Why the Universal Health Services Whistleblower Case is Such a Big Deal

This week, the U.S. Supreme Court heard oral arguments in the Universal Health Services whistleblower case, which has generated a fair amount of media attention. The implications of Universal Health Services vs. U.S. ex rel. Escobar cannot be understated, as the outcome could limit the number of cases that can be filed under the False Claims Act.

Background on Universal Health Services vs. U.S. ex rel. Escobar 

The Escobar family filed suit against United Health Services after their daughter had a seizure and died while in a counseling center owned by UHS. The teenage girl, a recipient of Massachusetts state medical benefits, was treated by mental health counselors who were not licensed in the state to provide mental health therapy, according to the United Health Services whistleblower lawsuit.

The complaint states that the UHS-owned counseling center submitted invoices for Medicaid reimbursement based on claims that the mental health councilors who were providing services were licensed to do so when, according to the lawsuit, they were not. The Universal Health Services whistleblower lawsuit further claims that the counseling center made similar fraudulent misrepresentations regarding other clinical staff members and nurse practitioners, and that the facility invoiced Medicaid for reimbursement despite its noncompliance with state staffing and supervision requirements.

The complaint was initially dismissed in district court, which found that the state regulations at issue imposed only “conditions of participation,” not “preconditions to payment” sufficient to give rise to False Claims Act liability.

The U.S. Court of Appeals for the First Circuit ended up reversing the district court decision and remanded the United Health Services whistleblower case for further proceedings. On June 30th of last year, UHS filed a petition for certiorari with the Supreme Court.

SCOTUS Hears Arguments in Universal Health Services Whistleblower Lawsuit 

In arguments heard earlier this week, attorneys for UHS asked the Supreme Court to consider that it isn’t fraud when a hospital bills Medicaid or other government health care agencies for doctor services when it knows that doctors didn’t perform the services; and that hospitals operating as government contractors should be permitted “to pick and choose which regulations they comply with.”

The UHS legal team further contended that while the company may have breached the terms of the government contract, it isn’t serious enough to be considered fraud. This question of what should be considered fraud is at the heart of this case.

After hearing their argument, Justice Sonya Sotomayor began to question UHS on why the company’s actions shouldn’t be considered fraud.

Justice Sotomayor asked if it would be a breach of contract to provide the Army with a gun that doesn’t shoot. A UHS attorney answered by saying it would depend on the facts of the case.

“What – what more facts do you need?” said Justice Sotomayor. “Government contracted for guns. All of sudden you deliver guns that don’t shoot. That – those are the facts that led to this Act.”

At another point in the transcript, Justice Sotomayor asked Mr. Englert if anybody, except himself, would ever think that it wasn’t fraud to provide guns that didn’t shoot, if that’s what the government contracted to purchase.

Justice Elena Kagan was also incredulous of UHS’s argument. When asked if UHS had satisfied the terms of their government contract, a UHS attorney said “not every jot and tittle.” Justice Kagan continued that she wasn’t concerned with every jot and tittle, only the material portions of the contract. “That – you know, that the guns shoot, that the boots can be worn, that the food can be eaten – … and a doctor’s care is a doctor’s care,” she said.

It seems clear that if a health care provider submits a claim for reimbursement to Medicare or Medicaid implying that it was in compliance with regulations and all material terms of a contract, when it knows that it wasn’t, that is fraud. As for UHS’s other argument – that government contractors should be allowed to “pick and choose which regulations they comply with” because “there’s so many and confusing” regulations to contend with – that is quite simply absurd. What would be the point of having any regulations at all if contractors could decide for themselves which they can ignore?

What Happens Next? 

Based on the transcripts from the oral argument, it seems unlikely that the Justices will strike down the FCA’s implied certification theory of legal falsity. Nonetheless, the Justices appear to be looking for a rule that would define when an implied certification claim of legal falsity can be made. What this rule would look like, or even whether a majority can reach an agreement on the rule, remains to be seen.

At any rate, the outcome of the Universal Health Services whistleblower case may very well decide how specific government contracts need to be in order to hold fraudsters accountable. It could even define what is considered a false or fraudulent claim under the False Claims Act. This case is definitely one to watch.

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SEC: Vanguard Whistleblower Deserves Protection

The Securities and Exchange Commission (SEC) has filed a brief in support of Vanguard whistleblower David Danon, who claims he was wrongfully fired after opposing the financial firm’s tax practices. The SEC filed its “friend of the court” brief on Monday, claiming Danon should qualify for whistleblower protection.

Mr. Danon worked as a tax lawyer for Vanguard Group, the largest mutual fund company in the United States. He was fired in 2013 for “not doing his job,” according to the Malvern, Pennsylvania-based financial firm.

Vanguard GroupThe Vanguard whistleblower disagrees, and claims, he was fired because he complained internally about the company underpaying federal and state income taxes. He filed a wrongful termination lawsuit in U.S. District Court for the Eastern District of Pennsylvania near the end of last year. Mr. Danon claims that Vanguard owes roughly $35 billion in federal and state taxes, interest and penalties dating back to 2007.

In response, Vanguard filed a motion to get Mr. Danon’s case tossed, arguing that whistleblower protection laws are only for individuals that come directly to the SEC with potential securities law violations before they are fired. In other words, Vanguard says Mr. Danon isn’t eligible for whistleblower protections because he voiced concerns internally to Vanguard before he ultimately brought allegations to the SEC.

The SEC’s brief to Judge C. Darnell Jones—the federal judge overseeing the Vanguard whistleblower lawsuit—maintains that the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the agency to offer rewards to individuals who voluntarily provide the SEC with information that leads to a successful enforcement action, and prohibits employers from retaliating against whistleblowers. Dodd-Frank whistleblower rules are in place to protect individuals who report violations internally, the SEC says. If the Vanguard whistleblower lawsuit were to be dismissed, the SEC believes it would “substantially weaken” the agency’s ability to use whistleblowers as the foundation for building cases against corporations accused of wrongdoing.

The irony with this Vanguard whistleblower case is that companies have long battled with the SEC over the question of whistleblower status. When Dodd-Frank was being crafted, some companies were adamant that employees should be encouraged to report any wrongdoing internally before bringing allegations directly to the SEC. How ironic that these same companies are fighting a rule they were supporting a few years ago.

How do the courts view this question of whistleblower status when allegations are made internally before being brought to the SEC? Thus far, they haven’t been consistent. According to the Wall Street Journal, a federal appeals court ruled last September that employees who report internally before bringing allegations to the SEC’s attention are protected, but another court has ruled that they don’t enjoy whistleblower protection.

The SEC has said it is not taking a position on the specifics of Mr. Danon’s Vanguard whistleblower allegations, only on the requirements necessary for claiming whistleblower protection. The agency has issued a regulation on the question of whistleblower protection, and Monday’s brief is in defense of that regulation.

The Vanguard Whistleblower is Helping Beyond the SEC 

It is worth noting that last year, Mr. Danon received an informer’s fee of $117,000 for helping the state of Texas collect back taxes owed by Vanguard. Texas audited Vanguard on four separate occasions in 2015, finding that the company owed taxes in each audit.

Mr. Danon has made accusations to the Internal Revenue Service, California, New York and other states, claiming the firm illegally avoided paying taxes. In the California case, the state’s Franchise Tax Board recently told Mr. Danon that the claims against his former employer warranted a criminal investigation. Vanguard could be liable for up hundreds of millions of dollars in that case alone.

In addition to these Vanguard whistleblower claims, Mr. Danon has also alleged to the SEC that Vanguard underpaid its own management affiliate in an effort to minimize its income-tax obligations while the firm hid illegal cash reserves from tax authorities and the company’s investors.

For their part, Vanguard has said the company’s financial arrangements are legal.

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Pfizer Whistleblower Has History of Exposing Big Pharma

After a lengthy government investigation, drug manufacturer Pfizer agreed to pay $784 million last month to settle claims that its Wyeth unit overcharged Medicaid for the heartburn drug Protonix. The settlement agreement resolved claims filed by Pfizer whistleblower William LaCorte, who accused the drugmaker of failing to provide Medicaid with the same discounts on Protonix that it provided to other customers.

Pfizer.svgLaCorte decided to blow the whistle on Wyeth in 2009. His was one of two Pfizer whistleblower lawsuits filed at the time accusing Wyeth of failing to provide the government with accurate pricing on Protonix. Wyeth had recently been acquired by Pfizer.

The Pfizer whistleblower lawsuits claimed Wyeth failed to provide government health care agencies with the same “Best Price” discounts on Protonix that the drugmaker was offering to its other customers. According to court documents, Wyeth offered “deep discounts” on Protonix to thousands of hospitals across the country using bundled pricing, allowing the drugmaker to market these discounts to the hospitals as a way to drive “spillover” retail sales covered by Medicaid and other insurers at higher prices.

Drug manufacturers are required to provide government health care agencies with Best Price reports detailing the drug prices offered to other customers. The Pfizer whistleblower lawsuits claimed that Wyeth knowingly ignored this requirement, which resulted in Medicaid overpaying for Protonix by hundreds of millions of dollars.

Wyeth reportedly offered discounts on two Protonix products—an intravenous version and an oral version—in response to AstraZeneca’s aggressive pricing on its heartburn drugs, Prilosec and Nexium, the latter of which had only recently been introduced. Protonix sales had slowed at the time and AstraZeneca was offering its own drugs at a nominal price in an effort to build market share for Nexium.

According to court documents, the “real money” for Wyeth was in the oral version of Protonix, and the company hoped that bundling the intravenous and oral products together would bolster demand for the oral version of Protonix.

This isn’t the first time that Pfizer has found itself in hot water. In 2013, Pfizer was accused of illegally marketing its immunosuppressive drug Rapamune. The case settled for a reported $490 million. Both Pfizer and Wyeth have been at the center of about half a dozen fraud cases going back to 2002.

Pfizer Whistleblower Receives $59 Million Award 

Pfizer whistleblower William LaCorte is not your traditional whistleblower. For starters, he doesn’t work in the pharmaceutical industry—he is a doctor based in New Orleans, Louisiana—which sets him apart from a great many that blow the whistle on pharma companies. What is most interesting about Mr. LaCorte is that he is a serial whistleblower that has filed a number of lawsuits against pharmaceutical companies that have netted him millions in rewards.

Aside from the $59 million reward that he received from this Pfizer whistleblower case, Mr. LaCorte also received roughly $38 million in 2008 for blowing the whistle on Merck in connection with its heartburn medication Pepcid. The allegations in the 2008 Merck case were similar to those in this most recent Pfizer case.

In total, LaCorte has made almost $100 million in payouts stemming from fraud settlements against drug companies. The amount of money he has made has drawn ire from some who say there should be a lifetime cap on whistleblower payouts in order to avoid ‘frivolous lawsuits.’ These naysayers point to the dozens of lawsuits that LaCorte has filed over the last 20 years, a number of which were not successful.

Since 2004, Pfizer has settled three of the largest healthcare fraud cases in the history of the United States. These three cases alone—which includes the Pfizer whistleblower case above—have returned roughly $3.51 billion (which includes a $1.3 billion criminal fine as part of a landmark 2009 settlement) to the government.

If we are to be effective at rooting out serial fraudsters, we need to welcome whistleblowers like William LaCorte, not try to limit their ability to bring pharma companies to justice when they step out of line. Remember, being a whistleblower isn’t as easy as filing a lawsuit and collecting a reward—these cases can take years to build and can be stressful for the relaters and their families. We need more people like Mr. LaCorte.

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Tenet Whistleblower Lawsuit Could Produce $238 Million

One of the largest hospital chains in the United States has set aside $238 million in anticipation of a multi million dollar settlement with the government over whistleblower allegations claiming the company paid kickbacks to a chain of prenatal clinics in the Atlanta, Georgia area in return for patient referrals. Tenet Healthcare Corp. made national news on Monday when the hospital chain notified shareholders that it hasreserved significantly more than the $20 million it had previously set aside to cover liability in the Tenet whistleblower lawsuit.

Tenet Healthcare.Logo_.2015The hospitals named in the Tenet whistleblower lawsuit include four of the company’s Georgia hospitals—Georgia-Atlanta Medical Center, North Fulton Regional Hospital, Spalding Regional Medical Center and Clearview Regional Medical Center (formerly owned by Tenet)—as well as Hilton Head Hospital in South Carolina. Other defendants in the Tenet whistleblower case include Hispanic Medical Management Inc. and its affiliates, Cota Medical Management Group Inc. and International Clinical Management Services Inc.

Tenet whistleblower Ralph Williams filed the lawsuit in 2009. He was formerly the chief financial officer (CFO) of Clearview Hospital, which was owned by Tenet at the time of his employment. The U.S. Justice Department decided to intervene in Williams’ case in 2014.

Williams claims that Clearview and Tenet created false contracts in an effort to conceal kickback payments made to a prenatal clinic chain called Clinica de la Mama. The kickbacks were allegedly offered in exchange for referrals of tens of thousands of undocumented of Medicaid patients, which reportedly make up the majority of Clinica de la Mama patients.

Court pleadings in the Tenet whistleblower case show that Clinica de la Mama clinics collected as much as $20,000 a month from each hospital, allegedly given to refer pregnant women to the hospitals to deliver their babies. The Anti-Kickback Statute prohibits hospitals from paying kickbacks to clinics, doctors or anyone else in exchange for patient referrals. The Statute is intended to ensure that a doctor’s medical judgment is based on the best interests of their patients, not on improper financial incentives.

In 2014, Clearview Hospital’s former CEO, as well as the former CEO of the now-defunct Hispanic Medical Management Inc., pleaded guilty to conspiring to pay or receive kickbacks. The charges stated that Hispanic Management’s CEO and others would only allow obstetricians with delivery privileges at the hospitals that paid kickbacks to see Clinica de la Mama patients. Relatedly, the Clinica de la Mama staff allegedly directed patients to those same hospitals when they went into labor.

One of the charges from the criminal case stated that the majority of the Clinica de la Mama patients were not made aware that they had the option of delivering their child at a different hospital. If a pregnant patient asked if it was possible to deliver her child at a different hospital, the Clinica de la Mama staff were allegedly instructed to discourage them from doing so by emphasizing the high likelihood of getting Medicaid to cover the cost of their labor and delivery if they went to the directed hospital. Likewise, the Clinica staff was also allegedly instructed to inform patients that if they chose to deliver at a different hospital, Medicaid might not cover the costs.

According to the Atlanta Business Journal, Medicaid was billed for more than 30,000 births by undocumented Hispanic women in connection with the alleged kickback scheme, which carried a cost to the federal government of between $150 million and $200 million. According to the Tenet whistleblower lawsuit, this amount still doesn’t take into account an additional undetermined amount of Medicare funds parceled out to hospitals and medical centers that provide care to a disproportionate share of low income and/or indigent patients.

In a securities filing that discussed the Tenet whistleblower lawsuit, the hospital chain expressed the possibility of the Justice Department making a counterproposal to the company’s $238 million offer. “There can be no assurance that the ongoing discussions to resolve these matters will be successful,” the company wrote. The filing also said one or more of Tenet’s hospital subsidiaries could enter a guilty plea or a deferred prosecution agreement as part of a Justice Department deal.

An agreement for hundreds of millions would represent a huge False Claims Act settlement, especially for a health care provider. Many of the larger scale FCA settlements stem from pharmaceutical companies or medical device manufacturers—it is something of a surprise when a health care provider is put on the hook for such a large amount.

But maybe it isn’t all that surprising for the Tenet whistleblower case…it turns out that Tenet Healthcare was in a similar situation years ago: In 2006, the company paid $900 million to settle claims that it manipulated “outlier” payments reserved for Medicare patients considered extraordinarily costly.

The proposed settlement from Mr. Williams’s case is likely to be finalized within the next few months. The Tenet whistleblower lawsuit is captioned U.S. ex rel. Williams v. Health Management Associates Inc. et al., case number 3:09-cv-00130, in the U.S. District Court for the Middle District of Georgia.

CFTC Whistleblower Program Not Working…Will It Get Better?

Last month in the whistleblower blog, we covered a substantial award handed out to an unnamed whistleblower who brought allegations of wrongdoing to the attention of the Securities and Exchange Commission (SEC). The $700,000 whistleblower reward demonstrates the effectiveness of the SEC’s whistleblower program—lots of people from within companies and others working as industry analysts are coming forward with financial fraud tips. As it stands, the same cannot be said for the Commodity Futures Trading Commission or CFTC whistleblower program, which came into existence at the same time as the SEC whistleblower program.

What Is Wrong With the CFTC Whistleblower Program? 

According to data obtained by the Wall Street Journal (subscription required), the CFTC whistleblower program has spent more on administrative costs than it has on whistleblower awards. Since 2011, the CFTC whistleblower program has set aside hundreds of millions of dollars in an effort to attract quality information from tipsters from the commodities and futures industry—an industry worth trillions of dollars—and it simply hasn’t been effective.

CFTC ProgramFunding for the CFTC whistleblower program has come from sanctions levied by the commission. At the end of September, it held $268 million—more than the CFTC annual budget. But the CFTC whistleblower program has only paid out $530,000 in total rewards in the four years of its existence.

The data presented by the Wall Street Journal paints a grim picture of the CFTC whistleblower program, but those with ties to the commission say it is unfair to focus solely on the total rewards payouts when evaluating the program’s efficacy. Some have said the commission is bound by strict rules governing the specifications for a whistleblower reward, rules that are purportedly not as stringent for the SEC whistleblower program.

To its credit, the commission is working to improve its whistleblower program. In an effort to increase awareness, the commission launched a new whistleblower.gov site last month. The CFTC inspector general is also auditing the limited number of whistleblower rewards that have been paid out since the program’s inception.

Nonetheless, the CFTC whistleblower program has failed to even approach the level of success earned by the SEC’s program, even though both programs have been active for the same amount of time.

CFTC Whistleblower Program Not as Effective as SEC Program 

Setting up programs to draw out whistleblower tips was an integral part of the government’s response to the financial crisis. With the passage of Dodd-Frank in 2010, the CFTC and the SEC were both poised to benefit from whistleblower programs guaranteeing rewards of 10 to 30 percent of any money collected in successful enforcement actions to tipsters with important information.

Both programs started with spears aimed at combating fraud, but they ended up with drastically different results. Since its inception, the SEC whistleblower program has paid 23 whistleblowers more than $55 million, which is over 100 times more than the CFTC whistleblower program has paid during the same period. The SEC program also benefitted from a landmark case in 2014 that captured the nation’s attention with a $30 million whistleblower reward.

As for the CFTC, its administrative costs are considerably more than the amount it has disbursed in whistleblower rewards. Since 2011, the CFTC spent a reported $4 million on administrative costs for its eight-employee whistleblower unit and a smaller office that handles “consumer outreach.” How specifically that money was allocated has not been reported.

While comparisons between the two whistleblower programs are inevitable, the scrutiny placed on the smaller CFTC whistleblower program might be a bit harsh. For one thing, the SEC has a broader mandate that includes the ability to police public company malfeasance. This alone allows for more opportunity, as a wider range of individuals can come forward with information.

The numbers bear this out: Through September of last year, the SEC has reported a total of 14,116 whistleblowers, compared to only 655 tipsters for the CFTC whistleblower program.

Attorneys Believe CFTC Whistleblower Program Will Gain Traction 

With the news of bloated administrative costs, it’s hard not to be cynical about the CFTC whistleblower program. But brighter days appear to be on the horizon—an anonymous whistleblower could receive a substantial payout for providing the CFTC with tips prior to a successful enforcement action against a British trader accused of making millions by manipulating the U.S. futures markets. This has led many whistleblower attorneys to believe that the CFTC whistleblower program will hit its stride and produce more results with bigger payouts to tipsters.

It is also worth remembering that the SEC whistleblower program had its fair share of critics in the early days when we weren’t seeing a lot of successful enforcement actions. Now it is largely held up as a beacon of success.

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SEC Whistleblower Reward Could be a Game Changer

The Securities and Exchange Commission (SEC) handed out a $700,000 whistleblower reward last week to a finance industry expert whose detailed analysis led to an enforcement action against a company. The SEC whistleblower reward represents the largest to date for independent analysis and signals a sea change for SEC reporting: no longer is the role of the SEC whistleblower exclusive to men and women within a company—industry analysts armed with publicly available data can also bring fraud allegations to the government’s attention and earn a reward.

SEC-logoThe SEC whistleblower reward announced last Friday was given to an unidentified tipster, and the company implicated by the allegations was also unidentified in court documents. The whistleblower reportedly came forward with tips prior to the establishment of the SEC whistleblower reward program, which was introduced in the Dodd-Frank Act. After the SEC whistleblower program came into effect, the whistleblower came forward with additional analysis, which eventually led to the successful enforcement action.

Most of the SEC whistleblower reward payout to date (a number of which have been discussed on this blog) have been given to corporate insiders who provided the SEC with original information that led to monetary sanctions in excess of $1 million. What you may not know is that the Dodd-Frank Act also authorizes whistleblower rewards for tips gleaned from “independent analysis,” as long as the information provided is not already known to the SEC. This rule in Dodd-Frank defines independent analysis as “your own analysis, whether done alone or in combination with others . . . your examination and evaluation of information that may be publicly available, but which reveals information that is not generally known or available to the public.”

It should be noted that the SEC wasn’t always so open to fraud allegations brought by those who weren’t corporate insiders. The SEC’s openness to whistleblower tips from analysts came in 2009 after the commission was embarrassed by Congressional testimony from Harry Markopolos, a Massachusetts-based financial analyst who said he “gift wrapped and delivered” to the SEC evidence of the Ponzi scheme orchestrated by Bernie Madoff nine years before the allegations were made public. Markopolos repeatedly implored the SEC to act, but was stonewalled.

In response to the 2009 testimony, the SEC created an office to collect whistleblower tips at Markopolos’ recommendation. And while corporate insiders still come forward with the vast majority of whistleblower tips, the most recent SEC whistleblower reward has made it clear that solid information brought by outside analysts will be taken seriously.

In the announcement of the SEC whistleblower reward on Friday, Director of the SEC’s Enforcement Division, Andrew Ceresney, said high-quality analysis by industry experts “can be every bit as valuable” as company insiders coming forward with first-hand knowledge of wrongdoing. The message seems to be clear—people that aren’t company insiders should not feel discouraged bringing valuable information to the government’s attention.

Another noteworthy aspect of this SEC whistleblower reward is that it represents the fourth consecutive instance in which the commission has issued an award. Since 2011, SEC whistleblowers have earned $55 million in total rewards.

Many expect that news of this SEC whistleblower reward will likely entice more analysts in finance to come forward with tips of wrongdoing. As evidenced by this case, any would-be tipsters can keep their identity anonymous, which would likely be an area of concern for professionals in the industry. The latest reward also demonstrates that blowing the whistle can be financially quite lucrative—$700,000 is nothing to sneeze at.

This reward also serves as a salvo to companies that were previously only focused on tips offered by current and former employees. With the SEC receiving potentially damaging tips from outside analysts, companies will have to be more vigilant with compliance programs.

Take this case, for example: if the whistleblower was a company insider, the company might’ve been able to mitigate against similar whistleblower claims in the future by simply creating a more ironclad confidentiality agreement. Because the tip came from an outside source, the company can’t just change its employee confidentiality agreement—it has to actually change its behavior to avoid another enforcement action.

What Does the SEC Whistleblower Reward Mean to Me? 

If in the course of your work you come across wrongdoing, the SEC wants you to come forward and report it, regardless of if you are a company insider or an outside analyst. Before you do, however, it is highly advisable that you speak with an experienced SEC whistleblower attorney to evaluate your claim.

Bringing fraud to the SEC’s attention is not easy—the SEC whistleblower program is filled with dense rules and regulations that may be difficult for non-lawyers to understand. The SEC whistleblower program also has a number of legal pitfalls that can hinder your eligibility to collecting a reward.

An experienced SEC whistleblower attorney can help guide you through this difficult process and provide you with all the resources you need to build a successful case. To learn more, contact the whistleblower law firm of Baum, Hedlund, Aristei & Goldman today.


2015 False Claims Act Recoveries Total $3.5 Billion

The U.S. Justice Department recovered more than $3.5 billion in settlements and judgments stemming from civil fraud cases against the government in fiscal year 2015. This marks the fourth year in a row that Justice Department recoveries met or exceeded the $3.5 billion mark.

Since 2009, the government has recovered $26.4 billion in cases brought under the False Claims Act. Most of the recoveries stemmed from qui tam (or whistleblower) provisions under the FCA. Of the total 2015 False Claims Act recoveries, more than $2.8 billion can be traced back to whistleblower lawsuits.

The government paid out $597 million in whistleblower rewards to the brave men and women who filed qui tam complaints in 2015, often putting their careers in jeopardy in the name of pursuing justice.

More and More Whistleblowers Are Coming Forward, Leading to Greater Recoveries 

False Claims RecoveriesThe number of whistleblower lawsuits has grown significantly since 1986, with 638 qui tam lawsuits filed last year. The growing number of whistleblowers has also led to increased recoveries for the government. In the period between January 2009 and the end of fiscal year 2015, the government recovered $19.4 billion in settlements and judgments stemming from qui tam lawsuits and paid out roughly $3 billion in whistleblower awards during the same time period.

The False Claims Act was amended in 1986 to, among other things, encourage whistleblowers to come forward if they had knowledge of fraud. Then in 2009, the Fraud Enforcement and Recovery Act made additional improvements to the FCA and other fraud statutes. Most recently in 2010, the Affordable Care Act added vital protections and inducements for whistleblowers, and strengthened the Anti-Kickback Statute.

Health Care Industry Continues to be Pain Point for Fraud and Abuse 

According to the Justice Department, $1.9 billion in fiscal year 2015 False Claims Act recoveries came from the health care industry alone. These recoveries stemmed from settlements and judgements for providing unnecessary or inadequate care, paying kickbacks to health care providers in order to incentivize the use of goods and or services, and overcharging for goods or services paid for by government health care programs.

Two of the largest 2015 False Claims Act recoveries came from Denver, Colorado-based DaVita Healthcare Partners, the nation’s leading provider of dialysis services. In one case, DaVita agreed to pay $450 million to settle claims that it knowingly generated unnecessary waste in administering two of the company’s drugs—Zemplar and Venofer—to dialysis patients. DaVita then billed the government for costs associated with waste that could have been avoided. In a separate case, DaVita paid another $350 million to resolve claims that it paid kickbacks to doctors in an effort to induce patient referrals to the company’s many dialysis clinics throughout the country.

Hospitals were another sector of the health care industry that played a part in the large number of 2015 False Claims Act recoveries. Hospitals collectively paid $330 million in settlements and judgments stemming from fraud claims. Pharmaceutical companies also paid a collective $96 million, and skilled nursing homes and rehabilitation facilities paid a collective $38 million.

Government Contractor Fraud 2015 False Claims Act Recoveries 

Fraud allegations involving government contractors accounted for $1.1 billion in settlements and judgments in 2015, which brings the total government contractor fraud recoveries since January of 2009 to nearly $4 billion.

Some of the most significant government contractor 2015 False Claims Act recoveries:

  • Supreme Group B.V. ($146 Million):

    The government accused Dubai, United Arab Emirates-based Supreme Group and several subsidiaries of submitting false claims to the Department of Defense for food, fuel, water and cargo transportation for American troops in Afghanistan. Supreme Group affiliates Supreme Foodservice FZA and Supreme Foodservice GmbH pleaded guilty to related violations, paying over $288 million in criminal fines.

  • Lockheed Martin Integrated Systems ($27.5 Million): 

    A Lockheed Martin subsidiary, Lockheed Martin Integrated Systems agreed to pay $27.5 million to settle allegations that the company charged the government at a higher level for work performed by employees who lacked qualifications necessary for performing the higher level work.

  • The Boeing Company ($18 Million): 

    The Boeing Company agreed to pay $18 millionto settle a whistleblower allegations claiming the company improperly charged the government for aircraft maintenance. The whistleblower, James Thomas Webb, Jr., received a reward of $3,060,000 for bringing the fraud allegations to the government’s attention. He was represented by whistleblower attorneys at Baum, Hedlund, Aristei & Goldman.

Housing and Mortgage Fraud Produced $365 Million in 2015 False Claims Act Recoveries 

From 2009 until the end of fiscal year 2015, DOJ has recovered over $5 billion in housing and mortgage fraud. This total includes 2015’s recoveries, which totaled $365 million.

Among the most notable housing and mortgage 2015 False Claims Act recoveries:

  • First Tennessee Bank ($212.5 Million): 

    From 2006 to 2008, First Tennessee admitted to originating and endorsing mortgages for federal insurance that did not meet Federal Housing Administration (FHA) requirements. The bank further admitted that it knowingly failed to report these deficiencies, despite widespread knowledge of their existence among senior managers in early 2008.

  • MetLife ($123.5 Million): 

    MetLife Bank, N.A., a subsidiary of MetLife, Inc., purchased First Tennessee in 2008. MetLife admitted to similar misconduct as described in the First Tennessee case between 2008 and 2012.

  • Walter Investment Management ($29.63 Million): 

    Walter Investment Management settled claims that its subsidiaries violated the Department of Housing and Urban Development’s rules for the Home Equity Conversion Mortgages programby submitting false claims for fees and other costs associated with servicing reverse mortgage loans. Reverse mortgages allow elderly people to access the equity in their homes by providing monthly payments, which enable them to cover expenses whilst remaining in their homes. Banks and other institutions that service reverse mortgages are eligible for HUD insurance, provided they meet requirements. Walter Investment Management was accused of failing to meet HUD requirements.

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New Study: Corporations Allowed to Write Off Billions in Court Settlements as Tax Deductions

‘The cost of doing business’ is a phrase we have used a number of times on this blog to describe the prevailing attitude that corporations appear to take when they pay millions (or even billions) to settle allegations of wrongdoing. At first glance, that phrase may seem overly cynical in relation to settling fraud charges—companies don’t literally view these settlements as the cost of doing business…right?

According to a new study conducted by the United States Public Interest Research Group Education Fund, that phrase is actually more applicable under these circumstances than many of us realize.

When corporations commit fraud, engage in financial scams, spill chemicals, manufacture dangerous products, or commit other misdeeds, they very rarely go to jail the way ordinary people would under the same set of circumstances. Instead, corporations are permitted to negotiate out-of-court settlements resolving the allegations of wrongdoing in return for agreed-to payments or promised remedies.

PIRG StudyEven though these settlements are made on behalf of the American people, they are not subject to any transparency standards, according to the U.S. PIRG study. Worse yet, companies are often allowed to write the settlements off as tax deductions. Put simply, corporations literally get to chalk up these settlements as ‘the cost of doing business.’

U.S. tax code allows businesses to deduct from their taxable income “all ordinary and necessary business expenses,” but they are prohibited from deducting penalties or fines paid to the government. This means that out-of-court settlements fall in a legal gray area as far as our tax code is concerned—settlement payments aren’t penalties or fines, but they are required payments made to address allegations of wrongdoing.

When the government agency that signs off on a settlement doesn’t have a standard for addressing tax liability, corporations are free to write the settlement off as a normal business expense.

You’re probably thinking, “But government agencies all have a strict policy for these circumstances, right?”

You’d think so, but according to the U.S. PIRG study, five of the largest government agencies that sign off on settlement agreements with corporations rarely specify the tax status of the subsequent payments, which means that the billions paid to resolve allegations of wrongdoing are considered no different than a business dinner.

We all suffer as a result of this for two reasons:

  • The write off status undermines the deterrent value those settlement payments are supposed to represent. Rather than sending a message of atonement for wrongdoing, the message is that the wrongdoing is literally accepted as the cost of doing business.
  • When corporations are permitted to write off settlement payments, the taxpaying public ultimately has to make up for the lost revenue in the form of higher taxes, cuts to vital public programs, or more national

Of course, the public really isn’t aware of just how much money is being lost in these settlements, because they are confidential. We get numbers from the Justice Department every year, saying just how much was returned to the government, but we have no idea what the real value is when settlement agreements are signed and tax implications are not considered.

If you want to see a clear example of this in action, look at the 2013 JPMorgan Chase and Co. case in which the bank was accused of illegally packaging, marketing, selling and issuing residential mortgage backed securities. The settlement from the case received a lot of attention (and outrage) because it was the largest amount in Justice Department history, and reports revealed that the government allowed JPMorgan to classify the $11 billion as a “legitimate business expense.”

Similarly, the Justice Department announced a blockbuster settlement with British Petroleum in October of this year over the 2010 Deepwater Horizon oil spill. BP will pay $20.8 billion settlement, of which the company will be able to write off approximately $15.3 billion as a deductible business expense.

Key Findings From the U.S. PIRG Study

The U.S. PIRG study looked at all out-of-court settlements reached between 2012 and 2014 for which press releases were posted by the Justice Department, the Environmental Protection

Agency, the Securities and Exchange Commission, the Department of Health and Human Service, and the Consumer Financial Protection Bureau.

  • Of the five agencies studied, not one has a publicly announced policy concerning how the agencies address the tax status of the settlements they sign.
  • In the ten largest settlements announced during the study period, companies were required to pay nearly $80 billion to resolve federal charges of wrongdoing. However, the same companies can write off at least $48 billion as tax deductions.
  • Some agencies do take action to limit tax deductibility for the settlements they negotiate, while others do little to address the issue. Likewise, some agencies have stronger practices in place than others to prevent settlements from being written off as tax deductions. The EPA and the CFPB, for example, are the most consistent in ensuring that at least portions of the settlements they sign are explicitly not tax-deductible.
  • The Justice Department signed most of the largest settlement agreements of all the federal agencies that were studied. Only 18.4 percent of settlement dollars during the period of study were explicitly not tax-deductible. Worse, only 15 percent of settlement dollars negotiated by the SEC included language to ensure that the settlement amounts were not tax-deductible (at least for those with publicly available settlement language).
  • The most transparent agencies in terms of making settlement terms publicly available were the EPA and the CFPB. The least transparent were the Justice Department and the SEC.

What Needs to Happen? 

It’s pretty obvious, isn’t it? The tax code should prohibit corporations from writing off payments made in connection with allegations of wrongdoing, unless reasons are specified in settlement agreements themselves. Furthermore, in the interest of transparency, all agencies should be required to publicly post the details of all settlement agreements. After all, these agreements are ostensibly made on our behalf, so we deserve to know the stakes. In the event that an agreement needs to be kept confidential, the appropriate agency as well as the corporation involved should have to explain why the terms should be kept confidential.

Government Contractors That Commit the Most Fraud Also Spend the Most on Lobbying

A handful of government contractors are responsible for paying the lion’s share of many billions in fines, settlements and court judgements stemming from misconduct dating back to 1995, according to a new database published by the Project on Government Oversight (POGO) last month. The contractors that have paid the most in penalties to the government share another dubious distinction: they spend the most on lobbying efforts.

The POGO database is filled with roughly 2,500 resolved and pending misconduct instances committed by government contractors over the last 20 years. Since 1995, the contractors cited in the POGO database have paid at least $92 billion in fines, settlements, and court judgments. The phrase “at least” is used only because a number of the investigations were settled confidentially, or the investigations involved multiple entities with no clear breakdown of how much each entity paid.

usa-dollar-bills-1431130-mThe database uncovered 17 different types of misconduct. Labor and environmental violations led the way as the most common, both of which accounted for a combined 40 percent of reported instances that were resolved. Government contract violations, including fraud, accounted for roughly 22 percent of the reported instances that were resolved.

According to POGO, BP P.L.C. (British Petroleum) alone paid more than 37 percent of the $92 billion total. Most of the cited misconduct stemmed from the Deepwater Horizon explosion and oil spill of 2010. Not to be outdone, pharmaceutical giants GlaxoSmithKline (GSK), Pfizer, Merck, and Schering-Plough (which merged with Merck back in 2009) accounted for another 27 percent of the total. All four companies paid a combined $24.6 billion in misconduct penalties stemming from cases that accused the companies of manufacturing unsafe drugs, financial irregularities, and illegal marketing practices.

In recent years, misconduct perpetrated by fossil fuel and pharmaceutical contractors have eclipsed that of military hardware contractors in penalty amounts and in the number of cited incidents. Of course, this is not to say that defense contractors like Boeing aren’t getting into its own fair share of dirt.

According to the database, Boeing has paid over $1.4 billion in penalties since 1995. The aircraft manufacturing firm—which contracts with the government to provide military equipment—has a long list of misconduct. Boeing has overbilled the government on the KC-10 aerial refueling tanker, submitted false invoices, and an array of environmental crimes, including waterway contamination and spilling jet fuel. In total, Boeing has been identified in the POGO database 60 times for fraud or violating the terms of a government contract. Only BP, Exxon Mobil and Lockheed Martin have more resolved misconduct charges.

How Can Government Contractors Whitewash Misconduct? The Answer Might be Lobbying 

You would think that after 60 resolved cases of alleged misconduct (not to mention the 13 cases that are still pending), the government would take a hard look at increasing contract oversight with a recidivist offender like Boeing. Surely there are other contractors out there that would love to earn lucrative government contracts and wouldn’t violate the terms by stealing taxpayer money (as a matter of fact, the POGO database shows many contractors with relatively “clean” misconduct records).

So why hasn’t the contractor fallen out of favor with the government? One reason might be that Boeing is the second largest political spender among the contractors listed in the database. In the first nine months of this year, Boeing spent a reported $16 million on lobbying efforts. Last year, Boeing spent $1.9 million in campaign contributions to candidates at the local and federal level on both sides of the aisle. This, of course, is in addition to the undisclosed amount that the company contributes to trade associations, think tanks, public relations efforts, and, last but not least, political groups that use “dark money” to influence elections. These 501(c)(6) tax entities are not compelled to disclose donor information.

Below is a list of other top government contractors and their instances of misconduct:

  • Exxon Mobil, which is the beneficiary of oil and gas contracts, has 84 instances of cited misconduct that have been resolved, according to the database. Since 1995, the company has paid $2.8 billion in penalties. As far as lobbying efforts are concerned, Exxon Mobil is the ninth largest spender on lobbying so far this year among individual firms.
  • Lockheed Martin, the beneficiary of aerospace contracts, has 79 instances of cited misconduct that have been resolved, and the firm has paid a total of $751 million in penalties since 1995. Lockheed Martin is the seventh largest spender on lobbying so far this year among individual firms.
  • General Electric, the beneficiary of defense contracts, has 59 instances of cited misconduct that have been resolved. GE has paid $638 million in penalties since 1995. So far this year, GE has spent more money on lobbying efforts than any other individual company.

Aside from the above government contractors, the following firms were also flagged for high political spending and high instances of misconduct:

  • BP
  • Honeywell
  • FedEx
  • Chevron
  • Halliburton
  • Shell
  • Pfizer
  • General Motors
  • GlaxoSmithKline
  • Merck

Federal Criminal Prosecutions of Corporations on the Decline 

It’s difficult to quantify what lobbying can buy a company, though it appears that continued access to business affairs with the government is certainly a part of it and worth the millions being spent. The money may also go toward keeping individuals responsible for misconduct out of jail.

According to a POGO investigator, less than seven percent of enforcement actions levied against the government contractors in the database included criminal prosecutions. This finding fits nicely with the results of another study published by the Transaction Records Access Clearinghouse (TRAC), which said that over the past 10 years, federal criminal prosecutions of corporations have declined by nearly 30 percent.

This year, Deputy Attorney General Sally Quillian Yates delivered a speech about corporate enforcement that said corporate misconduct “isn’t all that different from everything DOJ investigates and prosecutes. Crime is crime.” Yates added that it was the department’s job to hold “lawbreakers accountable regardless of whether they commit their crime on the street corner or in the boardroom.”

To Yates’s point, the Department of Justice issued a memorandum in September that outlined a new policy: to focus on specific people within corporations that commit misdeeds. It’s better late than never to make these changes, but why has there been such a long wait to do this? Why did we have to watch helplessly as the government continued to hand taxpayer dollars back to disreputable contractors?

Criminal prosecutions for corporate crime will go a long way toward stopping fraud and other misdeeds. Those who seek to steal from taxpayers will think twice about it if they were to land in prison after being caught. Now, the worst case scenario in an overwhelming amount of cases is that the company takes a financial hit, which is often a drop in the bucket when you consider industry profits.

Will the new policy shake things up? Will we start to see more fraudsters being criminally prosecuted? Here’s hoping…

Mortgage Fraud and Nursing Home Fraud Cases See Millions Returned to Government

The Justice Department settled two massive fraud cases this week that resulted in roughly $73 million being returned to the government. While both cases involve different industries, the fraud schemes share one key attribute: both companies named in the allegations tried to game the system in a way that left taxpayers on the hook for stolen funds. Thankfully the hard work of government prosecutors paid off, and these companies will be held accountable for their alleged fraud.

Franklin American Mortgage Company Settles False Claims Act Case for $70 Million 

Mortgage FraudOn Wednesday, Tennessee-based Franklin American Mortgage Company reached an agreement with the Justice Department to resolve government claims that the mortgage company violated the False Claims Act (FCA) by originating and underwriting mortgages that were insured by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) even though the loans were not eligible for government insurance.

According to the DOJ, Franklin American participated in the Federal Housing Administration’s insurance program as a direct endorsement lender (DEL) between 2006 and 2012. As a direct endorsement lender, a company has the ability to originate, underwrite and endorse a mortgage for FHA insurance. When a mortgage company (or a large bank) endorses a mortgage for FHA insurance, the company is, in effect, declaring that the loan meets HUD’s quality standards (HUD is the FHA’s parent agency).

Unfortunately, DEL’s are not subjected to review by the FHA or HUD when they endorse a mortgage loan for FHA insurance. In lieu of this lack of oversight, DELs are required to follow HUD rules that are in place to ensure that they are properly underwriting and certifying mortgage loans for FHA insurance. These rules require DEL’s to maintain a quality control program to prevent and correct any problems with their underwriting practices, as well as self-report any deficient loans they identify in the quality control program.

In the event that an endorsed mortgage loan defaults after a DEL has approved it for FHA insurance, the company that endorsed the loan is permitted to submit an insurance claim to HUD in order to recoup the losses on the defaulted loan.

According to Wednesday’s settlement agreement, Franklin American admitted the following:

  • During the years listed in the settlement agreement (January 1, 2006 to March 31, 2012), the mortgage company failed to comply with FHA origination, underwriting and quality control requirements.
  • Franklin American Mortgage Company certified mortgage loans for FHA insurance even though the mortgages failed to meet HUD requirements.
  • Between 2006 and 2010, Franklin American’s FHA mortgage loan production grew substantially. During this time, the company chose to employ unqualified junior mortgage loan underwriters who performed important underwriting functions. These and other mortgage underwriters were subjected to discipline if they did not meet high quotas established by the mortgage company.
  • Franklin American incentivized high volume production by offering bonuses to its FHA mortgage loan underwriters.
  • Loans underwritten by Franklin American were subjected to post-close audits that oftentimes showed that the mortgage loans didn’t meet HUD requirements. The audits highlighted a substantial amount of seriously deficient loans that were nonetheless underwritten by Franklin American. Even though the deficient loans were brought to the attention of management, the company only reported a select few deficiencies to HUD.

According to the settlement agreement, Franklin American’s alleged fraud caused the FHA to insure hundreds of mortgages that did not meet HUD requirements. As a result, the FHA incurred substantial losses after Franklin American was paid for insurance claims on those defaulted loans.

It doesn’t seem so long ago that we learned how fast and loose housing and mortgage companies were playing with other people’s money. When the world economy was nearly in shambles, we were all ready to do battle with these financial behemoths that dragged us right to the edge of the abyss.

Like many other companies—including some that are much bigger and handle significantly more business—Franklin American chose to ignore the widespread and systemic defects in lending practices so that they could make as much money as possible.

News of Wednesday’s settlement agreement should be music to the ears of many who believed that there would never come a day where these companies would be held accountable for their abuses. It is one in a series of steps necessary to hold financial institutions accountable for the havoc they caused. If these institutions are not held responsible history is doomed to repeat itself.

Regent Management Services to Pay $3.2 Million to Resolve Fraud Allegations 

On the health care front, Texas-based Regent Management Services reached a settlement agreement with the DOJ this week, agreeing to pay roughly $3.2 million to settle fraud allegations that the company accepted kickbacks from several ambulance companies in exchange for rights to Regent’s lucrative Medicare and Medicaid ambulance transport referrals. Regent Management Services, a skilled nursing facility company, has headquarters in Galveston and manages 12 nursing facilities in 11 different Texas cities that are separately owned and operated. As part of the agreement the state of Texas will receive approximately $533,000 to account for improper payments made by its Medicaid program.

At first glance, this settlement appears no different than countless other fraud cases involving kickbacks we have seen on this blog. Today’s settlement, however, has one key difference: this is believed to be the first settlement agreement in the country to hold a medical institution (hospital and skilled nursing facility) accountable for accepting kickbacks rather than the ambulance company solely being held accountable for these “swapping” arrangements.

The Anti-Kickback Statute prohibits a company or individual from offering, paying, soliciting or receiving payment in order to induce referrals of goods or services covered by government health care programs like Medicare and Medicaid. According to DOJ allegations, patients at Regent Management Service’s facilities were provided free or discounted ambulance transportation from a number of ambulance companies. In return, Regent referred other lucrative Medicare and Medicaid business to the ambulance companies that offered them free or discounted ambulance transport.

If Regent had not entered into this agreement with other ambulance companies, the skilled nursing facility company would have been responsible for transporting patients at significantly higher rates.

This case caught our attention because it demonstrates the government’s willingness to hold both sides of a swapping arrangement accountable when kickbacks are offered and received. This type of behavior is unfortunately common among unscrupulous skilled nursing facilities and ambulance companies.

If you have firsthand knowledge of this type of fraud, consider talking to a whistleblower attorney about it. An experienced whistleblower attorney can walk you through your options and help you decide whether filing a whistleblower lawsuit is the right decision. If you do decide to pursue a whistleblower claim, you may be eligible to receive a whistleblower reward if your case is successful and funds are returned to the government.

Contact us today to learn more about your rights as a whistleblower.