Aware of Wrongdoing? Blowing the Whistle Can Net You Big Bucks

Rewards for whistleblowingIf you get proof that a company's breaking the law, you have more than a moral imperative to step forward and expose that malfeasance: Blowing the whistle on rule-breaking companies can be more lucrative than you might think.

Fraud on the March

Corporate misdeeds particularly plague the health care sector, where many companies have tried to bilk the federal government by overcharging its Medicare and Medicaid insurance programs. In 2010 alone, pharmaceutical companies earmarked more than $2 billion to settle whistleblower lawsuits and accusations of fraud. For example:

  • In May 2011, Quest Diagnostics (DGX) agreed to pay $241 million to settle claims that it allegedly overcharged California's Medicaid program.
  • Johnson & Johnson (JNJ) also found itself in the hot seat in recent years. A South Carolina judge ordered the company to pay $327 million in penalties after one of its subsidiaries was accused of making false claims

Tax fraud is another area ripe for wrongdoing. According to a Government Accountability Office report, whistleblowers help the IRS chase down unpaid taxes, which total an estimated $345 billion annually. Since 2007, more than 1,300 people have filed allegations of tax fraud against nearly 10,000 parties, with the amount in dispute in each case exceeding $2 million. The majority of those claims remain under investigation by the IRS.

Right a Wrong, Make Some Cash

In exchange for exposing shady deeds, whistleblowers can receive big bucks. A former Walgreens (WAG) pharmacist received $1.24 million after alleging that he was fired for exposing Medicare billing fraud.

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As the IRS explains on its own website, "The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30% of the additional tax, penalty, and other amounts it collects."

America's whistleblowers also got a boost from recent Wall Street reforms. The Dodd-Frank Wall Street Reform and Consumer Protection Act supports whistleblowing about financial fraud, and government entities don't have to be the victims. When the value of the fraud tops $1 million, the reward to the whistleblower can be as high as 10% to 30% of any recovered sum.

Some proponents argue that if this law had been in effect earlier, it might have minimized or prevented a lot of damage done by Bernie Madoff. Similarly, in 2009, Goldman Sachs agreed to pay $550 million to settle a suit filed against it by the Securities and Exchange Commission. Had a whistleblower initiated that case, he or she might have collected at least $55 million.

What's a Whistleblower To Do?

Doing the right thing comes with a lot of potential complications. Some people have lost their jobs, and even done jail time, for shining a light on a company's illegal activity. Still, there are lots of laws designed to encourage and protect whistleblowing. Over time, many of these laws have gotten stronger, with the IRS rewards for whistleblowers shifting from discretionary to mandatory in 2006.

If you think you've spotted something wrong, and you want to make it right, keep these steps in mind:

  • Consult a lawyer: If you're taking a deep breath, whistle in hand, consider consulting a lawyer first. Lawyers who specialize in whistleblowing may help position you for maximum success.
  • Get details: Blowing the whistle on wrongdoing isn't as easy as picking up the phone and tattling. The IRS is looking for information that will help them collect taxes due. Ideally, you'll need to offer good evidence of the crime. If you don't qualify for the 15% to 30% reward, you might still receive up to 15% of the recovered sum.
  • Wait patiently for the payout: Remember that unless cash ends up being collected, there's likely to be no reward for the whistleblower -- and some whistleblowers end up losing their jobs. In addition, the IRS wants to wait until appeals can no longer be filed before paying whistleblowers.

Proceed with your eyes open. But if you have some dirt on a scam, do think about blowing the whistle. You may be richly rewarded.

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Longtime Motley Fool contributor Selena Maranjian owns shares of Johnson & Johnson, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Quest Diagnostics and Johnson & Johnson and creating a diagonal call position in Johnson & Johnson.

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