Archive for the ‘Dodd Frank’ Category

Former IRS Official Charged with Revealing Whistleblower’s Name to the Target Bank

In a Department of Justice press release on September 27, 2012, the U.S. Attorney’s Office for the Southern District of New York (Manhattan) announced the unsealing of a four-count Complaint charging Dennis Lerner, a former IRS official, with violating conflict of interest laws while he was an IRS employee, and continuing to do so after leaving the IRS. The government has also charged Lerner with improperly disclosing confidential IRS information, including information regarding pending audits and the identity of an IRS whistleblower. After being arrested on September 27 at his home in New Jersey, Lerner appeared in Manhattan federal court before Magistrate Judge Gabriel W. Gorenstein.

According to the allegations in the four-count Criminal Complaint:

From June 2010 until August 2011, LERNER worked as an International Examiner in the New York office of the IRS. For several months leading up to his resignation from the IRS, one of LERNER’s chief responsibilities involved conducting an audit of an international bank (“Bank 1”) related to approximately $1 billion in allegedly unreported income. This audit was triggered by confidential whistleblower information LERNER reviewed during the course of his IRS employment. Shortly before his resignation, LERNER led negotiations on behalf of the IRS which resulted in a proposed $210 million settlement between Bank 1 and the IRS. The settlement was still pending final approval at the time of his departure. Unbeknownst to his colleagues and supervisors, LERNER applied and interviewed for the position of Tax Director at Bank 1 during the time period in which he was representing the IRS in the Bank 1 settlement discussions. He also sent multiple emails to an individual in which he expressed both his dissatisfaction with his job at the IRS and his hope that he would secure the Bank 1 job. At no time did he notify the IRS of his efforts to obtain employment with Bank 1.

After LERNER announced his resignation from the IRS, he received written notification of certain restrictions imposed on former IRS employees regarding improper contacts with current IRS officials. However, when the IRS sent Bank 1 additional inquiries regarding the audit after he began working as Tax Director in September 2011, LERNER subsequently placed numerous phone calls to IRS employees and initiated meetings with them regarding the continuing audit. LERNER persisted with attempts to encourage IRS employees to provide information regarding the audit, and to approve the settlement between the IRS and Bank 1, despite warnings that he should not be participating in the audit or settlement discussions.

LERNER also engaged in improper disclosure of IRS tax return information during the time period that he worked as an IRS International Examiner. Specifically, LERNER divulged the identity of a whistleblower who had provided the IRS with confidential information regarding Bank 1 that had triggered the audit to someone not employed by the IRS, and provided details regarding pending IRS audits of other companies to individuals who were not employed by the IRS.

Posted in Dodd Frank, Tax Credits, Tax FraudNo Comments

SEC Adopts Dodd-Frank Net Worth Standard for Accredited Investors and Mine Safety Disclosure Requirements

On December 21, 2011, the SEC adopted the Dodd-Frank net worth standard for accredited investors and also adopted the Dodd-Frank mine safety disclosure requirements.

With respect to the net worth standard, the SEC amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings.  SEC rules permit certain private and limited offering to be made without registration, and without requiring specified disclosures, if sales are made only to “accredited investors.”  Under the amended rule, which takes effect 60 days after publication in the Federal Register, the value of an individual’s primary residence cannot be included as an asset when calculating the investor’s net worth for purposes of determining “accredited investor” status.

With respect to mine safety disclosure requirements, the SEC adopted new rules outlining how mining companies must disclose the mine safety information required by Dodd-Frank.  Dodd-Frank’s disclosure requirements are based on the safety and health requirements applicable to mines under the Federal Mine Safety and Health Act of 1977, which is administered by the Mine Safety and Health Administration (MSHA).  The new SEC rules, which take effect 30 days after publication in the Federal Register, require mines to provide mine-by-mine totals for the following:

  • Significant and substantial violations or mandatory health or safety standards under section 104 of the Mine Act for which the operator received a citation from MSHA;
  • Orders under section 105(b) of the Mine Act;
  • Citations and orders for unwarrantable failure of the mine operator to comply with section 104(d) of the Mine Act;
  • Flagrant violations under section 110(b)(2) of the Mine Act;
  • Imminent danger orders issued under section 107(a) of the Mine Act;
  • The dollar value of proposed assessments from MSHA;
  • Notices from MSHA of a pattern of violations or potential to have a pattern of violations under section 104(e) of the Mine Act;
  • Pending legal actions before the Federal Mine Safety and Health Review Commission; and
  • Mining related fatalities.

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“Whistleblower Improvement Act of 2011” Takes Aim at SEC Whistleblower Provisions

Representative Michael Grimm (R-NY) recently proposed a bill to amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to modify certain provisions relating to whistleblower incentives and protection.  The “Whistleblower Improvement Act of 2011” (H.R. 2483) primarily takes aim at the SEC’s decision not to require internal compliance reporting as a prerequisite to whistleblower eligibility, which was premised on the SEC’s concern that such a requirement would deter many potential whistleblowers.

The bill would amend Section 21F of the Securities Exchange Act (and Section 23 of the Commodity Exchange Act) to provide that, “[i]n the case of a whistleblower who is an employee providing information relating to misconduct giving rise to the violation of the securities laws that was committed by his or her employer or another employee of the employer, to be eligible for an award …the whistleblower, or any person obtaining reportable information from the whistleblower, shall – (A) first report the information … to his or her employer before reporting such information to the Commission; and (B) report such information to the Commission not later than 180 days after reporting the information to the employer.”

Under the bill, however, whistleblowers who do not comply with these internal reporting requirements may still be eligible for an award if the SEC determines (1) that the employer lacks either a policy prohibiting retaliation for reporting potential misconduct or an internal reporting system allowing for anonymous reporting, or (2) that internal reporting as not a viable option for the whistleblower based on (i) evidence that the alleged misconduct was committed by or involved the complicity of the highest level of management, or (ii) other evidence of bad faith on the part of the employer.

The bill would also expand Section 21F’s current exclusion of eligible whistleblowers (which currently excludes from eligibility any whistleblower convicted of a criminal violation related to the matter at issue). Under the bill, a person would be ineligible as a whistleblower if such person “has legal, compliance, or similar responsibilities for or on behalf of an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct or violations or to cause such entity to investigate or respond to the misconduct of violations, if the information learned by the whistleblower during the course of his or her duties was communicated to such a person with the reasonable expectation that such person would take appropriate steps to so respond.”  The bill would also exclude whistleblowers who the SEC determines committed, facilitated, participated in, or were otherwise complicit in the misconduct at issue.

Further, under the bill, the SEC would be required to notify an entity prior to commencing any whistleblower-related enforcement action in order to allow the entity the opportunity to investigate and remedy the alleged misconduct—unless, based on evidence of bad faith or complicity at the highest level of management, the SEC determines that notification would jeopardize its investigation.  If a notified entity responds in good faith, the SEC would be required to treat the entity as having self-reported the information.

With respect to Section 21F’s anti-retaliation provisions, the bill provides that “[n]othing … shall be construed as prohibiting or restricting any employer from enforcing any established employment agreements, workplace policies, or codes of conduct against a whistleblower, and any adverse action taken against a whistleblower for any violation of such agreements, policies, or codes shall not constitute retaliation . . . provided such agreements, policies, or codes are enforced consistently with respect to other employees who are not whistleblowers.”

H.R. 2483 is co-sponsored by Reps. John Campbell (R-CA), Bill Flores (R-TX), Scott Garrett (R-NJ), and Steve Stivers (R-OH).

Read the proposed legislation here.

Posted in Dodd Frank, Financial FraudNo Comments

SEC Launches New Website for Whistleblowers

With the new whistleblower program officially becoming effective on August 12, 2011, the SEC launched a new website for people to report violations of the federal securities laws and apply for a financial reward.  The new website,, provides information on eligibility requirements, directions on how to submit a complaint or a tip, instructions on how to apply for a reward, and answers to frequently asked questions.

Visit the SEC’s new Office of the Whistleblower website

Posted in Dodd Frank, Financial FraudNo Comments

Securities and Exchange Commission Whistleblower Program

By: Chris Gadoury and Stephanie Gutheinz

The SEC’s whistleblower program was implemented under Section 922 of the Dodd-Frank Act and is primarily intended to reward individuals who provide original information to the SEC that leads to a successful enforcement action.  Dodd-Frank also prohibits retaliation by employers against individuals who provide the SEC with information about possible securities violations.

In passing the Dodd-Frank Act, Congress substantially expanded the agency’s authority to compensate individuals who provide the SEC with information about violations of the federal securities laws. Prior to the Act, the agency’s bounty program was limited to insider trading cases and the amount of an award was capped at 10 percent of the penalties collected in the action.  Under Dodd-Frank, awards can now be up to 30 percent of the monetary sanctions or recovery obtained by the SEC.

In order to be considered for an award under the SEC whistleblower program, a whistleblower must: (1) voluntarily provide the SEC, (2) with original information that (3) leads to the successful enforcement by the SEC of a federal court or administrative action, (4) in which the SEC obtains monetary sanctions totaling more than $1 million.

Certain people generally will not be considered for whistleblower awards under the final rules, including:

  • People who have a pre-existing legal or contractual duty to report their information to the Commission;
  • Attorneys (including in-house counsel) who attempt to use information obtained from client engagements to make whistleblower claims for themselves (unless disclosure of the information is permitted under SEC rules or state bar rules);
  • People who obtain the information by means or in a manner that is determined by a U.S. court to violate federal or state criminal law;
  • Foreign government officials;
  • Officers, directors, trustees or partners of an entity who are informed by another person (such as by an employee) of allegations of misconduct, or who learn the information in connection with the entity’s processes for identifying, reporting and addressing possible violations of law (such as through the company hotline).
  • Compliance and internal audit personnel; and
  • Public accountants working on SEC engagements, if the information relates to violations by the engagement client.

Other individuals, such as employees of certain agencies and people who are criminally convicted in connection with the conduct, are already excluded by Dodd-Frank.

Under certain circumstances, however, compliance and internal audit personnel, as well as public accountants, can become whistleblowers when:

  1. the whistleblower believes disclosure may prevent substantial injury to the financial interest or property of the entity or investors;
  2. the whistleblower believes that the entity is engaging in conduct that will impede an investigation; or
  3. at least 120 days have elapsed since the whistleblower reported the information to his or her supervisor or the entity’s audit committee, chief legal officer, chief compliance officer—or at least 120 days have elapsed since the whistleblower received the information, if the whistleblower received it under circumstances indicating that these people are already aware of the information.

Regarding the increased anti-retaliation provisions, a whistleblower who provides information to the SEC is protected from employment retaliation if the whistleblower possesses a reasonable belief that the information he or she is providing relates to a possible securities law violation that has occurred, is ongoing, or is about to occur. In addition, the rules make it unlawful for anyone to interfere with a whistleblower’s efforts to communicate with the Commission, including threatening to enforce a confidentiality agreement.

Although the rules do not require that employee whistleblowers report violations internally in order to qualify for an award, the rules strengthen incentives that had been proposed and add certain additional incentives intended to encourage employees to use their own company’s internal compliance programs when appropriate to do so. For example, the rules make a whistleblower eligible for an award if the whistleblower reports internally and the company informs the SEC about the violations.  In addition, an employee is considered a whistleblower under the SEC program as of the date that the employee reports the information internally — as long as the employee provides the same information to the SEC within 120 days. Through this provision, employees are able to report their information internally first while preserving their “place in line” for a possible award from the SEC.  More importantly, the rules provide that a whistleblower’s voluntary participation in a company’s internal compliance program is a factor that can increase the amount of an award, and that a whistleblower’s interference with internal compliance and reporting is a factor that can decrease the amount of an award.

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