DHHS Whistleblower Program Expands Rewards

Steve W. Berman on May. 7, 2013 | 0 comments

Charles Munger, vice-chairman at Berkshire Hathaway, once gave a speech touting the importance of incentives in guiding human behavior.

He told the story of Xerox, who introduced a new and far superior machine to its customers, only to find that it was being outsold by its outdated and obsolete predecessor. Company founder Joe Wilson investigated the situation and found the problem. The sales team received higher commission bonuses on the older machines.

He also told the story of FedEx who in the early days of the company struggled to efficiently sort and move packages between its planes each night so they would be prepared to ship the next morning. The company, Munger claimed, tried everything to get the system to work more smoothly, but to no avail. Then finally, someone got the bright idea of paying employees by the shift, and letting them leave once their work was done, rather than paying them by the hour. With the incentive to finish quickly so they could leave early, the employees dramatically increased their efficiency.

Munger summed up the lesson with a maxim from Ben Franklin, “If you would persuade, appeal to interest and not to reason.”

As a whistleblower attorney, spotting motives and understanding incentives is very important. It not only helps in developing a case against a defendant, defining motive, opportunity and means. It also helps me to understand why whistleblowers choose to put their careers and livelihoods on the line to expose corporate wrongdoing.

I wish I could tell you that every whistleblower was motivated solely by a desire to make the world a better place. But like Franklin said, don’t look to reason, look to interest and incentives. The truth is that many whistleblowers are also motivated by the tremendous financial rewards available to those who recover significant funds for the government.

The cold hard truth is if we want to give more potential whistleblowers a reason to step forward and shine the light of public scrutiny on fraud, one of the things we need to do is improve the rewards programs available to them.

That’s why I was very excited to hear that the Department of Health and Human Services (DHHS) recently announced a proposed change to the rules of its whistleblower program. The program, administered by the Centers for Medicare and Medicaid Services (CMS), previously awarded a maximum of $1,000 to whistleblowers who exposed fraud in Medicare. The proposed new rule would increase that reward up to a maximum of nearly $10 million.

The proposed rule follows a number of other initiatives taken by the DHHS and CMS over the last several years to reduce Medicare fraud; steps that I applaud. Those steps are having a serious impact – last February the government reported that it recovered a record-breaking $4.1 billion in Fiscal Year 2011.

Despite the positive steps that have been taken, there is still a lot of fraud that goes unpunished. While estimates vary, the Government Accountability Office pegged losses in the program at nearly $50 billion, far larger than the government’s recoveries.

I hope and believe that the DHHS’ decision to expand rewards for whistleblowers will have a serious impact on closing that gap and returning money to taxpayers.

As a whistleblower attorney, I have some parting advice for potential whistleblowers under the expanded program.

Whistleblowers under this program, and other programs, should seek experienced legal counsel before moving forward with a formal tip to DHHS. A whistleblower attorney can make sure you know your rights and responsibilities as a whistleblower, as well as the risks of proceeding with a formal whistleblower complaint.

An attorney with experience prosecuting whistleblower cases can also help you develop your information to encourage the government to take action. DHHS will receive many more tips than the agency can fully investigate in the next several years; you want to make sure your information is actionable and credible.

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 www.hb-whistleblower.com.

New Federal Whistleblower Law Enhances National Security, Reduces Wasteful Spending

Steve Berman on May. 21, 2012 | 0 comments

Have you ever looked at an election ballot, and had a strange sense of déjà vu?

Every November when I look at my ballot, I see candidates who have run and lost at least a dozen times for as many different positions. Yet, every year, these perennial candidates throw their hat into the ring once more.

For instance, consider Michael “Goodspaceguy” Nelson, who has run for office in my home state of Washington the last several cycles, including runs for King County Council, congress and governor.

This year he is running for a seat on the King County Council. And yes, the name he uses on the ballot is actually “Goodspaceguy.”

Predictably, space exploration appears to be his most important concern.

Last election, he noted that “We should already have more than 200 private space habitats in orbit, connected together in different configurations and in different orbits. You have already paid the money required for space colonization, but you have not gotten the space colonies because many of your chosen leaders have not studied space colonization, and so they have misspent your money.”

Opining on the current economic outlook in the country, he noted, “I, Goodspaceguy, have studied economics and studied how to increase jobs and the living standard and how to improve the quality-of-life: To increase jobs, we should increase profits.”

Oh, if only it were that easy. I’ll make a bold prediction; Goodspaceguy is probably not going to win in November.

The phenomenon of perennial candidates is not unique to politicians. Some laws have been proposed dozens of times, only to be voted down by representatives and the people time and time again.

There are also laws that pass by a strong bipartisan vote, but are repeatedly vetoed or otherwise never implemented for a variety of procedural reasons. The champions of those ideas must feel like Sisyphus, the Greek King sentenced by the Gods to push a boulder up a hill for eternity.

For instance, many of us in the legal community who represent whistleblowers have long championed the core components of the Whistleblower Protection Enhancement Act (WPEA), a law that was first proposed more than a decade ago. The law, which contains various protections for federal workers who blow the whistle on fraudulent and improper practices, was recently passed by the U.S. Senate by a unanimous vote.

Yet, despite a unanimous vote in favor, I am only cautiously optimistic that the bill will become law. After all, it has passed unanimously at least four times before.

The last time the law came close to final passage was in 2010, when incoming House Republicans asked Senate colleagues to place an anonymous hold on the law, creating a short delay so they could “improve” the bill. That delay turned into gridlock and the bill never became law.

I really hope that the House Republicans and President Obama can come to an agreement this time around, especially on an idea with such strong bipartisan support.

There are certainly signs of hope on that front. The House Committee on Oversight and Government Reform unanimously passed the bill in November, setting the stage for a final vote.

Yet, in this election year, even the most bipartisan ideas may be abandoned on Capitol Hill.

That is a shame. The WPEA would deter and reduce wasteful spending and enhance public safety by protecting federal workers who blow the whistle on improper activities.

Consider the recent scandal at the General Services Administration (GSA), in which federal workers allegedly wasted nearly a million dollars throwing a lavish party in Las Vegas in 2010.

One would think that with so many hundreds of employees attending the conference, a whistleblower might have come forward earlier. Yet, GSA Inspector General Brian Miller explained the problem when he testified before Congress in April. He said that any whistleblower would have been “quashed like a bug” by the powers that be at the GSA.

Congress has passed a number of bills in recent years to expand whistleblower protections and rewards, including new programs for whistleblowers that expose tax fraud and fraud on Wall Street. However, federal workers remain woefully unprotected.

A study released by the U.S. Merit Systems Protection Board, an independent executive agency, last year revealed that one-third of whistleblowers were either threatened or retaliated against for exposing fraud. Of those who reported receiving threats or retaliation, 65 percent said they were shunned by coworkers, 15 percent were suspended from their jobs and 10 percent said they were fired.

The situation is only getting worse. The same study was conducted in 1992. The 2011 data show that whistleblowers are nine times more likely to be fired for exposing fraud.

With statistics like that, it is no wonder that individuals who saw fraud at the GSA were reluctant to come forward.

The WPEA would improve protections for those whistleblowers, and deter similar fraud in the future by creating a safe environment for insiders to come forward.

For instance, the law would expand existing protections to employees at the Transportation Security Administration (TSA). The TSA guards our airports and other ports of entry into the United States and whistleblowers within the TSA have the potential to not only spot wasteful spending, but also highlight issues that could threaten our national security.

The Wikileaks saga demonstrated the risks that come with not having an effective whistleblower program for intelligence personnel, allowing safe disclosure of sensitive information to the appropriate authorities. Without a clear process for whistleblowers, one desperate rogue actor could publish sensitive information and hamper our diplomatic and intelligence efforts, undermining national security.

That’s why the WPEA creates additional protections and a process for whistleblowing within the intelligence community. This will allow policymakers to target fraud and waste without the public release of sensitive information.

The law also closes a number of loopholes that allow government agencies to retaliate against whistleblowers and affirms that disclosure of information exposing fraud is lawful.

Perhaps most importantly, the WPEA would give whistleblowers a chance to have their day in court. Currently, federal whistleblowers can only take their cases to the Federal Circuit Court of Appeals, giving them limited legal options. The WPEA would give whistleblowers the right to challenge their employers in a trial by jury in United States District Court.

I believe strongly that the WPEA will promote our national security and reduce fraud and waste in federal programs. I hope that President Obama and the Republicans in the House of Representatives come to an agreement that allows this highly bipartisan bill pass and become law.

However, I would remind prospective whistleblowers that, even with expanded protections thanks to the WPEA, a consultation with an attorney is essential before blowing the whistle. Whistleblower cases are incredibly complex and can involve accusations of fraud totaling billions of dollars. The wrong steps early in a whistleblower action can result in difficulties later.

At Hagens Berman, we provide counsel to whistleblowers under all of the major state and federal whistleblower laws. You can learn more about our practice at www.hb-whistleblower.com.

State Passes New Whistleblower Protection Law

Steve Berman on May. 14, 2012 | 0 comments

A couple of years ago, CBS’ 60 Minutes conducted an investigation into Medicare and Medicaid fraud in Florida. The story included some shocking findings: fraud is rampant, hard to detect and costs taxpayers to the tune of at least $60 billion every year.

One person profiled in the story was former Federal Judge Ed Davis. Davis told 60 Minutes that his Medicare statement showed that the government had been billed to purchase him two artificial arms. Yet, Davis did not need artificial arms; the ones he was born with were still working just fine.

Someone, it seems, used Davis’ personal information to falsely bill Medicare and then pocketed the reimbursement. This scheme, and others like it, is costing taxpayers billions of dollars each year.

Thankfully – the Department of Justice and a number of state legislatures are taking the issue much more seriously than they were a few years ago. Attorney General Eric Holder has increased resources in this area and filed charges against dozens of people in connection with false billing schemes.

In fact, earlier this year, the Justice Department exposed what may be the largest healthcare fraud case of all time. Dr. Jacques Roy of Texas is accused of masterminding a scam that charged Medicare nearly $375 million for home healthcare services that were never requested or delivered.

Medicare is only one part of the equation, however. State Medicaid programs, which are designed to provide low-income and disabled people access to medical care, are also plagued by fraud. The scope of the problem is not fully understood. One official estimate suggested that nearly 8.5 percent of Medicaid claims could be fraudulent.

Washington State has not had the best track record on this issue – largely because the state has not devoted sufficient resources to the problem. Just last June, the state’s Medicaid Fraud Unit was nearly cut from the budget when the legislature failed to pass a new Medicaid fraud bill at the end of the legislative session. This is very disturbing given that the federal government pays for 75 percent of its funding on the condition that the state pays for the remaining 25 percent.

In my view, funding for Medicaid fraud programs should not be a partisan issue. Implemented correctly, these programs recover more money for the state than they cost to run. Given that so much Medicaid fraud goes undetected, the state could be recovering millions more.

One easy way that states have increased their detection and prosecution of Medicaid fraud is through the passage of whistleblower laws that provide rewards for those who come forward with information about fraud. These laws, known as false claims acts because they mirror a federal law of the same name, provide additional tools to state governments to combat fraud, including participation in multistate cases and qui tam provisions which reward whistleblowers.

Washington recently became the 29th state to pass such a law. The bill was passed on a bipartisan basis, 40-9 in the Senate and 56-42 in the House. Governor Gregoire has signed the bill into law, and it will go into effect this June.

The qui tam, or whistleblower provisions, in the law are especially important. Whistleblowers will now be able to file a lawsuit on the state’s behalf. If the state intervenes and takes over the litigation, the whistleblower can receive up to 25 percent of any funds recovered. If the state does not intervene, the whistleblower can continue to prosecute the fraud on their own and qualify for even greater rewards.

The law also provides new protections for whistleblowers, shielding them from retaliation by their employer. This will help encourage more whistleblowers to come forward and tell investigators what they know. Perhaps most importantly, the law trebles, or triples, damages, which should help to deter Medicaid fraud moving forward.

I strongly support this legislation. Over the years, I have worked on a number of cases on behalf of states, municipalities and consumers who have been overcharged or otherwise defrauded by Big Pharma and other healthcare companies.

I have also worked with a number of whistleblowers in the healthcare industry. My law firm prosecuted a whistleblower case against an ambulance company that resulted in the second-largest recovery in that industry’s history. We also worked with a whistleblower who exposed Medicare outlier fraud and helped the government to recover millions of dollars.

We recently settled a lawsuit on behalf of two whistleblowers here in Washington who alleged that Center for Diagnostic Imaging (CDI), a radiology and diagnostic imaging company with locations in seven states, improperly billed the federal government for services without a written order from a physician. A judge also approved the maximum reward for the whistleblowers, 30 percent of the recovery.

My experience in these cases has taught me that whistleblowers should be extremely careful and hire an ethical and effective attorney to prosecute the case. This is a complex area of the law, and whistleblowers need legal counsel that has the resources and expertise needed to take on large defendants who will fight the allegations and likely retaliate against the whistleblower.

Highly skilled legal counsel is especially important for whistleblowers that come forward under the new state law. As I’ve already noted, Washington has not devoted sufficient resources in the past to catching Medicaid fraud. Thus, the state will simply not have the resources to prosecute each and every whistleblower case that comes through its door.

Instead, the state will take the cases that offer the greatest opportunity for a large recovery. Attorneys with a solid understanding of whistleblower law and the healthcare industry will help whistleblowers develop their case and present it to the government.

I strongly suggest that any prospective whistleblowers consult an experienced attorney before taking any action. You can learn more about our whistleblower practice at www.hb-whistleblower.com

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.




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?

Patent Reform and The Ladies Home Journal

Posted by Nick Boebel on Apr. 13, 2011 | 0 comments

In 1900 John Elfreth Watkins, Jr. wrote an article for The Ladies Home Journal that attempted to predict “What May Happen in the Next Hundred Years.” He tapped some of America’s most educated minds at that time, men from the country’s greatest institutions of science and learning, to forecast the 20th century.

His research led to 29 predictions, some of which proved more entertaining than accurate. For instance, he predicted that, “there will be no C, X or Q in our modern alphabet. They will be abandoned because unnecessary.” If only.

However, Watkins also got a few things right. He wrote about man’s ability to see around the world through cameras and screens, express trains that traveled at 150 miles per hour and “air-ships” used by scientist to observe the earth above the heavens.

Watkins admitted that some of these prophecies seemed strange, almost impossible, but we now know that some of these ideas have come to life through inventors who believed in them. A number of predictions included in Watkins’ piece have manifested themselves in technologies that are fundamental to the modern world.

More than a century later, America continues to be at the forefront of innovation and technological advances. Names such as Alexander Graham Bell and the Wright brothers are embedded in the history books. They were great American inventors who paved the way for the inventors that founded the current list of America’s great companies.

Other inventors have yet to take their places in our history books for their technological advances. They have watched and learned from the inventors before them. And with modest beginnings, they believe that someday their ideas will improve lives, simplify processes and make an imprint on society.

But tomorrow’s inventors may face a new landscape to protect their ideas. Congress is currently considering legislation that would change patent law in the United States.

When our country was formed, the Founding Fathers noted the importance of patents, giving Congress the authority, “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

Congress established a patent system that, today, is very different from most other countries. In the United States, the patent is given not to the first person to file the patent, but to the person who first conceives an invention and then diligently works to reduce the idea to practice.

However, Congress is considering legislation, called the America Invents Act, that would change this system. Instead of giving a patent to the first person to conceive of an invention, the change to the law that would give patents to the first person to file a patent.

The change is being promoted mostly by large corporations with independent inventors and entrepreneurs on the other side. While the ultimate effect of this change in the law is uncertain, there is the potential to devastate innovation in this country. A first to file system would give an advantage to large companies with dozens of highly-paid lawyers, and at the same time provide a perverse incentive for entrepreneurs to commit scarce resources to securing patents rather than putting products in the marketplace.

Small business advocate groups pointed out in a two-page letter to Senate Majority Leader Harry Reid on February 23, 2011, that the Senate version of the legislation “disrupts the unique American start-up ecosystem that has led to America’s standing as the global innovation leader – the ecosystem that is vital to our businesses.”

We recognize and value the need for patent reform. We understand the tremendous burden on the Patent and Trademark Office (PTO) to review and grant patents. Patent reform should seek to limit that burden and speed up processing but not sacrifice innovation in the process.

America has led the world in innovation, in part, because our system provides a level playing field. A small inventor working out of his or her garage can create and profit from a patented invention just as surely as a large corporation with a team of scientists at its disposal. For more than 200 years, our current patent law has demonstrated an ability to foster innovation and grow small businesses.

When Watkins looked 100 years ahead and tried to predict what new inventions might change our world, he imagined a world that must have seemed impossible to his readers. Yet, Watkins knew that America’s spirit of innovation had always driven inventors to make their impossible visions a reality.

That spirit has persisted because of America’s patent system. We should be careful not to tinker with it, or we risk creating a disincentive for the next generation of inventors.

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