Whistleblower activity has consistently increased over the past decade, with 2018 being no exception. Although the Department of Justice (“DOJ”) reported a decrease in False Claims Act (“FCA”) whistleblower actions and recoveries in 2018, the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) both reported year-on-year increases in tips received and payments to whistleblowers.
False Claims Act Whistleblower Actions Down in 2018 but Overall Enforcement Remains Strong
The DOJ announced that in fiscal year 2018, it recovered almost $2.9 billion in settlements and judgments involving fraud and false claims against the government.1 Of the $2.9 billion reported, over $2.1 billion relates to recoveries under the FCA’s qui tam provisions, which allow whistleblowers (known as “relators”) to file lawsuits on behalf of the government alleging false claims.2 If the government intervenes in the qui tam action, the relator is entitled to receive between 15 and 25 percent of the amount recovered by the government through the action. If the government declines to intervene, the relator’s share is increased to 25 to 30 percent—but recoveries in such cases are far less common.3 Relators filed 645 qui tam lawsuits and were awarded $301 million by the government in fiscal year 2018; consistent with prior years, nearly 90 percent of all whistleblower rewards were made in cases where the government intervened. 446 of the qui tam actions alleged FCA violations in the healthcare sector, accounting for $1.9 billion of the Department’s 2018 FCA recoveries. While the $2.1 billion in recoveries in 2018 represents a decrease as compared to 2016 and 20174, whistleblower actions continue to represent a significant portion of the DOJ’s FCA enforcement.
Increasing SEC and CFTC Whistleblower Tips
The SEC received more than 5,200 tips in fiscal year 2018, 18% more than 2017 and 76% more than 2012, the first full year after the SEC’s Whistleblower Rules took effect.5 Approximately half of all the tips received concerned offering fraud, corporate disclosures and financials, and manipulation, which have long been the most common allegation types.6 The SEC also received a substantial number of tips alleging insider trading, trading and pricing, unregistered offerings, and Foreign Corrupt Practices Act violations.7 Additionally, in the fourth quarter of 2018, the SEC added an allegation category to its Tips, Complaints, and Rewards (“TCR”) system for “Initial Coin Offerings and Cryptocurrencies” in order to “refine data capture to better understand misconduct in the developing digital asset arena.”8 Since adding the Initial Coin Offerings and Cryptocurrencies category, the SEC received 39 related tips in 2018.9
In 2018, the CFTC also saw a dramatic uptick in whistleblower tips, receiving 760 tips in fiscal year 2018, a 63% increase from 2017.10 From 2012 to 2017, the CFTC received fewer than 1,400 tips total.11 The CFTC attributed the increase to outreach and education efforts.12
Record-Breaking Whistleblower Awards
Both the SEC and CFTC also reported record-breaking whistleblower awards in 2018. The SEC awarded its highest-ever whistleblower award under Dodd-Frank in 2018, with two whistleblowers sharing a $50 million award and a third receiving a $33 million award.13 The SEC also announced its first-ever award under the Dodd-Frank safe harbor provisions, which permit a whistleblower who first reports information internally (or to another covered government entity such as the DOJ), to nevertheless receive an award as long as the whistleblower reports the information to the SEC within 120 days of the internal report. Meanwhile, the CFTC also made five whistleblower awards in 2018, including its highest ever award of $30 million14 and its first-ever award to a foreign whistleblower.15 Prior to 2018, the CFTC had only made four such awards,16 and only one award reaching over a million.17
Other Agency Whistleblower Investigations
Though whistleblower activity related to the Department of Labor Occupational Safety and Health Administration (“OSHA”) and Department of Defense Office of the Inspector General (“DOD OIG”) appear to garner less attention than other agencies, both engaged in noteworthy whistleblower-related activity in 2018. OSHA made substantial awards to three whistleblowers in the aviation industry who were retaliated against after reporting safety violations18 and to two whistleblowers that faced retaliation after reporting environmental violations relating to waste disposal and storage.19
The DOD OIG initiated several investigations of government contractors after receiving whistleblower tips, including two investigations of General Atomics Aeronautical Systems, Inc. (“GA-ASI”) relating to its work on the MQ-9 Reaper, a drone equipped with weapons and surveillance systems. The whistleblowers alleged that GA-ASI misidentified and accepted nonconforming materials, performed flight tests under more forgiving conditions than permitted, and improperly charged the Air Force for repairs made prior to government acceptance.20 Although the allegations were not substantiated, the allegations, if proven, could have constituted parallel FCA claims. The DOD OIG also investigated Bechtel Parsons, Inc. (“Bechtel”) after receiving a whistleblower tip alleging that Bechtel violated hazardous waste laws and regulations.21 Although the allegation was not substantiated, the DOJ recently brought civil FCA and environmental claims for similar conduct.
Takeaways for 2019
Although FCA whistleblower activity fell in 2018, qui tam actions continue to account for the vast majority of the DOJ’s FCA recoveries. Additionally, the DOJ has seen comparable declines in previous years, even as the number of FCA whistleblower actions and the amounts recovered are increasing overall. At this point, there is little to suggest that 2018’s decrease in overall collections under the FCA enforcement program represents a reversal in that trend, especially when other federal whistleblower programs appear to be growing in popularity—and rapidly. With developments such as the Supreme Court’s February 2018 decision in Digital Reality v. Somers, which requires whistleblowers to report information to the SEC in order to benefit from the Dodd-Frank Act’s anti-retaliation provisions, it is possible that whistleblower activity may well increase in 2019.
In light of the increased activity and attention government agencies are paying to whistleblower programs, companies should continue to monitor whistleblower trends and take care to treat whistleblower risks seriously. Effective corporate compliance programs depend on the ability to detect and prevent potential violations of law and company policy, and internal reporting and hotline tips are an essential resource for companies in ferreting out wrongdoing. Where employees turn to government agencies for reporting wrongdoing rather than reporting through internal channels, companies are deprived of an important source of information necessary to effectively run their compliance program. In light of the efforts by government agencies to advertise their whistleblower programs and the significant awards noted above, companies should revisit the manner in which their compliance teams advertise and promote internal reporting channels, and test awareness of the reporting mechanisms such as through employee surveys.
Companies engaged in crypto-currency related activities or that are regulated by the Commodity Exchange Act also may wish to supplement existing compliance programs in light of the SEC’s demonstrated interest in the sector and the CFTC’s increased whistleblower activity this year. In recent years, enforcement agencies have taken several steps to combat crypto-currency related fraud.22 Whistleblowers play an important role in the government’s efforts to combat fraud in other industries and may prove to be similarly useful in the crypto-currency sector.