DETECTING BUSINESS FRAUD

IRE 2019

NICOLE HONG, WALL STREET JOURNAL

STEVE BAKER, BETTER BUSINESS BUREAU
ANGIE MORESCHI, JAMES HOYER LAW FIRM

POINTERS FROM INSIDE THE WALL STREET JOURNAL NEWSROOM

Nicole Hong
Reporter, Wall Street Journal
nicole.hong@wsj.com

Where can tips come from?

● Whistleblowers and their lawyers
● Short-sellers
● Investors and venture capital firms
● Victims and their lawyers
● Lawsuits (search for lawsuits against your company on Pacer)
● Glassdoor reviews
● SEC filings (search for “legal matters” in 10-Q filing to see if the company is under
investigation)

Early warning signs

● Has there been a lot of turnover among high-level executives in a short period? Did a
new executive, like the chief financial officer, leave shortly after joining?

● How does the company respond to critics or short-sellers? Do they go after critics in
a particularly vicious way?

● Do the people running the company have experience in that field? Do people in key
positions seem underqualified? Is there a lot of nepotism at the top?

● Is the company unusually secretive about key pieces of information related to its
business?

● Does the company use a legitimate audit firm or accounting firm? Has its accounting
firm resigned?

Reporting the story

● Ask whistleblowers for documents that corroborate their claims, like emails where
executives are telling people to do bad things, text messages, internal memos, etc.

● Use encrypted communications (Signal, iPhone to iPhone messages, etc.)

● Call experts to vet the claims that startup founders are making about their
technology

● If a source is scared to talk because of a nondisclosure agreement, you can cite an

SEC rule and federal statute that protect whistleblowers who report fraud to the
government.
○ Dodd-Frank, SEC rule 21F-17, states: (a) No person may take any action
impede an individual from communicating directly with the Commission staff
about a possible securities law violation, including enforcing, or threatening
to enforce, a confidentiality agreement ... with respect to such
communications. (b) If you are a director, officer, member, agent, or
employee of an entity that has counsel, and you have initiated
communication with the Commission relating to a possible securities law
violation, the staff is authorized to communicate directly with you regarding
the possible securities law violation without seeking the consent of the
entity's counsel.
○ Title 18, U.S. Code 1833(b) says employees have immunity from civil and
criminal liability for disclosing trade secrets for purposes of whistleblowing
alleged violations of the law. The law states in relevant part:
■ Immunity From Liability for Confidential Disclosure of a Trade
Secret to the Government or in a Court Filing. An individual shall
not be held criminally or civilly liable under any federal or state trade
secret law for the disclosure of a trade secret that—(A) is made (i) in
confidence to a federal, state, or local government official, either
directly or indirectly, or to an attorney; and (ii) solely for the purpose
of reporting or investigating a suspected violation of law; or (B) is
made in a complaint or other document filed in a lawsuit or other
proceeding, if such filing is made under seal.”

Helpful sources
● Criminal defense lawyers who represent companies on your beat - they will be the
ones to respond to subpoenas and will have gossip on other witnesses in a fraud
investigation
 ● Venture capital firms - find investors who declined to invest in a company and ask
them why

● Former employees - find them on LinkedIn (the more recently departed, the better)

Tips on the FTC and BBB

C. Steven Baker
International Investigations Specialist
BBB’s of Chicago, St. Louis, Omaha, Dallas and Oakland
stbaker@bbbinc.org
sbaker109@comcast.net
708/445-0642

FEDERAL TRADE COMMISSION

FTC.gov website

Press releases link to key court filings; no need for pacer

Can sign up for press releases, consumer and business blogs: https://www.ftc.gov/news-
events/media-resources

Quick FOIA for media: https://www.ftc.gov/about-ftc/foia/make-foia-request

Consumer Sentinel database annual reports:

https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-
book-2018/consumer_sentinel_network_data_book_2018_0.pdf

Press office head Cathy MacFarlane cmcfarlane@ftc.gov

202/326-2324 (Press office knows who at FTC expertise)

BETTER BUSINESS BUREAU

Reports on businesses on BBB.org

Companies get letter grades

Whether they are Accredited or not

BBB tries to resolve complaints both with accredited or no

Many of the redacted complaints display on the online BBB report for the company
Also have vetted reviews

BBB tends to know if a company really is where it says

BBB also has Scam Tracker for complaints not about real companies

Take reports, categorize, annual reports summarize

https://www.bbb.org/scamtracker/us/
Those complaining check a box if willing to talk to media

BBB fraud studies to date, all at: https://www.bbb.org/scamstudies

Puppy Fraud
Tech Support
Romance Fraud
Fake checks
Counterfeit goods sold online
Romance fraud money mules
Free trial offer frauds
Sweepstakes and lotteries
Upcoming: Business Email Compromise

Free weekly newsletter on consumer fraud that goes out around the world.
Baker Fraud Report: at Bakerfraudreport.com or steve@bakerfraudreport.com

TIPS FROM A LAW FIRM: Whistleblowers & whistleblower cases

Angie Moreschi /James Hoyer Law firm - Outline

1. What is fraud? THREE SIMPLE WORDS:

● “Lying for money”— so, don’t make it harder than it is.
● Motivation: Greed
● Lying and greed… usually make for good stories.

2. The kind of fraud my firm deals with is specifically -- fraud against the government.
● Contractors stealing from the American taxpayer
o Ripping off Medicare and Medicaid, the Defense Department, the
Department of Education -- any taxpayer funded agency or program.

3. How do they do that?

● Over-billing, double billing, ghost workers, billing for unnecessary products or
services, using fake qualifications to get government business, creating straw
companies -- things like that.
4. Fraud against the government is a huge problem
● Department of Justice estimates the U.S. loses more than $100 billion dollars a
year -- to healthcare fraud, alone.

5. How to find whistleblowers:

● The easiest thing to do is to find the whistleblower attorneys in your town,
because they are the *key* to getting access to whistleblowers and their
documents.
o Introduce yourself.
o Let them know you’re interested in whistleblower cases and ask if they
have any good cases they can talk about.
o Important-- Stay in touch.
o Check back every couple months; build a relationship with them as a
source. So when they do have good case, they know you and trust you and
will call YOU to tip you off to an exclusive.

6. Taxpayers Against Fraud: Great resource to find the whistleblower attorneys in your
town.
● National non-profit that educates the public on whistleblower issues.
● They know all the prominent whistleblower attorneys in the country … so
they can put you in touch with any in your town.
● TAF can also tip you off to any big whistleblowers cases going on in your
region -- e.g., if they involve a local hospital, or military base in your area.
● If you’re on a beat -- healthcare, defense, big pharma -- they will know about
all the good cases in those areas, too, so tap them for information like that.

7. PACER: Another great resource to find whistleblower lawsuits *online*.

o Public Access database for Federal Court Electronic Records.
https://www.pacer.gov/
o Very easy to access. Cost is 10-cents per page. Fees are waived if you
spend less than $15 a quarter.
o Helpful tips—when you query specifically for whistleblower suits:
o Search by a specific company name—if you’re interested in a
certain company—like Merck, Walgreens, General Dynamics—and
any suits involving them will come up.
o The way you know it’s a whistleblower suit-- involving fraud
against the government—is the plaintiff will always be the “United
States of America.”
 o Another trick—if you want to find ALL whistleblower cases in the
country: when you query-- use the CODE 375 – under “NATURE
OF SUIT.” That’s the code for whistleblower lawsuits—or False
Claims Act suits—as they are officially called.

8. The False Claims Act:

● The law that makes it possible for private citizens-- to file suit on behalf of the
government to recover money for taxpayers.
● It has become one of government’s *most effective* tools in fighting fraud.
● Last year alone, $2.8 billion was recovered for taxpayers with the help of
whistleblowers -- through the False Claims Act.

9. HISTORY of FCA:
● The law was passed by Congress in 1863, during the height of the Civil War
● It came to be known as the “Lincoln Law,” because President Lincoln pushed for
it and signed it into law.
● The goal was to try and stop crooked contractors from ripping off the Union
Army.
● The fraud was out of control. “War profiteers” were selling everything from
moth eaten blankets to cardboard soled shoes -- even crates filled with sawdust,
instead of gun powder -- to the Union Army, literally compromising soldiers and
putting them in danger for profit.
● False Claims Act was designed to take these bad companies down from the
inside, by providing a monetary incentive to employees to turn in their dishonest
employers.
● Employees with knowledge of fraud could get as much as 50% of any money
recovered by the government as a reward.

10. How the FCA works:

● It allows private citizens, called “relators” -- as in “relator of information” -- to file a
civil suit on behalf of the government.
● Technically, these companies file “False Claims” for payment. (i.e., the name of the
law)
● The goal is to recover money being stolen from taxpayers and return it to the public
fisc.
● If a case is successful and money is recovered, the whistleblower can still get a
reward. Today, with changes in the law -- it’s anywhere from 15 to 30 percent of the
recovery.

11. Important to understand the process:

 ● Cases are filed “under seal” or in secret — so at first, not even the target
company knows a suit has been filed against them.
o That’s to give the government time to investigate, assess the allegations,
and decide if it wants to join the whistleblower in the suit.
o The case remains under seal for at least 60 days, but in reality, that is
usually extended multiple times; sometimes for several years
● During that time under seal -- the whistleblower *CANNOT* talk to anyone about
the case publicly.
● Ultimately, the government has to decide if it wants to intervene-- or join the
whistleblower in litigating the case. Or decline. At which point the
whistleblower can either go forward on their own… or dismiss the case.
● Important: when the case is unsealed. *That* is the moment of opportunity.
o The unsealed complaint is a treasure trove for reporters, laying out the
fraud and identifying documents; and the whistleblower can finally talk
about the case publicly and do interviews

(For more information: Contact Angie Moreschi at the James Hoyer law firm, 813-
375-3735. amoreschi@jameshoyer.com)