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UBS Whistleblower Sentenced to 40-Month Prison Term Puts Chill on Whistleblowing

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Former UBS private banker, Bradley Birkenfeld, son of a Boston neurosurgeon, may be one of the most effective whistleblowers in the nation's history. He has essentially destroyed the chance for wealthy Americans and/or criminals to hide their money in Swiss numbered bank accounts. UBS, Switzerland's largest bank, has agreed to pay the U.S. Treasury a fine of $780 million. As a result, the IRS will also learn the identities of 4,450 wealthy Americans with secret Swiss bank accounts. Each will be forced to pay the income taxes they have evaded, along with penalties and interest, most likely amounting to hundreds of millions of additional dollars. Some of these tax evaders will go to prison.

Birkenfeld's reward? Because he had participated in the fraud by helping wealthy Americans set up secret Swiss bank accounts, he was given a 40-month prison sentence, 10 more months than the prosecutors recommended. (His lawyers had recommended probation.)

Birkenfeld's prison sentence will strike fear into the hearts of thousands of potential whistleblowers, who will now think twice about risking their freedom by blowing the whistle for a good cause.

Roger Ediger, who lost his family farm and won it back using the whistleblower law, pointed out that an insider is far more likely to know when a fraud is being perpetrated against the U. S. government. "It's so utterly foolish and counter-productive to put (Birkenfeld) in prison," said Ediger. "There should never be a disincentive for whistleblowers, because there is so much fraud out there. We need to be creating more incentives, not less."

Ediger's personal story, never before reported, is inspirational.[1]

After graduating from Tabor College in Hillsboro, Kansas in 1977, Ediger began working on the family farm in Garfield County, Oklahoma, not far from the panhandle and the Kansas border. The farm, which grew wheat and raised cattle, had been in his family for four generations. Times were always tough. At some point, Mr. Ediger desperately needed financial help. Gold Banc, a regional bank, loaned him some money, collateralized by the farm. The federal government partly subsidized the mortgage interest rate to help small, struggling farmers like Ediger survive. In this case, it didn't work out that way. To avoid foreclosure, Ediger was forced to sell his farm and all of its equipment in 2001.

Aware that he was about to lose his farm, not to mention his sole source of income, Ediger had no idea what to do next. So he and his wife decided that he should borrow more money and go to law school. Between his second and third years, Ediger was hired as a summer intern at Mitchell & DeClerck of Enid, Oklahoma, one of the state's oldest law firms. His boss gave him an assignment: Take the (Federal) False Claims Act, also known as the whistleblower law, and find a client who could blow the whistle and make the firm some money.

It didn't take Ediger long to locate one.

The False Claims Act essentially deputizes the ordinary citizen to become a private federal prosecutor, allowing him or her to file a lawsuit against someone who has defrauded the federal government. As an incentive, if the deputized citizen is successful, he is eligible to receive a reward of as much as 30% of the funds returned to the U. S. Treasury.[2]

Ediger had always had suspicions about his federally subsidized mortgage with Gold Banc, in which the interest rate had been allegedly reduced by 4%. It had always seemed a bit too high. The Gold Banc had used a complicated and confusing formula to compute its average interest rate, from which the federally subsidized 4% was to be subtracted from the interest rate that Ediger was paying on his mortgage.

The 45-year-old summer intern--with the help of his law firm--launched an investigation. They soon discovered that the Gold Banc had been cheating him, as well as nearly 1,000 other farmers in Oklahoma, Kansas, and Nebraska. The bank had been illicitly pocketing half of the 4% subsidy, hence defrauding the federal government.

This information was brought to the attention of the U. S. Attorney for the western district of Oklahoma, who successfully prosecuted the case. In August 2004, the Gold Banc settled the lawsuit by returning $16 million to the U. S. Treasury. Mr. Ediger's reward was approximately $3 million, a portion of which he used to buy back the family farm. There was also a good chunk of change left over. Since small-time farming is more an act of love than a profit-making endeavor, Mr. Ediger said that he would keep farming until the money ran out. But he also decided to keep his day job at Mitchell & DeClerck, which had subsequently hired him, where he practices law today.

"I was atypical," said Ediger, "because unlike the UBS whistleblower, I wasn't an insider." He also mentioned that if his story is ever made into a movie, his wife wants to be played by Catherine Zeta-Jones.

The bottom line is that the decision to imprison Bradley Birkenfeld makes absolutely no public-policy sense. President Obama should run, not walk, to pardon or commute Birkenfeld's sentence to probation.[3]

Gary S. Chafetz is the author of The Perfect Villain: John McCain and the Demonization of Lobbyist Jack Abramoff, published last fall.

[1] An incomplete version of Ediger's story was briefly mentioned in the Oklahoma Bar Journal on April 9, 2005.
[2] The law, also known as qui tam, actually dates back to as early as 1692, when the American colonies permitted citizens to sue on behalf of the king. (Qui tam is short for the Latin phrase qui tam pro domino rege quam pro se ipso in hac parte sequitur or "he who brings the action for the king as well as for himself". The current False Claims Act dates to the Civil War. Originally called "Lincoln's Law" or the "Informer's Law," it was enacted because unscrupulous contractors were selling bad mules and horses, defective rifles, and rotten rations to the Union Army. The law was updated in 1986. This is what Abraham Lincoln, who urged Congress to pass the law, had to say on the subject: Worse than traitors in arms are the men who pretend loyalty to the flag, feast and fatten on the misfortunes of the nation while patriotic blood is crimsoning the plains of the south and their countrymen are moldering in the dust.
[3] The National Whistleblowers Center is the central clearing house and resource center for those considering a lawsuit using the False Claims Act.