Whistleblower Lawyer Blog

This week, the United States Supreme Court agreed to hear a False Claims Act whistleblower case filed against the General Motors Corporation and its former division, Allison Engine Company. The alleged fraud concerns subcontracts for building parts for the U. S. Navy’s guided missile destroyers. Each of the 50 destroyers in question costs the taxpayers over $1 billion.

At issue in this case is an argument being made by the defendants that the whistleblower and the government cannot attack the alleged fraud scheme under the False Claims Act based on the failure of the subcontractor (Allison Engine Company) to personally present claims for payment to the United States government. (In short, even if fraud occurred, the subcontractor cannot be sued under the False Claims Act because the subcontractor did not itself present false claims to the federal government.) This rule, known as the “Totten” rule, was first articulated by the now Chief Justice of the Supreme Court John Roberts when he previously served on the U. S. Court of Appeals for the D. C. Circuit. The “Totten” rule allows subcontractors to escape liability under the False Claims Act if they were not the actual party who formally presented the claim to the government for payment.

In the case which the Supreme Court has agreed to review, the lower Appeals Court supported the whistleblower’s claims and explicitly rejected the “Totten” rule. The Court of Appeals reasoned that the subcontractor’s liability should not depend on a technical presentment of a claim to the government, but whether government money was used to pay a false and fraudulent claim for payment on the contract.

Obviously, this technicality is being used by defendants in many cases where the subcontractor does not actually itself submit a false claim for payment to the government, but instead “causes" it to be submitted (usually by the general contractor), but still ends up collecting substantial taxpayer monies. Obviously, the central focus of the False Claims Act is not only to hold liable not only those who submit a false claim to the government, but also anyone who causes such a false claim to be submitted with the intent that the government be defrauded. Obviously, the “Totten” rule needs to be overruled by the Supreme Court but given the fact that Chief Justice Roberts issued the “Totten” opinion when he was an Appellate Court Judge himself, court observers are mixed as to whether the Supreme Court will reject the rule and uphold the intent of the False Claims Act, or whether it will side with defendants and make it easier to escape liability for fraudulent conduct on technical grounds.

We have already written about the new amendments recently proposed to the False Claims Act in the Senate that would eliminate the Totten defense, and restore the False Claims Act to its original intended result in other ways as well. The “Totten” rule is bad law and bad public policy. If one causes a false claim to be submitted, this should be sufficient; otherwise form is elevated over substance. This whistleblower firm hopes that common sense will prevail in the Supreme Court.

From time to time on this whistleblower blog we report cases of significance involving successful whistleblower claims filed under the federal False Claims Act. We read about such a case today in the news involving a $28 million settlement with National Air Cargo. It appears that the government determined that National Air Cargo had billed the government $4.4 million for various military shipments delivered by that company between the calendar years 1999 and 2005. The false claim was that National Air Cargo had billed the government for higher air rates rather than the actual ground deliveries made. National Air Cargo also claimed that deliveries were made sooner than they actually were which served as a pretext for the higher shipment rates. The government’s investigation focused on shipments to military bases within the United States according to the government’s Press Release.
We read about such a case today in the news involving a $28 million settlement with National Air Cargo. It appears that the government determined that National Air Cargo had billed the government $4.4 million for various military shipments delivered by that company between the calendar years 1999 and 2005. The false claim was that National Air Cargo had billed the government for higher air rates rather than the actual ground deliveries made. National Air Cargo also claimed that deliveries were made sooner than they actually were which served as a pretext for the higher shipment rates. The government’s investigation focused on shipments to military bases within the United States according to the government’s Press Release.

As a result of the scheme which was reported to the government by a whistleblower, National Air Cargo agreed to pay $4.4 million in restitution, a fine double that amount, a civil forfeiture fine in the amount of $7.4 million and $7.3 million to settle a civil lawsuit brought by the whistleblower. The whistleblower’s identity was withheld by the Court apparently under a Confidentiality Agreement.

This case is yet another in the growing and long list of cases where government contractors have been proven to have submitted false claims for reimbursement. Once again, the False Claims Act works as was intended by Congress. It exposes the fraud, punishes the wrongdoer, and rewards the whistleblower for bringing forth the truth. Regrettably, fraud cases continue to occur at an ever increasing rate, but the good news is that occasionally justice is done. The False Claims Act remains the most valuable tool in the government’s arsenal to combat fraud perpetrated against it.

On this whistleblower lawyer blog, we have written previously about abuse of stock options--and how the IRS has declared that tax fraud and evasion from back-dating of stock options is a "Tier I" priority. Now, stock option fraud and income tax evasion will send a former stock options administrator to prison for almost four years.

The Securities and Exchange Commission has announced that Vencent Donlan was sentenced in a California federal court to 46 months in prison after pleading guilty to wire fraud and tax evasion charges. He was alleged to have fraudulently obtained stock and stock options from Wireless Facilities Inc.

Between November 2002 and November 2003, Donlan allegedly received more than $7 million by abusing his position as WFI's stock option grant administrator. The SEC alleged that Donlan issued and transferred more than 700,000 shares of the company's stock and stock options to a brokerage account that Donlan held with his wife. Donlan was alleged to have made false entries in WFI's stock options software to hide unauthorized stock option grants he made to his wife, as well as to have provided false information to the company's brokerage firm and transfer agent.

The tax law violations included that Donlan had evaded paying more than $2.2 million in federal income taxes on the income from his sales of this stock in 2002-2003. Donlan had already been ordered to disgorge all of his ill-gotten gains and pay interest and penalties.

We are encouraged by the successes of these government representatives who are working to stop fraud that causes losses to other persons or our public bodies.

Our whistleblower lawyer blog attorneys have written extensively about Georgia’s enactment of the new State False Medicaid Claims Act, a new whistleblower law that an attorney with our law firm helped enact. This qui tam whistleblower law has applicability to anyone who files a false or fraudulent claim for reimbursement with the State’s Medicaid program.

A classic example of this would be filing false claims for reimbursement for unnecessary and/or unauthorized laboratory tests. If a health care provider submits false or fraudulent claims for reimbursement under the State Medicaid program for performing lab tests which are not properly authorized by a medical physician, or do not otherwise meet Medicaid standards for reimbursement, such a submission could constitute a false claim against the Medicaid program, thus entitling any whistleblower reporting that claim to a reward for reporting Medicaid fraud. One such case, recently filed by the State of Massachusetts, indicates just how expensive such claims may be for the taxpayer.

Last week, in Boston, Boston Clinical Laboratories, Inc. was alleged to have submitted 66,000 false Medicaid claims for urine drug screens in circumstances where they were not ordered by an authorized prescriber or were ordered for non-medical purposes. According to allegations made by the Massachusetts Attorney General, many of these laboratory urine screens were to monitor sobriety tests for the individuals and were not approved for medical reasons. Under state regulations, eligible Medicaid claims are limited to laboratory services prescribed by a physician and must serve a medically necessary purpose. Court ordered and Social Service Agency drug testing, as well as testing for resident sobriety in out-patient treatment facilities, are not covered under the Medicaid program.

While we do not know whether the allegations against Boston Clinical Laboratories, Inc. are true, the fact remains that the case indicates just how expensive unauthorized laboratory tests could be for taxpayers. If laboratories are submitting false claims for reimbursement under the State Medicaid program and if the claims being submitted are not properly approved or authorized, this could constitute a claim under the applicable State False Claims Act for which a whistleblower/informant could receive a reward.

Procedurally, a False Medicaid Claims Act Complaint alleging Medicaid fraud must be filed under seal. The State Attorney General is then given adequate opportunity to investigate the case to determine whether the State wishes to intervene in the lawsuit and take it over as a case that the Attorney General will prosecute. If the State intervenes, the whistleblower is still entitled to a recovery out of any eventual settlement or judgment obtained. In those cases in which the State does not intervene, the whistleblower and his or her counsel can proceed nonetheless in the name of the State and receive an even greater percentage of any recovery assuming fraud is demonstrated. In any event, obviously, fraud needs to be exposed in whatever form it takes.

The claims filed against Boston Clinical Laboratories, Inc. represent merely one type of claim that can be pursued under a State’s False Claims Act. Because Medicaid fraud is such a national problem one must consider just how significant false laboratory claim are in reality. The problem could be huge particularly if only one provider can submit 66,000 claims just for urine screens!

Accounting fraud can create liability for violating the securities laws and IRS tax rules and regulations. This whistleblower lawyer blog regularly comments on cases of interest, as whistleblowers often play an important role in bringing the violations to light.

The U.S. Securities and Exchange Commission has announced civil fraud charges against Nortel Networks Corp. and Nortel Networks Ltd., alleging improper revenue recognition by Nortel between 2000 and 2003, designed to make the company look appear more profitable. Nortel agreed to pay $35 million to resolve these accounting fraud allegations.

Previously, the SEC reportedly announced civil fraud charges against Nortel's former CEO Frank Dunn, former CFO Douglas Beatty, former Controller Michael Gollogly, and former Assistant Controller Mary Anne Pahapill for their roles in the alleged accounting fraud. The SEC also later alleged involvement in the fraudulent scheme by four former vice presidents of finance of Nortel's business units.

We applaud the good work of the SEC in combatting these fraudulent practices.

Our whistleblower lawyer blog attorneys have written about how abusive and fraudulent tax shelters promoted by accounting firms are priorities on the list of conduct that the IRS (and IRS tax whistleblowers) seek to stop. We have followed the KPMG tax shelter prosecution, which was set for opening statements to begin on October 23.

Just before the trial, Judge Lewis A. Kaplan responded to a late motion by the government pointing out potential conflicts of interest by counsel for former KPMG partner John Larson, by disqualifying his attorney. A new trial date will be set in November, once new counsel is obtained.

The 2005 KPMG indictment concerning alleged abusive and illegal tax shelters has been clear evidence that the government is prepared to hold accountable the accountants, financial advisers, lawyers and bankers who participate in illegal tax schemes.

The case is pending in the United States District Court for the Southern District of New York, UNITED STATES v. JEFFREY STEIN, et al., S1 05 Crim. 0888 (LAK).

Individuals who have knowledge of the fraudulent write-off of bogus business losses are in a position to reap the rewards from such illegal conduct should they report it under the IRS Whistleblower Program. If a business writes off bogus business losses from a transaction and claims a tax refund, for example, such a transaction could constitute fraud and thereby expose the company to a whistleblower action by an insider with knowledge of such fraud. An apparent example of this was reported this week in an article in Information Week describing a federal investigation into the computer services firm, Oracle. According to the article, federal investigators are looking into whether Oracle improperly wrote off a quarter of a billion dollars in losses in the calendar year 2003 for the express purpose of obtaining a massive tax refund. Allegedly, Oracle claimed that it lost $223 million on stock transactions in the calendar year 2003 and applied for a $78 million tax refund. The government’s contention seems to be that the tax write-offs were completely fraudulent because no business losses actually incurred. Allegedly, the stock losses were fraudulently manufactured to support the refund application. If the IRS is correct, Oracle might have to repay to the government $78 million plus penalties and interest on the money.

What the article did not say is whether the source of the information about Oracle came from a whistleblower. The stock transactions at issue allegedly occurred in 2003. There does not appear to be a statute of limitations issue. If a whistleblower is the source of the information that started the government’s investigation, under the New IRS Whistleblower Program, the informant could receive up to 30% of the $78 million tax refund plus the same percentage of collected penalties and interest. In short, if the government was unaware of the scheme and learned of the scheme through an informant/whistleblower, then, in that event, if the IRS is successful in its efforts to get the refund back, the whistleblower would then be entitled to a reward because otherwise the government could not have recovered money.

While, of course, we do not know whether the allegations against Oracle are true and correct, what is noteworthy is that the Internal Revenue Service is clearly interested in investigating cases where businesses have written off large business losses which may be inappropriate. In this case, the appearance is that the write-off was inappropriate because the stock transactions at issue appear to have been manufactured to create a tax loss. Again, whether the allegations are true or not with respect to Oracle, the fact remains that the Internal Revenue Service will investigate such cases and obviously would appreciate assistance from insiders and whistleblowers who are willing to come forward to report possible violations of the tax code.

As we have written previously, the new IRS Whistleblower Program provides significant incentives for whistleblowers to come forward in cases of this nature. (The reward in this case could be in excess of $25 million!) If an insider is aware that his or her employer is falsely deducting from its tax returns manufactured, inflated or otherwise improper business losses, and the tax implications exceed $2 million, such an insider could be eligible to recover 30% of the back taxes, penalties and interest if they come forward under the new IRS Whistleblower Program.

The clients who have been represented by our firm thus far under this new IRS program have impressed us with their integrity and concerns about tax fraud in general. Indeed, as citizens we should all be concerned about tax fraud because it affects each and every one of us. To the extent that an employee is aware of employer misconduct involving tax fraud, we hope that such individuals will not hesitate to expose their employers to the government. Tax cheats deserve to be exposed.

The new IRS Whistleblower Rewards Program--and observations by one of the whistleblower lawyer blog attorneys--were featured in an October 15, 2007 article by Nicholas Rummell in Financial Week. Financial Week is a publication geared toward the CFO and other professionals in finance and accounting, with coverage of economics and business markets, regulatory and legislative actions, financing, banking, insurance, real estate, cash management, investment management, benefits and retirement finance, investor relations, accounting and technology.

This article discusses the fast start of the new IRS Whistleblower Program authorized by Congress in December 2007, which our whistleblower attorneys have written about extensively. I had the pleasure of speaking at length with writer Nicolas Rummell about the new IRS program, which is most promising. (The Financial Week article is at http://www.financialweek.com/apps/pbcs.dll/article?AID=/20071015/REG/71012026.)

Of particular interest was how those in the financial services industry, including hedge funds, have utilized the new IRS Whistleblower Program.

I want to clarify some of the comments attributed to this whistleblower lawyer blog author. In particular, based on comments by those in the Whistleblower Program, the statute of limitations is three years for tax noncompliance or tax violations that do not necessarily amount to tax fraud or tax evasion. It increases to six years if there is an open audit or investigation by the IRS. But for tax fraud or tax evasion, there is no statute of limitations as a matter of law. (We have written about the statute of limitations previously.)

Based on our dealings with the IRS, the new Whistleblower Office is operating with extremely professional and capable officials, who are looking to reward individuals who come forward with useful information about tax noncompliance and violations of the tax laws. We are excited to represent clients in the financial services industry and other industries in the new IRS Whistleblower Program. The new IRS regulations to be released by December 2007, should answer many questions that currently exist about the new IRS program.

The just released October 2007 edition of the Georgia Bar Journal, the primary bar magazine for lawyers practicing in Georgia, includes a key Whistleblower article written by one of the co-authors of this blog, Michael A. Sullivan. The article is entitled A "False Claims Act” is Finally Enacted in Georgia: What Georgia Lawyers Should Know About The State False Medicaid Claims Act. Obviously, Finch McCranie, LLP is proud that one of its partners had this article published by the State Bar’s leading journal and is particularly pleased that the Bar Journal decided to disseminate information to all lawyers in Georgia about the enactment of the new False Medicaid Claims Act.

It is noteworthy that the State Bar recognizes that the enactment of this new law is an important event in Georgia. The federal False Claims Act over the last six years has brought in over $12 billion in recoveries for the federal government. With Medicaid fraud becoming an ever-growing problem in Georgia, and nationally, obviously, the Georgia Legislature intended that this new law should duplicate some of the success of the False Claims Act in generating recoveries for the State when Medicaid fraud has occurred. By offering financial rewards to induce Whistleblowers with knowledge of Medicaid fraud to come forward, we believe this new law will undoubtedly produce significant financial recoveries for the State.

As former federal prosecutors, it is always a pleasure representing individuals who are willing to help root out fraud against their government. Georgia’s False Medicaid Claims Act is an important tool in combating Medicaid fraud. It is particularly gratifying to us that the Georgia Bar Journal has decided to educate its members about this new law through our partner’s article.

Your whistleblower lawyer blog attorneys are proud to announce that a retired judge has joined their firm, Finch McCranie, LLP, to assist in representing their clients.

Stephen E. Boswell, former Chief Judge of Clayton County Superior Court in the metro Atlanta, Georgia area, has joined the firm as "counsel."

Judge Boswell recently retired from the Superior Court bench after serving 13 years as a Superior Court Judge, over two periods of service since 1982. Previously, he was in private practice in the Atlanta area for 16 years, with a variety of experience in civil and criminal jury trials.

As of Oct. 1, 2007, he has become “counsel” to Finch McCranie and will assist the firm’s attorneys and clients in, among other things, qui tam “whistleblower” cases under the federal False Claims Act and the state False Claims Acts, and claims under the new IRS Whistleblower Rewards Program.

“I am excited to be joining a group of excellent lawyers who have earned an outstanding reputation over decades for representing their clients with integrity to great success,” Judge Boswell said. “Finch McCranie is one of the most well-respected firms around, and I have known its lawyers both for the quality of their work and for their character in representing clients in my court. I am pleased to be able to help represent those clients now.”

“Our firm is proud to have Judge Boswell join our practice,” said Richard W. Hendrix, partner in the firm. “He brings a wealth of knowledge and experience from having been in involved in literally hundreds of trials over his career. “He’ll be an invaluable resource for our clients. No one knows how to try a case any better than Judge Boswell, and that experience also will benefit all of our clients.”

Judge Boswell, a native of Hogansville, Georgia, is a 1974 graduate of the University of Georgia Law School. Before completing his legal education, he served as a U.S. Army officer and was awarded a Bronze Star in Vietnam. In addition to his years on the trial court bench, Judge Boswell has been appointed to sit specially on the Georgia Supreme Court, has taught courses at the American Bar Association's National Judicial College, and is a former President of the Clayton County Bar Association.

Judge Boswell also has served on the Boards of Heritage Bank and of many community organizations, including as Chairman of the board of the Salvation Army. He has also successfully acted as a mediator in bringing many cases to resolution. He has elected not to accept cases as a Senior Superior Court Judge at this time.

As former federal prosecutors who prosecuted fraud against the government and have tried many cases, we are thrilled to add Judge Boswell's expertise in evaluating cases for trial to the services we provide our whistleblower clients. In addition, his civil and criminal trial experience and our experience in defending white collar criminal cases are a huge advantage to whistleblower clients who need to evaluate whether they have any exposure or liability themselves.

Finch McCranie, LLP is an “all-litigation” trial practice law firm with more than 40 years of continuous practice. The firm's main office is in Atlanta, Georgia. It holds numerous records, including the first million dollar jury verdict in the state. The firm’s practice includes representation of citizens who report fraud against the government, including qui tam "relators" or whistleblowers under the False Claims Act and the state False Claims Acts, as well as IRS tax whistleblowers. Members of the firm also testified in legislative hearings and helped draft one of the nation's newest qui tam “whistleblower” statutes, Georgia's new State False Medicaid Claims Act in 2007.

To assist those who want to know more details about the nation's primary whistleblower law, the False Claims Act, as well as the wave of new state qui tam whistleblower laws that mirror the False Claims Act, the whistleblower lawyer blog attorneys are pleased to present this detailed article. A version of this article by whistleblower lawyer blog author Michael A. Sullivan has just been published in the October 2007 Georgia Bar Journal, and is reprinted here in updated form with permission of the Bar Journal.

For ease of reading, we have divided this detailed article into six parts:

1. Introduction: The False Claims Act and How It Has Inspired a Wave of State Qui Tam Whistleblower Laws

2. The Basics: The False Claims Act and the Growing Number of State False Claims Acts With Qui Tam Whistleblower Provisions

3. Background and History of the False Claims Act

4. The Modern False Claims Act--How It Works

5. The Successes of the Modern False Claims Act--and How They Have Prompted a Wave of State False Claims Acts With Qui Tam Whistleblower Provisions

6. The State False Claims Acts: Qui Tam Whistleblower Laws That Seek to Repeat the Successes of the Federal False Claims Act

We hope that you find useful and informative our article on the False Claims Act and the new state False Claims Acts. If you have any questions, please feel free to call us at 800-228-9159, or email us through our website link here.

This article is reprinted with permission of the Georgia Bar Journal.

Copyright © 2007 by Finch McCranie, LLP

This Part 6 is the final installment by whistleblower lawyer blog of an article explaining why the major qui tam whistleblower statutes, the federal False Claims Act, has led to a wave of new state False Claims Acts. It is part of a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and this article is reprinted with the permission of the Georgia Bar Journal.

This Part 6 describes the new state whistleblower laws and how states have fared to date in recovering taxpayer money wrongfully through fraud and false claims. It also discusses some interesting new approaches that some states have taken in improving on the federal False Claims Act with their own statutes.

V. Other States’ Experiences With Their Own False Claims Acts

As noted, in 2007 Georgia, New York, and Oklahoma joined the 16 other states that have a False Claims statute, and at least a dozen other states are considering similar laws. [58] The financial incentives of the Deficit Reduction Act of 2005 have not only prompted states that had lacked False Claims statutes to enact them, but also have caused many states wishing to qualify for the additional funds to amend their existing False Claims statutes.

In essence, while states may enact “tougher” or more comprehensive laws than the federal False Claims Act, states with “weaker” or less effective laws—as judged by the standards of the Deficit Reduction Act—will not qualify for the additional funds. [59]

Seven of the first ten states whose statutes were scrutinized by the Office of Inspector General (OIG) quickly learned this lesson when OIG disapproved their state statutes. [60] These included California (which lacked a minimum penalty), Florida (which omitted “fraudulent” from its definition of claims), Indiana (which did not make defendants liable for “deliberate ignorance” and “reckless disregard”), Louisiana (which did not permit the state to intervene in cases, set too low a percentage for whistleblowers to recover, and set no minimum penalty), Michigan (which omitted penalties and liability for decreasing or avoiding an obligation to pay the government, i.e., a “reverse false claim”), Nevada (which had a statute of limitations too short and a minimum penalty too low), and Texas (which did not permit the whistleblower to litigate the case if the state did not, and which provided for lower percentage shares to whistleblowers and lower penalties). Most of these states have gone back to the drawing board to correct these deficiencies.

In sum, the Deficit Reduction Act has set minimum standards for state False Claims Acts for states wishing to receive these additional funds. In plain English, the state laws must protect at least Medicaid funds, and they must be at least as effective as the federal False Claims Act, especially in rewarding and facilitating qui tam actions for false or fraudulent claims, with damages and penalties no less than those under the federal Act. [61]

A. How Other States’ False Claims Acts Compare to the New Georgia Statute

Many state False Claims laws have been in transition in 2007. States whose laws have been “disapproved” by OIG have begun to amend their statutes to meet the requirements for obtaining the additional funds under the Deficit Reduction Act, as Florida and Texas already have done in 2007. While these laws are in flux, some significant differences from Georgia’s new State False Medicaid Claims Act are likely to remain.

First, the majority of state False Claims statutes protect the state’s funds generally, rather than protecting only state Medicaid funds, as Georgia’s new State False Medicaid Claims Act is limited. Just as the federal False Claims Act is not limited to health care fraud, but encompasses fraud against the government generally (except for Internal Revenue violations, which are now covered by the new IRS Whistleblower program), [62] many states have used these statutes to protect public funds in general from fraud. Those states include California, Delaware, Florida, Hawaii, Illinois, Indiana, Massachusetts, Montana, Nevada, Oklahoma, Virginia, and Tennessee.

In addition, several states—including Hawaii, Massachusetts, Nevada and Tennessee— have expanded on the federal Act’s four commonly-used theories of liability listed above. These state laws create a new legal theory for holding liable a person or entity who is the “beneficiary” of the “inadvertent submission” of a false or fraudulent claim, if that person or entity fails to disclose (and presumably correct) the false claim after discovering it. [63]

Moreover, Tennessee’s False Claims Act reaches beyond false or fraudulent “claims” and imposes liability for false or fraudulent “conduct” that apparently does not necessarily involve “claims” submitted to the state. This state law adds a new category of liability for “any false or fraudulent conduct, representation, or practice in order to procure anything of value directly or indirectly from the state or any political subdivision.” [64]

Because states have this leeway under the Deficit Reduction Act to pass laws that may be “tougher” or more “effective” than the federal Act, some states have set the statutory penalties higher than the federal level of $5,500 to $11,000 per claim. For instance, under the New York law enacted in 2007, penalties range from $6,000 to $12,000 for each false or fraudulent claim. [65]

Some other states authorize a higher percentage of the state’s recovery that a relator (whistleblower) may receive, instead of the percentages that the federal False Claims Act authorizes (which the Georgia statute also uses): 15-25% of the recovery in cases in which the government intervenes, and 25-30% in cases in which the government does not intervene. For example, Nevada’s percentages are 15-33% in intervened cases, and 25-50% in non-intervened cases; Tennessee’s are 25-33% in intervened cases and 35-50% in non-intervened cases; and Montana’s range from 15-50%. [66]

B. Notable Results Obtained by States Under Their False Claim Statutes

Most qui tam cases filed under the state False Claims statutes have related to health care. Many are “global” Medicaid cases that were first developed in federal courts as Medicare and Medicaid fraud cases and that concerned a nationwide fraud which had been investigated by multiple federal and state jurisdictions. [67] Each state that enacts a False Claims Act that meets the minimum requirements is in a position to join the process.

Most of the state settlements have come from “piggy backing” on federal law enforcement efforts and from joining in global settlements. [68] Experience with some of the newer state statutes is too recent to evaluate, but many states have reported the desire for more resources to develop such cases. [69]

Texas’s experience is worth special mention because the Texas Attorney General’s Office has been especially effective in pursuing cases involving false claims in health care. Texas’s statute has allowed it to recover more than $216 million in health care fraud cases since 1999.

Because the Texas Attorney General’s Office has been a leader in recovering damages for health care fraud by using the Texas statute, it was perhaps ironic that OIG initially “disapproved” the highly successful Texas law before it was amended in 2007 to comply with the Deficit Reduction Act standards. [70]

California, whose statute is not limited to health care, recovered $43.1 million in 2005 in a state False Claims action alleging fraud in the installation and monitoring of heating and cooling equipment in San Francisco schools. [71] In 2001, California recovered $31.9 million in an action alleging fraudulent billing during construction of the Los Angeles subway system. [72] Similarly, California recovered $30 million in 2000 in a matter alleging the knowing sale of defective computers to the state and political subdivisions. In 1998, California recovered $187 million in an action alleging the improper retention of unclaimed municipal bonds. [73]

We do not know with any precision the dollar amount of fraud that affects any particular state's government spending, or how much of that fraud can be prevented through effective use of a state False Claims Act. For now, New York, Oklahoma, and Georgia have joined the list of states that will see how much of at least their Medicaid fraud losses can be recovered through the new state False Claims Acts.

Conclusion

We hope that our article on the False Claims Act and the new state False Claims Acts has been useful. If you would like, please feel free to call us to discuss any questions you may have at 800-228-9159, or email us through our website link here (or directly to msullivan@finchmccranie.com.)

Continue reading "Part 6: The State False Claims Acts: Qui Tam Whistleblower Laws That Seek to Repeat the Successes of the Federal False Claims Act " »

This is Part 5 of 6 by whistleblower lawyer blog of a detailed article for those wishing to know more about the principal qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. It is part of a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and this article is reprinted with the permission of the Georgia Bar Journal.

This Part 5 discusses the dramatic successes of the federal False Claims Act since its 1986 Amendments in recovering taxpayers' money wrongfully obtained by fraud and false claims.

IV. The Trend of Recent Recoveries Under the False Claims Act

Over the past two decades since the modern False Claims Act was established through the 1986 Amendments, the federal government’s recoveries of dollars have grown astronomically, especially in health care cases. The Department of Justice statistics [52] tell the story:

In 1987, the government’s recoveries in qui tam cases totaled zero, presumably because the 1986 Amendments had just taken effect; and total recoveries under the False Claims Act were just $86 million. The following year, qui tam and other False Claims Act settlements and judgments began a steady climb upward, exceeding $200 million by 1989, and $300 million by 1991. By 1994, the government’s recoveries broke the $1 billion mark for the first time, with $380 million of that amount attributable to qui tam case recoveries alone.

In 2000, the government recovered more than $1.5 billion, of which $1.2 billion was derived from qui tam actions. In 2001, the government recovered more than $1.7 billion, with almost $1.2 billion of that amount from qui tam cases. With the exception of 2004, in each year since 2000 the government has recovered more than a billion dollars per year under the False Claims Act, and qui tam actions were responsible for the lion’s share of those recoveries. For example, in 2003, government recoveries exceeded $2.2 billion, of which $1.4 billion came from qui tam cases. Similarly, in 2005, of the government’s total recovery of $1.4 billion, $1.1 billion of that amount came from qui tam cases.

In 2006, the Justice Department recovered a record of more than $3.1 billion in settlements and judgments for fraud and false claims. Of this record $3.1 billion in recoveries, 72% came from the health care field; 20% from defense; and 8% from other sources. Health care alone accounted for $2.2 billion in settlements and judgments, which included a $920 million settlement with Tenet Healthcare Corporation, the country’s second-largest hospital chain. Defense procurement fraud amounted to $609 million in recoveries, which included a $565 million settlement with the Boeing Company.

It is interesting that, while defense procurement fraud both inspired the Act and was the largest source of recoveries at the time of the 1986 Amendments, health care cases now lead in recoveries, as health care costs have grown as a percentage of the federal budget. By industry, in 1987 the defense industry was the largest source of cases under the False Claims Act. [53] The health care industry accounted for only 12% of cases under the False Claims Act in 1987; that percentage grew to 54% by 1997. [54]

Many health care fraud cases have addressed over-billing or up-coding, fraudulent cost reporting, billing for services not provided, and failure to furnish the required “quality of care.” [55] The breakdown of the Department of Justice statistics shows that government recoveries in the health care field have grown from less than $2 million in 1988 to more than $1.8 billion in 2003. Although the amounts recovered rise and fall each year, from 2001–2006 government recoveries from the health care field exceeded $1 billion in five out of six years.

The trend has continued in 2007, as the Office of Inspector General of the Department of Health and Human Services recently announced that it expects $2.9 billion in recoveries for Medicare, Medicaid, and other federal health and human services programs for the first half of fiscal year 2007. [56]

In short, the health care industry now consistently accounts for the vast majority of settlements and judgments obtained by the federal government for fraud and false claims.

Continue reading "Part 5: The False Claims Act's Successes--and How They Have Prompted a Wave of State False Claims Acts With Qui Tam Whistleblower Provisions" »

This Part 4 by whistleblower lawyer blog is a continuation of a detailed article for those wishing to know the specifics of the principal qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. It is taken from a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and it is reprinted with the permission of the Georgia Bar Journal.

This Part 4 focuses on the "modern" False Claims Act--since the 1986 Amendments. Before considering it, please note that, in September 2007, a bipartisan group of Senators introduced the "False Claims Act Correction Act," a bill to further "modernize" the False Claims Act with substantial improvements intended to restore the Act to Congress' original intentions. We at whistleblower lawyer blog will provide regular updates as that bill is considered by Congress.

III. Overview of How the Modern False Claims Act Works (with Comparisons to State False Claims Acts, With the New Georgia State False Medicaid Claims Act as a Primary Example)

A. Conduct Prohibited

The federal False Claims Act imposes civil liability under several different theories, only four of which are generally used:

First, the Act makes liable any person who knowingly presents, or causes to be presented, a “false or fraudulent claim for payment or approval” to the federal government. [30] “Claim” is broadly defined to include not only submissions made directly to the federal government, but also “any request or demand . . . for money or property” made to a “contractor, grantee, or other recipient” if the federal government provides any portion of the money or property in question. [31]

Second, the Act creates liability for using a “false record or statement” to obtain payment of a false claim. It imposes liability on any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to get a false or fraudulent claim paid or approved by the government.” [32]

Third, the False Claims Act imposes liability under a “conspiracy” provision. Any person who “conspires to defraud the Government by getting a false or fraudulent claim allowed or paid” is also liable under the Act. [33]

Fourth, since the government also can be defrauded when a private entity underpays or avoids paying an obligation to the government, the modern Act contains what is known as a “reverse false claim” provision. It creates liability for any person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the Government.” [34] For example, a company that is obligated to pay royalties to the government under an oil lease can be held liable if it uses false records or statements to pay less than what it owes.

Georgia Act compared: The same bases of liability are set forth in new section 49-4-168.1(a), with regard to the Georgia Medicaid program. “Claim” is also broadly defined in the Georgia statute in section 49-4-168(1). In fact, the Georgia statute’s definition of “claim” was intended by the legislature to eliminate a point of dispute about the federal statute [35] by making clear that it applies to “claims” submitted not only to the government, but also to other persons or entities, as long as the Georgia Medicaid program provides any portion of the money or property at issue.

The federal False Claims Act also creates a cause of action for damages for retaliation against employees who assist in the investigation and prosecution of False Claims Act cases. [36] This cause of action belongs to the employee alone, and the government does not share in any recovery for retaliation.

Georgia Act compared: New section 49-4-168.4 establishes a similar right to pursue a claim for retaliation in employment.

Continue reading "Part 4: The Modern False Claims Act--How It Works" »

This is Part 3 by whistleblower lawyer blog of a detailed explanation of the major qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. It is taken from a recently published article by whistleblower lawyer blog author Michael A. Sullivan, and is reprinted with the permisssion of the Georgia Bar Journal.

The Part 3 explains the history of the False Claims Act and why effective qui tam whistleblower laws are important.

II. Background of the False Claims Act

Although the False Claims Act may be the best known qui tam statute, it is far from being the first. Qui tam actions date back to English law in the 13th and 14th Centuries. This tradition took root in the American colonies and, by 1789, states and the new federal government had authorized qui tam actions in various contexts. [12]

According to one writer:

In the early years of the Nation, the qui tam mechanism served a need at a time when federal and state governments were fairly small and unable to devote significant resources to law enforcement. As the role of the Government expanded, the utility of private assistance in law enforcement did not diminish. If anything, changes in the role and size of Government created a greater role for this method of law enforcement. [13]

Birth of the False Claims Act: The Civil War prompted Congress to enact the original False Claims Act in 1863. As government spending on war materials increased, dishonest government contractors took advantage of opportunities to defraud the United States government. “Through haste, carelessness, or criminal collusion, the state and federal officers accepted almost every offer and paid almost any price for the commodities, regardless of character, quality, or quantity.” [14]

One senator explained how the qui tam provisions of the Act were intended to work:

The effect of the [qui tam provisions] is simply to hold out to a confederate a strong temptation to betray his co-conspirator, and bring him to justice. The bill offers, in short, a reward to the informer who comes into court and betrays his co-conspirator, if he be such; but it is not confined to that class. . . . In short, sir, I have based the [qui tam provision] upon the old fashioned idea of holding out a temptation and setting a rogue to catch a rogue, which is the safest and most expeditious way I have ever discovered of bringing rogues to justice. [15]

The original Act provided for double damages, plus a $2,000 forfeiture for each claim submitted. [16] If a private citizen or “relator” used the qui tam provision to file suit, the government had no right to intervene or control the litigation. A successful “relator” was entitled to one-half of the government’s recovery. [17]

The Act survived in substantially its original form until World War II. [18] In a classic and oft-quoted 1885 passage, one court rejected the argument that courts should limit the statute’s reach on the grounds that qui tam actions were poor public policy:

The statute is a remedial one. It is intended to protect the treasury against the hungry and unscrupulous host that encompasses it on every side, and should be construed accordingly. It was passed upon the theory, based on experience as old as modern civilization, that one of the least expensive and most effective means of preventing frauds on the treasury is to make the perpetrators of them liable to actions by private persons acting, if you please, under the strong stimulus of personal ill will or the hope of gain. Prosecutions conducted by such means compare with the ordinary methods as the enterprising privateer does to the slow-going public vessel. [19]

Continue reading "Part 3: False Claims Act--Background and History " »

This is Part 2 by whistleblower lawyer blog of a detailed overview of the federal False Claims Act and the new state False Claims Acts with qui tam whistleblower provisions. It is based on an article by whistleblower lawyer blog author Michael A. Sullivan, and is reprinted with permission of the Georgia Bar Journal.

This Part 2 discusses the sound policy reasons underlying the False Claims Act.

I. Why A “False Claims Act”?

Fraud is perhaps so pervasive and, therefore, costly to the Government due to a lack of deterrence. GAO concluded in its 1981 study that most fraud goes undetected due to the failure of Governmental agencies to effectively ensure accountability on the part of program recipients and Government contractors. The study states:

For those who are caught committing fraud, the chances of being prosecuted and eventually going to jail are slim. . . . The sad truth is that crime against the Government often does pay. [5]

Fraud—and allegations of fraud—plague government spending at every level. Today, as the federal and state governments struggle to fund the billions of dollars spent annually on health care through Medicare and Medicaid; national security and local security efforts; Hurricane Katrina and other disaster relief; and government grants and programs of every description, there is no shortage of opportunities for fraud against the public fisc.

The federal False Claims Act has been the federal government’s “primary” weapon to recover losses from those who defraud it. [6] The Act not only authorizes the government to pursue actions for treble damages and penalties, but also empowers and provides incentives to private citizens to file suit on the government’s behalf as “qui tam relators.” Over the past 20 years, recoveries for the federal government have grown dramatically since Congress amended the Act in 1986 to encourage greater use of the qui tam provisions, as part of a “coordinated effort of both the [g]overnment and the citizenry [to] decrease this wave of defrauding public funds.” [7]

The federal False Claims Act has been successful in recovering billions of dollars, increasingly through qui tam lawsuits brought by private citizens. In light of the federal Act’s successes, Congress in the Deficit Reduction Act of 2005 [8] created a large financial “carrot” for states that adopt state versions of the False Claims Act. Any state that passes its own “False Claims” statute with qui tam or whistleblower provisions that are at least as effective as those of the federal Act becomes eligible for a 10% increase in its share of Medicaid fraud recoveries. [9]

Thus, Georgia’s and other states' impetus in enacting these new state False Claims Acts in 2007 was this incentive of more dollars. In 2007 to date, Georgia, New York, and Oklahoma have joined the 16 other states that have enacted some version of a “False Claims” statute. [10] At least a dozen other states [11] are considering enacting similar statutes of their own so that they, too, qualify for increased funds under the Deficit Reduction Act.

Continue reading "Part 2: The False Claims Act and the Growing Number of State False Claims Acts With Qui Tam Whistleblower Provisions--the Basics" »

We at whistleblower lawyer blog hope this detailed article assists those interested in the federal False Claims Act and the new state False Claims Acts with qui tam whistleblower provisions. A version of this article by whistleblower lawyer blog author Michael A. Sullivan [1] has just been published in the October 2007 Georgia Bar Journal. For ease of reading, we have divided the article in six parts--this is Part 1.

The federal False Claims Act [2] has inspired a wave of new state False Claims Acts with qui tam whistleblower provisions, as the New York False Claims Act, the Oklahoma Medicaid False Claims Act, and the Georgia State False Medicaid Claims Act [3] in 2007 have joined sixteen other state laws that allow qui tam whistleblowers to pursue cases based on fraud and false claims that rob taxpayers' dollars.

These new state qui tam whistleblower laws are critical to stopping fraud against taxpayers. For example, in April 2007, the Georgia Legislature enacted a state version of this important—but commonly misunderstood—federal law, the False Claims Act. The new “State False Medicaid Claims Act” mirrors the federal False Claims Act in important respects, but differs in some significant ways.

Both the state and federal Acts create civil liability for treble damages and potentially huge penalties for fraud and false claims submitted to the government. Both authorize “qui tam” or “whistleblower” lawsuits by private persons, who may share in the government’s recovery. Both have unique procedural requirements that are foreign to most lawyers. Like the federal whistleblower law, most state qui tam whistleblower laws protect all state government funds. A few states such as Georgia have opted for the narrower reach of the Georgia Act, which applies only to fraud or false claims affecting the Georgia Medicaid Program, rather than all State programs.

This article explains how the new state False Claims Acts work, which itself requires an explanation of the unique and sometimes perplexing federal False Claims Act on which the state Acts are based. This article summarizes the background of the federal False Claims Act, outlines how it operates, and discusses the Act’s increasing use to combat fraud directed at public funds. This article also highlights the important differences between the state and federal Acts, using Georgia's as an example. Finally, this article also compares other states’ False Claims Acts and discusses some of the recoveries that other states have obtained to date.

The new Georgia “State False Medical Claims Act” became law on May 24, 2007. Participating in the signing ceremony with Governor Sonny Perdue were (shown above from left to right) Carrie Downing, Director of Legislative and External Affairs of the Georgia Department of Community Health; Dr. Rhonda Medows, Commissioner of the Georgia Department of Community Health; Inspector General Doug Colburn; Governor Perdue; Rep. Edward Lindsey, sponsor of the State False Medicaid Claims Act; whistleblower lawyer blog author Michael A. Sullivan of Finch McCranie, LLP; and Philip Consuegra, Legislative Assistant to Rep. Lindsey.

Footnotes:
1 Michael A. Sullivan has worked with the False Claims Act since the late 1980s and has both defended and prosecuted cases under the False Claims Act. He is the co-author of www.whistleblowerlawyerblog.com. At the request of Georgia legislators, Mr. Sullivan provided input in the drafting of the new Georgia State False Medicaid Claims Act and testified in each of those legislative hearings to explain the False Claims Act. His practice includes whistleblower litigation under the False Claims Act and the IRS Whistleblower Program, serious injury litigation, and white collar criminal defense. He is a graduate of the University of North Carolina and Vanderbilt Law School, where he was Senior Articles Editor of the Vanderbilt Law Review. He clerked for U.S. District Judge Marvin H. Shoob in Atlanta from 1984-86. From 1995-98, he served as a federal prosecutor in the Independent Counsel investigation of the Department of Housing and Urban Development, including the prosecution of a former Secretary of the Interior. His most recent article appears in the Health Care Compliance Association’s September 2007 edition of Compliance Today, entitled “New State ‘False Claims Acts’: An Executive Summary for Health Care Compliance Professionals.” He also appeared with the Director of the new IRS Whistleblower Office in discussing and explaining the new “IRS Whistleblower Program” in September 2007 at the Taxpayers Against Fraud Annual Conference in Washington.

2 The federal False Claims Act is at 31 U.S.C. §§ 3729-33.

3 The new Georgia State False Medicaid Claims Act is codified at O.C.G.A. §§ 49-4-168 to 49-4-168.6.

We read today in the news that a Dr. Michael D. Kim in Houston, Texas had been indicted by a Federal Grand Jury in yet another “motorized wheelchair fraud scheme.” According to the government’s indictment, Dr. Kim fraudulently approved thousands of Medicare beneficiaries for motorized wheelchairs in return for cash payments of $200.00 per beneficiary. According to the indictment, thousands of Medicare beneficiaries were brought by paid recruiters to Dr. Kim’s medical clinic in Houston between April of 2002 and October of 2003 for the purpose of securing a false or fraudulent Certificate of Medical Necessity. A CMN as it is called in the industry is necessary to bill Medicare for a physician approved motorized wheelchair. Dr. Kim allegedly assisted others in filing false and fraudulent claims for motorized wheelchairs at a cost of $4,200.00 a piece. The indictment seeks to forfeit approximately $13 million from Dr. Kim. Allegedly, Dr. Kim routinely approved wheelchairs for 20 to 60 patients a day who clearly did not meet the Medicare guidelines to receive such a device.

When it comes to government programs which depend upon the honesty of those providing services thereunder, there appears to be no end in sight with respect to the imagination of those willing to defraud the government of taxpayer money. Claims are filed under false pretenses and monies are paid based on certifications provided to the government. While the government’s audit function obviously is a problem and a cause for concern for all tax payers, the good news is that occasionally the government does get it right and does indict those who would defraud their government. Here, however, the proverbial horse is “already out of the barn” since taxpayers paid $29 million in fraudulent charges under the Medicare program. It appears that it is simply too easy (and too attractive to criminals) to rip off the Medicare program. Obviously, payment guidelines need to be tightened otherwise we can expect to read similar headlines in the future with respect to the Medicare and Medicaid programs.

It is estimated that the annual tax gap between those who owe money to the government as taxes and those who actually pay them (i.e. the annual underpayment of taxes) is $345 billion. Under the new IRS Whistleblower provisions, an insider with information about tax fraud can claim a minimum of 15% up to a maximum of 30% of back taxes collected by the government based on information received from the whistleblower. What this means is that each year if, in fact, the annual tax gap is accurately reported at $345 billion, whistleblowers nationwide could potentially receive 15 to 30 percent of this amount plus interest and penalties should they report tax cheats to the government.

The typical case we see here in our practice is where an insider at a business becomes concerned about blatant tax fraud. Examples include executives using corporate funds for their personal use, fraudulent business expenses, diversion of income to off-shore accounts, etc. The forms of fraud in the tax context are myriad and sometimes complex but the whistleblowers that have contacted our firm all are genuinely interested in making sure that tax cheats have to pay their tax bills. Indeed, what is unfair about this?

Given the huge amount of the annual tax gap, Congress hoped to increase whistleblower activity by enacting the new IRS Whistleblower provisions which provide increased incentives for insiders to come forward. Not only is the insider now entitled to a minimum of 15% of all back taxes collected, they also are eligible for up to 30% of such back taxes collected including 30% of interest and penalties collected on the taxes owed. Moreover, as we have previously blogged about, where overt fraud and income tax evasion is involved, there is no civil statute of limitations which prohibits such claims.

As former federal prosecutors who used to prosecute cases involving income tax evasion and false tax returns, we are pleased to represent those men and women who come forward with “insider” knowledge of tax fraud. All citizens should be opposed to tax fraud as we each, in our voluntary tax system, annually pay our fair share of taxes as required by the law. Those that try to evade their responsibilities in some cases should probably be criminally prosecuted but in all cases should be forced to pay what they owe. Finch McCranie is pleased to represent whistleblowers who through their efforts are making sure that tax cheats pay what they owe plus interest and penalties.

Last week, the United States Department of Justice announced that Bristol-Meyers Squibb (BMS) had entered into a settlement agreement to pay more than $515 million to resolve allegations of illegal drug marketing and pricing. This is yet another example where Big Pharma has attempted to gouge the government to increase profits, at the public’s expense. The allegations made by the government, regrettably, are all too familiar and have occurred in many other cases of a similar nature.

The first thing the government alleged was that from 2000 through 2003 BMS knowingly and willfully paid illegal renumeration to physicians and other healthcare providers to induce them to purchase BMS drugs. According to the government, BMS paid illegal renumeration in the form of excessive consulting fees and expenses to physicians in various sham consulting programs, etc. Some expenses involved travel to luxurious resorts. Second, the government alleged that from 2002 through the end of 2005 BMS knowing promoted the use of Abilify, an anti-psychotic drug, for pediatric use and to treat dementia related psychosis, both of which are “off label” uses. The Food and Drug Administration never approved the use of Abilify for children and adolescents or for geriatric patients suffering from dementia related psychosis. Indeed, the FDA had mandated that Abilify carry a black box warning concerning its use in dementia related psychosis. Nonetheless, according to the government, BMS directed its sales force to specifically call on pediatric specialists and nursing homes in order to illegally promote its product.

The third allegation of the government’s complaints against BMS was that it maintained fraudulent and inflated prices on a wide assortment of oncology and generic drug products with the knowledge that bills to federal healthcare programs were based on those fraudulent prices. The government specifically alleged that BMS knowingly misreported its best price for the anti-depression drug Scrzone.

Out of the $515 million settlement, $50 million will be paid to seven different whistleblowers. Also, BMS will be required to enter into a Corporation Integrity Agreement which will require the company to do what it should have done all along, that is report accurate average sales prices and accurate average manufacturer prices for its drugs covered by the Medicare and other federal healthcare programs.

This case is a sad reminder that Big Pharma will use a variety of marketing schemes and other illegal tactics to maximize its profits at the expense of taxpayers. We applaud those who were involved in these whistleblower cases. While the government may not have uncovered the full extent and breadth of the fraud without the assistance from whistleblowers, the fact remains that such fraud seems prevalent in the pharmaceutical industry which is why it is that we continue to hope that other whistleblowers will come forward so that similar wrongdoers can be held responsible, at least financially, for their wrongdoing. Whether a criminal prosecution should also be pursued is, of course, a matter subject to debate but if these same companies continue to engage in illegal marketing, we believe that they should also be criminally prosecuted as well and would expect the Department of Justice to enforce the laws against them regardless of their “special interest” status.