Utah is one of only two states in the United States that has a whistleblower act (Indiana is the other). Utah’s statute was written and passed by a young ambitious politician named Ben McAdams in 2011. Ben asked me to assist with the drafting and to provide testimony in support, which I gladly did. We hoped at the time that this new statute would provide powerful incentives for whistleblowers to come forward and help combat Utah’s unusually high Ponzi scheme problem. And that it would be a model for other states to follow.
The statute passed easily, but unfortunately other states have not followed suit. Making matters worse, Utah’s Whistleblower Act has never really been used much — they have only paid out one award so far. I can personally attest to the fact that there have been many applications for whistleblower awards filed with the Division of Securities (because I have filed a bunch of them), so why haven’t they paid out more awards?
Paying big awards with a press conference would be a great way to publicize this little-known program. Paying awards will incentivize people with knowledge of fraud to file whistleblower tips, which would stop more fraudulent schemes and put more fraudsters in prison. So why haven’t they done that?
I actually have no idea.
Whistleblower Programs are a Good Thing
I think it is fairly noncontroversial for me to say that whistleblower laws are a good way to expose and stop fraudsters. They provide financial incentives to individuals with knowledge of fraud to report that knowledge to state or federal securities (and tax) regulators.
Whistleblowing can be really bad for your career and can even put you in physical danger, so understandably people are not terribly excited about sticking their neck out. But the prospect of receiving a financial award can change that calculus in a big way. These programs really do work!
The SEC’s Whistleblower Program was created by Congress on July 21, 2010 and can be found in Section 922 of the Dodd-Frank Act. In its most recent report to Congress, the SEC reported that since the program’s inception they have imposed over $2 billion in total monetary sanctions as a result of whistleblower reports, of which almost $500 million has been returned to harmed investors.
In 2019, the SEC received its second largest number of whistleblower tips ever and paid out its third largest award to date – $37 million. The SEC’s Office of the Whistleblower paid out a $50 million award in March 2018 and a $39 million award in September 2018. Clearly, massive whistleblower awards like that provide a powerful incentive for those with knowledge of fraud to come forward.
The CFTC also has a very successful whistleblower program. In its 2019 report to Congress the CFTC reported that since the inception of its whistleblower program it has issued 14 awards totaling approximately $100 million, and that enforcement actions initiated as a result of those tips have let to sanctions totaling more than $800 million.
The IRS whistleblower program has also paid out millions in awards – from billions in collections. Since 2007, the IRS Whistleblower Office has paid out over $931.7 million based on the collection of $5.7 billion in additional taxes. In 2019 alone the IRS handed out 181 awards totaling $120,305,278. According to IRS whistleblower expert (and friend) Dean Zerbe the IRS program has been very successful:
“For all the talk that fills Washington about making sure people pay their fair share, this little program of awarding whistleblowers … has punched far above its weight in terms of successfully going after big-time tax cheats. Any country (or state) that wants to get serious about tax evasion should take note.”IRS Reports Ten-Fold Increase in Tax Whistleblower Awards: $312 Million, Forbes Magazine
How a Whistleblower Stopped the Rust Rare Coin Ponzi Scheme
Utah’s largest Ponzi scheme, Rust Rare Coin (RRC), would still be ongoing today if not for a brave whistleblower who was an employee at the company, and an investor. He stumbled upon information that led him to be highly skeptical of the outrageously high profit claims that were being made by RRC’s owner Gaylen Rust and began to investigate.
The whistleblower’s suspicions grew as he observed unusual business activities and the total lack of financial controls RRC had. What began as observations of odd and unusual business practices quickly let to serious concerns about outright fraud. By early 2018 the whistleblower concluded that the RRC businesses were operating fraudulently, that investor money was being commingled with other company funds, and that Gaylen Rust was likely running a massive a Ponzi scheme.
Once he became convinced that the company was a scam he reported his concerns to the FBI and began meeting with the state and federal securities regulators. Eventually the SEC, CFTC and State of Utah filed coordinated complaints, froze all of RRC’s assets and shut the whole scheme down.
There were at least 430 victims of the RRC Ponzi, and their collective losses were at least $200 million. But it could have been much worse if not for the actions of this brave whistleblower. The court-appointed receiver Jonathan Hafen is now in the process of trying to unwind the whole mess and return money to the victims.
NOTE: I know this story because the CFTC filed a very detailed declaration from the whistleblower with their complaint.
NASAA’s Model Whistleblower Act
Because of the demonstrated success of the SEC, CFTC and IRS whistleblower programs the North American Securities Administrators Association (NASAA), which is comprised of state securities regulators in all fifty states, seems to have decided that more states should follow Utah’s lead.
They just released a Model Whistleblower Act, which is modeled on Utah’s law and has some nice improvements. Thomas Brady, Director of the Utah Division of Securities, tells me that he was involved in the drafting process.
Many of the provisions are based on Utah’s statute:
- The Model Act creates a civil cause of action for a whistleblower who is retaliated against with powerful remedies including reinstatement, two times back pay with interest, actual damages, litigation costs, or “any combination of these remedies.” Utah Code Ann. § 61-1-105(5); MWA § 9-6
- The Model Act provides that rights and remedies contained in the act cannot be waived contractually. Utah Code Ann. §61-1-108(2); MWA §9-9
- The Model Act provides that the regulator cannot disclose information that could reveal the identity of the whistleblower. Utah Code Ann. §61-1-103(2)(a). MWA § 9-7
However, the NASAA update also includes some much-needed protections that are not currently included in the Utah law, including the following:
- A specific prohibition on retaliatory behavior, including terminating, discharging, demoting, suspending, threatening, or harassing a whistleblower. MWA § 9-1.
- A 10 year statute of limitations for a claim against an employer for retaliatory behavior. MWA §9-5. (Utah’s is currently only 4 years)
- A provision that employee non-disclosure (NDA) or confidentiality agreements cannot be used to prevent or discourage communications with the securities regulator about possible securities law violations. MWA §9-8.
I think that all states should seriously consider enacting this model statute. NASAA’s Model Whistleblower Act provides a robust framework for protecting whistleblowers, and substantial financial incentives for them to come forward.
Copyright © 2020 by Mark W. Pugsley. All rights reserved.