Whistleblowing and Criminal Antitrust Cartels: a Primer and Call for Reform

• Publication year: 2019
• Author: By Robert E. Connolly and Kimberly A.Justice

WHISTLEBLOWING AND CRIMINAL ANTITRUST CARTELS: A PRIMER AND CALL FOR REFORM

By Robert E. Connolly and Kimberly A.Justice¹

"In the two decades I was deeply involved in the Crazy Eddie fraud, the only threat that made us lose sleep at night was the possibility of a whistleblower blowing the lid on our crimes. Consistent studies by the Association of Certified Fraud Examiners have shown that most frauds are exposed by whistleblowers, far ahead of frauds exposed by any other source."

Sam E. Antar, Former Crazy Eddie CFO, former CPA, and a convicted felon²

I. INTRODUCTION

We are currently in the heyday of government prosecuting agencies using whistleblowers as a means of exposing frauds that are difficult to detect without the aid of an "insider." News outlets routinely report on record breaking awards made by the Securities and Exchange Commission ("SEC") to whistleblowers who blow the whistle on financial fraud. SEC whistleblowers can be eligible for an award when they voluntarily provide the agency with "original, timely, and credible information" that leads to a successful enforcement action.³ Awards can range from 10 percent to 30 percent of the money collected when penalties are more than $1 million.⁴ The SEC has awarded more than $300 million to whistleblowers since the inception of the agency's whistleblower program⁵ including a recent award of $500,000 to an overseas whistleblower.⁶ More than $2 billion in monetary sanctions have been ordered against wrongdoers based on actionable information provided by whistleblowers since the program's inception.⁷ The Commodity Futures Trading Commission ("CFTC")⁸ and Internal Revenue Service⁹ have also made large awards to whistleblowers whose cooperation has resulted in large settlements.

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The SEC and other agencies have legislation providing for whistleblower awards. There is no such legislation for reporting a price fixing scheme or bid rigging antitrust crime. As discussed below, however, if the government, not a private party, is the victim of illegal price collusion, the False Claims Act provides a vehicle for a whistleblower to file a qui tam case and receive an award. To remedy this unacceptable anomaly and to strengthen cartel enforcement overall, we advocate passage of an SEC-style "cartel" whistleblower statute.¹⁰ It is our contention that there are scores of lower level employees—sales managers, estimators—who may come forward, risk losing their job and incur significant legal fees—if there is a mechanism by which they may be compensated—i.e. receive a reward for this difficult and life changing act. Public policy and vigorous cartel enforcement favors rewarding lower level cartel players to expose cartel ringleaders.

In this article we discuss the current options for being a whistleblower for criminal antitrust cartels; anti-retaliation protections for whistleblowers; and a proposal for antitrust whistleblower reform by creating criminal cartel whistleblowing opportunities similar to those offered by the SEC.¹¹

II. WHISTLEBLOWING UNDER THE FALSE CLAIMS ACT ("FCA") 12

Currently, a person can blow the whistle on financial crimes fraud if the government is the victim of the fraud, such as bid rigging on federally funded contracts.¹³

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A. The FCA

A whistleblower can file a claim under the FCA. The FCA's qui tam provision, § 3730(b), allows a private person, known as a "relator," to bring an action on behalf of the United States if the government has suffered monetary damages due to fraud.¹⁴ The whistleblower can receive a percentage of the government's recovery if the litigation results in a damage award for the government. Successful relators may receive a reward of up to 25 percent of a settlement if the government intervenes and prosecutes the case and 30 percent if the government does not but the relator prevails after moving ahead on her own. The FCA also provides reimbursement for attorney's fees, costs, and expenses.¹⁵

Qui tam actions are initially filed under seal for an initial 60 day period.¹⁶ At the time of filing the suit, the relator serves upon the DOJ a "relator statement" explaining the allegations in the suit and the evidence the relator has to support the suit. The defendant is not served during the time the government investigates to determine if it will intervene. During this time the identity of the relator remains confidential.¹⁷ As discussed below, however, the complaint will eventually be unsealed and become public.

B. Anti-Retaliation Protection Under the FCA

Whistleblowers understandably worry about potential retaliation for coming forward. The FCA contains an anti-retaliation provision to address this legitimate concern. Employers are prohibited from discriminating against employees, contractors, and agents "because of lawful acts done by the employee, contractor, agent or associated others in furtherance of an action under this section or other efforts to stop one or more violations" of the FCA.¹⁸ Prohibited retaliation includes: termination, suspension, demotion, harassment, or any other discrimination in the terms and conditions of employment. To state a claim for retaliation, a plaintiff must demonstrate that: (1) he engaged in activity protected under the statute; (2) the employer knew the plaintiff engaged in a protected activity; and (3) the employer discriminated against the plaintiff "because he . . . engaged in protected activity."¹⁹

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C. No Whistleblower Anonymity Under the FCA

The strong presumption that court proceedings are open to the public means that a whistleblower complaint, and the whistleblower's identity, will eventually become public. The significant public interest in open judicial records will almost always outweigh the relator's desire to limit access to her identity. In essence the laws say that if you come forward as a whistleblower, you have the potential for a large monetary reward and you have anti-retaliation protection under the FCA (even if you think it is inadequate), but if you file a lawsuit it will become matter of public record. Nonetheless, relators have tried (almost always unsuccessfully) other means to file a suit while keeping their identity concealed even after the case is unsealed.

1. John Doe Plaintiffs

Federal Rule of Civil Procedure 10(a) requires that "[t]he title of the complaint must name all the parties." ²⁰ This apparent prohibition of anonymous filings stems from the strong presumption in favor of transparency in judicial proceedings. A plaintiff's use of a pseudonym "runs afoul of the public's common law right of access to judicial proceedings."²¹ Anonymous filings are permitted in very limited circumstances, such as sexual assault, national security issues, or other compelling reasons. That a plaintiff may suffer embarrassment or economic harm is not enough.²² Instead, a plaintiff must show "both (1) a fear of severe harm, and (2) that the fear of severe harm is reasonable."²³ Fear of retaliation from a drug cartel for being a government informant is one example of the showing of the severity of the harm that will justify keeping a party's name anonymous.²⁴

2. Sealing the Case Docket

Relators have also failed to permanently seal the record of dismissed FCA claims. In US v. Apothetech Rx Specialty Pharmacy Corp.,²⁵ relators claimed they would face potential retaliatory actions if the case was not permanently sealed. The court held, however, that such "generalized apprehensions of future retaliation" were not enough to overcome the strong public right of access to judicial proceedings.²⁶ The court denied the relators' motion for a permanent seal. Noting that such closed proceedings "must be rare and only for cause shown that outweighs the value of openness," the court held that the relators' concerns alone, even if well-founded, "are insufficient to overcome the public right to access judicial records." The court also noted that the FCA provided a remedy for retaliation²⁷ and relators had other remedies like tortious interference with business relations and defamation. ²⁸

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3. Corporate Relators

Courts have ruled that various types of legal entities are also a "person" for purposes of the FCA's qui tam provision.²⁹ A corporation, therefore can be the whistleblower plaintiff but the organization must have been in existence at the time of the alleged fraud³⁰ in order to have the "direct and independent" knowledge needed to file a case.³¹ There will be limited opportunities to use a corporate relator and even then, the identity of the individual whistleblowers will likely come to light at some point in the litigation. Keeping individuals' names out of the case captions, however, provides some anonymity from online search engines.³²

D. The FCA and Government Purchasers

As mentioned, a whistleblower may be able to collect a reward if the government is the victim of a criminal antitrust violation. For example, a whistleblower recently exposed a cartel that fixed prices and rigged bids on U.S. Department of Defense fuel oil contracts in South Korea. Bid rigging is a criminal per se violation of the Sherman Act. Submitting a rigged bid to the United States also violates the FCA because the companies must certify that the bids were independently arrived at, when in fact they were the product of collusion. Three South Korea-based oil companies pled guilty in November 2018 to the misconduct alleged by the whistleblower. The defendants agreed to pay a total of approximately $82 million in criminal fines and approximately $154 million to the United States for civil antitrust and FCA violations related to the bid-rigging conspiracy.³³ Moreover, the companies that have pled guilty are cooperating, resulting in two additional companies agreeing to plead guilty and pay over $75 million in criminal fines and over $50 million in civil settlements.³⁴ The whistleblower will collect between 15 and 25% of these recoveries. This has been a tremendously positive demonstration of the...