DOL ARB Rules that Whistleblowers May Disclose Confidential Employer Information Evidencing Wrongdoing

October 10, 2011

In Vannoy v. Celanese Corp., the Department of Labor Administrative Review Board (ARB) reversed the Administrative Law Judge’s decision, affirming that whistleblowers are protected when disclosing to the government confidential employer information evidencing wrongdoing.

Whistleblower Matthew Vannoy filed a complaint with the Department of Labor on January 25, 2008, alleging his employer, Celanese Corporation, violated the whistleblower protection provisions of the violated the Sarbanes-Oxley Act (SOX) when placing him on paid administrative leave and subsequently terminating him.  Celanese is an international publicly traded company that manufactures and distributes industrial chemicals.

Vannoy noticed potential weaknesses in the company’s credit card reimbursement program and reported those weaknesses internally and to the IRS.  Some of the documents Vannoy sent to the IRS included confidential employer information such as employee home addresses and social security numbers.

The ARB held that SOX whistleblowers are not only protected when disclosing information to the SEC or Department of Justice, but they are also protected when making disclosures to the IRS.  Applying the Williams standard, the ARB also held that the use of paid administrative leave could constitute an adverse employment action when forced upon a SOX whistleblower.  Lastly, the ARB found:

There is a clear tension between a company’s legitimate business policies protecting confidential information and the whistleblower bounty programs created by Congress to encourage whistleblowers to disclose confidential company information in furtherance of enforcement of tax and securities laws. Passage of these bounty provisions demonstrate that Congress intended to encourage federal agencies to seek out and investigate independently procured, non-public information from whistleblowers such as Vannoy to eliminate abuses in the tax realm under the IRS Whistleblower program and now in the securities realm with the SEC Whistleblower program recently enacted in 2010. In 2010, the Dodd-Frank Act established the SEC Investor Protection fund, which is to be used to pay whistleblower claims and is funded with monetary sanctions that the SEC collects in a judicial or administrative action, or through certain disgorgements under the Sarbanes-Oxley Act of 2002. Similar to the IRS Whistleblower bounty program that Vannoy pursued, Section 21F(b) of the Dodd-Frank Act provides that the SEC “shall pay” a whistleblower who voluntarily provides original information to the SEC that leads to the successful enforcement of a covered judicial or administrative action and results in certain monetary sanctions.

Under the SEC bounty program, the whistleblower is entitled to an award of between 10 percent and 30 percent of what the SEC collects in monetary sanctions. However, the whistleblower must provide “original information to the SEC relating to a violation of the securities law.” 15 U.S.C. 78u-6 (b)(1) (emphasis added). The Act defines original information as information that: (i) “is derived from the independent knowledge or analysis of the whistleblower;” (ii) “is not known to the SEC from any other source, unless the whistleblower is the original source of the information;” and (iii) the information “is not derived exclusively from an another allegation contained in a judicial or administrative hearing, in a governmental report, hearig, audit or investigation, or from the news media, unless the whistleblower is a source of the information.” 15 U.S.C. 78u-6(a)(3).

Under the terms of the SEC whistleblower bounty program, Congress anticipated that the whistleblower would provide independently garnered, insider information that would be valuable to the SEC in its investigation. Indeed, the recently issued final rule implementing the SEC bounty program contains a provision prohibiting employers from enforcing or threatening to enforce confidentiality agreements to prevent whistleblower employees from cooperating with the SEC. 17 C.F.R. § 240.21F-17(a).

The IRS whistleblower bounty program Vannoy used, like the SEC program recently established, reflects Congressional recognition of the notable contributions to law enforcement provided by whistleblowers with non public, inside information. Vannoy’s allegations must be viewed in light of these significant enforcement interests. Evidence of record supports Vannoy’s allegations that he procured employee data in 2005 and in 2007 as part of his efforts to facilitate his complaint with the IRS as to Celanese’s accounting practices. In doing so he sent confidential information by e-mail and created compact discs containing confidential information concerning Celanese employees without the company’s permission. Indeed the record shows that some of this information was transferred to a personal computer at Vannoy’s home. See supra at 4. Thus the crucial question for the ALJ to resolve with a hearing on remand is whether the information that Vannoy procured from the company is the kind of “original information” that Congress intended be protected under either the IRS or SEC whistleblower programs, and whether the manner of the transfer of information was protected activity within the scope of SOX. These are mixed questions of law and fact for the ALJ to determine in the first instance.

IRS Awards Whistleblower $4.5 Million

April 08, 2011

The IRS Whistleblower Office paid a $4.5 million reward under its new Whistleblower Reward Program to an unidentified accountant who discovered a tax liability greater than $20 million at a Fortune 500 financial services firm.  The firm had declined to report the tax liability to the IRS after it was discovered. The whistleblower came forward with information and reported the tax liability to the IRS, resulting in a large reward. In 2006, Congress passed legislation implementing the new IRS Whistleblower Reward Program where individuals who expose tax fraud can receive an award ranging from 15% to 30% of the proceeds recovered by the IRS.

IRS Rewards Enron Whistleblower $1.1 Million

March 18, 2011

The Washington Post reported that the IRS awarded $1.1 million to the anonymous whistleblower who reported Enron for bilking the government out of over $200 million in tax revenue before its collapse in 2001.  The whistleblower showed the IRS how Wall Street banks, using business arrangements and entities, provided tax shelters for $600 million of Enron’s income and fraudulently boosted Enron’s earnings by over $300 million.  The whistleblower was employed at a Wall Street investment bank while he educated the IRS on those fraudulent tax shelters.  In 2006, Congress passed legislation implementing the new IRS Whistleblower Reward Program where individuals who expose tax fraud can receive an award ranging from 15% to 30% of the proceeds recovered by the IRS.

IRS Broadens Opportunities for Whistleblower Rewards

January 19, 2011

The Internal Revenue Service (IRS) recently issued new rules that now permit whistleblowers to be rewarded for reporting a company’s illegal tax scheme that leads to ill-gotten tax refunds or credits.  Under the IRS’s whistleblower program, whistleblowers can be rewarded up to 30% of the funds recouped in return for reporting tax fraud.

Wall Street Journal Quotes TELG Principal on IRS Whistleblower Program and Combating Tax Fraud

December 13, 2010

In today’s Wall Street Journal article titled “Whistleblower Bounties Pose Challenges,” Jason Zuckerman, a principal at The Employment Law Group® law firm, states that the IRS “needs to be more responsive” to whistleblowers claims.  Zuckerman is referring to the IRS whistleblower program under which whistleblowers who report tax fraud can obtain a reward of up to 30 percent of any taxes collected as a result.  While the IRS’s whistleblower program has been largely touted as a success at generating quality leads, the IRS has yet to reward any of the hundreds of whistleblowers who provided the agency with the information

UBS to Pay $780 Million to Settle Tax Fraud Allegations

February 20, 2009

UBS has agreed to pay $780 million to settle allegations that it helped thousands of U.S. taxpayers defraud the Internal Revenue Service (“IRS”).  According to reports by the Department of Justice, UBS concealed billions of American dollars in accounts held overseas despite requirements to report IRS income and other identifying information for its U.S. clients to the IRS.  The U.S. Securities and Exchange Commission (“SEC”) also filed a complaint against the financial firm, alleging that UBS violated SEC rules by acting as an unregistered broker-dealer and investment advisor to thousands of U.S. citizens.  The settlement agreement includes payment for disgorgement, interest, penalties and restitution for unpaid taxes.  Other terms of the agreement include disclosure of the names of U.S. clients with UBS accounts.

This settlement is significant because it allows the U.S. government to pierce the veil of the Swiss bank secrecy and reminds companies that the penalties for participating in tax evasion schemes are severe.

U.S. Tax Court Proposes Amendments to IRS Whistleblower Award Program

June 05, 2008

On June 2, 2008, the U.S. Tax Court proposed new rules for determining IRS whistleblower awards under section 7263.  The proposed rules grant the court jurisdiction over appeals of award determinations and include procedures for commencing a whistleblower award action.  

Among the proposed amendments are references to actions for redetermination of a whistleblower’s employment status, determination of relief from joint and several liability, and lien or levy, and authorization for electronic service.  The press release regarding the proposed amendments to the Tax Court’s Rules of Practice and Procedure is available here.

IRS Issues Guidelines for Whistleblowers Reporting Tax Fraud

January 01, 2008

The Internal Revenue Service released new guidelines for whistleblowers to report tax fraud and possibly claim a reward based on the amount of additional tax, penalties and interest that is owed. Under the new procedures, the award for reporting tax fraud ranges from 15% to 30% of the collected proceeds. To be eligible for an award, the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed in the aggregate $2,000,000 and, if the allegedly noncompliant person is an individual, the individual’s gross income must exceed $200,000. The new guidelines are posted at http://www.irs.gov/pub/irs-drop/n-08-04.pdf.