The Elusive Rewards and High Costs of Being a Whistleblower

Earlier this year, a tailor in New York City with a celebrity clientele pleaded guilty to a ten-year scheme to avoid state sales taxes and agreed to pay $5.5 million in back taxes and penalties. The whistleblower who turned him in is slated to receive $1.1 million.

A Florida dermatologist agreed to pay $26 million to resolve charges of receiving illegal kickbacks from a pathology lab and of billing Medicare for unnecessary procedures. The pathologist who brought the alleged activities to light will get a $4 million share of the settlement.

And in Washington, D.C., the U.S. Department of Justice joined a lawsuit by a cyclist-turned-whistleblower who accused Lance Armstrong and others of defrauding the U.S. Postal Service of more than $30 million by using perform­ance-enhancing drugs while on the USPS-sponsored team. The whistleblower reward could reach tens of millions of dollars.

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We’re in the midst of a war against fraud, and the government and corporate America are enlisting an army of citizen whistleblowers to fight it. New and enhanced laws make it harder to retaliate against anyone who reveals wrongdoing at work, whether the boss is Uncle Sam or the company CEO, while bounty programs are starting to pay off for tipsters exposing tax cheats and shareholder rip-offs. “Whistleblowers are making a difference as never before, and their rights are stronger than ever before,” says Tom Devine, legal director of the Government Accountability Project (GAP), an organization that represents and advises whistleblowers.

Last year, the Justice Department recovered $3.3 billion in taxpayer funds thanks to whistleblowers, who originated hundreds of lawsuits and shared $439 million of the proceeds. (In 1988, there were just 43 whistleblower suits, leading to $2 million in collections.) The Securities and Exchange Commission paid out the first whistleblower bounty in August 2012, in a program launched in 2011—nearly $50,000 to an unnamed tipster who helped unravel an undisclosed scheme, netting the agency $150,000 in sanctions so far. And the Internal Revenue Service made headlines with an eye-popping $104 million check to Bradley Birkenfeld, the UBS insider who exposed the secrets of Swiss-bank tax dodges, leading to the recovery of $5 billion in unpaid taxes.

Blowing the whistle isn’t all about bounty-hunting, though. The Department of Labor’s Occupational Safety and Health Administration (OSHA), which administers a broad swath of provisions to protect whistleblowers but does not pay for information, reported 2,787 cases in fiscal 2012, up more than 40% from 2005. Meanwhile, corporations -- some kicking and screaming but nonetheless compelled by law -- are initiating and beefing up whistleblower programs, too.

Weighing the costs

Don’t get the idea that whistleblowing is easy. Disclosing waste, misconduct or outright fraud is a complicated process that entails a lot of work and enormous commitment. It can cost you your job, take a toll on your family and consume years of your life. Monetary rewards are rare and, headlines aside, rarely life-changing. Even generous payouts can pale in comparison with steep costs. “There can be loss of income, house, friends, marriage,” says John Phillips, a Washington lawyer who specializes in advising whistle­blowers. “There are health issues and sometimes even death because of the stress of going through this.”

Take, for example, Jim Holzrichter’s bittersweet experience. “I lost a career,” says Holzrichter, 59, who struggled to make ends meet for much of the 17 years he was embroiled in a whistleblower suit with his former employer, defense contractor North­rop Grumman. In 2005, without admitting guilt, Northrop settled charges of improperly billing the government for aircraft parts, but Holzrichter didn’t receive his share, roughly $2 million after lawyers’ fees and taxes, until 2010, following five more years of squabbling with other whistleblowers in the case.

When Holzrichter left Northrop, he was under a doctor’s care for symptoms mimicking a heart attack. “The last three weeks, I was at my desk every day but was locked out of my computer so I couldn’t do my job. People I’d had lunch with for years would see me coming down the hall and walk the other way.” A search for work in his field yielded more than 400 rejection letters. “It was hard on my kids, going from middle class to poverty. By the time I got the $2 million, the kids were grown and gone with families of their own.” Holzrichter, who lives just outside Chicago, counsels other whistleblowers through Taxpayers Against Fraud, a nonprofit organization. He is now a paralegal, and he also consults with attorneys on whistleblowing cases.

The possibility of such hardships aside, the distinct policy shift in favor of those who speak out is understandable. Whistleblowing works. According to the Association of Certified Fraud Examiners, 43% of fraud within organizations is detected through tips. Less than 15% is ferreted out by management or internal auditors; outside auditors uncover just 3%. “No question, whistleblowing is effective,” says fraud expert Kristin Rivera at PricewaterhouseCoopers. “I always say, If you want to find a needle, look in the sewing kit, not the haystack. Likewise, if I wanted to find fraud in a company, I’d go to the [whistleblower] hotline.”

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A legal maze

The definition of a whistleblower depends on who you ask. Truth-teller or tattletale? Hero or fortune hunter? Sometimes the answer is muddled, as in the case of the Rutgers assistant coach who exposed alleged abuses by the head basketball coach but is widely reported to be under investigation for extortion. Legally, the definition might depend on where you work and who you work for. A maze of 57 federal laws protect and sometimes reward whistleblowing, to varying degrees, while 44 states and the District of Columbia also offer some level of legal recourse. Before you disclose anything to anybody, it’s essential to get expert legal advice from someone experienced in whistleblower law. Both the Government Accountability Project and Taxpayers Against Fraud can help you find a lawyer (see How to Blow the Whistle).

Whistleblower laws fall into two broad categories. One branch provides incentives for people to come forward, while the other protects them from retaliation for doing so. The granddaddy -- make that the great, great granddaddy -- of whistleblower laws is the False Claims Act, enacted during the Civil War to marshal whistleblowers against price-gouging defense contractors. Another round of defense procurement scandals in the late 1980s (remember $400 hammers and $600 toilet seats?) led to False Claims Act amendments that ushered in the modern whistleblowing era.

The law is aimed at those who defraud the government, and it encompasses any organization or person receiving any kind of government funding -- from a research grant to a Medicare payment. Four out of five cases concern health care, with military defense cases second. Other areas with significant claims include energy, construction and mortgage fraud. Some 29 states and the District of Columbia have their own versions of the False Claims Act. The law’s qui tam provision (Latin meaning “in the name of the king”) deputizes private citizens to file suit on behalf of the government. If they prevail, Uncle Sam thanks them for their trouble with 15% to 30% of the money recovered, which can include damages of triple the amount of the alleged fraud.

That’s a big if. Your chances improve tremendously if the Department of Justice joins your case, and the Justice Department declines 80% of the time, according to Taxpayers Against Fraud. In turn, 80% of declined cases are dropped. Cases take 38 months to resolve, on average, although some take years longer. Half of successful cases settle for $2 million or less, and the average whistleblower award in a $2 million case is about $320,000 -- provided there is only one whistleblower. The typical lawyers’ cut is 40%.

Blair Hamrick, 49, of Gig Harbor, Wash., is one of the lucky ones. The former drug salesman received a multimillion-dollar payout last year when GlaxoSmithKline settled allegations of fraudulent marketing practices for drugs including Advair, Wellbutrin and Paxil. Hamrick claimed the company aggressively promoted the drugs for off-label uses or for inappropriate patients. Glaxo settled civil charges in the False Claims Act suit originated by Hamrick and other whistleblowers (and later joined by the Justice Department) for more than $1 billion. Glaxo paid a total of $3 billion to resolve civil and criminal charges in the case. Hamrick says his share was a whopping $31 million. But 40% is in escrow pending further litigation of other aspects of the case; another chunk went to lawyers, and taxes sliced away still more.

“I got enough to start my life over,” says Hamrick. “I’m not so wealthy that I’m jetting around the U.S., but I have a house, I bought my son a car, I play golf.” During the nearly ten years it took to resolve the case, however, Hamrick says his life was “hijacked.” Formerly a rising star at Glaxo, Hamrick was eventually fired. Hamrick, a single dad, moved with his young son from Denver into his mother’s home in Florida, and found a string of jobs paying less than the six-figure salary he’d been earning. By the time the case settled, it had become full-time work.

Bounty payments

The success of the False Claims Act has led to other bounty programs modeled after it. Though the IRS has been auth­orized to reward whistleblowers since 1867, legislation amended in 2006 was meant to invigorate the program, boosting awards to 15% to 30% of what the IRS collects after a whistleblower uncovers tax fraud or a major underpayment.

The IRS program isn’t a penny ante tip line for pinching ex-spouses or feudin’ neighbors. Disputed amounts have to exceed $2 million, and if you’re blowing the whistle on an individual, his or her gross income must exceed $200,000 for at least one of the tax years in question. No lawsuit is required; just file directly with the IRS, on Form 211.

With the annual tax gap—the difference between what’s owed and what the IRS collects -- estimated at $385 billion, you’d think that whistleblowers would walk a red carpet into the IRS. But lawyers complain about cases languishing. The process can take five to seven years or longer. The IRS recently announced that it would reduce whistleblower payments by nearly 9% as a result of government spending cuts that went into effect in March.

The SEC has a similarly buffed-up whistleblower office, and likewise can pay a maximum of 30% of sanctions collected. Tipsters have to supply original information in cases that result in sanctions of more than $1 million. Whistleblowers fill out the online Tips, Complaints and Referrals questionnaire or mail Form TCR to the SEC’s Washington, D.C., office. (The Commodity Futures Trading Commission’s whistleblower program is similar; file complaints at www.cftc.gov or mail them to the Washington, D.C., office.)

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The SEC office averages eight or nine tips a day, most often about corporate financial statements and disclosures, securities-offering fraud, and market manipulation. Sean McKessy, chief of the SEC’s Office of the Whistle­blower, says he’s pleased with the quality. “Specific, timely and credible are the buzzwords. If we had a bumper sticker, that’s what we’d put on it.”

Eric Ben-Artzi, 40, one of the Wall Street cognoscenti, is precisely the type of insider meant to inform SEC probes into complex financial schemes. The former risk analyst with a PhD in mathematics hopes the SEC will vindicate his allegations of multi-billion-dollar securities violations at his former employer, Deutsche Bank, the giant global investment bank.

Ben-Artzi claims that during the financial crisis, between mid 2007 and 2010, Deutsche Bank failed to accurately report the value of its credit derivatives portfolio and misrepresented trades, thereby giving the impression that the bank was weathering the crisis better than its peers and allowing it to escape the government bailouts many of them required (and the stock-price hits that ensued). Ben-Artzi says he discussed his concerns extensively at the bank before filing a complaint with the SEC in November 2011. The bank has denied Ben-Artzi’s allegations and in a statement last December said: “The allegations of financial misstatements, which ... have been the subject of a careful and thorough investigation … are wholly unfounded.” The SEC declined to comment.

Like so many whistleblowers, Ben-Artzi found himself out of a job, and he has filed an anti-retaliation complaint with the Department of Labor. He says the bank told him that the job had been moved overseas. Ben-Artzi interviewed with a number of Wall Street firms, but nothing panned out. “This kind of thing is career-short-circuiting,” he says. Last year, Ben-Artzi and his family left Hoboken, N.J., for Bellingham, Wash., where the cost of living is lower, and a job for someone with his skills -- at a big tech company, maybe -- is a possibility. “I knew there was some risk, but I didn’t know what I was getting into,” he says.

Fighting back

Employees who believe they’ve been harmed at work -- fired, demoted or blacklisted, for example -- for un­covering illegal activity can seek protection from a patchwork of more than 20 anti-retaliation statutes. The game changed in 2002 with enactment of the Sarbanes-Oxley Act, which expanded protection to whistle­blowers who reveal fraud, such as doctored financial statements, that harms the shareholders of any public corporation. SOX, as the act is known, also required that companies set up whistleblower hotlines. All of the anti-retaliation statutes are administered by OSHA, where the process starts with a complaint filed at the regional office closest to you.

These cases are a tough slog, too. Without a bounty at stake to entice lawyers who will work on contingency, be prepared to spend $10,000 to $20,000 to get a case off the ground. Cases commonly take two to three years—longer for complex lawsuits, says GAP’s Devine. You might win reinstatement of a lost job, back pay, compensatory damages and lawyers’ fees. But only 2% of OSHA decisions in fiscal year 2012 were decided in favor of the employee—closer to 20% if you count cases that settle—and few whistleblowers ever return to business as usual. Finding similar work is often daunting for professionals, who find that industries are small worlds where employers view whistleblowers as wild cards they’d rather not risk.

Not every whistleblower faces an uphill battle. Jon Oberg, 70, of Rockville, Md., was a Department of Education retiree with decades of experience in post-secondary finance when he brought a whistleblower suit against a group of student-loan lenders who he said were inflating interest rate subsidies they received from the government. Four lenders settled the charges for $58 million. Oberg says colleagues were supportive, the emotional cost bearable and that the money he received (more than $16 million) has allowed him to contribute more to charity. As with many whistle­blowers, money was not his motivation. “I considered it a public duty,” says Oberg. “I think it’s important that somebody says it’s very much worthwhile to do a citizen’s duty.”