Friday, July 23, 2010

Outsourcing financial reform

Guambat can't figure out why the "conservatives" were so recalcitrant in passing the Financial Reform package, such as it was. After all, one component, which may yet to prove more worthy than all the rest, was all about privatizing some of the enforcement provisions.

Of course, "conservatives" have long considered lawyering to not really be private industry. Just jealous of the privateering rewards, Guambat supposes.

For a little background, ever since the US Civil War, there has been a federal law which allows private citizens to bring "false claims" actions against other private parties who are cheating the government on their government contracts. The actions are brought by private parties with the consenting collusion of the government, and if the case is successful, the private party gets a share of the rewards. In the arcane language of the law, this sort of lawsuit is called a "qui tam" action. It is a form of action that is very much alive and well today, as these posts in Guambat's alter ego blawg discuss.

Financial reform law includes big cash incentives for whistle-blowers
A little-known provision in the huge package extends to the private sector a concept long applied to government contracts.

It gives whistle-blowers a mandatory 10% — and as much as 30% — of what the government recoups in fines and settlements in financial fraud cases. Awards are triggered only when the government recovers at least $1 million.

To claim a bounty, the whistle-blower must provide the Securities and Exchange Commission with "original information" that reveals the fraud and leads to a successful recovery. These can include insider trading, false earnings reports and classic Ponzi schemes.

"This is very significant and will have an immediate impact," said Erika Kelton, a Washington lawyer who has represented whistle-blowers. "It will motivate knowledgeable insiders to step forward and tell the enforcement agencies what they know. It is the secret weapon in this massive bill."

Goldman Sachs recently agreed to pay $550 million to settle a suit brought by the SEC accusing the investment banking firm of misleading investors who bought mortgage-backed securities just as the housing market collapsed. Had the case arisen from a whistle-blower's tip under the new law, "it would mean at least $55 million for the whistle-blower," Kelton said.

After the collapse of Enron Corp. and the passage of the Sarbanes-Oxley Act, companies tried to keep problems in-house by setting up hotlines and encouraging employees to tell top management if they saw questionable conduct.

Some employees may see an incentive not to report a problem internally, but instead "to go to the SEC with it," said Martin Rosenbaum, a Minneapolis lawyer.

"This is the most successful fraud-recovery program ever. It brings money back to the taxpayers," said Stephen Kohn, executive director of the National Whistleblowers Center in Washington.

"This is a not a get-rich-quick scheme for whistle-blowers," Kohn said. "Any time you are involved in a government investigation you are in for a long, drawn-out proceeding. But under this law, whistle-blowers win if they are right, and the government collects."

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