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Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group Teleforum calls, become a Federalist Society member today at fedsoc.org.
Ryan Lacey: Welcome to The Federalist Society's virtual event. This afternoon, May 9, 2022, we discuss "How the Largest Whistleblower Award in History Came About." My name is Ryan Lacey, and I'm an Assistant Director of Practice Groups at The Federalist Society. As always please note that all expressions of opinion are those of our experts on today's call.
Today we are fortunate to have an excellent speaker in David Kovel who is being interviewed by Gary Kalbaugh whom I'll introduce briefly.
Gary Kalbaugh is a Deputy General Counsel and Director at ING Financial Holdings Corporation and Special Professor of Law at Maurice A. Dean School of Law in Hofstra University. His practice areas include derivatives and banking law. Previously, he served as Executive Director, Counsel, and Chief U.S. Data Protection Officer at WestLB, chairing WestLB's Global Dodd-Frank and Underwriting Task Forces. Kalbaugh received his Master of Laws from the University of Pennsylvania in 1999 and his BCL from the National University of Ireland, University College Cork in 1998.
After our speakers give their remarks, we will turn to you, the audience for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen, and we will handle questions as we can towards the end of today's program.
With that, thank you for being with us today. Gary, the floor is yours.
Gary Kalbaugh: Great. Well, thank you, Ryan. When I first met David I was in an organization at the New York City Bar, the Future and Derivatives Law Committee, which was largely people more on the defense side of things. And my conversations with David blew my mind because he opened doors and ways of thinking of things that, candidly, I just hadn't been exposed to.
When we look at David's biography, it's very hard to go through it because it's just dwarfed by the fact that he's the lawyer whose client the single largest whistleblower award in history, a $200 million reward, which we're going to talk about today. But we can't let that distract us from the underlying reality that for well over a decade David is probably the most prominent plaintiff's attorney in the derivatives area. And I know not everybody on this call and this webinar is in the derivatives bar, but I can say he's one of the most respected lawyers in the derivatives bar.
And I also have to note he played professional soccer in Nicaragua. How awesome is that? We don't get that very often. And so maybe, David, my first question to you has nothing to do with our topic today. How did that come about?
David Kovel: Well, good morning or good afternoon, now. Thanks for that introduction, Gary. It is an exaggeration. I don't know how I'm viewed in the derivatives bar, to be honest. Gary, that's news to me, so I appreciate the compliment. I think it's an exaggeration.
Likewise, my professional career in soccer in Nicaragua lasted for about a year and a half. And for those who know soccer, they know that Nicaragua is not the most, the biggest powerhouse in Latin America when it comes to soccer. So I was able to hold my own, and I made money. They paid me. But most of the people who were on my team were part of the Sandinista military. So they were paid by the military. I just got paid cash.
Gary Kalbaugh: [Laughs]. You know what, David, we're going to have to schedule a whole different webinar [laughter] to this one because there's so many questions on the tip of my tongue.
We do have to talk about this whistleblower award which is equally interesting. I'll start with the big elephant in the room. Your client received the largest whistleblower award in history. It totaled nearly $200 million. How did that come about?
David Kovel: So just one clarification, this is the largest whistleblower award paid to any individual. Under the False Claims Act, which is somewhat analogous whistleblower statute, others have gotten more, but it was divided up to a number of people. This is the largest single award of any whistleblower ever which I've been told by people who actually know more about this than I do.
Gary Kalbaugh: I did research it a bit to make sure that no individual, and I'm not able to discover any individual that is at that level.
David Kovel: So it came about in part because of, well, entirely I suppose because of Dodd-Frank. Dodd-Frank brought forth a whistleblower law, a whistleblower statute that allows whistleblowers to bring violations of securities laws and violations of commodities laws to the appropriate authorities and to collect what may be termed a bounty of 10 to 30 percent if they are successful in helping these agencies, the FCC on the one hand, and then the CFTC, the Commodities Futures Trading Commission on the other, collect fines. And then of course if others also collect fines, other regulators also collect fines, they can collect from that.
The Dodd-Frank imposed -- the whistleblower provisions in Dodd-Frank came about because of the financial crisis and also because of the Madoff scandal which was an embarrassment for the FCC because they didn't catch the scandal early on, and there had been a whistleblower. The idea was to create these statutes to allow a really programmatic approach to whistleblowers so that good information from whistleblowers wouldn't be lost and to incentivize the whistleblowers to come forward.
I can get into detail about my case, too, if you'd like, but that's sort of the process.
Gary Kalbaugh: Just one note, if I could on the Dodd-Frank Act just for all of our listeners. And many of you probably know this. The Dodd-Frank Act just passed in 2010, and it regulated the derivatives industry in ways that are comparable, I would say, a level of regulation comparable to existing federal regulation of the securities industry. And as David noted, it was motivated by the financial crisis. And this is the first time I've been able to draw a line between Madoff and the whistleblower provisions of Dodd-Frank. So thank you for that.
So well, I guess we'll get into the facts of how the whistleblower claim came into your hands and procedurally how you handled it. But not everybody may know what the Commodity Futures Trading Commission is, what we're going to refer to as the CFTC, so we don't have to say it 50 million times. But that stands for the Commodity Futures Trading Commission. What are they and how does their whistleblower program ordinarily work?
David Kovel: Well, so the CFTC is maybe the step sibling to the FCC in terms of prominence. But in terms of its mandate, it regulates huge, huge amounts of the economy. And as you said, Gary, it regulates derivatives. It regulates primarily futures on exchanges but also now the derivatives that are associated with those exchanges as well and to a certain commodities that underly all of those derivatives. It's sort of a freak of nature. It's overseen by the USDA. And I mean freak of nature not pejoratively. It comes from butter exchanges and wheat exchanges, all of the natural commodity products that were part of the U.S. economy in the 1800s. And it's slowly developed into a regulator that has sophisticated financial regulatory authority.
Gary Kalbaugh: So historically it was under the USDA, and it was in 1974 an independent commission came out. But you're noting the origins were deeply, deeply agricultural, right, without any contemplation of regulating financial instruments?
David Kovel: That's right. The regulation of financial instruments has slowly developed over time as the futures markets and the derivatives markets have become more dominated by financial derivatives.
Gary Kalbaugh: So how does the CFTC's whistle program normally operate?
David Kovel: Well, the CFTC and the FCC both have their own whistleblower offices with staff there. And their mandate is to do a number of things. The main thing they do is do intake of whistleblower submissions, and then they make sure that those submissions get to enforcement staff. The whistleblower office is not directly enforcement, although they're in that office.
And then they also help interface with whistleblowers to a certain degree, although that mostly is taken over by enforcement. Whistleblowers are bringing forth, usually, assertions, facts, allegations of misconduct. And so there's a filtering process that occurs over time. But the CFTC whistleblower office will always be involved in that process and importantly is usually involved, with some exceptions, in the pay out of whistleblower awards, the analysis of whether a whistleblower should be paid at all.
Gary Kalbaugh: So what happened? Did somebody come into your office one day and say something bad really happened? What can I do about it? How does something like this come about?
David Kovel: Good question. And just to preface it, my ability to talk about this case is somewhat limited by my client's interest in remaining confidential. So I'll be a little bit circumspect. But as you noted, Gary, I've been involved in derivatives cases for a long time, litigation, and on the plaintiff's side which is where I've made my profession, my career in litigation.
So I had a number of derivative cases and number of contacts in the industry. And actually through a Wall Street Journal reporter, probably the one who broke the LIBOR story in the first instant in 2008, I got a referral. And it was -- as a whistleblower attorney, it's always a real big question, how are you going to get cases? And I cannot answer that question, but this one was a nice referral from a Wall Street Journal reporter.
Gary Kalbaugh: Well, now we know how you get cases because anyone who Googles 'whistleblower CFTC is going to see you. But, yes. That's amazing. So it's a Wall Street Journal reporter reached out to you. Because I would think a lot of people won't even know that they can be a whistleblower. It's a little bit obstruse or abstract for most people.
David Kovel: Well, actually that was a point back then, for sure. This was almost a decade ago when I was first introduced to the whistleblower. And I didn't know it had come from the Wall Street Journal reporter. That I found out later, by the way. At that time, the Dodd-Frank whistleblower statutes were very new, and very few people know about them. And even to this day, few people know about them. But I think that's changing with when you get eye-popping results that are headlined. There tends to be a little bit more attention given to whistleblowers. So I think that's changing. But certainly for the first five to eight years of the program, it wasn't very well known.
Whistleblowers can go directly to the CFTC, directly to the FCC. They don't need lawyers. But I personally would highly recommend that they use lawyers as part of the package.
Gary Kalbaugh: We'll get to that. If you client didn't have a lawyer, your client would not have gotten this claim. And we'll get to that. But before we get to that, you do owe the Wall Street Journal reporter lunch or dinner. I hope you know that.
Gary Kalbaugh: Good. Good. And secondly, so what was the next step? So now you're in touch with this person. This person says I was given your name. What do you do next? Is the next thing -- do you go straight to the CFTC? What's the next step? Do you investigate first?
David Kovel: Yes. When you do intake for a whistleblower, you try to spend a lot of time investigating. It so happened that the whistleblower who came to me knew -- I knew a lot about the area that the whistleblower was talking about. And frankly, I also knew that the CFTC was already investigating. And so I was quite dubious at the time about whether we should waste -- what I thought would be a waste of time bringing the case to the CFTC.
But the whistleblower convinced me that the information that the whistleblower had was such that it could be extremely helpful to the CFTC, and ultimately I was convinced to put together what was a -- what looks like a complaint, although we try to make it look more like a summary judgement motion which is peppered with evidence at the same time and legal analysis. And we put that together for the CFTC, and we submitted it, knowing that they were already investigating the derivative market in question.
Gary Kalbaugh: Well, how can it be a whistleblower claim if the CFTC's already investigating it? Isn't a whistleblower claim normally like no one knows about this, and now I'm the person bringing it to the regulator's attention?
David Kovel: Yeah. That's a good question, and that was part of a lot of the trouble that ensued after we submitted it. But the simple answer is there are really two ways a whistleblower can get paid and get credit from the CFTC for bringing a -- or the FTC -- for bringing to their attention information. And the information is brought in something called a TCR, a tip complaint or referral. It's just an official acronym and name.
But when they bring that, if they are -- I guess the term is if they were the but for cause of the initiation of an investigation, they're pretty much going to get credit as long as there's a result that means that there's money that comes to the CFTC. And the other way is if they significantly contribute to an investigation that is already ongoing. And that's a bit more amorphous. It's discretionary, and it involves, especially the way the CFTC works now and the FCC too, a fair amount of hindsight analysis, which can cause hindsight bias which I think appeared in our case, at least initially.
But our client -- and we weren't certain that there was an investigation into the particular target at issue. It was a big bank. But we knew there was an investigation generally into banks about this derivative and these derivatives benchmarks. And we had enough information that we thought that we were going to help significantly contribute to the results of the CFTC.
Gary Kalbaugh: So if you could just briefly again, for our listeners, David mentioned benchmarks. I think most of you are probably familiar with the variety of scandals. The most famous one related to LIBOR benchmarks. But that's not the only ones. There's ones related to metals. There's a variety of scandals where industries rely on benchmarks set, sometimes by a finite group of individuals that are prominent dealers in, for example, the commodity or in LIBOR, in setting LIBOR.
And in a lot of those cases, it was actually judicially determined that manipulation occurred, that some of those people were suborned and provided things that were not the good faith items that they should have provided in creating these base rates. Some of the base rates are -- LIBOR was a multi trillion dollar market, so these are as big as they get in the financial world. And to see them be undermined and suborned was a tumultuous event.
I don't know if this claim is a LIBOR related one or if you can even talk about it. I understand if you can't, but I just want to provide people those benchmarks also occur in the metals markets and a variety of markets.
David Kovel: This was a large, financial benchmark, and there aren't that many that resulted in billions and billions of dollars of recovery for the government. That's why, frankly, the whistleblower got so much money was because the government got about $2 billion or more, actually.
So you can sort of figure it out, but it was a very big financial benchmark, and there are only a couple of them that were involved. But we found out as we provided the information, we did what typically happens in these situations, we were able to speak with the CFTC and meet with them. And then ultimately, and this took a few months, but ultimately we were contacted by a federal regulator who's not named, but we were contacted by a federal regulator and that federal regulator we met with a large number of times and even in person, back in the day when you did that, and the FBI, we met with, and the CFTC multiple more times. So it ultimately blossomed.
By the way, the whistleblower to the extent people are nervous, you can look this up, but the CFTC whistleblower award, there's a determination that's public. It's redacted. It's called CFTC Whistleblower Award Determination Number NO.21-WB-07. And it's available on the CFTC website. That's what discusses this particular award.
Gary Kalbaugh: Is that 21 B or V?
David Kovel: 21-WB, as in whistleblower, -07.
Gary Kalbaugh: Got it.
David Kovel: And there's a whole process by which -- I mean we can get into it at some point. But once the regulators -- let's say the CFTC -- issues a fine and collects on it, there's a process by which you make an award application. You have, I think, 90 days to put in that application. You have to dot the i's and cross the t's if you really want to get the money.
And what triggers that is something called covered action. So if you look on the CFTC website, you'll see every now and then they have notice of covered actions. And those are to alert whistleblowers, potentially -- not always because covered actions can be without whistleblowers, but they are usually settlements or some kind of regulator action that are resulted in money for the CFTC. And whistleblowers can apply for their awards based on those alerts.
Gary Kalbaugh: So you submitted this which was similar to a motion of summary judgement, stylistically, right, not procedurally. And you submitted that, and you met with all these agencies. And right after your meetings they wrote you a $200 million check, and you all went home.
David Kovel: Yeah. If that had happened, it would have happened sometime in 2013, I think, or '14. [Laughter] So all joking aside, actually, this was a long haul. And I'm a lawyer, and I do have a decent practice. But for the whistleblower, especially whistleblowers generally who get blacklisted, which happens sort of as a matter of course if they're found out, it can be very hard. And so in this particular case, it was very, very hard for the whistleblower at issue, and it went on and on. And there was no certainty. Even up until the last minute, we didn't really have certainty about whether we were going to be successful. And the ultimate award came out, the determination came out in October, last October. I think it was -- we found out about it October 15th. I think it became public the following week.
So yeah, we meet in 2013 or so, maybe a little later, with regulators from the CFTC and from what's known as a federal regulator if you've look at the public version of that determination. And then things when silent. And then about a year and a half, maybe two years later, there was a big settlement between regulators, including a foreign regulator and CFTC as well, a federal regulator and the CFTC and a foreign regulator, big numbers. And we had reason to believe that it was associated with our contribution.
We filed an award application. There was a notice of a covered action, as I said, that came out. And we filed, associated with that notice, we filed within 90 days our award application. Six years went by [laughs] or close to six, maybe five. So then --
Gary Kalbaugh: - So David, if you hadn't filed within that 90 day period, if you hadn't been scanning for that notice of claim, notice of covered action, excuse me, and you missed it or something and 91 days has passed, would your client have had no claim?
David Kovel: The CFTC has discretion to go beyond the 90 days. I don't think it's a, as they would say in litigation, jurisdictional. I don't think it knocks you out right. But I think if you are beyond that limit, you better have a good reason not to have filed in those 90 days. If it's just negligent malpractice, something like that, you probably won't get it. So if there's a good reason, they have discretion to allow claims, award application beyond the 90 days.
Gary Kalbaugh: Right. But we'll get to this. It was somewhat controversial in some quarters, the CFTC paying this amount, so I can't imagine if they had discretion that they would have exercised that discretion in your client's favor. But we can get to that.
David Kovel: The client went personally down to Washington and delivered the application. Let's put it that way. Because we wanted to make sure it was delivered on time.
Gary Kalbaugh: Yeah. A lot was riding on that. So you delivered the application. And then you heard absolutely nothing?
David Kovel: For about three years, two and a half or three years.
Gary Kalbaugh: But you did just -- you were calling them in that time, right? You were saying hey. Were they stonewalling you? Were you getting answers?
David Kovel: There was a time when I think the whistleblower office was a little bit -- it's developed over time and gotten to be much more efficient. And I have very high regard for the whistleblower office, by the way, despite some of the stories I'm going to tell. But they were -- I think they were jammed up. There were a lot of frivolous award applications that occurred, and that caused a real back log. So among other reasons, they were highly delayed because of these frivolous applications which required a lot of time. They've since streamlined it so that they can exclude a bunch of really facially frivolous applications. And so they've gotten faster.
But I think they also had real trouble with the numbers at issue here. Our client, on behalf of our client, we were asking for a huge amount of money. And I think that really affected an agency which doesn't really deal with those kinds of numbers normally. And this was an exception or at least the beginning of a number of exceptions associated with some real strong regulatory action by the CFTC after the financial crisis.
So I think the whistleblower office itself was a little tied in knots by what to do here. And we couldn't, as I said earlier, we couldn't say that the whistleblower had started the investigation. We knew because it hadn't. So then there was a lot of discretion -- in my mind, there was a lot of discretion at the whistleblower office about how to determine whether the whistleblower had significantly contributed to the investigation.
So I think after about three years, we got an incredibly depressing preliminary determination which isn't public. It's something that you receive to an award application, and you're given the opportunity to contest it internally at the CFTC. So it's like an administrative appeal internally at the CFTC. So we got a negative determination with a declaration, with an affidavit by someone at the CFTC that said more or less that our client, although they had provided information, hadn't done enough or something like that.
And we contested and we asked for a bigger record. We tried to depose that anonymous CFTC person. We also sought out the federal regulator whom we met with many times because the federal regulator, not the CFTC, had been our main point of contact for a lot of these meetings, and our impression was they had led the charge on this. So we reached out and put together what we thought was a much better claim that we were able to contest a lot of the things that were said in that affidavit and in that determination.
And then things got tied up in knots yet further later on. We got the indication fairly quickly, about within a year after we contested internally, we go the indication that the CFTC was, to its credit, turning around and going to agree with us after having spoken with that federal regulator and after having done more investigation. And that was refreshing. And then things went radio silent for about a year and a half because we broke the CFTC [laughs].
Gary Kalbaugh: Well, tell us about that. Yeah. So you have this internal hearing at the CFTC. Is this with an administrative law judge?
David Kovel: It's not. It's not. It's much less formal than that. And that's what -- if I have a beef with the program, it makes it pretty hard to know what's going on. It's pretty opaque. You contest it by filing at the whistleblower office. It's essentially the same people who made the initial determination, the preliminary determination. You contest it. You're able also to ask for what they relied on, but that's often very curtailed from what the record we think, we thought should be. You can also ask to meet with some people, and we did. So we went down to D.C. and met with them.
But then you just sort of throw -- you contest it, and you throw it into a black box. And then you're constantly calling up and saying hey, are you guys making a decision? And the decisions come through -- there's a whole process. There's, I think, initial analysis by the whistleblower office. And then there's what's called a claims review staff who can look at it. And then after that, the commissioners themselves of the CFTC will sign off on it, usually by doing nothing. It's sort of operation of law. It just becomes a final determination, ultimately. But they are allowed to ask for the record, and in once instance in history, they have done that. And I experienced that.
Gary Kalbaugh: A lot of history making. By the way, I see come great questions coming in. Please keep them coming in. We are going to reserve time at the end, and we'll ask those questions. So if I'm not addressing your question now, please know that it will be addressed. Great questions coming in.
So all right. So that anonymous CFTC employee, did you ever succeed in deposing him or her?
David Kovel: No. No. And I actually -- we did it in a way that I thought was delicate in the sense that we told them we were going to ask to depose this person. And the main idea was that we would develop a record that showed that we couldn't develop a record. When they refused, which they did, to produce this person for a deposition, we were going to have that as a piece of evidence that we couldn't dispose this person when we appealed. So if the final determination -- after you contest, if you lose again, then -- we were fortunate enough not to lose again -- but if you do lose again, your only recourse then is to go to the court of appeals. You can go to the court of appeals where the whistleblower is located or the D.C circuit. So we were preparing. That ask for deposition was really just preparing to say there wasn't enough information in the record and there should have been more.
Gary Kalbaugh: Sure. So you were just preparing for that eventuality. You never had to go there. But my understanding, David, so you mentioned the last year and a half. They tell you, you know what, you guys were right all along. Sorry for all the trouble we gave you. And then a year and a half, they go silent. I'm going to make a guess as to why they went silent. Because you bankrupted the whistleblower office. Is that true?
David Kovel: Yeah. Well, technically no, but yes, practically. So the whistleblower office is funded by a consumer protection fund. I think it's called CPF. I think that's what it's called. And it tops off at $100 million. So even if the CFTC, as in our case, collects far more than $100 million, the whistleblower hadn't been awarded anything yet, and so the money will flow into this fund, but then anything above -- there's a steady state. Anything above the 100 million pours into the treasury. And so all that's left -- all -- all that's left is $100 million in the fund.
And the other thing to know is that the whistleblower office itself is funded through that same fund. So they're paying out whistleblowers, and they're paying their salaries. And that was a great thing for them when the government shut down and everyone was furloughed, actually the whistleblower office at the CFTC wasn't because they had their own funding. So they kept being paid. They watered everyone's plants, they tell me, at the CFTC.
But that became a problem when there was this potential. We didn't know with any certainty what was going on, but we understood that there were problems. We thought we were going to get a good response, but then everything went radio silent. And then it slowly occurred to us that there was a risk that that fund would be depleted completely. And then the consequence of that, we found out, was that the whistleblower office itself would shut down. So there was a real -- just a complete freeze up of all of the whistleblower awards that were going out because there was this potential. And I think at that time, it really was a potential. I'm not sure they had decided anything with our case. But a potential that the whistleblower fund would be depleted, the CTF.
And then --
Gary Kalbaugh: - Sorry. Go ahead.
David Kovel: I was just going to say, this caused huge amounts of problems for the whistleblower office as much as for -- well, our client was in desperate straits, but it was existential for the whistleblower office. And they had to get a fix, a legislative fix, in order to continue to operate, which they did. In the summer of 2021, they were able to get bipartisan support to set aside some money for the whistleblower office and separate and apart from what was in the fund. The program's still broken because that's going to sunset at the end of this year. So they're going to be back in the same spot if they ever have big whistleblower awards.
What essentially happened was that the whistleblower office shutdown, stopped working while they figured out how to address this.
Gary Kalbaugh: So it seems that that would be an additional claim if you had to go to an Article 3 court, right, that there's a conflict of interest here if they deny you. Is that fair or no?
David Kovel: That was their position. I personally don't agree with it, but that was the position that was take at the CFTC, that the whistleblower office, because the office itself would be bankrupt, would be put out of business if the fund was depleted, they would be conflicted and not want to give large awards out. And so yeah, I think a lot of these big awards, then, were turned over to less conflicted parts of CFTC, as I understand it, and other people did -- I think with our case, especially, because the numbers were so big, they sort of did a de novo review of everything we'd submitted. And we had to do more presentations.
So there was a -- even after the fix, there was still a new analysis of the application, I think because the numbers were just so huge.
Gary Kalbaugh: Yeah. It's very hard. I've got to imagine if I put myself in the shoes of somebody that's at CFTC, it's very hard to be the guy who's going to sign that check and say, yeah. It is a lot of money, and so we can understand, I think, and sympathize with the hesitation. But did you client get interest?
David Kovel: No interest. No. We thought about asking for it, but we thought that would be the height of chutzpa once we figured out we were going to get something. So we didn't ask for interest. But that's a good point. I'm not saying that in retrospect it makes sense, but there is a huge amount of time and a huge amount of uncertainty. As I said, our client, up until mid-October, really had no idea that they would ever get anything because all we had was this preliminary determination which said they didn't help. So it was risky, and it took a long time.
But what the rules do say is that you are, under most conditions, if you are a successful whistleblower, you will get 10 to 30 percent. So that is -- and we think that we argued that is not discretionary. So although we knew we weren't getting interest, we thought if we were going to be successful we were going to a lot of money. There was a lot of money at stake here.
Gary Kalbaugh: Yeah. For sure. The statements of one of the CFTC commissioners, Dawn Stump, at the time of the whistleblower award, I believe she issued a critical statement of the whistleblower award. What is the gist of the criticism that she offered?
David Kovel: Yeah. So in this whistleblower award determination, there were three buckets of money. One was the CFTC, what they recovered. One was what a federal regulator recovered. And one was what a foreign regulator recovered. And the reason why is because the whistleblower provisions provide that if there's a related action, something that's related to whatever you provided to the CFTC in this instance, that whatever fine that that is obtained by that related action, the federal regulator or the foreign regulator, that 10 to 30 percent bounty will be paid on that award as well.
So even though the CFTC didn't collect the money that the foreign regulator got or that the federal regulator got, they still had to pay 10 to 30 percent of what was obtained by those two entities, by those two regulators. And the Commissioner Stump who took issue with that one part of the decision, in particular, I think she was quite unhappy that there was a determination that our client would a percentage of a recovery that didn't even go into the United States coffers. It went to a foreign regulator. I think that's the policy behind the displeasure.
And her statement, I think, brings up a couple of issues. We spoke about this earlier, Gary, but she thought that the CFTC should exercise its discretion not to pay a related action for that foreign regulator, in other words, not to pay our client a percentage of whatever that foreign regulator obtained. Despite the fact she conceded that our client had provided the information that had been provided to that regulator and the regulator had acted upon it to some degree at least.
But the problem that we had, and this was a real issue for us because we were considering -- we thought we might have to appeal to the circuit, to the D.C. circuit -- was the statute itself doesn’t have that language of discretion. The regulations that govern this idea that 10 to 30 percent of a related action is going to be going to a whistleblower, the regulations say that CFTC may provide that 10 to 30 percent goes to the whistleblower.
Gary Kalbaugh: So the statute says must and the regulation says may?
David Kovel: The statute says shall. Yep. The statute says shall pay the related action among other things, but 10 to 30 percent of the related action. Shall. And the regs say may. And so Commissioner Stump was relying on the regs, which give a lot more discretion to the CFTC and in this case a lot more power to the CFTC. Normally that kind of power of exercise I would think from the left rather than from the right, and she was a Republican. But in this instance, I think she wanted the CFTC to have more authority to prevent and to have more discretion to prevent money being paid to whistleblowers when the money wasn’t coming to the U.S.
Gary Kalbaugh: So I've got to ask, David, because it does strike me initially as odd, what does the public policy behind that statute? Why would the U.S. be paying a whistleblower who whistle blows wrongdoing in another country?
David Kovel: Well, it's a good question. And a necessary predicate is always that the CFTC is also recovering. So you can't get a 10 to 30 percent from a foreign regulator if the CFTC hasn't used the same information and gotten its own two cents, really 2 million or whatever. I think the idea behind it is to encourage whistleblowers to -- it's an acknowledgement, I think, that these markets are international and that whistleblowers should be incentivized to make sure that regulators in all jurisdictions, not just in the U.S., go after misconduct. That's my own overlay. The legislative history will probably will provide more accurate context, maybe, than I can. But that's my sense.
I see the counter argument. I just want to say in our case that the CFTC made much, much more than the $200 million that our client got, even with the payment of the related action to the federal regular and to the foreign regulator. So it's a bit of an academic argument that there's going to be some huge payment for overseas regulation.
But I would also say that the CFTC is fairly liberal in the sense of what it construes as a related action. The FCC's rules are much more constrained. So it's not -- and that's all done through the regs, and it's worth looking at. If you're ever going to do whistleblower practice, you should be careful about whether it's a related action. And it differs between the FCC and the CFTC.
Gary Kalbaugh: Oh, very helpful. So was that Commissioner Stump's primary criticism, or did she have other critiques? Or was that pretty much her only criticism?
David Kovel: That was her main criticism, that there was -- that this foreign -- she maligned our client a little bit, the whistleblower a little bit, by saying that what they provided wasn't that great, or it was good but it wasn't great, something like that. I don't remember exactly what she said. But she said it in that context that CFTC should exercise discretion and not pay money for regulatory enforcement that flowed overseas. I don't think she had officially in that statement much more in terms of an attack on the results.
I think there was just generally some sticker shock at the $200 million. And reading between the lines, she may have been interested in lowering that number, almost $200 million I guess I should say. But I think she put forth a legitimate argument. I think it was based on improper administrative aggrandizement of power. But she did put together a proper argument.
It was actually interesting because we didn't know about this foreign regulator how much the foreign regulator had relied on our client until we saw her statement and the award determination. And we thought, wow, that's a lot more than we thought.
Gary Kalbaugh: So David, you took seven years of risk, and your client, I assume, is underemployed or unemployed during a lot of this period. And do you believe in hindsight that the whistleblower program worked as it should?
David Kovel: I think the answer's yes and no. First, in a board brush way, they need to fix this funding of the whistleblower office so that they're not tied to the ups and downs of this fund which may pay out large whistleblower awards. They just need to fix that. So in that sense, they did a small fix and it worked, but it's only a patch. It needs to be finally done through legislation.
I think we were the victim of our own success in the sense that there's so much money at stake here. And the initial preliminary determination which didn't give us what we wanted, I think was based on a lot of hindsight, that hindsight bias that could have been -- so I think that was the negative side of things.
But what I do think is the CFTC really did honestly turn back to this and look at it and do a full analysis. I think they've learned a lot from this process, just this one award. And they've got lots more, and I know that they've got lots more that are coming to fruition now. I think it is working. I think they just need to fix this problem, get all of the "conflict" between the office and their providing money to the whistleblowers has to be fixed.
Gary Kalbaugh: So you said -- and I also want to note, David. This circumstance is anomalous, right, having such a large award that's way larger than what the whistleblower fund had. I don't believe that these are circumstances that ordinarily present themselves in whistleblower claims. Is that fair?
David Kovel: I think that's very fair. This is a two-edged sword. The $200 million, as I said, has sticker shock. It's got real sex appeal too for would be whistleblowers, which, depending on your bend, is good or bad. But it also shouldn't be used as a means of determining policy because it is such an anomaly. It's not like that's going to be the norm at the CFTC in how the whistleblower office performs.
Gary Kalbaugh: So I have way more questions for you, and normally I would go to questions at the 12 minutes left mark, but we have so many questions that I just want to do justice to them, and they're excellent questions. And I do have -- hopefully I'll have time to ask you a couple more questions.
But the first one is from Jeffery Wood, "Do these actions parallel federal qui tam actions generally? What are the similarities or differences?"
David Kovel: So that's a big question, but the short answer is they are based on -- the CFTC and FCC whistleblower statutes are based on the False Claims Act. The main difference is you don't file in court. In the False Claims Act, you would file a complaint under seal in a court. And likewise, in a federal False Claims Act case or state one, you could move forward if the government doesn't choose to go forward. The whistleblower can choose to go forward on its own on behalf of the government.
Here you just give your information to the CFTC or the FCC, and that's sort of the end of the road. If they don't do anything with it, that's too bad, so sad for you.
Gary Kalbaugh: Right. Well, we have a question from our very own Wayne Abernathy, and Wayne asks, "Very interesting discussion. Raises a number of questions. The one at the top of mind is whether whistleblower awards are taxable. That is, when the government giveth does the government to some degree take back?"
David Kovel: Well, I'm not a tax advisor. I have to say that. But the answer is yeah, as far as I can tell, yes. The $200 million award, close to $200 million award, was taxable.
Gary Kalbaugh: Right. So all right. Christopher Aquilina has a couple of questions. Let's answer his first one. "Congress creates whistleblower statutes through one legislative means or another. Should they now create a statute requiring said whistleblowers to be awarded if X standard is met? It seems somewhat disingenuous to tell people that they may receive an award, but only if some administrative agency feels like it. It should not be that hard to determine who provides what information and whether said information is vital to the investigation recovery." Now Christopher, this is a great question because I think this is a good opportunity to clarify the view -- I think David would have the view -- and David, I'll let you speak for yourself -- that it is a mandatory process and it's not completely discretionary. I do think he had some contrary views in some quarters of the CFTC. So I'll let him address that. Great question.
David Kovel: That is a good question. And we'll see how this plays out and how the CFTC behaves over time and the FCC too for that matter. From our perspective, they're not supposed to have very much discretion if you check the boxes. So the main box being if your whistleblower brings forth information that starts in investigation, it's pretty much per se. If there's money that comes in, your whistleblower is likely to get it because it starts the investigation. And that's pretty much objectively verifiable.
The tricky part, which was our case, is when there's already investigation and there's some subjectivity as to how much there was a contribution by the client. That -- I don't know how to -- I agree with that should be allowed to claim an award based on significantly contributing to an existing investigation. But it necessarily involved some discretion on whoever is arbitrating that, or the arbitrator for that decision is going to have to decide whether it was enough, how, what significant, that kind of thing.
Gary Kalbaugh: So the core whistleblower claim itself is pretty much mandatory, but what you're noting is around the edges, there is inherently a lot of discretion. And I think the last thing you want to do is end up in an Article 3 court, court of appeals, right. That's probably not where you want to be.
David Kovel: It's really tough to be in Article -- in the court of appeals because to this day, the court of appeals still do give some deference to the agencies. They'll give -- what are they called -- Skidmore deference to the FCC. The FCC has said that's what they're entitled to which is a little bit more collectible, I suppose, than Chevron deference. But you also don't have a record at the appellate level, so that's the problem we always face is we want to develop a record and it's constrained at the administrative level. There's no district court. You just straight up on appeal. What do you do?
Gary Kalbaugh: Yeah. What do you do? Can you do facts finding at that point at all?
David Kovel: No. What we do is if you're going to contest, and this is even when you do the award application, you put together your record, and you better hope that it's complete because that's it.
Gary Kalbaugh: So another question we have, I'm not going to mention the name of this person because the person says, "I do not speak for my employer in any way, shape, or form." So don't worry, Questioner, unless you want me to mention your name, in which case just throw it in the chat window, and I'm happy to mention your name. I won't mention who you are. And the question's about extra territoriality. "In efforts dealing with foreign bankruptcy, for example, it is often expected that there will be a 'single point of entry' so that regulators going against a private party do so at the institution's home regulator. Should we expect whistleblowing to follow similar methods going forward? Or should we expect to see what we got during the great financial crisis where, even internally in the United States, we had each regulator seeking to take their pound of flesh?"
David Kovel: I'm going to respond to that practically which is if a whistleblower comes to me and I see the opportunity to go to a foreign regulator and I think the CFTC or the FCC is also going to exact a fine, I'm going to go to any regulator that's going to listen to me.
Gary Kalbaugh: Okay. Great. So it's less single point of entry and it's more just a practical assessment, multiple points, as many as are viable.
David Kovel: Yeah, I think -- but another practical point on that is -- and I don't pretend to be an expert here, but in my experiences with these derivatives markets, it's usually just a few of these regulators. With some exceptions, it's usually just a few regulators who are going to be interested. And it's generally concentrated in just a couple of financial centers.
Gary Kalbaugh: Right. Sure. Sure. So naturally it's not -- even if it might be multiple points of entry, it's not infinite points of entry. It's just a handful. Perfect.
David Kovel: Right.
Gary Kalbaugh: All right. So then Samuel Wright asks us, "Will federal employees who have information about wrongdoing in their agencies be reluctant to blow the whistle by contacting the inspector general if they think that they should be paid millions of dollars for their information?" And then he asks, "Can a federal employee get a whistleblower cash award?" And let me just throw out an additional question on to that. Can I get a whistleblower award? Ignore that I'm an attorney. Let's pretend I'm not an attorney because that complicates things being an attorney. But can I get a whistleblower award if I find out something bad happened. I don't talk to management. I just go straight to you. So can you answer all those questions together?
David Kovel: Yes. So a federal employee -- it depends on a federal employee, but generally the definition of whistleblower excludes people who are involved in enforcing the laws, especially the ones that are at issue. There's a whole slew of people, federal employees, who cannot be whistleblowers. I don't think it's complete, but it pretty much will keep out those who have run across this as part of their work.
I don't about the question about going to the inspector general and whether there's overlap between doing that and going to the CFTC or the FCC. I don't really know enough about that situation. There may be times when you could do both. I don't know how often that would occur though. And I don't know what the incentives would be to not to go either.
My experience with whistleblowers is they often internally complain. They don't have to, Gary. They don't. They can go straight to the CFTC. They're given credit if they do, although that's difficult. But they don't have to. But you generally find that whistleblower have complained internally first.
Gary Kalbaugh: Well, let me ask you. You have an employee, David, who doesn't go up the pull of command. Haven't they violated their duty as an employee?
David Kovel: Not if they're going to regulators. Not if they've gone to regulators. And they have a good faith basis to assert that there's been a violation of some sort. There's another practical reason why I would advise whistleblowers to go straight to the regulator which is that if they're going to be retaliated against, there are anti-retaliation provisions in Dodd-Frank, in the whistleblower provisions. Those anti-retaliation provisions only kick in if you're a whistleblower. And the only way to be a whistleblower is to file a complaint. So and that's based on case law. The Supreme Court has ruled that. And because of that, if someone comes to me and is at a job and says, "I want to complain internally. I might get fired." I'm going to say, "File a complaint with the CFTC first before you go internally if you're worried about getting fired so that you can claim anti-retaliation remedies."
Gary Kalbaugh: Sure. I have two larger questions that are fantastic questions, so I want to get through them both, both from Christopher Aquilina. So I'm going to give you the first one which is a bit of a fact pattern, so let me read it, but these are great questions. So, "How is it that the CFTC may make a recovery based in information provided by your client, but the CFTC can then block you from evidence and even the identity of the employees who may have performed the investigation? Where are the checks and balances if you cannot even get timely access to information and identities you may need to file a civil case? Are you simply state anonymous or unknown as the names of the employees and then wait as the CFTC drags out legal hearings for a potential years until you get the identities of the people you need to interview to prove your case?"
I think, Christopher wants to get hired by your firm. These are great issues that are raised.
David Kovel: Yeah. I think that would have been the opening statement of our appeal is we didn't have enough information to -- well, look, to defend the CFTC, even though I don't want to, there's got to be limits because there's always going to be people who contest, and they need to streamline the process or else you could tie them up in knots for years and years with litigation. So I think that's -- they're trying to tow a line between creating enough of a record so they can make it if there is an appeal they can make a decision and not overwhelming their staff on this. They're always going to fall short when they're wrong. That's just the way it is. And it was a real frustration when they rejected us the first time.
Gary Kalbaugh: I'm sure it was. Just a final point, a little bit of a point, a critical question, again from Christopher. "How much of the resistance that you encountered from the CFTC is more a result of them having red faces because they failed at their job of oversight versus them not wanting to pay out such a large award? The amount of money was a lot, but the significance of it," and I think this is a very good point, "is that someone was able to pull the wool over the eyes of the regulators to such a large degree." So is regulatory embarrassment an issue here, David?
David Kovel: I don't think it was in this case. I supposed it can be, but then it's -- that might also argue that they wouldn't go after -- the thing is whistleblowers are generally given their money and their awards quietly. No one knows unless there's a big press release. And it's not connected to the cases themselves. So I think there is some insulation from that possibility.
There is, I think, in our case our appeal was successful because we were so right that I think the CFTC might have been worried that they would have been red-faced publicly in an appeal before the D.C. Circuit. I want to say that. But in terms of the regular investigations themselves, I don't know -- regulators want to take credit for the work they've done. They don't want to look bad. But I don't think there's a huge tension these days between whistleblowers and the regulators.
Gary Kalbaugh: David, after all this discussion, the question people really want answered is how does a lawyer do a whistleblower award? Unfortunately though, we don't have time to answer that question [laughter], and I'm going to hand it over to Ryan. But thank you so much for your time today and thank you to the audience for just fantastic questions. What a great discussion.
David Kovel: Absolutely. Thank you very much.
Ryan Lacey: It was amazing discussion. And on behalf of The Federalist Society, I would like to thank our experts for the benefit of their valuable time and expertise. And I would like to thank you the audience for joining us and participating. We welcome listener feedback by email at firstname.lastname@example.org. As always keep an eye on our website and your emails for announcements about upcoming webinars. Thank you for joining us today. We are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s Practice Groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at www.fedsoc.org.