Would $104 Million IRS Whistleblower Get Stiffed Under Dodd-Frank?

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Internal Revenue Service

[author: Richard F. Albert]

The recent announcement that the IRS granted a $104 million whistleblower award to convicted former UBS banker Bradley Birkenfeld generated front-page news coverage. Birkenfeld, the U.S.-bred former private banker who provided the government with detailed information regarding a program catering to U.S. taxpayers seeking to hide assets in Swiss accounts, may be correct in proclaiming himself “the most famous whistleblower in the world.” As has been discussed in detail elsewhere, (See NYLJ Jeremy Temkin July 2012 and Jeremy Temkin July 2008), since Birkenfeld started cooperating with the IRS in 2007, his information directly or indirectly led to UBS paying $780 million to resolve criminal charges, to the disclosure of the previously sacrosanct names of thousands of Swiss accountholders, and to a resulting IRS enforcement initiative and amnesty program that has so far recovered more than $5 billion in taxes, interest and penalties. 

Whether, like one Wall Street Journal op-ed columnist, you consider Birkenfeld’s saga a “tale [of] sordidness piled on sordidness” and his career “grotesque,” or you consider Birkenfeld to be a “modern-day hero” deserving of “a statue on Wall Street” as has been proclaimed on the pages of the New York Daily News (See New York Daily News Juan Gonzalez, Jan 6, 2010), his stature as a critical precedent in the legal treatment of whistleblowers is difficult to challenge.

Because Birkenfeld was convicted and sentenced to forty months in prison for his own role in the conduct at issue, the impact of the Birkenfeld precedent will be particularly interesting to track in the context of securities law enforcement – the realm of the much-discussed Dodd-Frank whistleblower provisions. Indeed, it appears that a key difference in language between the pertinent IRS whistleblower provision and the parallel provision in the Dodd-Frank Act likely would mean the difference between a $104 million award and no award at all.

Under the tax whistleblower statute, Birkenfeld’s conviction did not disqualify him from collecting an award. That statute provides that the IRS is prohibited from making a whistleblower award only to an individual “who planned and initiated actions” that led to violation of the internal revenue laws and “who is convicted of criminal conduct arising from” such role. 26 U.S.C. § 7623(b) (3). Particularly in light of allegations that the UBS programs that focused on serving US taxpayers were supervised by high-level managers, the $104 million award indicates that the IRS did not consider Birkenfeld to have “planned and initiated” such activities.

But the comparable Dodd-Frank provision applicable to securities fraud whistleblowers is different. As I discussed in a prior entry on this blog, Dodd-Frank provides that “no award . . .  shall be made . . . to any whistleblower who is convicted of a criminal violation related to” a securities enforcement proceeding in which the sanctions are collected. 15 U.S.C. § 78u-6(c)(2)(B). Thus, because Dodd-Frank does not include the “planned and initiated” limitation, but broadly disqualifies whistleblowers convicted of conduct “related to” a proceeding generating a recovery, it would appear that if Birkenfeld had provided information about corporate securities fraud rather than tax fraud, he would be barred from any award.

It is interesting to contemplate the potential fallout from such a result in an even moderately high-profile SEC whistleblower case in a post-Birkenfeld world. The SEC itself might be more favorably inclined. It has faced pressure to encourage whistleblowers, and in issuing regulations implementing the Dodd-Frank whistleblower provisions, the SEC took a more measured approach to those who were culpable (but not convicted), providing for the reduction, not elimination, of their awards. But if there were a conviction, it is difficult to see a way around the seemingly absolute language of the statute. There is also the matter of the SEC protecting its own enforcement prerogatives – sometimes referred to as “turf” – because after all it is the DOJ, not the SEC, which decides who gets prosecuted criminally and who does not. But perhaps even the IRS approach to Birkenfeld would have been different in other circumstances – one of Birkenfeld’s attorneys is the former chief counsel for Senator Charles Grassley, whose office drafted applicable provisions of the IRS whistleblower law; Grassley has publicly praised the Birkenfeld award.

Only time and experience will tell how a high-profile, high-value but convicted whistleblower will actually wind up at the end of the day under Dodd-Frank. But it seems clear that from now on, with respect to the proper treatment of whistleblowers, the perspective of the relevant constituencies – the public, law enforcement, legislators and the judiciary – will be significantly altered by the $104 million Birkenfeld award.

Topics:  Dodd-Frank, IRS, UBS, Whistleblowers

Published In: Administrative Agency Updates, Criminal Law Updates, Finance & Banking Updates, Securities Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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