By

Lauren Treadaway

12 November 2013

New York Proposes Law to Improve Incentives for Financial Industry Whistleblowers

Posted by David Rody and Lauren Treadaway

New York lawmakers have sought to fill a perceived gap in the New York State False Claims Act by providing a bounty and legal protections to whistleblowers who provide information for successful claims involving financial wrongs prohibited by state law. NYS Bill No. 4362, which is modeled in part on the New York State False Claims Act, provides new incentives to employees of financial services providers who report employer violations of New York State’s banking, insurance, and financial services laws. Currently, the New York Financial Services Law does not address monetary rewards or legal protection from employer retaliation for whistleblowers who report employer misconduct. Sponsored by New York State Senators James Seward and Joseph Griffo, S4362 would strengthen the current Financial Services Law in two significant ways: (1) by providing financial rewards for employees who disclose employer violations of New York State’s banking, insurance, and financial services laws to the Department of Financial Services (“DFS”); and (2) by including a provision for legal protection against employer retaliation for employees who report such misconduct.

If enacted, S4362 would allow a whistleblower who reports original information to receive between 10 and 30 percent of the total monetary sanctions received by DFS in a successful action against defendant based on the whistleblower’s information. The bill also creates legal protections for whistleblower employees against employer retaliation that mirror the remedies provided by the New York False Claims Act. According to the bill, a whistleblower employee may seek an injunction, reinstatement, backpay, and/or special damages where an employer retaliates against the employer by demoting, suspending, terminating, or harassing the employee. The full text of S4362 can be found here.

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04 November 2013

U.S. Chamber of Commerce Recommends False Claims Act Reforms

Posted by David Rody and Lauren Treadaway

On October 23, 2013, the U.S. Chamber of Commerce’s Institute for Legal Reform (ILR) issued a white paper entitled “Fixing the False Claims Act: The Case for Compliance-Focused Reform.” The paper proposes three areas of Congressional reforms to the FCA that would better prevent the loss of government funds through earlier detection and prevention of fraud, while reducing the cost of FCA lawsuits and investigations on companies accused of wrongdoing by narrowing the scope of successful claims as well as the amount of damages and penalties.

The first area of the paper’s FCA reform proposal deals with a shift from the government’s use of ex-post litigation to recover for fraudulently obtained government funds to ex-ante compliance programs that encourage businesses contracting with the government or participating in government programs to preclude, discover, and report fraudulent activity. Such compliance programs would not only reduce the estimated $60 billion lost by the U.S. Treasury to fraud each year but would also decrease the burden of FCA enforcement on taxpayers by relying on less expensive government investigation techniques and reducing the resort to costly litigation techniques.

The proposed voluntary compliance programs would encompass two requirements outlined by the paper: (1) independently developed” best practice” standards that measure compliance both across industries and within specific industry sectors; and (2) company retention of an independent auditing body to periodically review and certify the company’s compliance with those standards. To incentivize voluntary adoption of the certified compliance programs, the paper proposes reforms to the FCA for companies with such programs, including elimination of the blanket mandate for treble damages in favor of a variable factor based on the defendant’s culpability; a prohibition of subsequent qui tam actions based on fraudulent activity already reported by the company to a government investigatory agency; a mechanism by which companies can dismiss a qui tam suit filed by a relator-employee who failed to internally inform the company of the alleged wrongdoing at least 180 days prior to filing suit; and an elimination of mandatory or permissive exclusion or debarment.

The second area of the paper’s FCA reform proposal targets eight isolated provisions of the FCA, recommending amendments in order to effectuate the just and efficient use of the FCA against all companies and individuals regardless of their adoption of the proposed certified compliance programs. A majority of the eight proposed reforms focus on narrowing the scope of the FCA in various ways, thus preventing duplicative or frivolous claims as well as excessive damage pay-outs by defendants. The amendments would include, among other things, a calibrated structure for determining relator award percentages to reduce high recovery amounts paid to relators and their counsel; a prohibition against the filing of qui tam suits by government employees based on information obtained during their government service; a restriction of FCA liability to “instances of genuine, material falsehood or fraud” as opposed to the historical “implied false certification” cause of action; a change in the standard of proof for all elements under the FCA from a preponderance of the evidence to clear and convincing evidence; and a limitation of the government’s recovery to “net actual damages” to prevent windfall recoveries by the government.

Finally, the FCA reform proposal also urges the Department of Justice to improve its policy guidelines governing the use of Civil Investigative Demands (CIDs) in order to reduce the number of CIDs and the cost that companies incur when responding to these administrative subpoenas. The proposals include limiting the employees authorized to issue CIDs, establishing a narrow scope for CIDs, and limiting the DOJ’s ability to share CID-obtained information with relators and third parties. The report is available here.

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