Whistleblowers have big incentives to commit fraud

Since Enron, corporate whistleblowers are seen as protectors of consumers and investors against corrupt executives. However, Forbes Magazine argues that many people become whistleblowers because of greed. Moreover, fraudulent whistleblowing is very profitable.

Congress changed the law in 2002 to require that whistleblowers get 30 per cent of any money recouped by the government because of their actions. This gives people a powerful incentive to craft fraudulent charges. Since the change in law:

Whistleblower cases have boomed (up over 300 cases since 1986) recovering $7.9 billion from offending companies – and paying out $1.3 billion to the insiders.

In most instances, the penalty paid was several times the losses caused by the fraudulent action.

The feds also have a profit motive – they bring in $13 for each dollar spent prosecuting a case, and some of those funds get funnelled back in the pursuit of new cases.

For example, take the case of Douglas Durand. He worked for TAP Pharmaceutical Products and eventually built a whistleblower case against them with the Feds. In July 2004, a federal jury found all the defendants not guilty. However, by that time TAP had already paid out $885 million to settle the case. Durand himself received $126 million, even though his testimony had been picked apart during cross-examination.

Source: Neil Weinberg, The Dark Side of Whistleblowing, Forbes, March 14, 2005.

For text (subscription required): http://www.forbes.com/business/forbes/2005/0314/090.html

For more on Regulatory Reform and Deregulation: http://www.ncpa.org/pd/regulat/reg.html

FMF Policy Bulletin/ 26 April 2005