A whistleblower or qui tam action can provide financial rewards to individuals who are retaliated against for providing information that a company or individual has defrauded the government. The primary statutes under which this relief may be sought are the federal and state False Claims Acts (“FCAs”), which are not specific to any particular type of fraud. In addition to the FCAs, there are federal statutes which apply to tax fraud and securities fraud. This article briefly summarizes the statutes and types of fraud which can be pursued under these laws.
I. Federal and State False Claims Acts
The federal False Claims Act is codified at 31 U.S.C. 3729, et seq. As of 2013, the District of Columbia and 29 states have passed similar state-specific False Claims Acts as well. The state and federal FCAs place power within the hands of private citizens, allowing them to become “private attorney generals,” and, with the assistance of an attorney paid on a contingent fee basis, file a lawsuit if they have knowledge of fraud or dishonesty in certain transactions with the government. The citizens that bring a case on behalf of the government are called “whistleblowers.” Whistleblowers are provided with a financial reward if the suit is successful. The reward to the whistleblower is normally between 15% and 25% of the amount recovered.
Any persons or entities with evidence of fraud against federal programs or contracts may file a qui tam lawsuit. The following actions are considered violations under the FCAs:
- Knowingly presenting (or causing to be presented) to the federal government a false or fraudulent claim for payment;
- Knowingly using (or causing to be used) a false record or statement to get a claim paid by the federal government;
- Conspiring with others to get a false or fraudulent claim paid by the federal government; and
- Knowingly using (or causing to be used) a false record or statement to conceal, avoid, or decrease an obligation to pay money or transmit property to the federal government.
A qui tam action must be confidentially filed in camera and under seal. The complaint and its contents must be kept confidential until the seal is lifted. The complaint is not served on the defendant. If the plaintiff violates the provisions of the seal, his or her complaint could be dismissed. A copy of the complaint, with a written disclosure statement of substantially all material evidence and information in the whistleblower’s possession, must be confidentially served on the government (United States Attorney and/or Attorney General).
After the qui tam complaint is filed, often the government will seek to interview the whistleblower. The government then investigates the case by interviewing witnesses, obtaining claims regards from the affected governmental agency, using compulsory process such as subpoenas, and retaining experts for consultations on complex issues.
If after the investigation, the government sees merit in the allegations, the government will intervene in the case. If the government does not see merit or does not have the resources to pursue the case, the government declines intervention. At this point, the case comes out from under seal and the defendant may be served with the complaint. After the case is unsealed litigation proceeds as would be typical of other lawsuits.
Once the case is unsealed, the defendant or defendants often seek to dismiss the case on the grounds that the case is not plead properly, the whistleblower does not have evidence to support his/her allegations, the alleged conduct is not actually illegal, and/or the conduct engaged in was a technical violation of the law and not material.
Certain types of fraud are regularly pursued under the FCAs, including healthcare fraud, financial industry fraud, defense contractor fraud, and grant fraud.
Healthcare Fraud: State and federal governments pay hundreds of billions of dollars each year for pharmaceutical drugs, medical devices, hospital care, and nursing home care through Medicare, Medicaid, and other programs. The examples of health care fraud that are discussed give an idea of the types of fraud that have been or could be the basis of whistleblower lawsuits.
Pharmaceutical or medical device companies have been and can be charged with the following types of fraud: (1) Price fraud – companies may conceal discounts that they receive from the government and which they are expected to pass on to Medicaid clients; (2) “Off-label” marketing – this occurs when a company, in an effort to increase sales, markets its product for uses not approved by the Federal Drug Administration; and (3) Defective Devices – if a device is defective and the company, knowing about the defect, nonetheless bills and is reimbursed for same, the government has been defrauded.
Hospitals and physicians have been and can be charged with the following types of fraud: (1) Phantom Billing – billing the government for a service which was not provided to the patient; (2) Billing for Unneeded Procedures – providing and billing for a procedure, even though the patient did not need that type or quantity of care. For example, a patient only needs a basic x-ray which costs $75, but the physician orders an MRI and related testing which costs additional money; (3) Up-coding – medical procedures have a “code” which determines how much the provider is going to get paid by the government. If a provider bills for a higher “code” – and is paid more by the government – a fraud has been committed; (4) Kickbacks – kickbacks are items of value (money, gifts, trips, meals, etc.) which are provided by one party in exchange for referrals or business from the other party. This can include waiving co-payments and deductibles; and (5) Stark Violations – there are complex laws limiting certain physician referrals. It is generally illegal for a doctor to make a referral to a business with which he has a financial relationship unless a “safe harbor” applies. For example, a doctor may not refer one of his patients to a physical therapy business that the doctor also owns.
Financial Industry Fraud: There are many ways in which financial transactions, accounting practices, lending/borrowing, and other financial activities can run afoul of the FCAs, including: (1) Financial Assistance Fraud – submitting fraudulent or falsified information in conjunction with a request for financial assistance under the Troubled Asset Relief Program (TARP) and the Capital Purchase Program (CPP). By way of explanation, in order to receive TARP funds, a bank certifies it will use such funds for lending or to strengthen capital. But, a whistleblower claim may arise if instead the money is used to make an acquisition; (2) Mortgage Fraud – submitting fraudulent or falsified information in conjunction with securing Federal Housing Administration (FHA) or Housing and Urban Development (HUD) funds, loan guarantees, or mortgage insurance that results in government financial assistance being paid based on this fraud/falsification; (3) Loan fraud – violations of the Federal Reserve’s Term-Asset-Backed Securities Loan Program (TALF), such as the improper use of off-shore vehicles by hedge funds; (4) Securities pricing fraud – fraudulent pricing of securities or financial products purchased by public pension funds or government entities; and (5) Emergency fund fraud – receiving funds in to serve the Federal Emergency Management Agency (FEMA) and fraudulently failing to provide services or provide services in a substandard manner.
Defense Contractor Fraud: The federal government spends hundreds of billions of dollars each year in defense of the United States. A huge portion of the services utilized by the armed forces comes from private companies. Defense contractors may commit FCA violations by, among other things, representing parts are purchased from American companies when they are not, failing to comply with contract specifications, misrepresenting qualifications to complete the work, overbilling or overcharging for goods or services, billing for services not provided, utilizing sub-standard goods, or violating the Truth-in-Negotiations Act (TINA) (which stipulates that the government should have access to all the cost or pricing data the contractor used in making a bid for a government project); if a contractor withheld relevant data which resulted in an overstated price, this would be a violation.
Grant Fraud: Every year, the federal government also funds millions of dollars in research in a broad range of fields, from clinical medicine, to education, to healthcare, to nutrition and fitness, and to highway safety. Research fraud involves using these funds for inappropriate purposes, including siphoning of funds into for-profit ventures, using funds for other, unrelated projects, inflating project-related costs, or making misrepresentations in grant proposals to obtain funds.
Cases under the FCAs can result in prolonged, complex and expensive litigation. Prior to bringing a case under the FCA, ideally whistleblowers and their attorneys should have substantial financial resources and evidence that the defendant committed fraud. Additionally, often times government regulations are unclear; defendants’ interpretations of the regulation may be fair and not always knowingly fraudulent, thus defeating a FCA claim.
II. Tax Fraud
The Internal Revenue Service (“IRS”) Whistleblower law rewards whistleblowers that lead the IRS to the recovery of unpaid taxes and/or violations of the internal revenue laws, including failure to disclose income from overseas, underreporting income, overstating deductions, concealing of assets from a foreign country, and using of tax shelters to show deductions. If the IRS recovers, to be eligible to receive a reward under this statute whistleblowers must submit a Form 211 disclosing all relevant facts and evidence of the alleged fraud to the IRS.
III. Securities Fraud
Finally, Section 922 of the Dodd-Frank Act provides rewards to whistleblowers for exposing significant violations of the securities laws. Unlike the FCAs these frauds do not have to relate to government money. Types of fraud that can be pursued under this statute include: bribery of foreign officials in violation of the Foreign Corrupt Practices Act, and securities law violations that create an unfair playing field for the investing public. To be eligible to receive a reward under this statute if the Securities and Exchange Commission (“SEC”) recovers, whistleblowers must complete a Form TCR disclosing all relevant facts and evidence of the alleged fraud and submit it to the SEC.
Shauna Itri (firstname.lastname@example.org) is an Attorney at Berger & Montague, PC in Philadelphia, Pennsylvania.