While the expansion of telehealth during the pandemic benefits patients, the current situation is ripe for fraud

The Covid-19 pandemic has caused a dramatic increase in the use of telehealth services, and this higher usage is likely to continue in the future.  At the start of the pandemic, Medicare and Medicaid acted quickly to increase the range of healthcare services that are covered when provided though telehealth technology, and this expansion has allowed patients to receive safe and secure healthcare from the convenience of their own homes. Private markets responded by investing billions of dollars into telehealth companies. As whistleblower lawyers, we know from our experience that the combination of expanded coverage and increased private investment creates a situation that is ripe for fraud.

Prior to the pandemic, Medicare imposed strict limitations on when telehealth services were covered. Historically, Medicare would only cover telehealth services that were provided in certain designated geographical areas, at certain types of provider locations (such as a hospital or doctor’s office), using certain types of telehealth technology, or a narrow set of “virtual check-ins” used solely for the purpose of determining whether an in-person visit was necessary. Due to these limitations, as of February 2020, only 0.1% of all Medicare healthcare services were provided via telehealth technology.

Beginning in March 2020, Medicare and Medicaid widened the scope of covered telehealth services, including services that may be provided remotely to a patient’s home. This expansion of healthcare services has benefitted both patients and providers during the pandemic. The dramatic increase in private capital investments in telehealth companies reflects a strong belief that this expansion of telehealth is here to stay.

While a broader range and type of telehealth services are now covered by Medicare and Medicaid, Medicare’s core requirement that services be reasonable and necessary remains in force. The unique nature of telehealth services presents a high risk that providers may bill Medicare or Medicaid for unreasonable, unnecessary, or otherwise non-covered services.

For instance, if a doctor billed for in-office visits that he or she did not actually perform, it would be likely that nurses or other staff would see that fraud was being committed. But if a doctor is billing for telehealth services that were not performed, other staff may not learn about the fraud since they would not observe a patient entering or leaving the office.

Other examples of telehealth fraud may include when a provider:

• bills for more services than were actually provided, i.e., billing for a 25-minute service when the service was only 5 minutes long.
• bills for a medically unnecessary service or product that was provided or ordered using telehealth technology;
• receives or offers any kind of kickback in exchange for referring or providing a telehealth service to a patient; or
• bills for telehealth services that do not occur using an interactive audio and video telecommunications system that permits real-time communications to occur.

The United States Department of Justice and the Centers for Medicare and Medicaid Services are concerned about misuse of telehealth services, and actively investigate and pursue those who abuse the programs.

An individual who learns of telehealth fraud should speak with an experienced whistleblower attorney to analyze the situation and consider whether his or her information would support a whistleblower lawsuit under the False Claims Act.

By Gary L. Azorsky and Raymond M. Sarola:

In its 10-year existence the SEC’s whistleblower program has recovered nearly $5 billion in actions that were initiated or assisted by whistleblower tips and paid over $1 billion in awards to those whistleblowers.

In its 2021 annual report to Congress on its whistleblower program, the Securities and Exchange Commission proudly touted its continuing success in encouraging and rewarding individuals for blowing the whistle on financial fraud. In its 10-year existence the SEC’s whistleblower program has recovered nearly $5 billion in actions that were initiated or assisted by whistleblower tips and paid over $1 billion in awards to those whistleblowers.

More than half of total whistleblower payments—over $500 million—were awarded last fiscal year alone, which is one of several trends indicating that the role of whistleblowers in securities law enforcement will continue to increase in the years to come.

It is clearer than ever that individuals who have knowledge of securities law violations should consult with a whistleblower attorney about participating in the SEC’s whistleblower program. This year’s report shows that the SEC values tips from any whistleblower who has useful knowledge to assist in an investigation, regardless of whether they are an “insider” and are eager for assistance in new and emerging fields, such as cryptocurrencies.

The Headline Facts of 2021: More Tips and More Awards

In its 2021 fiscal year, the SEC received over 12,200 whistleblower tips. This figure not only continued but accelerated an upward-sloping trend. From 2012 to 2020, the number of tips increased steadily from approximately 3,000 to 7,000 per year. This number jumped by over 5,000 tips last year, a 76% increase from 2020, which was previously the year with the largest number of tips.

Remarkably, the amount of whistleblower award payments made by the SEC in 2021 reflected an even bigger increase from prior years. The SEC awarded $564 million to 108 individuals in 2021. Both figures were not only the highest annual numbers but were larger than the $562 million that the SEC awarded to 106 individuals in the nine prior years of the program combined. The SEC made its two largest whistleblower awards in 2021, a payment of over $114 million to a single whistleblower and a payment of nearly $114 million to a pair of whistleblowers.

Trends and Implications: Continued Growth, New Case Types, and Faster Payments

The dramatic year-over-year growth in the number of whistleblower tips received suggests a trend that is likely to continue. While the underlying drivers of this growth are numerous, a few possibilities stand out. The turbulence in the labor market caused by the COVID pandemic has led many people to leave their jobs. Reporting fraud against a prior employer, versus a current employer, may appear to present fewer risks. Even those who remained in their jobs but transitioned to remote work may feel less of an emotional bond with their company or be better positioned to objectively evaluate its conduct. And the success of the SEC’s whistleblower program may be self-reinforcing as more people hear about the program and the increasingly large awards that whistleblowers receive.

The SEC closely guards the identity of whistleblowers, who can submit claims anonymously if they are represented by counsel, but the 2021 report included aggregated statistics concerning successful whistleblower claims that highlight important trends. For example, while most successful whistleblowers were current or former employee “insiders,” approximately 40% were not. Similarly, a majority of successful whistleblower tips caused the SEC to open a new investigation, but approximately 44% provided useful information regarding an existing investigation. Taken together, these facts show that the SEC values and will reward whistleblowers who provide substantial contributions to SEC enforcement actions, even if the information they provide was generated from their own analysis of publicly available data or related to a company that was already under investigation.

The large volume of tips in 2021 encompassed a wide range of securities law violations. The most frequent type of whistleblower tip alleged some form of “manipulation,” and other common topics were corporate disclosure and offering frauds, and trading violations. Notably, the fifth-most common topic included initial coin offerings and cryptocurrencies, for which the SEC received over 750 tips. Whistleblowers can be extremely helpful to the SEC in uncovering and prosecuting new types of securities fraud, as further illustrated by the SEC’s recent enforcement action against a special purpose acquisition company that was the subject of a whistleblower tip. (SPACs are newly popular investment vehicles in which a shell company raises money in a public offering to buy or merge with a private company and thereby take it public.)

Lastly, the report emphasized the administrative improvements that the whistleblower program has implemented to more efficiently handle and resolve whistleblower claims. As a result of recent amendments to the regulations covering the whistleblower program, the SEC now applies a presumption that whistleblower awards of $5 million or less will be granted the statutory maximum award percentage of 30% of the SEC’s monetary proceeds. The recent amendments also permit the SEC to use a summary disposition process to quickly deny frivolous claims. These program improvements contributed to the SEC processing 354 whistleblower claims in 2021, the largest annual figure in its history.

Conclusion: Whistleblowers Play a Valuable Role in Securities Law Enforcement

It is undeniable that whistleblowers play a unique and valuable role in assisting the SEC in protecting our capital markets and prosecuting companies and individuals that violate the federal securities laws. The most recent statistics from the SEC whistleblower program show a clear trend towards greater participation from whistleblowers and awards that are more frequent and larger in size than ever before.

Gary L. Azorsky is a partner at Cohen Milstein Sellers & Toll in Philadelphia, and co-chair of the firm’s Whistleblower/False Claims Act practice.  Raymond M. Sarola is of counsel with the firm in the Whistleblower/False Claims Act practice.

The complete article can be viewed here.

Comment Letter:  The IRS Should Direct Individuals with Information on Tax Fraud to File a Whistleblower Claim

PHILADELPHIA – Gary L. Azorsky, co-chair of Cohen Milstein’s Whistleblower and False Claims Act practice group, along with co-chair Jeanne A. Markey, and Raymond M. Sarola, submitted today a comment letter on the group’s behalf to the Internal Revenue Service (IRS) proposing changes to a form used for collecting information on tax fraud that will promote awareness and use of the IRS Whistleblower Program.

Cohen Milstein regularly represents individuals who provide information to the IRS Whistleblower Program and who are eligible for financial awards if that information meets program criteria and contributes to the IRS’s collection of tax underpayments and penalties.  Today’s comment letter responds to the IRS’s request for input on its Form 3949-A, which is used by individuals to submit information regarding tax fraud to the IRS, but which does not qualify individuals for mandatory awards under the IRS Whistleblower Program.  Cohen Milstein proposes to the IRS that it revise Form 3949-A and its instructions to more fully and prominently communicate that individuals with information regarding tax underpayments who wish to participate in the IRS Whistleblower Program and be eligible for financial awards need to file a different form (Form 211) and comply with all rules and regulations of the Whistleblower Program.

“Whistleblowers have provided the IRS Whistleblower Office with valuable information that has led to the collection of over $6 billion in underpaid taxes,” said Gary L. Azorsky.  “We share the IRS’s belief in the importance of its Whistleblower Program and have offered our thoughts on how to increase the public’s awareness and use of this crucial mechanism to assist the enforcement of our nation’s tax laws.”

Read the comment letter.

Cohen Milstein’s Whistleblower and False Claims Act practice group has decades of combined experience successfully pursuing whistleblower cases under the federal and state false claims act statutes, and claims under the whistleblower programs of the SEC, IRS, and CFTC.

According to multiple employee surveys, sexual harassment is one of the most underreported forms of abuse in the workplace. There are a number of reasons that reportedly account for this reluctance to complain about sexual harassment. They include the potential shame, embarrassment, and fear that may accompany reports of sexual harassment and the blame and heightened scrutiny of the victim that may be prompted by these complaints. Unlike most other forms of discrimination, where their presence may be inferred from patterns observed in workforce data, sexual harassment is typically undetectable and certainly not actionable unless it is the subject of a legally cognizable complaint. This brief Article poses whether, and if so to what extent, the legal framework for addressing sexual harassment imposes unrealistic obligations on victims of this misconduct and, if so, whether there are strategies that practitioners can employ to help overcome these obstacles.

In the six whistleblower lawsuits against Kaiser Permanente consortium members in which the Department of Justice intervened in July 2021, the whistleblowers allege that Kaiser violated the False Claims Act in its operation of Medicare Advantage plans—specifically that Kaiser caused its doctors to create after-the-fact “addenda” to patients’ medical records for the purpose of adding diagnoses that did not comply with Medicare requirements because the patients did not have those diagnoses or the doctor did not address those diagnoses during the patients’ visits.

This enforcement action represents the latest development in the escalating battle between the DOJ and private Medicare Advantage Organizations over those companies’ compliance with the laws and regulations of the Medicare Advantage program. With the federal government’s annual expenditure on Medicare Advantage exceeding $340 billion, the stakes in the battle with private Medicare Advantage Organizations are enormous. DOJ’s intervention also illustrates the common truth tying together the behavior that DOJ is targeting in pursuing MAOs: these organizations have a financial incentive to assign more serious diagnoses to their beneficiaries when they report to CMS. The greater the health risk the patient appears to present, the more federal money the MAO stands to pull in.

The lawsuits in which the DOJ intervened were brought by health care professionals who worked for or with Kaiser, and who provided the government with important, nonpublic information supporting their allegations. The government’s intervention in these cases illustrates the critical role played by whistleblowers in protecting government programs from fraud and abuse.

Fraud in Medicare Advantage Programs Is in the Government’s Crosshairs

The federal regulations governing how Medicare Advantage Organizations are paid per patient create a framework that is ripe for fraud. MAOs must report their beneficiaries’ diagnoses to the federal government in accordance with applicable laws and regulations. These reported diagnoses contribute to a patient’s annual “risk score,” which is a numerical value used in determining the amount that the government will pay an MAO to cover that specific patient. In general, the government will pay an MAO a larger capitated amount for patients who have certain chronic conditions or diagnoses that are complex or estimated to be more costly to treat.

Recent years have seen an upsurge in government investigative and enforcement activity in the Medicare Advantage space. This has included FCA settlements and litigation, investigations by the Office of Inspector General of the Department of Health and Human Services, and legal disputes over the validity and interpretation of Medicare Advantage regulations before the courts.

The DOJ has brought and settled a number of enforcement actions regarding the provision of false diagnosis codes that cause the government to make higher risk-adjusted payments to MAOs, including with DaVita Medical Holdings LLC, Sutter Health and companies within Kaiser Permanente. And it has brought False Claims Act cases against MAOs, including UnitedHealth Group and Anthem, that are presently being litigated.

Medicare Advantage fraud and abuse has also been a major focus of the OIG in recent years, which has reported on a large and growing number of investigations focusing on fraud and the operations of MAOs.

MAOs have hardly stood idly by in response. They have not only disputed the results of OIG investigations and defended themselves in court against FCA allegations brought by the DOJ and whistleblowers, they have also challenged the legitimacy of specific Medicare Advantage regulations. By way of illustration, a UnitedHealthcare MAO appeared to have scored a huge win when it convinced a district court to invalidate a CMS regulation that required MAOs to return overpayments to the governments. However, the court of appeals recently overturned that decision and reinstated the regulation (UnitedHealthcare Insurance v. Becerra).

The False Claims Act Lawsuits Against Kaiser Showcase the Importance of Whistleblowers

Whistleblowers are a critically important asset when pursuing fraud committed by MAOs. In the Kaiser Permanente case, the Department of Justice intervened in whistleblower claims alleging that Kaiser pressured physicians to create documentation well after patient visits had occurred that added certain diagnoses that patients either did not have or that were not addressed during their visit.

The whistleblower complaints underlying these claims were brought by health care professionals with inside knowledge of Kaiser’s alleged scheme. They included a current or former national co-chair of Kaiser’s coding compliance committee (U.S. ex rel. Taylor v. Kaiser Permanente), national director for coding quality (U.S. ex rel. Bryant v. Kaiser Permanente), data quality trainer (U.S. ex rel. Osinek v. Kaiser Permanente), health information manager (U.S. ex rel. Stein v. Kaiser Foundation Health Plan), and other physicians (U.S. ex rel. Bicocca v. Permanente Medical Group), and coding specialists (U.S. ex rel. Arefi v. Kaiser Foundation Health Plan).

These whistleblowers alleged a range of claims beyond those in which the DOJ intervened. For example, they also alleged that Kaiser directed physicians to “upcode” diagnoses to obtain inflated risk-adjustment payments and that it ignored the results of its own internal audits that indicated certain expensive diagnosis codes were being improperly reported to the government.

The importance of the issues these lawsuits raise cannot be overstated. If MAOs systematically report false diagnoses, the government will pay these private companies millions or even billions of dollars more than is appropriate for the care of their members with MAOs pocketing this ill-gotten revenue enhancement. Meanwhile, critical Medicare dollars are wasted. Medicare Advantage’s risk-adjustment payment structure makes perfect sense provided MAOs play by the rules. But the financial incentive to abuse this structure nevertheless exists. The False Claims Act—with its threat of treble damages—is the government’s most powerful tool to deter illegal activity and recover lost funds when it occurs.

The Important Role Whistleblowers Play in Detecting MAO Fraud

The Medicare Advantage program is one of the most complex and least transparent of all government spending programs. The operation of Medicare Advantage plans by private companies takes place largely outside of public view and in many respects outside of the government’s view as well. At the same time, it implicates enormous amounts of federal money. Accordingly, whistleblowers with inside, nonpublic information regarding fraudulent practices or schemes within MAOs are exceptionally valuable to government enforcement efforts in this industry.

The False Claims Act provides financial incentives for individuals to blow the whistle on companies that defraud the government. Successful whistleblowers may obtain 15% to 25% of the government’s recovery as an award, and an even higher percentage if the whistleblower and her counsel litigate the action themselves. These awards are designed to encourage people with knowledge of fraud to confidentially come forward and assist the government in remedying and deterring fraudulent conduct.

The six whistleblower complaints against Kaiser are perfect examples of this concept. These whistleblowers included company executives, physicians, and coders who by virtue of their positions, knowledge, and experience were able to alert the Department of Justice to serious allegations of fraud that without their efforts may have gone undetected.

In testimony to Congress and other public comments, Securities and Exchange Commission Chair Gary Gensler has outlined a broad, ambitious regulatory agenda that inspired breathless tabloid-like headlines in normally staid financial broadsheets.

“SEC Chief to Wall Street: The Everything Crackdown Is Coming,” warned an October 8 Bloomberg article that included a list of “Gensler’s Terrible 10: SEC Rules That Make Wall Street Tremble.” An October 5 Wall Street Journal article bore the ominous title, “Gensler Aims to Save Investors Money by Squeezing Wall Street.” From the Financial Times, “Wall Street Beware: The SEC’s Gensler carries a big stick.”

“Crackdown” or not, dozens of new rules are in the works. According to Bloomberg, Chair Gensler has assigned approximately 200 people divided into 50 teams to research and draft the proposed rules. Each team includes lawyers and economists to weigh the proposals’ costs and benefits in compliance with federal requirements. In June, the SEC released its Spring 2021 Unified Agenda of Regulatory and Deregulatory Actions, which contained 49 potential rules: four at the pre-rule stage; 36 at the proposed rule stage; and nine at the final rule stage.

To those who accuse him of overreach, Chair Gensler says he is staying within the “narrow set of chalk lines” that defines the SEC’s mandate “to promote investor protection and facilitate capital formation and that which is in the middle.”[1]

Here is an abbreviated list of some of the most important and controversial new rules under consideration:

• Say-on-Pay Disclosures. On September 29, the Commission proposed enhancing rules that require mutual funds and exchange-traded funds to disclose information about their proxy votes to include how they voted on executive compensation (known as “say-on-pay”). The rule was required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
• Clawbacks. On October 14, the SEC reopened comment on another Dodd-Frank Act rule about clawbacks of erroneously awarded incentive-based compensation. Under the new rule, executives would have to “give back compensation paid in the three years leading up to the restatement that was based on … misstated financials – regardless of whether the misstatement was due to fraud, errors, or any other factor,” according to a statement by Chair Gensler. Previously, the lookback period was one year and clawbacks were limited to misconduct.
• Gamification. The SEC has asked for public comment on “digital engagement practices” used by broker-dealers and investment advisors—think Robinhood—to spur retail investor trading. Chair Gensler has said the use of these techniques, known as “gamification,” to get clients to trade stocks more frequently raises potential conflicts between advisory firms and investors. A proposed rule.
• Blank-Check Companies. The SEC’s Division of Corporation Finance is weighing whether to recommend that the Commission require increased disclosures about special purpose acquisition companies, or SPACs. Called blank-check companies because they raise capital via IPOs without specifying which businesses they will buy, SPACs have come under criticism for a conflict-laden structure whereby founders and initial investors profit handsomely even if the combined business—and its shareholders—don’t.
• Modernizing Market Structure. The Commission is exploring whether to modernize rules relating to equity market structure, including “payment for order flow, best execution (amendments to Rule 605), market concentration, and certain other practices.” All these practices have been criticized as creating conflicts that could potentially hurt investors even though they may lower trading costs.
• Climate Risk Disclosures. SEC staff is looking at the possibility of recommending “rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.” Chair Gensler initially said he expected staff to write a proposed rule by the end of the year but later indicated that it would likely take longer. The rule seeks to “make companies’ climate-related disclosures more consistent, comparable and useful to investors’ decision-making,” The Wall Street Journal has said.
• 10b5 Executive Stock Trading Plans. Chair Gensler has asked staff to recommend changes to address abuses of these plans, which insulate public company executives from accusations of inside trading by setting up purchases and sales of company stock on a regular schedule. Changes may require a waiting period between the time the plan is established and when trading occurs, limiting the number of plans executives can have, taking away their ability to cancel trades whenever they’d like, and requiring companies to disclose more about the plans.
• Human Capital Disclosures. A year after former Chair Jay Clayton’s SEC adopted rules in this area, Chair Gensler has asked staff to consider requiring public companies to disclose more data about their workforces, potentially including information on workforce diversity, employee turnover, and the company’s use of part-time and contract workers.
• Cryptocurrency. Chair Gensler told the House Committee on Financial Services October 5 that banning cryptocurrency would be “up to Congress,” but said both crypto exchanges and decentralized platforms should be registered and with the SEC. He also said that stablecoins pose a systemic risk to the economy and that most cryptocurrencies fall under the definition of a security.
• Cybersecurity Risk Governance. Chair Gensler has asked staff to develop proposals for both public companies and investment funds to enhance required disclosures about the risk of cyberattacks, their “cyber hygiene,” and the rules about reporting incidents after they have occurred.

A decision by the world’s largest asset manager that will allow big clients to vote in corporate elections offers a glimpse of a future in which public and Taft-Hartley pension funds could retain their vital role as capital stewards even as their direct ownership of public company stock declines.

Like other money managers, BlackRock currently casts proxy votes on behalf of investors in its funds—a practice has made it difficult for shareholders to successfully challenge policies at annual meetings, since money managers traditionally vote with corporate leadership, if at all. But starting next year, BlackRock said it will give some institutional clients in the U.S. and U.K. the option to vote for themselves or select from a menu of third-party voting policies.

BlackRock told affected clients about the change in an October 7 letter. News reports citing the letter quoted BlackRock as saying the new capability “responds to a growing interest in investment stewardship from our clients” and reflects technological advances. “These options are designed to enable you to have a greater say in proxy voting, if that is important to you,” BlackRock told the clients.

BlackRock said the expanded options would apply to about 40% of the $4.8 trillion assets held in its equity index strategies and another $750 billion in pooled fund assets, or a total of 28% of BlackRock’s $9.5 trillion in assets under management (AUM).

The change in policy comes at a time when retail and institutional investors are buying less company stock directly and more through equity funds, especially passive index vehicles that can give them a low-cost exposure to any market or sector.¹ The shift in underlying stock ownership from asset owners like pension funds to asset managers like BlackRock and from active to passive equity strategies has prompted concerns about capital stewardship because, with notable exceptions, money managers tend to side with management in proxy fights.²

“This is a very big deal on multiple fronts,” said Laura H. Posner, a Cohen Milstein Partner who formerly served as Bureau Chief of the New Jersey Bureau of Securities. “Public and Taft-Hartley pension funds provide an important bulwark against corporate malfeasance because they are willing to selectively engage with the companies they own and challenge them through the proxy process, if necessary. Let’s hope this type of mechanism is adopted as a standard by all asset managers.”

The new policy appears to recognize that some large investors prefer to retain control of their proxy votes despite money managers’ vocal support of incorporating environmental, social, and governance (ESG) considerations into their investment decisions which resonates with some—not all—investors.

But even if asset managers become less reluctant to oppose management in proxy elections on ESG or other issues however, there is little evidence they will use the other tool at their disposal to influence governance of the companies whose stock they own: securities litigation. A 2019 University of Chicago Law Review article found that, over a 10-year sample period, the 10 largest US mutual fund families filed only 10 securities lawsuits over five instances of corporate misconduct.³

“The dismal litigation record that we uncover raises serious questions of whether mutual funds are acting as faithful governance intermediaries for their investors,” wrote the study’s authors. “If mutual funds could create value for investors by engaging in shareholder litigation yet are failing to do so, then they would seem to be failing in their fiduciary obligations to investors.”

With most of money managers’ income coming from fees from corporate clients, it is unlikely they will ever overcome their aversion to initiating shareholder litigation against those same companies.⁴ But BlackRock’s new policy on proxy voting may offer a blueprint for an eventual solution. The same technological advances that enable asset managers to determine their clients’ underlying beneficial ownership of public companies could someday be marshaled to assign litigation rights to those same clients. The result would ensure that sophisticated institutional investors, like public and Taft-Hartley pension funds, continued to hold companies accountable through the private right of action.

---

1. A December 2020 report by PricewaterhouseCoopers projected global AUM, which stood at $85 trillion in 2016, to grow from $110 trillion in 2020 to more than $147 trillion by 2025; passive strategies, which accounted for 17% of global AUM in 2016, will make up a quarter of AUM by 2025. “Asset and Wealth Management Revolution: The Power to Shape the Future,” PricewaterhouseCoopers, 2020, available at https://www.pwc.com/gx/en/industries/financial-services/asset-management….

2. For example, a 2017 academic study found that the three dominant index fund players—BlackRock, Vanguard, and State Street—voted regularly with management. According to the same study, the “big three” collectively constituted the largest shareholders in 40% of all companies listed on U.S. stock exchanges and a mind-boggling 88% of S&P 500 corporations—a troubling concentration of ownership and power. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=6196&con…. There have been exceptions, however. This year, for example, Vanguard, BlackRock, and State Street sided with the major proxy advisory firms and some large public pension funds to support at least two candidates for Exxon Mobil’s board of directors proposed by an activist shareholder dissatisfied with the company’s approach to ESG disclosures and risk management. In the end, three of the candidates were elected over management’s nominees. Big money managers also joined with pension funds in 2020 to reject a proposal that would have imposed forced arbitration on any investors seeking to sue Intuit for alleged securities fraud.

3. “A Mission Statement for Mutual Funds in Shareholder Litigation” by Sean J. Griffith, Professor at the Fordham University School of Law, and Dorothy S. Lund, Assistant Professor of Law at the University of Southern California, The University of Chicago Law Review, 87:1149 2020. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=6196&con…

4. To cite just one example, Griffith and Lund said that in 2017 corporate pension plans accounted for about two-thirds of BlackRock’s AUM and generate fees that totaled 83% of the company’s revenue. The authors say this “corporate client conflict” give money managers “incentives to cater to the interests of their corporate clients [that] may lead them astray from acting as faithful stewards of their investors’ capital, …” Ibid, p.1212.

By Jay Chaudhuri

According to Johns Hopkins University School of Medicine, the COVID-19 pandemic has now resulted in more than 700,000 deaths in the United States. Aside from the unprecedented number of deaths, the pandemic has also shocked our economy. In the spring of 2020, the stock market dropped dramatically and the unemployment rate climbed to almost 15 percent, the highest level since the Great Depression, as businesses shut down. The twin public health and economic crisis logically raised red flags about the strength of the pillars of our retirement security system, including the Social Security trust funds and defined benefit pension plans.

As an example, last month, the annual Social Security Trustees Report revealed the funds would be unable to pay full benefits in 2034, compared to last year’s estimate of 2035. The estimate reflects the push and pull of the pandemic. On the one hand, the short recession following the first wave of COVID-19 reduced revenue from payroll taxes and contributions to the funds. On the other, the virus’s disproportionate impact on older people resulted in many premature deaths in that age group, cutting future benefit payouts.

Has COVID-19 similarly affected public pension plans? To answer this question, it’s important to examine how the pandemic impacted three areas—investment returns, state budgets, and demographics.

First, public pension plans rely on investment returns for most of their revenue. A recent National Conference on Public Employee Retirement Systems (NCPERS) study found that public pension plans receive 71 percent of their revenue from investment earnings. Even though the stock market tumbled by 34 percent in March 2020, the market subsequently bottomed out late that month before rallying 68 percent for the rest of the year, breaking all records. Not surprisingly, pension plans experienced historical gains. On average, plans saw investment returns of more than 25 percent for fiscal year 2021, the highest annual return in more than 30 years.

Second, public pension plans rely on annual contributions from state budgets. According to the same NCPERS study, public pension plans obtain 22 percent of their revenue from employer contributions carved from state budgets. In this instance, where tax revenues drop, state budgets may fall short on the annual required contribution. Last spring, many states saw their tax revenue decline sharply due to lockdown orders and businesses closures. Specifically, tax revenue for state budgets from April through June 2020 fell by 25 percent compared to the same quarter of 2019. Yet, the doom and gloom about state budgets did not play out. In the end, states collectively received almost the same revenue in 2020 compared to 2019. Two studies by the Pew Charitable Trusts and the Federal Reserve Bank of St. Louis concluded that state revenues for 2020 turned out better than anticipated. More importantly, a Pew study found a significant increase in contributions to pension plans from employers and employees. In fact, “Pew found that for the first time this century, states are expected to have collectively met the minimum pension contribution standard.”

Finally, pension plans use demographic assumptions to determine fiscal impact. In this instance, actuaries ask whether pandemic-related deaths and early retirement of public employees have a financial impact on pension plans. According to the American Academy of Actuaries (AAA), the demographic impacts of both COVID-19 deaths and early retirement remain uncertain. As AAA states, “Even with recent progress developing treatment and vaccines, the long-term impact on mortality is unknown.” With regard to increased retirement, AAA writes that “[i]t isn’t yet clear how strong these trends are, how long they may last, and whether they will have a positive or negative effect on public pension plans.”

In short, COVID-19’s impact on investment returns and state budgets did not result in the severe harm on pension plans some observers predicted. To the contrary, pension plans experienced a once-in-a-generation historic returns and increased contributions, part of a continued trend over the last decade. The last factor of demographic assumption appears to have had very little effect on pension finances in the short-term; however, the long-term impact remains uncertain.

The Fall 2021 issue of the Shareholder Advocate includes:

• BlackRock’s Move to Let Big Clients Vote their Proxies Offers Boost for Future of Capital Stewardship – Richard E. Lorant
• Biden Accentuates Diversity in Selecting Nominees to Federal Bench – Molly J. Bowen
• SEC Chair Gensler’s Ambitious Agenda Has Wall Street ‘Trembling’ – Richard E. Lorant
• Investors’ Lawsuit Against Wells Fargo Survives Motion to Dismiss Largely Intact – Molly J. Bowen
• The Financial Impact of COVID-19 on Pension Plans – Jay Chaudhuri

Download the Summer 2021 edition of the Shareholder Advocate.

The SEC is doubling down on potential fraud involving special purpose acquisition company (SPAC) transactions. Cohen Milstein attorneys look at the role inside knowledge of potential fraud can play in protecting investors and say the time is ripe for whistleblowers to come forward.

Market enthusiasm for special purpose acquisition company (SPAC) investments has reached unprecedented heights during the last two years, stoking the concern of the Securities and Exchange Commission as it seeks to protect investors in these transactions.

With stepped up SEC enforcement, the timing is ripe for whistleblowers with knowledge of securities law violations to consider providing the SEC with information about potential SPAC securities law violations. Whistleblower’s can be eligible to receive substantial financial awards for providing useful information to the SEC, but would be well-advised to speak in advance with experienced whistleblower counsel.

The Structure, Purpose of SPAC Transactions

SPACs are publicly-traded shell companies that raise money from investors through an initial public offering with the goal of using that capital to merge with or acquire a private operating company, in a transaction known as a “de-SPAC,” that will result in that target company becoming publicly-traded.

SPACs have bfeen around for years but have only recently come into vogue with retail investors. In 2020, SPACs raised over $80 billion, exceeding the total amount they raised in the prior decade, and raised nearly $100 billion more in just the first three months of 2021.

Whistleblowers Can Profit From Protecting SPAC Investors

Since the creation of its whistleblower program in the wake of the financial crisis of 2007-2008, the SEC has consistently extolled the critical role whistleblowers play in alerting the SEC to fraud that might otherwise go undetected. To provide incentives for individuals to come forward with evidence of securities fraud, the SEC will make financial awards to eligible whistleblowers.

By any measure, the SEC’s whistleblower program has been a success. In the last 10 years, it has awarded a total of more than $1 billion dollars to over 200 individual whistleblowers, with half of that total issued in its last fiscal year.

The agency issued payouts to the highest number of tipsters in fiscal year 2021, and the number of whistleblower tips it receives continues to grow, a strong signal that its pace of issuing whistleblower awards will only increase. In October 2020, the SEC distributed its biggest payout to date, which totaled over $114 million.

Who Are Likely SPAC Whistleblowers?

Likely successful whistleblowers on this issue include individuals with critical information regarding violations of the securities laws such as SPAC or target company insiders, consultants or bankers to SPAC transactions, SPAC investors, and even market observers who use their expertise to identify fraudulent conduct.

The SEC’s investigation and enforcement activity can often take a number of years, and the commission will take all reasonable steps to protect the identity of whistleblowers. Even after an award is issued, and for an added layer of confidentiality, whistleblowers who are represented by counsel can submit their information to the SEC anonymously.

Whistleblowers whose information leads to a monetary recovery of over $1 million and who comply with all eligibility and procedural rules of the SEC’s Whistleblower Program will be eligible for a financial award in the range of 10% to 30% of the SEC’s recovery, depending on factors that include the amount and nature of assistance provided by the whistleblower and her or his counsel.

The Time Is Right

The timing is perfect for whistleblowers with knowledge of securities law violations because the SEC has closely monitored the recent explosion of interest in SPACs, has issued guidance for investors, and brought enforcement actions where appropriate.

Its primary concern, highlighted in investor bulletins and other public statements, is that SPAC investors may not be given full and accurate disclosure of SPAC transactions, particularly as to the terms of those transactions and the financial or operational details of target companies.

Animating the SEC’s concern is the divergence of interests between SPAC investors, who profit only when a deal goes well, and SPAC sponsors, who can profit from fees and other incentives even when a deal doesn’t.

The SEC’s public comments this spring were merely a preview of enforcement activity to come. In July, the SEC brought an action against a SPAC called Stable Road Acquisition Corp., its sponsor, its CEO, the target company Momentus Inc., and the target company’s former CEO. The SEC alleged violations of the securities laws from false or misleading statements about the state of the target company’s outer space propulsion technology.

Only a few weeks later, the SEC brought an action alleging that the former CEO of an automobile company that went public in a de-SPAC transaction, Nikola Corp., made false and misleading statements about his company’s technology on social media. Nikola stands out as a cautionary tale for SPAC investors, as the former CEO has since been indicted for fraud and the company’s share price has fallen from $65 to under $10.

Market trends suggest that the SEC’s enforcement activity regarding SPAC transactions will grow, particularly as the enormous sums raised by SPACs will soon result in a race among sponsors to find target companies or risk losing all opportunity for profit.