"Private justice" and FCPA enforcement: should the SEC whistleblower program include a qui tam provision?

Author:O'Sullivan, Julie Rose
Position::Foreign Corrupt Practices Act of 1977 - Symposium on Private Justice and Enforcement
 
FREE EXCERPT

INTRODUCTION

The most important--and under-recognized--fact about the enforcement of transborder anti-corruption legal regimes is this: governments cannot realistically expect to be able to do it effectively without enlisting the help of whistleblowers and the private bar. Various international conventions that require criminalization of transborder corruption recognize that civil remedies may be effective, but they do not require state parties to implement such remedies. (1) This article posits that "private justice," defined expansively as private persons initiating, or assisting in the launching, of lawsuits to detect and deter public harms, (2) must be employed in conjunction with governmental criminal enforcement if we are to achieve any real success in containing the contagion of transborder corruption. (3) Not all states' legal systems are hospitable to private justice, and the United States is one of the few countries that use it so comprehensively. (4) This may arise from a cultural antipathy toward whistleblowers, a preference for judicial investigations of wrongdoing, or a disinclination to adopt the structural incentives--such as contingency fee arrangements--that make some such mechanisms work. But those states whose legal systems are congenial to the notion ought seriously to consider harnessing the power of private justice in the war against corruption and its many collateral ills.

So what should private justice look like in this context? Private justice can be configured in numerous ways to pursue the public interest. (5) The effectiveness of any particular cause of action or legal device (such as class actions) depends upon the goals identified, which in turn depend on the particular subject-matter of regulation, (6) among other things. For example, one goal of "private justice" regimes in regulatory areas where discrete victims may be identified, such as environmental and civil rights enforcement, is to make individual victims whole. I submit that in the corruption context, identifiable victims (other than competitors) may be difficult to isolate and that the harms sought to be prevented and punished are overwhelmingly social, political, and diplomatic ones in which the ultimate costs of the corruption may be difficult to quantify. This paper begins by summarizing two U.S. private justice regimes that are structured to serve at least some of the goals that should be considered in this context: one that is commonly cited as extraordinarily successful in combating false and fraudulent claims against the U.S. government (the False Claims Act ("FCA")), and one that is a newer, and more limited, program Congress created to incentivize private persons to disclose information and evidence regarding securities law violations, including those related to transborder corruption, to the U.S. government (the Securities and Exchange Commission's ("SEC") Whistleblower Program ("WBP")).

These mechanisms are designed to: elicit insider information that will jumpstart enforcement efforts; ease the burdens presented by sole reliance on criminal mechanisms; and significantly supplement the ever-decreasing amount of resources (7) committed to public enforcement by allowing citizens to pursue litigation without the government (FCA) and/or by promoting the more effective and efficient use of public resources (FCA and WBP). A critical footnote to these aims is that the goal cannot be simply to attract whistleblowers; given governmental resource constraints, screening thousands of random tips will be more trouble than it is worth and may indeed be counterproductive from a deterrence standpoint. For this and other reasons, the incentives must also be sufficient to attract entrepreneurial lawyers--often working on a contingency fee basis--to screen, investigate, and present the best and most complete cases to enforcement authorities. A further aim--fighting regulatory "capture" by regulated industries---may also be appropriate in this context and may be served by designing the private justice mechanism to permit private individuals to proceed without government intervention, as does the FCA but not the WBP. Finally, one must consider the law-generating function of private justice and evaluate whether the particular regulatory context will be well served by additional judicial participation in fleshing out the applicable law or whether instead there is an undue risk that private enforcers will drive the law's boundaries in ways that do not serve the public interest.

Returning to my thesis, I will, in the course of describing how these two regulatory regimes further the public interest, also discuss the circumstances that conspire to make criminal enforcement of transborder anti-corruption norms prohibitively difficult and the reasons that private justice mechanisms, like the FCA or the SEC Program, may cure or at least ameliorate these difficulties. In discussing design features, I do not purport to canvas all the considerations--normative, political, or structural--that may inform this debate, in part because the SEC Program has been in operation only a short time and any conclusions regarding its efficacy or effects (intended and unintended) are premature. I will, however, conduct a limited comparison of the design features of these two mechanisms--and their costs and benefits in this context--to illustrate some of the design decisions that must be made in structuring an anti-corruption private justice vehicle.

In so doing, I would like to reinvigorate the debate over whether Congress should have provided for an FCA-like qui tam regime instead of or in addition to the WBP in the FCPA context based on recent empirical work in the FCA space and what we can posit regarding the likely incentives the WBP offers to whistleblowers and the private bar. My preliminary conclusions are that: the current WBP program encourages nearly cost-free tipping, which may incentivize the provision of masses of low-quality information; the SEC's resource constraints may mean that it does not have the capacity to effectively screen the wheat from the chaff, paradoxically resulting in lower quality enforcement and less deterrence; it may be that only the provision of qui tam authority will provide entrepreneurial law firms--who can significantly assist the SEC in triaging tips--the incentives, in terms of the quantity of the awards and the certainty of prevailing, to make the necessary investment in this practice.

  1. THE FCA AND SEC WHISTLEBLOWER (OR "BOUNTY") PROGRAMS

  1. The Civil False Claims Act

    The civil False Claims Act (8) contains a number of substantive prohibitions (9) but is most frequently used to recover government monies persons knowingly obtained--or improperly retained (10)--through false claims (11) or false statements. (12) Generally, a person may be liable under the FCA if the defendant presented to the government a claim that he knew to be false or fraudulent or knowingly made or used a false statement material to such a claim.

    The FCA, inter alia, authorizes the government to bring actions to secure damages for false and fraudulent claims upon the government. (13) Critically, however, it also allows private citizens, known as "relators," to bring what are known as qui tam (14) suits in the name of the government, based on the individual's knowledge of fraud against the government, and to secure for his trouble a portion of the funds recovered in the suit. Thus, a civil False Claims Act suit may be initiated by either the Attorney General or by private persons. (15)

    A private person may initiate a qui tam suit "for the person and for the United States Government" in the "name of the Government" (16) by filing a complaint under seal with the court and serving a copy on the Department of Justice ("DOJ") (but not on the defendant until the court so orders). The relator is also required to provide the DOJ with a "written disclosure of substantially all material evidence and information." (17) The "relator" does not have to have alleged or suffered any personal harm--the idea is that he is suing on behalf of the harmed government. What the relator must have, however, is information not previously publicly disclosed unless the relator is the "original source" of the information. (18) A relator cannot file a qui tarn action where he has been convicted of criminal misconduct arising from his role in the FCA violation, another qui tam relator alleging the same violation has filed before him, or the government is already a party to a civil or administrative procedure concerning the same conduct. (19)

    Where a case is initiated by a private relator, rather than the government, the complaint remains under seal and the action is stayed for sixty days while the government determines whether to intervene--that is, take over the case as its own--or to leave the case to the relator to litigate. (20) The sixty-day seal period permits the government to review the relator's allegations and evidence, to assess the suit's impact on any pending criminal investigation, and to prevent alerting potential criminal defendants of an investigation. The statute permits the court to grant the government extensions of the sixty-day period during which the complaint remains under seal. (21) While the government takes over a minority of the qui tam actions brought by relators, it investigates all of them. (22)

    If, after investigating the matter, the government declines to intervene, the relator may litigate the case to judgment, although the relator must obtain the government's approval to settle or dismiss a case. (23) Even if the government intervenes, thus taking over primary responsibility for its prosecution, (24) relators may remain involved.

    Relators may, if the suit is successful, recover between fifteen and twenty-five percent of the proceeds of the suit if the government chooses to intervene and conduct the litigation, and...

To continue reading

FREE SIGN UP