Whistle-blower Award System Incentivizing Wrongdoing?


2014 was a very good year to be a whistle-blower. Individuals who blew the whistle on crimes they knew of or were involved in received a total of $435 million last year, and another $170 million is also to be shared among three whistle-blowers in a case involving Bank of America.

The Justice Department notes that these whistle-blower payments were all related the nearly $6 billion recovered under the False Claims Act during 2014, which allows individuals to sue others to get back money fraudulently taken from the government. Nearly all of the cases related to illegal mortgage practices or Medicaid and Medicare fraud.

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Whistle-blowers helping the government do its job

The government argues that whistle-blowers offer valuable (and necessary) assistance. They report wrongdoings, but they also know how their industry operates. This means, for example, that whistle-blowers can explain new financial instruments to officials who might not even know the instruments exist. Not surprisingly, whistle-blowers have proven particularly useful in bringing litigation against banks related to the financial crisis.

The point of view of most  government officials is that these awards are just the price of doing business and are much like the contingency fees paid to lawyers in private securities fraud cases. With whistle-blowers, however, the money is going to someone who actually finds the misconduct, rather than lawyers who are just doing there (high-priced) job.

Public uncomfortable with whistle-blowers

Whistle-blowing is a double-edged sword. People who do it are often called “snitches” or “traitors.” The career prospects of whistle-blowers are diminished in most cases. In fact, the government itself has had a tension-filled relationship with whistle-blowers. For example, Edward J. Snowden, the former NSA contractor who leaked classified documents, calls himself a whistle-blower, as does Linda Tripp, the Pentagon employee who exposed Monica Lewinsky’s affair with President Clinton in the 1990s.

The expressed intent behind the law is to compensate whistle-blowers for the adversity they face afterwards.

How much is too much?

Steven Davidoff Solomon argues that an award of millions of dollars may be too much. In a December 30th article in the New York Times, Solomon argues instead of incentivizing the reporting of criminal conduct and fraud, whistle-blower laws are “turning everyone into entrepreneurs looking for a possible case in their own companies.”

He also notes another major problem with the current whistle-blower system — it rewards bad people.

He points to the case of Robert Madsen, a real estate appraiser at LandSafe, a subsidiary of the bank. Madsen went along with his supervisor in what was in essence appraisal fraud involving 14 homes. He claimed he felt guilty so he filed a whistle-blower action. This eventually led to a whistle-blower award of $56 million, based on the bank’s $16 billion settlement regarding its sale of toxic mortgage securities. As Matt Levine of Bloomberg View wrote, the current system encourages people to: “Sign up to do bad stuff. Do bad stuff. Call the F.B.I. Profit.”

In another example, Solomon highlights Bradley Birkenfeld, a former private banker at UBS who was received a $104 million whistle-blower for helping win a $780 million fine from the bank in a tax evasion case.

Birkenfeld pled guilty to putting diamonds in a toothpaste tube and smuggling them on behalf of an American client. He was in prison two and a half years after a conviction for assisting U.S. citizens dodge taxes, but received a $100 million plus payday for his whistle-blowing efforts when he was released from prison..

Solomon says: “I view all this as akin to robbing a bank and then turning in your colleagues to get a cut of the money you stole.”

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