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Lessons Learned for the SEC from the False Claims Act and Whistleblowers

If you want to see how the SEC’s whistleblower program may look in a few years, all you need to do is take a look at the False Claims Act and the role that whistleblowers play in the enforcement of the Act.

Whistleblowers are the most important tool in the government’s FCA enforcement arsenal. They are authorized by qui tam provisions (meaning “he who prosecutes for the king”) which permit a private complainant, or relator, to bring a case on behalf of the United States government to recover payments induced by fraud.   As an incentive, the FCA allows the relator to receive up to 30 percent of the amount recovered by the government.  Qui tam settlements now constitute about 70 percent of all FCA recoveries.  The number of pending qui tam actions has increased steadily every year.

Employees who learn about any potential fraud can initiate an FCA action. There are plenty of lawyers who practice in this area and are willing to help the whistleblower on a contingency basis in the hope of a big pay-off, consisting of a portion of the recovery and statutorily-mandated attorneys’ fees.

A relator is required to file its suit under seal and to serve the government with the complaint, along with disclosure of all material evidence and information in the possession of the relator in connection with the alleged false claims.  Once served with the complaint and information, the government has a sixty-day period to investigate the complaint and decide whether it wants to intervene in the action. The government typically delays a decision whether or not to intervene while it investigates the allegations made by the relator.  

If the government chooses to intervene, it exercises primary responsibility for the case, and the relator has limited control over the action. If the government declines to participate, the relator may pursue the action without the government’s assistance.

The same rules and standards regarding liability and calculation of damages and penalties apply in a qui tam action as under a normal FCA action.  Upon a successful recovery by the government, a relator is entitled to share in the damages, in the range of 15 to 30 percent of the recovery.

The case law surrounding relators is very well developed. The relator bar is sophisticated. Unlike the SEC whistleblower program, the Justice Department and the courts are familiar with the law and practices surrounding False Claims Act cases.

As the SEC whistleblower program matures, it is likely to operate in much the same fashion as the False Claims Act except that the SEC will need to develop specific practices and procedures for handling whistleblower complaints.  For right now, the SEC has a very broad field of discretion as to how it operates the whistleblower program.  The False Claims Act involves a supervising court from the very start – once the complaint is filed, and the Justice Department is under scrutiny from the beginning in its handling of the complaint. 

The SEC should be very careful with its new authority. Already it engendered a controversy when a whistleblower claimed his identity was mistakenly disclosed during an SEC deposition.

As time goes on, the SEC should develop more specific protocols so that the industry can rely on established practices when dealing with the SEC and a whistleblower.  If the SEC is not careful, it could end up with allegations of inconsistent treatment of whistleblowers, and disparate handling of whistleblower complaints.  Such claims could unravel the SEC’s whistleblower program.

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