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Today the Department of Justice announced the largest settlement in its history with a skilled nursing facility chain–a qui tam whistleblower case under the False Claims Act that our firm and our co-counsel Mark Simpson worked side-by-side with DOJ to prepare for trial.

We applaud the exceptional work of DOJ’s attorneys, as well the outstanding attorneys of the U.S. Attorney’s Office for the Eastern District of Tennessee.  Below is our press release on today’s settlement:

$145 Million Settlement in Groundbreaking Health Care Fraud “Whistleblower” Case by Atlanta’s Finch McCranie LLP and U.S. Department of Justice

This past week our firm’s Larry D. Thompson,  the former Deputy Attorney General of the United States, joined me for a panel discussion that I moderated on “The False Claims Act at 30,” at the annual Taxpayers Against Fraud Annual Conference in Washington, D.C.

Joining us on the panel were the Department of Justice’s Renee Brooker, an Assistant Director in the Civil Division with 25 years of DOJ experience; James J. (Jim) Breen, an accomplished qui tam lawyer whose cases have recovered almost $4 billion for federal and state taxpayers; and Neil Getnick, Chairman of TAF and an accomplished FCA lawyer in his own right.

Larry provided his observations about the importance of meaningful compliance programs to prevent and detect fraud within organizations.  He continues to share his perspective gained from years of government service, private practice, and as general counsel to a major corporation, with in-house counsel who contact him for advice.

In a momentous decision that will impact many future cases, New York Attorney General Eric Schneiderman has just won a major victory in his pioneering tax fraud case against Sprint Nextel Corp.

The Appellate Division unanimously affirmed the trial court’s 2013 ruling (background discussed here) to allow Schneiderman’s first tax enforcement case under the New York False Claims Act to proceed.

The Complaint alleges that Sprint unlawfully failed to collect and pay $130 million in New York sales taxes on a portion of its revenue from fixed monthly access charges. Like the federal False Claims Act, the New York False Claims Act provides for recovery of three times the amount of damages incurred–“treble damages.”

A major aspect of Schneiderman’s victory was that it makes Sprint potentially liable under the New York False Claims Act for tax fraud that preceded the Act’s 2010 amendments to include tax violations. In fact, the court affirmed the trial court’s decision allowing the case to proceed in all respects:

The court properly denied the motion to dismiss the complaint in its entirety. Plaintiffs’ complaint adequately alleges that defendants violated New York’s False Claims Act (State Finance Law § 189[1][g]), Executive Law § 63(12) and Article 28 of the Tax Law by knowingly making false statements material to an obligation to pay sales tax pursuant to Tax Law § 1105(b)(2). Contrary to defendants’ interpretation, the Tax Law provision is not preempted by the Federal Mobile Telecommunications Sourcing Act (4 USC 116 et seq.).

The court also properly rejected defendants’ argument that the New York False Claims Act with respect to statements made under the Tax Law should not be given its stated retroactive [*2]effect. Defendants fail to show that the Act’s sanction of civil penalties, including treble damages, is so punitive in nature and effect as to have its retroactive effect barred by the Ex Post Facto Clause (US Const, art I, § 10).

We once again applaud the efforts of Attorney General Schneiderman and his office to protect the public’s purse though the New York False Claims Act. The case shows the value that tax whistleblowers can bring to stop those who refuse to pay their fair share of the tax burden.

The Attorney General’s announcement is linked here.
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Earlier this week we wrote about our urging the IRS to remain true to Congress’s plain intent to attract a greater number and variety of tax whistleblower claims. Our written comments on changes needed to the IRS Whistleblower regulation were published in today’s Tax Notes.

We will be in Washington on May 11 to address the IRS in person. In the meantime, here is some additional discussion of why these changes are so important.

As the annual deadline for filing state and federal income tax returns has passed, honest taxpayers might be shocked to learn that the government will experience an estimated $350 billion shortfall between what is owed and what is collected, thanks to those who cheat on their taxes. To help plug the multi-billion-dollar tax gap, the IRS has instituted new whistleblower rules, but Michael A. Sullivan, a leading whistleblower lawyer, says the IRS needs to revamp its rules dramatically to encourage participation by the public to help the government recoup what is owed. Sullivan and Richard Rubin, an Atlanta-based federal and international tax attorney, plan to address the IRS in Washington, D.C. May 11 on how the rules can be revised to accomplish the law’s intended goals.

“The new rules are supposed to help citizens participate in closing the almost $350 billion tax gap by removing roadblocks to whistleblowers making claims, and by facilitating reward payments from those claims”

.Earlier this year, the Internal Revenue Service responded to sharp criticism of its existing rules by Senator Chuck Grassley (R-Iowa) by announcing new rules to broaden the kind of claims that will merit rewards to whistleblowers who alert the authorities to fraudulent taxpayers. However, Sullivan, attorney with Atlanta-based Finch McCranie, LLP, and author of the leading whistleblower blog, https://www.whistleblowerlawyerblog.com, says the new rules do not address key obstacles and create pointless delays for whistleblowers, which ultimately discourage citizens from reporting fraudulent taxpayers to the IRS. According to Sullivan, the new rules actually limit payment of whistleblower rewards in certain types of cases and thwart the intent of Congress to expand those rewards.
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The facts about how the AIG Financial Products unit took down AIG begin to emerge more clearly, as AIG whistleblowers begin to speak.

Former AIG auditor Joseph St. Denis described his concerns about AIG’s Financial Products unit–and how AIGFP’s Joseph Cassano refused to let him investigate:

“Mr. Cassano shouted at me for several minutes, and then said, as previously noted: ‘I have deliberately excluded you from the valuation of the Super Seniors because I was concerned that you would pollute the process.”

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]
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This is Part II of this whistleblower lawyer blog’s description of how IRS Tax Whistleblower officials have explained many of the long-awaited details of the new IRS Whistleblower Rewards Program to whistleblower attorneys at the annual Taxpayers Against Fraud Conference in Washington, a national organization of whistleblower lawyers who represent whistleblowers under the False Claims Act, the state False Claims Acts, and the new IRS Whistleblower Rewards Program for tax whistleblowers. Both parts summarize information provided by IRS Whistleblower officials at this Conference, at which I had the pleasure of participating in a panel discussion with the Director of the IRS Whistleblower Office, Stephen Whitlock, and later spending time with other IRS officials from the IRS group responsible for the Financial Services industry (including hedge funds), Large and Mid-Sized Business Division, Stuart Mann and Nicole Cammarota.

The investigation of matters submitted by whistleblowers will be handled not by the Whistleblower Office, but by other IRS officials–in the field. The Whistleblower Office will initially perform a screening function at the beginning of the process, with “classifiers” reviewing the claim submissions and directing them to the appropriate persons within the IRS for investigation, if an investigation is warranted.

If an investigation results, and the government recovers funds (tax liability, interest, penalties, or other amounts), Director Whitlock then will determine the amount of any award to the whistleblower or whistleblowers. The new statute allows the whistleblower to appeal any determinations to the Tax Court to review decisions about rewards.

The threshold question for persons seeking to submit IRS Whistleblower claims is to demonstrate plainly to the IRS why–with so many potential matters that the IRS already has to investigate, and with limited resources–pursuing an investigation suggested by an informant is the best use of the IRS’ limited resources. Not all potential tax violations can be investigated–or will be investigated–by the IRS. Thus, the challenge is to present a whistleblower claim that the IRS will decide to pursue–and pursue vigorously.
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From potential clients seeking information about the new IRS Whistleblower Rewards Program that our attorneys have written about extensively, questions have been asked about the statute of limitations for tax whistleblower cases.

If a whistleblower informant possesses information concerning false of fraudulent tax returns filed with the intent to evade taxes, 26 U.S.C. § 6501(c)(1) provides for no statute of limitations. In the case of a willful attempt in any manner to defeat or evade income tax obligations, once again, the IRS may assess such taxes at any time without regard to a specific statute of limitations.

Thus, in cases involving fraud, these provisions provide no statute of limitations. The same is true in the case of a failure to file a return. If the taxpayer fails to file a return and has earned income on which taxes are owed, once again, these provisions provide for no specific statute of limitations.

Another False Claims Act Recovery by Government Lawyers Is Part of $42.65 Million Heath Care Fraud Settlement

A qui tam whistleblower case alleging Medicaid fraud by Maximus, Inc. of Reston, Virginia led to a $30.5 million settlement under the False Claims Act this week.

According to the Justice Department, the whistleblower case settlement accompanied a deferred prosecution agreement and corporate integrity agreement by Maximus to end the government’s investigation of Maximus’ contract with the District of Columbia’s Child and Family Services Agency (CFSA). Maximus had contracted to assist CFSA in submiting claims to Medicaid for services that the District allegedly provided to children in its foster care program. The services were known as “target case management “(TCM) services, which were intended to help foster children with their medical, social and educational needs.

Taxpayers every day lose money because of fraud against their government. Current examples include government contracting fraud in Iraq, procurement fraud regarding the efforts of the Federal Emergency Management Agency and Hurricane Katrina and numerous false claim schemes under both the Medicare and Medicaid programs. Those who are bent of fraud are usually clever and devious. This is the very reason why President Abraham Lincoln enacted the False Claims Act during the American Civil War in 1863.

During the Civil War, as today, there were greedy contractors bent on defrauding the government at taxpayer’s expense. At President Lincoln’s request, the False Claims Act was enacted into law and was specifically directed at an effort to “root out fraud against the government. . .[a]nd to encourage individuals who are aware of fraud being perpetrated against the government to bring information forward.” Thus, “Lincoln’s law,” the False Claims Act, has literally been on the books for over 140 years.

The False Claims Act as sponsored by President Lincoln was designed to help the government stop procurement fraud during the Civil War. Congress intended that the False Claims Act would encourage private citizens to file cases in the name of the United States to recover damages when false and fraudulent claims were submitted to the government. These lawsuits, oftentimes called Whistleblower or Qui Tam cases, provide a way for private citizens to share in the recovery of damages recovered. The term “Qui Tam” described the procedure well and derives from a Latin phrase which means “Who pursues the action on our Lord the King’s behalf as well as his own.”