WHISTLEBLOWER QUOTE OF THE DAY:

“Whistleblowers can receive an award not only when their tip initiates an investigation, but also when they provide new information or documentation that advances an existing inquiry. This particular whistleblower’s tip substantially strengthened our ongoing case and increased our leverage during settlement negotiations with the company.”

— Andrew Ceresney, Director of the SEC’s Division of Enforcement, speaking about the $3.5 million to a company employee whose tip bolstered an ongoing investigation with additional evidence of wrongdoing that strengthened the SEC’s case
 

DAILY WHISTLEBLOWER HEADLINES:

How drug whistle-blowers in India have to fight a long battle

Since 2014, Narayan Konduru Reddy has been relentlessly writing emails to drug regulators from the US to Europe asking them to investigate the malpractices he alleged of his former employer GVK Biosciences , a leading contract research firm based in Hyderabad. According to Reddy, GVK was fudging data to pass the efficacy test of certain medicines. One of his emails landed with the French drug authorities who banned in 2015, 700 drugs — across EU — that GVK tested. 

Reddy's actions turned him into one of the pharma industry's most prominent whistle-blowers in recent years. Sounds heroic, right? But his expose also put him on a collision course with his superiors in GVK and eventually ended his career. Reddy left the company in 2011; the company later used an alleged extramarital affair to portray him as a disgruntled employee gone rogue. He was eventually arrested under criminal defamation charges once the company found that he was sending incriminating mails to various regulators. 

GVK has denied any wrongdoing. A spokeswoman said characterising Reddy as a whistle-blower is wrong. "It is only when the legal proceedings against Reddy got close to implicating him that he has taken an avatar of a whistle-blower." 

Reddy is now languishing in his home town in Andhra and devotes a lot of time writing to the US Food and Drug Administration about his expose. He wants to be compensated for his troubles. 

Even big Indian companies have not been able to meet FDA's quality standards. In the last two years, companies like Sun Pharma, Dr Reddy's and Cadila have all faced FDA's heat for not meeting good manufacturing practices. 

That means for some time now, India has been grappling with the dreadful image of being a producer of poor quality drugs. The health ministry has announced a reward worth $55000, or around Rs 37 lakh, to those who will come forward and expose counterfeit or substandard drug syndicates, but few are biting. 

Long struggle 

It is not hard to see why. Prashant Reddy, a lawyer, says the path of Indian whistle-blowers is littered with draconian defamation laws and a regulator with a pathetic track record of holding the pharma industry accountable. "Not only is a whistle-blower liable to get sued under both civil and criminal defamation laws (and perhaps jailed), he is also unlikely to get any reward from the CDSCO because the regulator has a very poor track record of enforcement." 

In other words, whistleblowers in pharma — and in other sectors — in India are not only not celebrated, they also have to struggle. Take the case of IFS officer Sanjiv Chaturvedi . As the Chief Vigilance Officer of All India Institute of Medical Sciences (AIIMS), he exposed how private clinics were selling fake medicines in AIIMS thanks to a powerful nexus between the drug industry and hospital administration. read more »

SEC Announces Insider Trading Charges in Case Involving Sports Gambler and Board Member

The Securities and Exchange Commission today announced insider trading charges against a professional sports gambler who allegedly made $40 million based on illegal stock tips from a corporate insider who owed him money.

The SEC alleges that the sports gambler, William “Billy” Walters of Las Vegas, was owed money by then-Dean Foods Company board member Thomas C. Davis.  According to the SEC complaint, Davis regularly shared inside information about Dean Foods with Walters in advance of market-moving events, using prepaid cell phones and other methods in an effort to avoid detection.  The SEC further alleges that while Walters made millions of dollars insider trading using the confidential information, he provided Davis with almost $1 million and other benefits to help Davis address his financial debts. 

The SEC complaint also alleges that professional golfer Phil Mickelson traded Dean Foods’s securities at Walters’s urging and then used his almost $1 million of trading profits to help repay his own gambling debt to Walters.  Walters and Davis are charged with insider trading, and Mickelson is named as a relief defendant.  Relief defendants are not accused of wrongdoing but are named in SEC complaints for the purposes of recovering alleged ill-gotten gains in their possession from schemes perpetrated by others.

“As we charge in our complaint, Walters illegally reaped tens of millions of dollars with the benefit of the ultimate ace in the hole – confidential information leaked by a sitting board member of a public company,” said Andrew Ceresney, Director of the SEC’s Enforcement Division.  “Additionally, Mickelson will repay the money he made from his trading in Dean Foods because he should not be allowed to profit from Walters’s illegal conduct.” 

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Walters and Davis.

After certain suspicious trades had been identified, the SEC’s investigation analyzed years of trading data and other information and followed the leads back to Walters and Davis, including their use of a variety of prepaid cell phone numbers.

According to the SEC’s complaint, Walters provided Davis with a prepaid cellular phone to use when he shared inside information about Dean Foods.  Walters further instructed Davis to refer to Dean Foods as the “Dallas Cowboys” during conversations. read more »

Volkswagen and the Culture of Silence

Since the Volkswagen story first broke in September 2015, most observers have just scratched their heads and muttered to themselves in amazement: “What were they thinking? How could you place ‘defeat devices’ in 11 million cars worldwide and expect that you were going to escape detection for long?” There is, however, an answer to this question—one that says much about what is wrong with current priorities and practices for the enforcement of white-collar crime. This column begins with an assessment of the Volkswagen case and then turns to an analysis of white-collar crime strategies. Finally, it proposes remedies that criminal and civil enforcers could utilize to break down the culture of silence that surrounds many large organizations (and especially foreign corporations that often view U.S. regulators with deep suspicion).

The Volkswagen Story

The first (and simpler) point to make about Volkswagen is that the stakes involved were enormous for it, enough to justify taking a huge risk. Volkswagen had bet its future on “clean diesel” (whereas other automakers had largely bet on hybrid or electric models to gradually replace gasoline). As events began to unfold, Volkswagen learned to its horror that the California Air Resources Board (CARB), and, later, the Environmental Protection Administration (EPA) were about to impose standards with which Volkswagen did not believe it could comply without sacrificing performance and much of its competitive advantage.

The second (and more important) point is that Volkswagen believed it could safely take the risk of engaging in a massive deception of U.S. regulators. Why? Simply put, it had done so in the past.

Even more importantly, other manufacturers had just done so and escaped relatively unscathed. Here is where journalists and other critics have failed to connect the dots. The Volkswagen scandal was preceded by very similar conspiracies to rig the testing for auto emissions only a few years earlier, and the participants in these conspiracies experienced only a mild slap on the wrist. read more »

Justice Dept. Sues Guild Mortgage in False Claims Case

The Justice Department filed suit Thursday against Guild Mortgage, arguing the firm violated the False Claims Act by improperly originating and underwriting Federal Housing Administration loans.

Justice alleges that Guild submitted hundreds of improperly underwritten FHA-insured loans from 2006 to 2011.

"Guild grew its FHA lending business by ignoring FHA rules and falsely certifying compliance with underwriting requirements in order to reap the profits from FHA-insured mortgages," the Justice Department said in a press release.

But the firm disputes the government's claims.

"The government's action is unwarranted and without merit," Mary Ann McGarry, the San Diego company's president and CEO, said in a statement. "The implication that any default on an FHA loan by a borrower represents wrongdoing by the lender is not justified. For more than five decades Guild has responsibly underwritten fixed rate and fully documented loans in accordance with FHA requirements."

Justice claims that Guild knowingly filed claims to be reimbursed for losses on hundreds of improperly underwritten FHA-insured loans.

"To protect the housing market and the FHA fund, we will continue to hold responsible lenders that knowingly violate the rules," said Benjamin Mizer, the principal deputy assistant Attorney General.

In the statement, McGarry said it is "unfortunate that lenders are placed in an untenable position where a minor error could result in substantial financial penalties." She also noted the enforcement environment threatens to limit homeownership opportunities and hurts the housing market.

Guild is one of the largest independent mortgage banking companies in the U.S. and originated $13.8 billion in loans in 2015. It has 234 branch and satellite offices in 25 states. read more »

CFTC Whistleblower Head Wants Office to Toughen Up SEC-Style

After awarding a more than $10 million whistleblower award, exchange regulator may soon adopt stronger policies to protect tipsters.

The U.S. Securities and Exchange Commission had awarded 21 tipsters under its whistleblower program by the end of September. By comparison, the Commodity Futures Trading Commission had only just issued the second award since its program began—a bounty of about $290,000.

The agencies are substantially different in size and scope of enforcement, but the disparity caught the attention of the CFTC’s internal watchdog nonetheless. In a report to Congress for the six months ending Sept. 30, 2015, the inspector general’s office noted that it had reopened an investigation into the “limited number” of CFTC whistleblower awards compared with the SEC.

But Chris Ehrman, who left the SEC in 2013 to lead the CFTC’s whistleblower program, isn’t concerned. Knowing the relatively limited scope of his new agency, Ehrman said he and his staff are “right where we should be” with whistleblower awards. read more »