The FIRREA Whistleblower Statute: A failure to adequately incentivize whistleblowing
In the wake of the savings-and-loan debacle of the 1980’s, Congress enacted a statute – the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) – creating a potentially powerful tool to address financial fraud. FIRREA allows the Department of Justice to recover hefty civil penalties from those whose fraudulent schemes harm banks, other financial institutions, and the customers who trust their money to those institutions.
Congress recognized that DOJ would need help in enforcing FIRREA – namely, help from corporate insiders who could blow the whistle on fraudulent schemes. A follow-on statute enacted in 1990 attempted to incentivize whistleblowers to come forward by awarding those whose tips lead to a FIRREA penalty recovery a percentage share of the amount recovered – in the same way as the False Claims Act has done (and, more recently, the SEC whistleblower program created under Dodd-Frank).
But the incentives provided by Congress have proven woefully inadequate. Somewhat unwisely – and contrary to the compensation formulas used in the False Claims Act and SEC whistleblower programs – Congress adopted a formula that decreases the percentage of the whistleblower’s award as the size of the government’s recovery increases, and effectively caps the potential award at $1.6 million. This award is further reduced by taxes and legal fees, as Congress neglected to provide an attorneys’ fee-shifting mechanism as it did in the False Claims Act.
The sponsors of the whistleblowing provisions thought they were offering sufficiently “handsome rewards” to incentivize corporate insiders to come forward.[1] They were mistaken. In addition to overlooking the need for insiders to pay taxes and their attorney, the sponsors failed to consider the potential blackballing of a corporate executive who blows the whistle on his or her company’s fraud. They also failed also to anticipate the exponential growth of executive pay. As then-Attorney General Eric H. Holder later observed, a FIRREA award that’s capped at $1.6 million is “unlikely to induce an employee to risk his or her lucrative career in the financial sector.”[2]
The intervening years and the history of FIRREA enforcement have borne out the Attorney General’s observation. In contrast to the False Claims Act (where the lion’s share of the government’s civil fraud recoveries result from whistleblower-initiated lawsuits[3] and awards are not capped), there have been relatively few recoveries of civil penalties under FIRREA, and only a handful of those recoveries resulted from whistleblowers.[4] Banking insiders have chosen to remain silent – even during the mortgage origination and securitization frauds underlying the financial crisis of 2007-2008, which entailed grave damage to the U.S. financial system and required a massive bank bailout program.
FIRREA is destined to remain an underutilized enforcement tool unless Congress substantially improves the statute’s incentivizing of whistleblowers, as Attorney General Holder (and practitioners) have advocated.[5] In the absence of such a legislative fix, many complex financial frauds will remain undetected – until the next banking crisis brings them to light, too late to prevent harm to customers and the financial system.
Written by Ed Scarvalone of Willens + Scarvalone LLP
[1] 136 Cong. Rec. S17595-01 (Oct. 27, 1990) (statement of Sen. Roth), 1990 WL 168469.
[2] Remarks of Attorney General Eric H. Holder, Sept, 17, 2014, https://www.justice.gov/opa/speech/attorney-general-holder-remarks-financial-fraud-prosecutions-nyu-school-law.
[3] See DOJ Civil Fraud Statistics FY2020, https://www.justice.gov/opa/press-release/file/1354316/download.
[4] As of February 2021, only six FIRREA recoveries resulted from whistleblowers. See Whistleblower Network News, “FIRREA Fiasco,” Feb. 5, 2021, https://whistleblowersblog.org/government-whistleblowers/firrea-fiasco/.
[5] Eric H. Holder speech of Sept. 17, 2014, supra; National Whistleblower Center, “Strengthen FIRREA Whistleblower Protections,”https://www.whistleblowers.org/strengthen-firrea-whistleblower-protections/; Andrew W. Schilling, “Should FIRREA Whistleblower Bounties Be Higher?,”, https://buckleyfirm.com/articles/2014-09-29/should-firrea-whistleblower-bounties-be-higher.
