The Economist predicted that 2012 would be the "Year of the Whistleblower." Indeed, the front pages were littered with examples, including Brad Birkenfeld's $100 million award for exposing the UBS tax shelter fraud. The Department of Justice also reported record recoveries of nearly $5 billion under the federal False Claims Act, which provides monetary awards for whistleblowers who bring meritorious cases.
This year promises to be even bigger, which is good news finally for Main Street and bad news for Wall Street.
For financial institutions, which invested heavily in Barack Obama's 2008 candidacy, this is a stark reversal of fortunes. Prior to September 2008, times were good and profits flush for banks. When the financial crisis hit, however, it provided Obama an opportunity to advance major legislation on financial reform. Dodd-Frank not only created an entirely new layer of regulation, it also created a whistleblower regime for securities and commodities fraud that makes future liability for these institutions far more likely.
Given the tenor in Washington, Wall Street switched sides this past election, hoping that a Mitt Romney victory would represent the beginning of a truce. Not only did Romney lose, but Elizabeth Warren — Wall Street's worst nightmare — was elected to the Senate from Massachusetts.
Warren, a former Harvard law professor, has made a career to date of addressing financial fraud, and her work inspired creation of the Consumer Financial Protection Bureau. She now serves on the Senate banking committee and could be a powerful new ally on Capitol Hill for whistleblowers. She is also an ideal partner for Republican Iowa Sen. Charles Grassley, who has long been Congress's undisputed watchdog when it comes to fighting private sector fraud. As 2012 highlighted, there is no shortage.
Banks alone paid more than $10 billion in fines last year for things ranging from mortgage fraud to money laundering to LIBOR (London Interbank Offered Rate) manipulation. This does not even count the $11 billion settlement between Bank of America and Fannie Mae recently in which the bank has to buy back billions of dollars in loans that never meet federal standards.
Year 2012 also saw a record number of insider trading cases brought by the feds, including a widening probe of mega-hedge fund SAC Capital, and its founder, Steve Cohen.
Not to pick just on finance, fraud is widespread across other industries as well, particularly health care, where the massive growth of public expenditures on Medicare and Medicaid has created opportunities and incentives for unscrupulous business. In fact, Florida has become the epicenter of health care fraud given the number of residents covered by Medicare.
The annual cost to the American economy of fraud has varying estimates. But it is an enormous number that stretches deep into the billions.
Despite a divided nation politically, one issue on which all Americans should agree is that fraud should be pursued zealously and with the same sense of bipartisan purpose no matter who the perpetrator. With new whistleblower laws in place that provide incentives for reporting fraud, particularly in finance, and new members of Congress committed to pursuing it, expect 2013 to be another year for the whistleblower.