30.

What they found after doing some digging is that -- according to AT&T – ‘free’ doesn’t really mean ‘free’ – taxes and other fees weren’t included in the deal.

Upset at what they perceived as false advertising, the Concepcion’s sued AT&T. They weren’t the only ones who found the offer disingenuous, and the lawsuit was ultimately combined into a class action law suit.

That is where things get interesting – most people think that if they feel a company cheated them, or did them wrong, they have the right to take the company to court.

Not in this case.

Unbeknownst to the Concepcions and many others, buried in AT&T’s contract is the following clause: “Any arbitration under this Agreement will take place on an individual basis; class arbitrations and class actions are not permitted.”

In other words, people purchasing phones unknowingly signed away their right to a common form of redress, the class action lawsuit.

Paint me a hardened cynic, but I know why AT&T did this, why they would rather face thousands of individual claims than one large lawsuit.

First, AT&T knows that the Concepcions could never afford to hire a lawyer to fight a case in which the total loss is only $30. The only way consumers can defend their rights in these types of cases are by joining together, sharing the cost of legal representation across thousands, even millions of plaintiffs.

Second, AT&T knows that professional arbiters are usually much more likely to decide a case in favor of the defendant in these kinds of consumer cases. One study by Public Citizen, a non-profit research organization, found that businesses win a stunning 96.8 percent of the time in arbitration handled by the National Arbitration Forum.

Perhaps most important, companies like AT&T know that by building these barriers to redress, most consumers would throw up their hands in disgust, mark up the monetary loss to experience and move on.

In this specific case, AT&T argued that the Concepcion’s class action should be tossed from court because their contracts excluded any right to a class-action lawsuit.

In turn, the Concepcion’s lawyers argued that, according to the Federal Arbitration Act, contracts requiring arbitration are not to be enforced if a state law says the contracts are unenforceable. In this case, Californian courts have generally ruled that these contracts are unenforceable.

The case was appealed all the way up to the Supreme Court. In a contentious 5-4 decision, the court ruled in favor of AT&T.

Justice Stephen G. Breyer asked the key question in his dissenting opinion: “What rational lawyer would have signed on to represent the Concepcions in litigation for the possibility of fees stemming from a $30.22 claim?”

As you might expect, I do not agree with the decision. I believe the Supreme Court has stripped consumers of one of the most important tools left in their battle against unscrupulous businesses. What the court has done – unintentionally or not – is to say to businesses, “go ahead and have your way with consumers, but do it in small ways so they can’t rebel at the abuse.”

Already, many defense lawyers are filing motions to compel arbitration in a variety of cases, including a case against a payday lender in Philadelphia, a case against U.S. Bancorp and a case in Los Angeles against Alliance Data Systems Corporation.

AT&T’s contract terms are hardly unique among cell phone providers. In fact, both Verizon and T-Mobile have nearly identical forced arbitration clauses in their contracts.

In the longer term, this ruling will compel companies throughout the country to work forced arbitration clauses into their agreements. Like the Concepcions, consumers will be unlikely to discover these clauses before it is too late.

Amid all these dire predictions, I do have two pieces of news that offer some hope for consumers.

First, the Supreme Court has agreed to take another case on this issue. The case involves credit card companies that charge massive fees for low-rate credit cards. The companies have claimed the case must be handled through arbitration because of a clause in the credit card agreement. I hope the Supreme Court will clarify its position and support consumers’ rights when this case is decided next fall.

Second, the new Bureau of Consumer Finance Protection (BCFP), created by the recent Dodd-Frank Wall Street reform bill, may have the power to restrict companies from putting forced arbitration clauses in their contracts. There are those in the house and senate, though, trying to gut the BCFP just as it is getting on its feet.

In the meantime, consumers should read contracts carefully and seek the best legal counsel available in the event of a serious complaint.

After all, who wants to be Bill Gates’ towel boy?

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