Federal agencies enhance tipster programs

'It hasn't ... resulted in a slew of people coming forward'

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Burned by its failure to catch the Bernard Madoff Ponzi scheme, despite years of warnings from a tipster, the Securities and Exchange Commission couldn't say no when Congress ordered it to pay whistleblowers.

There's little love in official Washington for the Edward Snowden kind that takes secrets to the media. But people who turn in their bosses or companies to the government are viewed as heroes -- eligible for compensation -- in more and more corners of the federal bureaucracy.

"Let's face it, blowing whistles is a career limiting, if not a career-ending act," said Sean X. McKessy, chief of the SEC's Office of the Whistleblower. In the high-dollar world of securities, he said, only a significant financial incentive would counterbalance that.

"We now have rewarded six people who have enabled us to prevent an ongoing fraud or conduct from getting worse," he said. "I think that sends a message."

Skeptics are countering that if the modest number of payouts doesn't increase this year, faith in the program will wane.

"I have to tell you that the program has had small returns so far," said Patrick Burns, co-director of Taxpayers Against Fraud, a nonprofit group that backs whistleblowers. "The SEC is an apple tree. ... We think it will produce more apples in the future."

The Dodd-Frank financial reform law requires that when the SEC gets a tip that results in a payment by the company of $1 million or more, the whistleblower gets between 10 and 30 percent of the amount recovered. Awards should tend to the high side when the whistleblower tried to report the fraud within the company first.

The SEC's Office of the Whistleblower has so far paid $14.88 million to its six whistleblowers. That total, though, is dominated by one $14 million payout on a case the SEC declines to detail.

The U.S. Chamber of Commerce, which opposed putting a whistleblower provision into Dodd-Frank, worries that the $14 million award will prompt people to skip their companies' internal chains of compliance that it believes are better equipped to handle complaints quickly.

"Obviously, the money is a big incentive for people just to call [the SEC] with anything. The SEC is probably spending a lot of time sorting the wheat from the chaff," said Alice Joe, managing director of the Chamber's Center for Capital Markets Competitiveness. "If a whistleblower went straight to the SEC, by the time the SEC addresses it, it could be a number of months," before the company learns of the problem and can take internal measures.

The six awards paid by the SEC stemmed from 6,574 tips to Mr. McKessy's office. They represent a sliver of the 431 cases in which the SEC imposed sanctions of $1 million since 2011.

In one case before the 2nd U.S. Circuit Court of Appeals, the SEC is accused of looking for reasons to deny an award.

In 2010, the SEC sued Advanced Technologies Group, based in Nevada, and its officers, claiming they raised $14.7 million plus interest from investors through illegal securities offerings, then paid roughly $4 million to themselves and their wives.

A co-founder of a company that became part of ATG took the SEC to court. He said the agency gobbled up information he provided, acted on it, and never paid him. The SEC responded that the information came in before the July 2010 passage of Dodd-Frank, so there's no obligation to pay.

Stephen Kohn, executive director of the National Whistleblower Center, said the SEC's stance "is having a devastating impact on whistleblowers."

Other agencies are taking tentative steps to enhance long-moribund whistleblower programs.

The Center for Medicare and Medicaid Services, called CMS, has had a whistleblower program for 16 years -- and has paid $16,000 to 18 tipsters in that time. The program has a $1,000 cap on awards. The federal agency recognized that was small potatoes for a program that insures 100 million Americans and is charged with ferreting out unscrupulous providers that bill for services they never provided, or enroll people in inappropriate health care plans.

Last year, the agency proposed bulking up the program by boosting the tipster's share of any recovery from 10 to 15 percent, and hoisting the maximum whistleblower award to $9.9 million.

"We consider the public and our beneficiaries to be our partners in fighting Medicare fraud and anything we can do to incentivise them to report fraud is a good thing," said Ted Doolittle, deputy director of CMS's Center for Program Integrity.

The Veterans Affairs Office of Inspector General has a reward program that can pay up to $10,000 for information about unlawful activity involving benefits, when the information results in a felony charge or the recovery of money. The office gets 25,000 to 30,000 hotline calls a year -- not all from would-be whistleblowers -- and in recent years has paid three awards, totaling $4,000.

The administration began advertising the program's existence on its website in 2012.

"It hasn't obviously resulted in a slew of people coming forward to claim a reward," said James O'Neill, assistant inspector general for investigations at the Veterans Affairs OIG.

Whistleblower programs typically don't catch fire without effort, said David Kotz, former inspector general of the SEC, who oversaw the early stages of the whistleblower program before he left the agency in 2012.

"In the past, there has been a sense in some government quarters that 'We don't need the public. ... We can handle things ourselves,' " he said. "You want to look for reasons to give out awards. That should be the mind-set."

Rich Lord: rlord@post-gazette.com or 412-263-1542. Twitter @richelord.

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