Former Congressional Staffer Pleads Guilty to Extensive Fraud and Money Laundering Scheme

Wednesday, October 11, 2017

A former congressional staffer pleaded guilty today for his role in  orchestrating a scheme to steal hundreds of thousands of dollars from charitable foundations and the individuals who ran those foundations to pay for personal expenses and to illegally finance a former congressman’s campaigns for public office, announced Acting Assistant Attorney General Kenneth A. Blanco of the Justice Department’s Criminal Division and Acting U.S. Attorney Abe Martinez of the Southern District of Texas.

Jason T. Posey, 46, formerly of Houston, and currently residing in Mississippi, pleaded guilty to one count of mail fraud, one count of wire fraud and one count of money laundering before Chief U.S. District Judge Lee H. Rosenthal of the Southern District of Texas.  Sentencing is set for March 29, 2018.

According to admissions made in connection with Posey’s plea, Posey served as director of special projects and treasurer of the congressional campaign committee for former U.S. Congressman Stephen E. Stockman, 60, of the Houston, Texas area, from in or around January 2013 until in or around November 2013.  Posey admitted that, at Stockman’s direction, he and another congressional staffer, Thomas Dodd, 38, of the Houston, Texas area, illegally funneled $15,000 of charitable proceeds into Stockman’s campaign bank account and caused the campaign to file reports with the Federal Election Commission (FEC) that falsely stated that the money was a contribution from their parents and from the staffers themselves.  According to Posey’s admissions, Stockman also directed Posey to send a letter to a charitable donor that falsely stated that the donor’s $350,000 donation had been used to support a charitable endeavor, when in fact the funds were actually used for other purposes, including Stockman’s campaigns for public office.

In connection with his plea, Posey also admitted that he and Stockman raised $450,571.65 to support Stockman’s 2014 Senate campaign by falsely representing to a donor that the funds would be used to support a legitimate independent expenditure by an independent advocacy group Posey created.  In fact, Posey admitted that Stockman personally directed and supervised the activities of the purportedly independent group, including the printing and mailing of hundreds of thousands of copies of a pro-Stockman publication to Texas voters.  Posey also admitted that he submitted a false affidavit to the FEC in order to conceal the scheme.

Dodd pleaded guilty on March 20 to conspiracy to commit mail and wire fraud and conspiracy to make illegal conduit contributions and false statements to the FEC.  Stockman’s trial is scheduled to begin on Jan. 29, 2018.  The charges and allegations in this case are merely accusations.  Stockman is presumed innocent until proven guilty.

The FBI and IRS-CI are investigating the case.  Trial Attorneys Ryan J. Ellersick and Robert J. Heberle of the Criminal Division’s Public Integrity Section and Assistant U.S. Attorney Melissa Annis of the Southern District of Texas are prosecuting the case.

Chief Executive Officer of Armored Vehicle Company Convicted of Defrauding the United States

Tuesday, October 10, 2017

A federal jury convicted the owner and chief executive officer of an armored vehicle company for his role in a scheme to provide the U.S. Department of Defense with armored gun trucks that did not meet ballistic and blast protection requirements set out in the company’s contracts with the United States.

Acting Assistant Attorney General Kenneth A. Blanco of the Justice Department’s Criminal Division; Acting U.S. Attorney Rick A. Mountcastle of the Western District of Virginia; Special Agent in Charge Adam S. Lee of the FBI’s Richmond, Virginia Field Office and Special Agent in Charge Robert E. Craig Jr. of the Defense Criminal Investigative Service’s (DCIS) Mid-Atlantic Field Office, made the announcement.

William Whyte, 72, of King City, Ontario, the owner and CEO of Armet Armored Vehicles of Danville, Virginia, was found guilty after a two-week trial of three counts of major fraud against the United States, three counts of wire fraud and three counts of criminal false claims.  Whyte was charged by an indictment in July 2012.  Following the verdict, Senior U.S. District Judge Jackson L. Kiser of the Western District of Virginia, who presided over the trial, remanded Whyte into custody pending a full bond hearing.  A sentencing date has not yet been scheduled.

Evidence at trial demonstrated that Whyte executed a scheme to defraud the United States by providing armored gun trucks that were deliberately underarmored.  According to the trial evidence, Armet contracted to provide armored gun trucks for use by the United States and its allies as part of the efforts to rebuild Iraq in 2005.  Despite providing armored gun trucks that did not meet contractual specifications, Whyte and his employees represented that the armored gun trucks were adequately armored in accordance with the contract, the evidence showed.  Armet was paid over $2 million over the course of the scheme, including an $824,000 advance payment that the United States made after Whyte personally promised the United States that he would use the money in furtherance of the contract, the evidence showed.

The case was investigated by DCIS and the FBI.  The case is being prosecuted by Trial Attorney Caitlin Cottingham of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Heather Carlton of the Western District of Virginia.  

Real Estate Investor Pleads Guilty to Bid Rigging in Northern California Public Foreclosure Auctions

Friday, October 6, 2017

Investigations Have Yielded 63 Plea Agreements to Date

A real estate investor pleaded guilty for his role in a conspiracy to rig bids at public real estate foreclosure auctions in Northern California, the Department of Justice announced.

Jim Appenrodt pleaded guilty to two counts of bid rigging in U.S. District Court for the Northern District of California in San Francisco. Appenrodt was charged in an indictment returned by a federal grand jury on October 22, 2014.

According to court documents, Appenrodt participated in a conspiracy to rig bids by agreeing to refrain from bidding against other coconspirators at public real estate foreclosure auctions in San Francisco County and San Mateo County from as early as August 2008 until January 2011.

“The Antitrust Division has prosecuted scores of real estate investors who, for their own benefit and profit, conspired to corrupt the bidding process at foreclosure auctions,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division.  “Today’s guilty plea demonstrates the Division’s continued commitment to bringing to justice the individuals who committed these crimes.”

Today’s guilty plea is the result of the Department’s ongoing investigation into bid rigging at public real estate foreclosure auctions in San Francisco, San Mateo, Contra Costa and Alameda counties, California. To date, 63 individuals have agreed to plead or have pleaded guilty.

These investigations are being conducted by the Antitrust Division’s San Francisco Office and the FBI’s San Francisco. Anyone with information concerning bid rigging or fraud related to real-estate foreclosure auctions should contact the Antitrust Division’s San Francisco Office at 415-934-5300 or call the FBI tip line at 415-553-7400.

CCC’s: An Antitrust Lawyer’s Guide to Machine Learning (Guest Post by Ai Deng PhD.)

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Below is a post by valued guest contributor, Ai Deng, PhD. of Bates White Economic Consulting.

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There has been growing interest in the legal community in artificial intelligence (AI), and more specifically in machine learning (ML). This recent interest in AI is at least in part driven by concerns about algorithmic collusion, i.e., the possibility that computer algorithms could ultimately collude on their own, without human facilitation.

There is no question that the antitrust community is largely playing catch-up when it comes to the technical subject matters of AI and ML. As the Acting Chair of the Federal Trade Commission Maureen K. Ohlhausen noted, “The inner workings of these tools are poorly understood by virtually everyone outside the narrow circle of technical experts that directly work in the field.”

While there is no point to antitrust attorneys understanding the nuts and bolts of AI and ML technology, a basic understanding is necessary to better understand and assess the implications of the AI/ML research on antitrust and related legal and economic issues. That is the motivation behind my latest article. Through a series of simple examples, I introduce some fundamental concepts in ML. Along the way, I also discuss a wide variety of ML applications in the law and economics field. I conclude with a brief discussion of the hot topic of algorithmic collusion.

You can download the paper here https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3082514

As always, I appreciate your thoughts and comments. You can reach me at ai.deng@bateswhite.com or connect with me on LinkedIn [here].

Ai Deng, PhD

Principal

direct: 2022161802 | fax: 2024087838

1300 Eye Street NW, Suite 600, Washington, DC 20005

ai.deng@bateswhite.com

BATESWHITE.COM

CCC’s: Top Comments on Antitrust Whistleblower Posts

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I’ve received several comments on the idea of an Antitrust Whistleblower Statute.  Some of the top comments are:

  1.    Didn’t you retire?  No.
  2.    Well, you should have.  I sometimes think the same thing, but what could be more fun than being an antitrust lawyer?
  3.    Your website design stinks and for a nominal fee I can fix it and help you lose weight.  I’m not worried about the website design.  But, please email me with the weight loss help.  
  4.    There were concerns that, particularly with international cartels, a whistleblower award could be excessive.  We agree that some allowance should be made to address this possibility.  John Connor offered this helpful comment:  “What is an appropriate standard for the size of the award? Using a percentage the employer’s fine is likely to be excessive. What about 5 or 10 years’ of the whistle-blower’s compensation?”   
  5.  There were some questions as to whether cartel whistleblower bounty provisions exist in other countries.  That is a good question.  We are researching that and will follow up.   
  6. Several people noted that an antitrust whistleblower idea is not a new idea and has never received support in the past from the Antitrust Division or Congress.  This is true, and we may get nowhere with our proposal this time.  But, as we’ve noted, the leniency “cash cow” is slowing down and the SEC whistleblower provision has been a huge success (by most people’s estimation).   Sometimes persistence pays off and the time may have come has come for a successful antitrust whistleblower push.  And, I may humbly suggest that Kimberly Justice and I may have some insights based on our many years with the Antitrust Division that have not been considered before.  We’ll see.

P.S.

The Grassley-Leahy Criminal Antitrust Anti-Retaliation Act of 2017, was just passed unanimously in the Senate.  The legislation would make it unlawful for an employer to retaliate against an employee who reports a violation of antitrust laws or a crime connected to antitrust laws.  This is the third time this legislation has passed the Senate unanimously, but it has never even been taken up by the House.

Stay tuned….

Thanks for reading.

Middleman Who Lied About Being an Agent of a Foreign Official Sentenced to 3 ½ Years in Prison for Role in Foreign Bribery Scheme Involving $800 Million International Real Estate Deal

Thursday, October 5, 2017

The middleman in a foreign bribery scheme who falsely held himself out as an agent of a foreign official was sentenced today to 42 months in prison for each count, to run concurrently, for his role in a scheme to bribe a foreign official in the Middle East to land a real estate deal, and to defrauding his co-schemers.

Acting Assistant Attorney General Kenneth A. Blanco of the Justice Department’s Criminal Division, Acting U.S. Attorney Joon H. Kim of the Southern District of New York and Assistant Director in Charge William F. Sweeney Jr. of the FBI’s New York Field Office made the announcement.

Malcom Harris, 53, of New York City, was sentenced by U.S. District Judge Edgardo Ramos of the Southern District of New York.  Harris pleaded guilty to one count of wire fraud and one count of money laundering on June 21.

According to admissions made in connection with Harris’s plea, Harris participated in a corrupt scheme to pay bribes to a foreign official in a country in the Middle East in order to facilitate the sale by South Korean construction company Keangnam Enterprises Co., Ltd., (Keangnam) of a commercial building known as Landmark 72 in Hanoi, Vietnam, to the Middle Eastern country’s sovereign wealth fund.  According to the indictment, the building sale was valued at $800 million, and purported bribe would total $2.5 million.

In connection with his guilty plea, Harris admitted that, from on or about March 2013 to on or about March 2015, he wrongfully obtained $500,000 from his co-defendants by falsely holding himself out as an agent of a foreign official in text messages and emails.  Harris admitted directing the $500,000 to be deposited into an account in the name of Muse Creative Consulting, but which Harris actually controlled.  Thereafter, Harris used the illegally obtained money to engage in transactions exceeding $10,000, he admitted.

Harris was charged in a December 2016 indictment along with codefendants Joo Hyun Bahn aka Dennis Bahn (Bahn) and Ban Ki Sang (Ban).  According to the indictment, during this time, Ban was a senior executive at Keangnam, and allegedly convinced Keangnam to hire his son Bahn, who worked as a broker at a commercial real estate firm in Manhattan, to secure an investor for Landmark 72.

Bahn and Ban are awaiting trial.  The charges and allegations contained in an indictment are only accusations.  The defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

The FBI’s International Corruption Squad in New York City investigated the case.  In 2015, the FBI formed International Corruption Squads across the country to address national and international implications of foreign corruption.  Trial Attorney Dennis R. Kihm of the Criminal Division’s Fraud Section and Assistant U.S. Attorney Daniel S. Noble of the Southern District of New York are prosecuting the case.  The Criminal Division’s Office of International Affairs also provided substantial assistance in this matter.

The Fraud Section is responsible for investigating and prosecuting all FCPA matters.  Additional information about the Justice Department’s FCPA enforcement efforts can be found at www.justice.gov/criminal-fraud/foreign-corrupt-practices-act.

Real Estate Investor Sentenced to 14 Months in Prison for Rigging Bids at Northern California Public Foreclosure Auctions

Wednesday, October 4, 2017

A real estate investor was sentenced today for his role in a conspiracy to rig bids at public real estate foreclosure auctions in Northern California, the Department of Justice announced.

Brian McKinzie was charged on June 30, 2011, in an indictment returned by a federal grand jury in the Northern District of California. McKinzie pleaded guilty on Oct. 26, 2016, to two counts of bid rigging at real-estate foreclosure auctions in Alameda and Contra Costa County. Today, McKinzie was sentenced to serve 14 months in prison and to serve three years of supervised release. In addition to his term of imprisonment, McKinzie was ordered to pay a criminal fine of $10,000 and $652,824.43 in restitution.

“Today’s sentence reflects the seriousness of offenses that subvert the competitive process,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division.  “The Division remains firm in its resolve to seek prison terms for individuals who commit antitrust crimes.”  

Between November 2008 and January 2011, McKinzie and other bidders at the auctions conspired not to bid against one another for selected properties, instead designating a winning bidder to win the property at the auction. The members of the conspiracy then held second, private auctions, known as “rounds,” to award the properties to members of the conspiracy and determine payoffs for other conspirators who had agreed not to bid against each other at the public auctions. The private auctions often took place at or near the courthouse steps where the public auctions were held.

When real estate properties are sold at public auctions, the proceeds are used to pay off the mortgage and other debt attached to the property, with the remaining proceeds, if any, paid to the homeowner.

The sentence is a result of the division’s ongoing investigation into bid rigging at public real estate foreclosure auctions in California’s San Francisco, San Mateo, Alameda and Contra Costa counties. These investigations are being conducted by the Antitrust Division’s San Francisco Office and the FBI’s San Francisco Office.

Anyone with information concerning bid rigging or fraud related to public real estate foreclosure auctions should contact the Antitrust Division’s San Francisco Office at 415-934-5300 or call the FBI tip line at 415-553-7400.

Doctor Pleads Guilty to Health Care Fraud Conspiracy for Role in $19 Million Detroit Area Medicare Fraud Scheme

Tuesday, October 3, 2017

A physician pleaded guilty today to conspiracy to commit health care fraud for his role in an approximately $19 million Medicare fraud scheme involving three Detroit area providers.

Acting Assistant Attorney General Kenneth A. Blanco of the Justice Department’s Criminal Division, Acting U.S. Attorney Daniel L. Lemisch of the Eastern District of Michigan, Special Agent in Charge David P. Gelios of the FBI’s Detroit Division, Special Agent in Charge Lamont Pugh III of the U.S. Department of Health and Human Services Office of Inspector General’s (HHS-OIG) Chicago Regional Office and Special Agent in Charge Manny Muriel of Internal Revenue Service Criminal Investigation (IRS-CI) made the announcement.

Abdul Haq, 72, of Ypsilanti, Michigan, pleaded guilty to one count of conspiracy to commit health care fraud before U.S. District Judge Denise Page Hood of the Eastern District of Michigan.  Sentencing has been scheduled for May 29, 2018 before Judge Hood.

As part of his guilty plea, Haq admitted that he conspired with the owner of the Tri-County Network, Mashiyat Rashid, and his co-defendants and others to prescribe medically unnecessary controlled substances, including Oxycodone, Hydrocodone and Opana, to Medicare beneficiaries, many of whom were addicted to narcotics.  He further admitted that in furtherance of the conspiracy, Rashid and others also directed physicians, including Haq and others, to require Medicare beneficiaries to undergo medically unnecessary facet joint injections if the beneficiary wished to obtain prescriptions for controlled substances.

In furtherance of the conspiracy, Haq and others referred Medicare beneficiaries to specific third party home health agencies, laboratories and diagnostic providers even though those referrals were medically unnecessary, he admitted.  Haq also served as the straw owner of various pain clinics owned and/or controlled by Rashid, and submitted false and fraudulent enrollment materials to Medicare that failed to disclose the ownership interest of Rashid, as it was illegal for Rashid – a non-physician – to own medical clinics under Michigan law.  In total, Haq admitted that he submitted or caused the submission of approximately $19,322,846.60 in false and fraudulent claims to Medicare.

Haq was charged along with Mashiyat Rashid, 37, of West Bloomfield, Michigan; Yasser Mozeb, 35, of Madison Heights, Michigan; Spilios Pappas, 61, of Monclova, Ohio; Joseph Betro, 57, of Novi, Michigan; Tariq Omar, 61, of West Bloomfield, Michigan; and Mohammed Zahoor, 51 of Novi, Michigan, in an indictment unsealed on July 6.  Rashid, Mozeb, Pappas, Betro, Omar and Zahoor are awaiting trial.

An indictment is merely an allegation and all defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law.

This case was investigated by the FBI, HHS-OIG and IRS-CI.  Trial Attorney Jacob Foster of the Criminal Division’s Fraud Section is prosecuting the case.

The Fraud Section leads the Medicare Fraud Strike Force, which is part of a joint initiative between the Department of Justice and HHS to focus their efforts to prevent and deter fraud and enforce current anti-fraud laws around the country.  The Medicare Fraud Strike Force operates in nine locations nationwide.  Since its inception in March 2007, the Medicare Fraud Strike Force has charged over 3,500 defendants who collectively have falsely billed the Medicare program for over $12.5 billion.

Western New York Contractors and Two Owners to Pay More Than $3 Million to Settle False Claims Act Allegations

Tuesday, October 3, 2017

Alden, New York-based contractors, Zoladz Construction Company Inc. (ZCCI), Arsenal Contracting LLC (Arsenal), and Alliance Contracting LLC (Alliance), along with two owners, John Zoladz of Darien, New York, and David Lyons of Grand Island, New York, have agreed to pay the United States more than $3 million to settle allegations that they violated the False Claims Act by improperly obtaining federal set-aside contracts designated for service-disabled veteran-owned (SDVO) small businesses, the Justice Department announced today.    

“Contracts are set aside for service-disabled veteran-owned small businesses so to afford veterans with service-connected disabilities the opportunity to participate in federal contracting and gain valuable experience to help them compete for future economic opportunities,” said Acting Assistant Attorney General Chad A. Readler of the Justice Department’s Civil Division.  “Every time an ineligible contractor knowingly pursues and obtains such set-aside contracts, they are cheating American taxpayers at the expense of service-disabled veterans.”

To qualify as a SDVO small business, a service-disabled veteran must own and control the company.  The United States alleged that Zoladz recruited a service-disabled veteran to serve as a figurehead for Arsenal, which purported to be a legitimate SDVO small business but which was, in fact, managed and controlled by Zoladz and Lyons, neither of whom is a service-disabled veteran.  The United States alleged that Arsenal was a sham company that had scant employees of its own and instead relied on Alliance and ZCCI employees to function.  After receiving numerous SDVO small business contracts, Arsenal is alleged to have subcontracted nearly all of the work under the contracts to Alliance, which was owned by Zoladz and Lyons, and ZCCI, which was owned by Zoladz.  Neither Alliance nor ZCCI were eligible to participate in SDVO small business contracting programs.  Zoladz and Lyons are alleged to have carried out their scheme by, among other things, making or causing false statements to be made to the U.S. Department of Veterans’ Affairs (VA) regarding Arsenal’s eligibility to participate in the SDVO small business contracting program and the company’s compliance with SDVO small business requirements.

“Detecting and discontinuing fraud, waste, and abuse committed by those who do business with the government remains a core function performed in this Office,” said Acting U.S. Attorney James P. Kennedy, Jr. for the Western District of New York. “That function, however, takes on additional significance when the target of the fraud is a program designed for the benefit of the heroes among us—our disabled veterans.  Although this investigation did not uncover sufficient evidence to establish criminal liability by these entities and individuals, the multi-million dollar civil judgment ensures that those involved pay a heavy price for their decision to divert to themselves resources intended for the benefit of those who have made supreme sacrifices on behalf of all.”

“This settlement demonstrates the commitment of the Department of Veterans Affairs, Office of Inspector General, the Department of Justice, and other law enforcement agencies to aggressively pursue individuals and companies that misrepresent themselves as service-disabled veteran-owned small businesses and deny legitimate disabled veterans the opportunity to obtain VA set-aside contracts,” said Inspector General, Michael J. Missal of U.S. Department of Veterans Affairs, Office of Inspector General (OIG).  “The VA OIG will continue to work diligently to protect the integrity of this important program, which is designed to aid disabled veterans.  I also want to thank the U.S. Attorney’s Office and our law enforcement partners in this effort.”

“The contracting companies and principals allowed greed to corrupt a federal process intended to benefit service-disabled, veteran-owned small businesses,” said Special Agent in Charge Adam S. Cohen of FBI Buffalo Field Office. “The FBI and our partners will continue to identify and investigate companies and individuals who target these types of programs for personal gain.”

The settlement resolves a lawsuit filed under the whistleblower provisions of the False Claims Act, which permit private individuals to sue on behalf of the government for false claims and to share in any recovery.  The civil lawsuit was filed in the Western District of New York and is captioned United States ex rel. Western New York Foundation for Fair Contracting, Inc. v. Arsenal Contracting, LLC, et al., Case No. 11-CV-0821(S) (W.D.N.Y.).  As part of today’s resolution, the whistleblower will receive $450,000.

“This case is yet another example of the tremendous results achieved through the joint efforts of the Small Business Administration (SBA), the Department of Justice, and partner agencies to uncover and forcefully respond to fraud in Federal Government contracting programs, such as the Service Disabled Veteran-Owned Program in this case,” said Christopher M. Pilkerton, General Counsel of the SBA.  “Identifying and aggressively pursuing instances of civil fraud by participants in these procurement programs is one of SBA’s top priorities.”

“Providing false statements to gain access to federal contracts set aside for service-disabled veterans denies the government opportunities to meet its abiding commitment to our nation’s veterans,” said Acting SBA Inspector General Hannibal “Mike” Ware.  “The SBA’s Office of the Inspector General is committed to bringing those that lie to gain access to SBA’s preferential contracting programs to justice.  I want to thank the Department of Justice for its leadership and dedication to serving justice.”

“There is an obvious need and reason for service-disabled, veteran-owned small businesses in the government contracting process,” said Director Frank Robey of the Army Criminal Investigation Command (CID), Major Procurement Fraud Unit.  “Special Agents from Army CID will continue to work closely with our law enforcement partners to make every contribution possible to bring persons to justice who violate that process.”

This matter was investigated by the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office for the Western District of New York, the FBI, the VA’s Office of Inspector General, the SBA’s Office of Inspector General, and Army CID.

The claims resolved by the settlement are allegations only, and there has been no determination of liability.

CCC’s: It Is Time for an Antitrust Whistleblower Statute–Part 3

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This is Part Three of a four-part series of posts by myself and colleague Kimberly Justice on “It Is Time for an Antitrust Whistleblower Statute.”  Parts 1 and 2 can be found here and here.

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Note:   If the Grassley/Leahy Anti-Retaliation Act is passed, that protection would be part of the whistleblower statute. Ms. Justice and I are advocating that an antitrust whistleblower statute should go farther and provide a reward for actionable cartel-busting information.

The SEC whistleblower statute is a very successful model to be followed for a potential antitrust whistleblower statute. There should be differences in some areas (discussed below), but the SEC program has shown to be an effective tool in preserving the integrity of the nations’ securities market while conserving the investigative resources of the SEC.  But, it took a severe financial crisis to overcome the objections to an SEC whistleblower statute.  Many of the stakeholders, such as the Chamber of Commerce that opposed allowing a whistleblower award as part of the Dodd-Frank Act are likely to oppose an antitrust whistleblower statute.  But in November 2016, then SEC chair Mary Jo White said: “The whistleblower program has had a transformative impact on enforcement and that impact will only increase in the coming years.”

The success of the SEC whistleblower statute, at least from an enforcement perspective, is one reason why we think the time has come for a similar antitrust whistleblower statute.  It works.  The SEC, which pays the whistleblower 10-30% of the sanctions collected in successful actions, has rewarded 46 whistleblowers with approximately $158 million for information that has led to successful enforcement actions.

The SEC statute, like the antitrust statute we propose, is different than a typical False Claims Act-type whistleblower claim where the relator (whistleblower) brings an action in the name of the United States alleging the government has been the victim of fraud.  The SEC statute basically provides an informant with a reward (bounty) for coming forward with actionable information where the SEC obtains monetary sanctions.  The SEC, however, is precluded from making monetary awards “to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award.”

While the SEC statute provides a model, there are areas where adjustments for the nature of cartel violations may be made in an antitrust whistleblower statute.  The full SEC legislation can be found here, but below are a couple of key provisions and our suggestions about how they might be modified.

Payment of Award

The SEC whistleblower program allows for a reward, “In any covered judicial or administrative action, or related action.” 

The Antitrust Division does not have administrative actions.  An antitrust whistleblower would be eligible for an award, in our view, only based on original information that led to criminal Sherman Act convictions and the imposition of fines based on a conviction.

 Amount of Award

The SEC provides for a whistleblower award only where the penalties exceed $1 million.  In such cases the reward is an aggregate amount [if more than one whistleblower] equal to—

‘‘(A) not less than 10 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions; and

‘‘(B) not more than 30 percent, in total, of what has been collected of the monetary sanctions imposed in the action or related actions.

In our view, this may not be an appropriate award schedule for an antitrust whistleblower.  At a minimum, the $1 million threshold should be eliminated. A whistleblower statute may be particularly effective in construction-type contracts where the loss to the victim is acute.  For example, a rigged electrical contract at a local hospital that would have been $750,000 with competitive bidding but has a low fixed bid of $1 million is as worthy of a whistleblower award as an international cartel where each consumer suffers a relatively small loss, but cumulatively the loss will easily exceed $1 million.

Also, the 10 to 30 percent award range may be excessive in a large cartel case.  The impetus behind our proposed legislation is not so much to make a whistleblower a mega-lottery winner, but to provide a way to help the whistleblower pay for what could be substantial attorney fees, and to compensate the whistleblower for what may be a long period of unemployment or underemployment, regardless of anti-retaliation protection. Therefore, we would eliminate the minimum award of 10%, leave the maximum of 30% and perhaps require that in making the award the Antitrust Division consider a) the attorney fees incurred; and b) the likely or actual loss of income over a period of time, as well as the value of the information provided, the level of cooperation and the amount of the recovery.

No Recovery for One Convicted of the Violation

No SEC whistleblower award can be made to ‘‘to any whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower otherwise could receive an award under this section.”

             An antitrust whistleblower statute should certainly retain this provision.  It is our sense that the most likely potential antitrust whistleblowers will be lower-level employees who know about a conspiracy and take some action in furtherance of it—thus creating criminal liability for themselves.  This will give the Antitrust Division much control over who can become a whistleblower.  The Division retains the discretion whether to give non-prosecution protection, a necessary first step before an insider can become a whistleblower.  If the potential whistleblower has a level of culpability such that the Antitrust Division is not comfortable accepting as a whistleblower, the simple answer is to not grant non-prosecution protection.  Another possible scenario is that the Antitrust Division grant non-prosecution protection to a highly culpable individual (making them eligible for an award because no conviction) but write into the cooperation agreement that the cooperator waive the right to a potential “bounty.”

There may be, and hopefully will be, some whistleblowers who do not need non-prosecution protection (customers, administrative staff or others who learn of a cartel but have no role in it).  But, in practice, the Antitrust Division would have significant control over the whistleblower program because it is likely that many potential whistleblowers would have to take as a first step, negotiating non-prosecution agreements.

 Office of the Whistleblower

            A key aspect behind the success of the SEC whistleblower provision is that the SEC actively promotes the program.  The SEC established an Office of the Whistleblower.  This is an excerpt from the office’s home page:

Assistance and information from a whistleblower who knows of possible securities law violations can be among the most powerful weapons in the law enforcement arsenal of the Securities and Exchange Commission. Through their knowledge of the circumstances and individuals involved, whistleblowers can help the Commission identify possible fraud and other violations much earlier than might otherwise have been possible.

The level to which the Antitrust Division promotes a new whistleblower statute will determine its level of success.  When the Division first began the revised leniency program, it rolled it out like a new iPhone.  The Division went to great lengths to advertise the program and make the program successful in practice by working with companies to help them qualify if at all possible.  The flexibility and discretion built in to an SEC style whistleblower statute will give the Antitrust Division the ability to accentuate the features the whistleblower provisions that work best for law enforcement while mitigating any possible downside (such as very culpable people getting awards).

Miscellaneous

We’ve only touched on the most significant feature of the SEC whistleblower program that may be mimicked in an antitrust whistleblower statute.  There would be more “sausage making” into creating actual legislation.  Other features of the SEC program worth noting are the reporting requirements to Congress and the Inspector General review and report on the program.  If an antitrust whistleblower statute is nearly as effective as the SEC statute, law enforcement and consumers will be the winners.  But, if an antitrust whistleblower statute is a bad idea, it can be a short-lived bad idea.  In light of the success of the SEC program, it is prudent to give it a chance.

Thanks for reading

Robert.connolly@geyergorey.com

Kimberly A. Justice, kjustice@ktmc.com