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The Week in Whistleblowing

Tax day fell on April 18 this year, and law enforcers celebrated by announcing their wins in recent tax cases. Especially notable was a $40 million settlement unveiled by New York’s attorney general Eric Schneiderman — the largest-ever tax recovery under the New York False Claims Act, which was amended in 2010 to cover tax-related claims (as the federal FCA ought to be, too). A whistleblower brought the case against Harbert Management and related entities, alleging that Harbert helped its hedge-fund managers to declare income in Alabama, where Harbert is based, rather than in New York, where they worked under the leadership of Philip Falcone, a billionaire who’s currently barred from the securities industry after he admitted wrongdoing in a separate action by the Securities and Exchange Commission. The Harbert whistleblower’s name was redacted in this week’s settlement agreement, but he or she will receive a generous $8.8 million share of the recovery. Bragging rights go to Getnick & Getnick and Labaton Sucharow, the firms that represented the whistleblower.

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SEC Whistleblowers Have a Stake in Kokesh Case

On Tuesday the U.S. Supreme Court will hear arguments on a provision of law that has stood mostly unchanged since it was introduced more than 175 years ago — but that could, if interpreted badly, make it harder to maintain a pool of award money that’s been available to whistleblowers since the Dodd-Frank Act was implemented in 2011.

The provision in question is 28 U.S.C. § 2462, a catch-all that sets a five-year time limit for the enforcement of “any civil fine, penalty, or forfeiture” unless Congress specifies otherwise. In Kokesh v. Securities and Exchange Commission, the justices will consider whether this statute of limitations applies to disgorgements, a frequent remedy in SEC actions.

Disgorgements, in which offenders must return ill-gotten money, help to fill the coffers of the SEC’s Investor Protection Fund, from which Dodd-Frank whistleblowers are rewarded for providing tips that lead to successful enforcement actions.

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The Week in Whistleblowing

Wells Fargo continued to dominate whistleblower news, releasing on Monday a 110-page report from Shearman & Sterling that said the independent law firm hasn’t yet “identified a pattern of retaliation against [bank] employees who complained about sales pressure or practices” in its fake-accounts scandal, despite plenty of media documentation of such a pattern. The update was buried in a footnote on page 87 of the report, which described the firm’s investigations so far — clearly and admittedly incomplete. The big headline, meanwhile, was the bank’s clawback of $75 million in compensation from its disgraced former CEO and its former head of community banking, both of whom it said had turned a blind eye to fraud. At the Los Angeles Times, columnist Michael Hiltzik was convincing in his condemnation of the report as “a whitewash.”

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Nation’s Largest Accreditor of For-Profit Colleges Loses Federal Recognition

The Department of Education (DoE) terminated federal recognition of the Accrediting Council for Independent Colleges and Schools (ACICS) on September 22, 2016. Earlier this year, the National Advisory Committee on Institutional Quality and Integrity (NACIQI) recommended ACICS for shutdown to the DoE.

On June 23, 2016, NACIQI recommended to the Senior Department Official (SDO) of the DoE that ACICS be denied recognition as an accreditor. ACICS is no stranger to scrutiny, accrediting controversial schools like Corinthian Colleges, and the recently shutdown ITT Technical Institute. Despite many questionable accreditation decisions made by ACICS over the years, ACICS remained a trusted business partner by the DoE for many years.

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Tenth Circuit Court of Appeals Upholds ARB Decision in Favor of Truck Driver Who was Fired After He Abandoned His Disabled Vehicle to Avoid Freezing to Death

In a recent case before the United States Court of Appeals for the Tenth Circuit, the Court upheld an Administrative Review Board (ARB) decision finding that a truck driver was terminated in violation of the whistleblower provisions of the Surface Transportation Assistance Act (STAA).  The truck driver, Alphonse Maddin, unhitched his truck from a trailer and drove away to avoid freezing to death after the brakes on the trailer froze due and roadside assistance failed to respond.  Maddin had reported to his employer, TransAm Trucking, both the condition of the trailer and the threat to his health due to the freezing weather conditions.  The Court held that Maddin had engaged in protected activity under the STAA by reporting the frozen brakes and the threat to his health; and that the driver’s termination for leaving the trailer to seek safety violated the whistleblower protection provisions of the STAA.

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Whistleblower Exposes Hedge Fund for Misleading Investors

Dhir v. Carlyle Group, 3:16-cv-00219, U.S. District Court, District of Connecticut

A hedge fund employee decided to blow the whistle on the company’s misstatements to investors regarding its financial investments in certain derivative products. The plaintiff, Nikhil Dhir, a former portfolio manager at the hedge fund, claims that the firm misstated both the amount of assets the firm had invested in these derivative products, as well as the risk associated with the products. Dhir alleges that Vermillion hedge fund founders, Chris Nygaard and Drew Gilbert, “knowingly and intentionally” advertised the fund has having low risk and volatility, even though freight derivatives are highly volatile and not liquid.

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Michigan Court Upholds Right to Pursue FRSA Cases in Federal Court

In a recent case in the U.S. District Court for the Eastern District of Michigan, the court denied Grand Trunk Railroad’s Motion to Dismiss, holding that a plaintiff may pursue a Federal Railroad Safety Act (FRSA) whistleblower retaliation claim in federal court, even after he has pursued the same claim administratively with the Department of Labor. The court held that pursuing remedies in both venues did not constitute bad faith on the part of the complainant, did not present a res judicata (claim preclusion) issue, and did not violate the due process rights of the defendant railroad. This case is important because it affirms the options available to a whistleblower to fully adjudicate claims of unlawful retaliation.

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ARB Upholds “Reasonable Belief” Standard for Fraud Claims Under SOX

The Department of Labor’s Administrative Review Board affirmed an Administrative Law Judge’s (ALJ) decision that found the following: Timothy Dietz reported violations of the federal mail and wire fraud statutes to his former employer Cypress Semiconductor Corporation and, in retaliation, Cypress placed an undeserved disciplinary memo in his personnel file, and then constructively discharged him, thereby violating the whistleblower provision of the Sarbanes-Oxley Act (SOX).  The ARB’s decision was issued in Dietz v. Cypress Semiconductor Corp., ARB Case No. 15-017, ALJ Case No. 2014-SOX-002

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ARB Resolves a 20 Year Dispute Involving Racially Motivated Hiring at Bank of America

In April 2016, the Department of Labor’s Administrative Review Board (ARB) settled a twenty-year dispute in Office of Federal Contract Compliance Programs, United States Department of Labor v. Bank of America.  Judge Luis A. Corchado authored the ARB opinion affirming an Administrative Law Judge’s (ALJ) August 2004 ruling regarding discriminatory hiring practices allegedly used by Bank of America (BOA) to exclude African American applicants in 1993. But relying on statistical analysis, Judge Corchado reversed the ALJ’s ruling that BOA utilized similar discriminatory hiring practices between 2002 and 2005. Judge Corchado’s opinion defined the contours of legally persuasive statistical analysis.The ARB cited a long-established principle regarding the role of statistical analysis in employment discrimination cases: “[S]tatistical evidence may be used to rule out chance.” Bank of America, ARB No. 13-099, LJ No. 1997-OFC-016 slip op. at 13 (ARB April 21, 2016)(Corchado L.). Courts have consistently considered disparities exceeding two standard deviations to be significant.  And the more extreme the statistical disparity, the less additional evidence a Plaintiff need present to prove that racial discrimination  caused the variation.

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Connecticut District Court Applies Dodd-Frank Retroactively and Sends SOX Whistleblower Case to Trial

In Richard Trusz v. UBS Realty and UBS AG, Case No. 3:09-cv-00268,  Richard Trusz, a high-ranking executive for UBS, complained that the company followed improper procedures in its real estate valuation. These problems, Trusz claimed, resulted in valuation errors totaling as much as $27 million.

Trusz reported his concerns about these valuation procedures both internally and externally prior to the termination of his employment in 2008. According to UBS, it eliminated Trusz’s position because the company decided to outsource its valuation review duties. Trusz alleged three types of whistleblower retaliation claims, one a federal claim under the Sarbanes-Oxley Act and two state law claims.» Read more

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