BOSTON/WILMINGTON, Delaware Delaware touts itself as a business-friendly haven, but a new strategy by a well-known whistleblower takes the rules in an unexpected direction.
Recent suits against major banks claiming they defrauded public pension funds were filed by Delaware partnerships tied to Harry Markopolos, an associate said.
Markopolos is the Massachusetts fraud investigator best known for trying to tip authorities to Bernard Madoff's massive Ponzi scheme. It is not unusual for companies to file suits seeking a share of damages that officials might recover in fraud cases.
The twist is that by using Delaware entities that disclose few details about themselves, Markopolos has made it easier to shield the identities of the insiders who bring forward evidence of wrongdoing, said Patrick Burns, spokesman for Taxpayers Against Fraud, a Washington group Markopolos has worked with in the past.
"This was something Harry figured out," Burns said in an interview on the recent cases. "It's to protect the anonymity of the whistleblowers who are still in their industries, and helped set up teams of whistleblowers who can work together."
Markopolos declined to comment via e-mail. Burns declined to discuss many more specifics.
Another person who has worked with Markopolos, Los Angeles attorney Mark Labaton of Motley Rice, said the new partnerships also could be a way to protect whistleblowers from retaliation from companies whose fraud they are reporting, a concern Markopolos has expressed in the past.
"That is something new and I think it reflects a certain amount of creative thinking," Labaton said of the partnerships. Just how to protect the identity of whisteblowers has been a hot topic among like-minded attorneys in the past, he said.
The suits against the banks claim they overcharged public pension funds. They include one filed in Fairfax County, Virginia, circuit court by a Delaware partnership, FX Analytics, against Bank of New York Mellon Corp (BK.N), in which Virginia Attorney General Kenneth Cuccinelli has intervened; and one unsealed in 2009 by then-California Attorney General Jerry Brown against State Street Corp (STT.N), which states it was built on a suit first filed by another Delaware corporation Associates Against FX Insider Trading.
Also, on Thursday Florida Attorney General Pam Bondi filed a motion to intervene in and unseal a case that FX Analytics had filed against Bank of New York Mellon. The two large custody banks deny wrongdoing.
Neither partnership provided many details in filings, a common omission permitted by state rules. They were created in 2008 and 2009.
The partnership strategy fleshes out some details that Markopolos has left vague in past interviews, and shows the growing power of investigators and attorneys to leverage laws such as the False Claims Act and state statutes. Broadly these allow individuals who bring forward evidence of fraud to share in money recovered by the government.
Such cases are on the rise. Last fall a former GlaxoSmithKline PLC (GSK.L) employee was awarded about $96 million after reporting problems at a drug-making plant in Puerto Rico, believed to be a record recovery.
Also, in a January 24 letter to U.S. Sen. Charles Grassley of Iowa, officials noted the number of new Justice Department healthcare fraud investigations -- often sparked by whistleblowers -- had risen 10 percent in fiscal year 2010 from 2009, after rising 17 percent that year compared with 2008.
It is not unusual for these suits to be brought by companies rather than individuals. Just on Tuesday, for instance, a Texas jury ordered a unit of Iceland's Actavis to pay $170 million for overcharging the state's Medicaid program, in a case first brought by the owners of Florida pharmacy Ven-a-Care, themselves a group of former healthcare workers.
Ven-a-Care has been quite public about its role. Delaware laws allow partnerships like FX Analytics much secrecy, however, under a state effort to get companies to register themselves under its business-friendly laws. The state says it has attracted more than 50 percent of all U.S. publicly traded companies, including nearly two-thirds of the Fortune 500.
Lately the lack of transparency has itself come under fire as potentially aiding tax fraud or terrorism. Michigan Sen. Carl Levin has criticized the state and Nevada for allowing businesses to set themselves up with "less information than is required to open a bank account or get a driver's license," as Levin told a Senate hearing in 2004.
Markopolos himself has cultivated a somewhat shadowy image, an approach he has said in interviews was needed to help protect employees rooting out fraud.
Markopolos discussed some of his thinking in the book he published last spring, "No One Would Listen," about his unsuccessful efforts to get securities regulators interested in Madoff years before his scheme blew up.
In it Markopolos described how matters he unearthed became the basis of the fraud suit filed by California against State Street Corp.
"I have many other cases in the pipeline," Markopolos wrote. He added, "In fact I intend to be in this business until I can't find any more financial or Medicare frauds -- which makes me think I'm going to be in the whistleblower business for a long, long time."
(Reporting by Ross Kerber; additional reporting by Tom Hals), editing by Matthew Lewis)