As the Obama administration has cracked down on corporate fraud, lawyers representing whistleblowers have reaped multimillion-dollar rewards. Now, as they seek to sustain these historic payouts, they are serving as generous donors to the president’s re-election campaign.
Lawyers in the tight circle who specialize in filing fraud claims with the federal government on behalf of clients with evidence of wrongdoing have raised more than $3 million so far for President Obama. The administration, meanwhile, has paid out $1.6 billion to whistleblowers during his tenure, with law firms taking a cut in some cases of up to 40 percent of the proceeds.
The lawyers have contributed directly to Mr. Obama’s campaign, served as “bundlers” who solicit contributions from others, donated to the Democratic National Committee and written large checks to Priorities USA, the “super PAC” supporting Mr. Obama’s re-election efforts. They have also donated heavily to Congressional Democrats.
Their support comes as Mitt Romney, the Republican presidential nominee, has called for repeal of the Dodd-Frank Act, which imposed new oversight of the financial services industry and expanded the government’s whistleblower program to the Securities and Exchange Commission, which has set aside $430 million for payouts. Business groups have also pushed for legislation imposing a cap on payments to whistleblowers, arguing that rewards reaching as high as $104 million, as happened in one case, have turned anti-fraud efforts into a lottery.
“The risks are enormous there will be real pullback because of pressure from the industry that has paid billions in penalties,” said John R. Phillips, one of the nation’s top whistleblower lawyers, who has raised more than $200,000 for Mr. Obama’s re-election from colleagues, after first working in 2008 to help Mr. Obama get elected.
The fund-raising is already a flash point in Washington, where lawmakers have been divided along partisan lines over the administration’s efforts to regulate the financial industry and the political parties have long been at odds over trial lawyers and class-action suits. On the campaign trail, Mr. Romney has cast himself and fellow Republicans as champions of business and the president and Democrats as hostile to business interests.
The U.S. Chamber of Commerce, which represents many of the companies that have been targets of the whistleblower investigations, has criticized the lawyers’ efforts, particularly their aggressive outreach for potential clients.
“If someone is defrauding the federal government or investors, they should have the book thrown at them,” said Matt Webb, senior vice president for legal reform policy at the U.S. Chamber Institute for Legal Reform. “But increasingly, this is not just about exposing wrongdoing. It is about trying to generate as much money and fees for the firms handling the cases.”
Some of the industry’s most important players, including lawyers from Mr. Phillips’s firm, played a central role in advising the Securities and Exchange Commission on the rules creating its whistleblower program, including a provision to broaden the list of who was eligible to file a claim. In the last year, whistleblower law firms have hired several top S.E.C. officials who helped write those rules. They include Jordan Thomas, who has started a new S.E.C. whistleblower unit at Labaton Sucharow, a New York-based firm whose employees have contributed to the Obama campaign.
“We have had hundreds and hundreds of inquiries,” said Mr. Thomas, who has sought out clients and promoted his firm’s practice in speeches nationwide, an Internet blog and YouTube videos. “Our phones are ringing off the hook.”
The push to crack down on Medicare fraud, for example, started long before the Obama administration, with many cases initiated by the Justice Department under President George W. Bush. But the Obama administration has been particularly aggressive in pursuing them.
Since January 2009, $13.2 billion has been collected by the federal government from companies through the False Claims Act, the primary whistleblower tool, with about $9.4 billion of that involving alleged health care fraud. The federal government has recovered more overall in financial penalties against drugmakers since 2009 than in the previous 18 years combined, with whistleblowers credited for helping initiate about three quarters of the cases, according to a recent study by Public Citizen, a nonprofit group.
Among the biggest False Claims Act settlements was a $2 billion fine against GlaxoSmithKline, accused of illegally promoting one of its blockbuster drugs, which could translate into a more than $100 million bounty for the whistleblowers, two of whom were represented by Mr. Phillips’s firm. In May, Abbott Laboratories agreed to pay an $800 million fine, which included an $84 million payment to the whistleblowers, four former Abbott sales staff members, who tipped off authorities about illegal marketing of an anti-seizure drug to children and elderly patients. The lead whistleblower was represented by Grant & Eisenhofer, a Delaware-based firm whose managing director has also served as bundler and contributor to Mr. Obama.
The S.E.C. whistleblower program targets fraud that harms investors or consumers through a securities law violation, while the health care cases typically involve cheating the Medicare or Medicaid programs. No big fines have resulted yet from the S.E.C. program because cases typically take several years to develop. But the office is receiving on average 10 tips a day, and got nearly 3,000 in its first year.
Mr. Phillips and other lawyers said their contributions are unrelated to their work and he said they have sparred with the Justice Department during Mr. Obama’s tenure because of its efforts to minimize payouts to whistleblowers. Corporate lawyers who defend companies, he added, typically make more money on a case than the whistleblower attorney does.
Still, the ranks of lawyers seeking to represent whistleblowers has grown quickly in the last several years, as the value of the awards has skyrocketed. Lawyers at dozens of these law firms nationwide have contributed to Mr. Obama, campaign finance records show, while only a sprinkling of checks have been written from employees at the same firms to Mr. Romney.
The single biggest fund-raiser is John Morgan, a Florida-based lawyer. He has collected more than $1.7 million for Mr. Obama’s re-election or for the Democratic National Committee, making him one of the campaign’s biggest bundlers nationwide. He has also raised money for Elizabeth Warren, the Massachusetts Democrat running for the United States Senate. Ms. Warren served as interim head of the Consumer Financial Protection Bureau, also created as part of the Dodd-Frank law.
Mr. Morgan, in an interview, said his support for Mr. Obama and Ms. Warren was entirely motivated by his admiration for their leadership in Washington. But his fund-raising blitz occurred just as he was expanding his personal injury and trial law practice into the whistleblower field, with a television advertising campaign and new Web site, named whistle-blower-attorneys.com.
“America is full of crooks who are defrauding the government and investors every day,” Mr. Morgan said. “We are talking about billions of dollars in ill-gotten gains. We win one case and it will pay for our entire national advertising budget.”
Sean McKessy, a former corporate attorney who leads the new S.E.C. Whistleblower Office, said he welcomed the support of the outside lawyers. Whistleblowers get paid only if the claim is substantiated and results in a fine of at least $1 million — meaning there is no incentive to flood the agency with frivolous complaints.
“There is an extraordinary important role that good lawyers that understand the regulatory process can play,” Mr. McKessy said, adding that individuals can also submit a tip without hiring a lawyer at all, although many do.
At a recent gathering of whistleblower lawyers at a Washington hotel, several hundred of them sipped on glasses of wine and cocktails as they began a series of meetings with senior officials from the Justice Department, the S.E.C. and Medicare programs — as well as Mr. McKessy — to compare strategies on how to bring in more corporate wrongdoers.
“The way you get more hunting dogs showing up is you feed them,” said Patrick Burns, director of communications at a group that calls itself Taxpayers Against Fraud, the legal industry group that sponsored the conference. “And the Justice Department is cooking with Crisco right now.”