An Introduction to Whistleblower/Qui Tam Claims

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An Introduction to Whistleblower/Qui Tam Claims

By Shauna Itri

Shauna Itri represents whistleblowers in cases involving fraud against the government and with claims brought under the SEC and IRS whistleblower reward programs. Ms. Itri has successfully represented whistleblowers in qui tam or False Claims Act law suits in state and federal courts throughout the United States, including series of cases against large drug companies for fraudulent Medicare and Medicaid drug pricing. This litigation has returned well over $1 billion to state and federal governments.

A whistleblower or qui tam action can provide financial rewards to individuals who suffer retaliation for providing information that a company or an individual has defrauded the government. The primary statutes are the federal and state False Claims Acts ("FCAs"), including California False Claims Act, Ca. Gov’t Code §§ 12650-12656. The FCAs are not specific to any particular type of fraud, but there are federal statutes that apply specifically to tax fraud and securities fraud. This Article briefly summarizes the statutes and types of fraud that 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 FCAs 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 usually 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 who bring a case on behalf of the government ("qui tam lawsuits"), are called whistleblowers. Whistleblowers (employees, former employees, or competitors) 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. 31 U.S.C. § 3730(d). 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. 31 U.S.C. § 3729(1)(A);
  • Knowingly using (or causing to be used) a false record or statement to get a claim paid by the federal government; 31 U.S.C. § 3729(1)(B);
  • Conspiring with others to get a false or fraudulent claim paid by the federal government; 31 U.S.C. § 3729(1)(C); 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. 31 U.S.C. § 3729(1)(G).

Prior to filing a qui tam action, the whistleblower must make a voluntary disclosure to the government – essentially informing the government of the fraud. A qui tam action must be confidentially filed in camera and under seal. The complaint and its contents must be kept confidential, and the complaint is not served on the defendant until the seal is lifted. If the plaintiff violates the provisions of the seal, then 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). 31 U.S.C. § 3730(b).

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After the qui tam complaint is filed, the government often will seek to interview the whistleblower. The government then investigates the case by interviewing witnesses, obtaining claims records 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 determines that the allegations have merit, the government will intervene in the case and take over its prosecution. If the government does not see merit nor does it have the resources to pursue the case, the government will decline intervention. At this point, the case is unsealed and the defendant may be served with the complaint. After the case is unsealed, the litigation proceeds on the allegations in the complaint or the case is dismissed. If litigation proceeds, defendants usually will first seek to dismiss the case on the grounds that: the case is not plead properly, the whistleblower does not have evidence to support his or her allegations, the alleged conduct is not actually illegal, or the conduct engaged in was a technical violation of the law and not material.

TYPES OF FRAUD

There are various types of fraud that can be pursued under the FCAs, including healthcare fraud, financial industry fraud, defense contractor fraud, and grant fraud.

Healthcare Fraud: The 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. Some examples of health care fraud will give you an idea about the types of fraud that have been or could be the basis of whistleblower lawsuits.

Pharmaceutical or medical device companies have been charged with the following types of fraud: (1) Price fraud – companies may conceal discounts that they receive from the government that 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 FDA. (3) Defective Devices – if a device is defective and the company knows about the defect, but nonetheless bills and is reimbursed for the same, then the government has been defrauded.

Hospital and physicians have been charged with the following types of fraud: (1) "Phantom Billing" – billing the government for a service that was not provided to the patient. (2) Billing for Unneeded Procedures – providing and billing for a procedure that the patient received, but did not need (either 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" that 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, then fraud has been committed. (4) Kickbacks – kickbacks are items of value (money, gifts, trips, meals) that are provided by one party in exchange for referrals or business from the other party. This can include waiving co-payments and deductibles. (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. For example: a doctor may not refer one of his patients to a physical therapy business that the doctor owns, unless a "safe harbor" applies.

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) 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). For example: in order to receive TARP funds, a bank certifies it will use such funds for lending or to strengthen capital; but instead the money is used to make an acquisition. (2) Mortgage Fraud – submitting fraudulent or falsified information in conjunction with securing FHA or HUD funds, loan guarantees, or mortgage insurance that results in government financial assistance being paid based on this fraud/falsification. (3) 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) Fraudulent pricing of securities or financial products purchased by public pension funds or government entities. (5) FEMA fraud for services not provided or provided in a substandard manner.

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Defense Contractor Fraud: The federal government spends hundreds of billions of dollars each year in defense of the United States. A very substantial portion of the services utilized by the armed forces comes from private companies. Defense contractors may commit FCA violations in numerous ways: (1) representing parts are purchased from American companies when they are not; (2) failing to comply with contract specifications; (3) misrepresenting qualifications to complete the work; (4) overbilling or overcharging for goods or services; (5) billing for services that are not provided; (6) utilizing sub-standard goods; or (7) violations of the Truth-in-Negotiations Act (TINA).

Grant Fraud: Every year the federal government funds millions of dollars for research in a broad range of fields, such clinical medicine, education, healthcare, nutrition and fitness, and highway safety. Research fraud involves utilizing these funds for inappropriate purposes, including siphoning of funds into for-profit motives, 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, whistleblowers and their attorneys must have substantial evidence that the defendant committed fraud and the financial resources to prosecute the litigation (often against well-funded adversaries) if the government declines to take over the litigation. Often times government regulations are unclear and defendants’ interpretation of the regulation is fair and not knowingly fraudulent, which may provide additional defense.

II. TAX FRAUD

The Internal Revenue Service ("IRS") Whistleblower law rewards whistleblowers who lead the IRS to the recovery of unpaid taxes 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 improper use of tax shelters to generate invalid deductions. To be eligible to receive a reward under this statute, IRS must not only recover assets, but also the whistleblower must complete a Form 211 disclosing all relevant facts and evidence of the alleged fraud and submit it to the IRS. 26 U.S.C. § 7623(b).

III. SECURITIES FRAUD

Section 922 of the Dodd-Frank Act provides rewards to whistleblowers for exposing significant violations of the securities laws. 15 U.S.C. § 78u-6. Unlike the FCAs, these frauds do not have to relate to government money. Types of fraud that can be pursued under this statute include: (1) bribery of foreign officials in violation of the Foreign Corrupt Practices Act and (2) securities law violations that create an unfair playing field for the investing public. To be eligible to receive a reward under this statute, whistleblowers must complete a Form TCR disclosing all relevant facts and evidence of the alleged fraud and submit it to the SEC and the SEC must recover assets.

IV. THE FUTURE OF QUI TAM ACTIONS

Cases under the various whistleblower acts are on the rise primarily because the FCAs are the government’s primary civil remedy to redress claims for money or property. Statistically, as the government funds more social programs and healthcare with the implementation of the Affordable Care Act, the likelihood of fraud increases and false claims are also likely to increase. The rate of whistleblower cases is not expected to slow down, especially because whistleblowers have been rewarded handsomely and are thus incentivized to report fraud. On the other hand, representing whistleblowers is challenging as this is a very complex area of the law with a number of unique provisions that an unexperienced attorney may overlook or misinterpret. This area of law, like so many, presents both tremendous opportunities and tremendous risks.

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