Whistleblower Law Newsletter

In This Issue

1. We Hand Out Our “Bad Actor Of The Year” Award For 2010

2. Blowing The Whistle On Violations Of The Foreign Corrupt Practices Act

3. Qui Tam Litigation Against For-Profit Colleges

4. DOJ Releases False Claims Act Statistics

5. The Top Settlements Of 2010

6. The False Claims Act In The Supreme Court

7. Check out our website and blog

1. We Hand Out Our “Bad Actor Of The Year” Award For 2010

A lot of egregious wrongdoing became public in 2010 as a result of qui tam cases brought by whistleblowers. If you follow these cases on a regular basis-as we do-you begin to realize how surprisingly widespread fraud and abuse is in government programs, and particularly in government-funded healthcare programs, where a huge percentage of the qui tam action is these days. (See the piece below, on recent Department of Justice statistics.) but we decided to pick out the worst-of-the-worst, and present one of them with our “Bad Actor Of The Year” award.

Our “Bad Actor Of The Year” award goes to . . . FOBRA Holdings LLC, for orchestrating a scheme that included unnecessary fillings and root canals performed on babies. FOBRA, a dental management company that ran a nationwide chain of children’s dental clinics under the brand “Small Smiles Centers,” agreed in 2010 to pay approximately $24 million to settle allegations, initially made by three qui tam whistleblowers, that it caused bills to be submitted to state Medicaid programs for medically unnecessary dental services-including fillings and root canals-performed on children. Yes, they were drilling for profits, at the expense of children. Congratulations to FOBRA Holdings LLC.

2. Blowing The Whistle On Violations Of The Foreign Corrupt Practices Act

By Jonathan Tycko, Partner
Under recently-enacted legislation, individuals who blow the whistle on violations of the Foreign Corrupt Practices Act (“FCPA”) are now eligible to receive substantial monetary rewards. To receive those rewards, a whistleblower must provide his or her information to the Securities and Exchange Commission (“SEC”) pursuant to certain specific procedures.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was signed into law in July of 2010. Dodd-Frank included a provision intended to encourage whistleblowers to report securities laws violations to the SEC. Pursuant to Dodd-Frank, the SEC has established a new Whistleblower Office, and is in the process of adopting regulations for that office and for the award of rewards to whistleblowers. According to a report issued by the SEC in October, 2010, the SEC has already established a fund of approximately $452 million to fund whistleblower rewards under Dodd-Frank.

The whistleblower provision of Dodd-Frank implicates the FCPA because the SEC has enforcement authority over certain aspects of the FCPA, namely, the so-called “books and records” provision. The FCPA is intended primarily to prohibit the payment of bribes by companies to foreign government officials. In addition, the FCPA requires publicly-traded companies to comply with certain accounting provisions. Those accounting provisions include a requirement that covered corporations maintain a system of books and records that accurately reflect the corporation’s transactions, and that those corporations maintain an adequate system of internal accounting controls. While the Department of Justice prosecutes violations of the anti-bribery provisions, it is the SEC that is charged with enforcing the books and records provisions.

In 2010 alone, the federal government entered into six separate FCPA settlements in excess of $100 million. The biggest FCPA settlement of 2010 was for $400 million. Had that settlement come as a result of a whistleblower submission to the SEC under Dodd-Frank, the whistleblower could have claimed a reward of between $40 million and $120 million.

To be covered by the Dodd-Frank whistleblower provision, and to be eligible for a reward, a FCPA whistleblower would need to follow the specific procedures laid out in Dodd-Frank, and in the forthcoming SEC regulations. Dodd-Frank is unique among whistleblower laws in that it permits anonymous whistleblowing. A whistleblower may hire an attorney, and have the attorney submit the information to the SEC. The SEC will accept that information and will deal with the whistleblower through his or her attorney, thereby assuring that the whistleblower’s identity remains secret.

Given the time it takes for the government to investigate FCPA violations, it may be a number of years before we see a FPCA whistleblower reward. But the SEC Whistleblower Office is now “open for business,” and the whistleblower information that Dodd-Frank was intended to unleash is no doubt now flowing freely into the SEC.

3. Qui Tam Litigation Against For-Profit Colleges

By Melanie Williamson, Associate

For-profit colleges are corporations in the business of selling “career” education services at a premium price to a largely underprivileged population. Last year, a surge of consumer complaints led the U.S. Government Accountability Office (“GAO”) to conduct an undercover investigation into the recruiting and enrollment practices of 15 for-profit colleges. As a result, the GAO issued a report revealing that every single school that it investigated had engaged in fraudulent, deceptive, and misleading practices during the recruiting and enrollment process.

The investigation was rooted in large part by the government’s own staggering financial contribution to the for-profit college sector: despite enrolling only 10% of post-secondary education students nationwide, for-profit colleges obtain 25% of the $89 billion in Federal Title IV student aid that is distributed to all institutions annual. In fact, many for-profit colleges derive the large majority of their revenues from Title IV student aid. For example, Corinthian Colleges, Inc., one of most expansive for-profit colleges in the country, derives 89.9% of its revenue from Title IV lending programs.

All colleges and universities must follow specific laws to participate in Title IV student financial aid programs, including for-profit institutions, which have become increasingly popular and profitable in recent years. With the rise of for-profit institutions, allegations of fraud and abuse of Title IV eligibility is becoming more common. Many of these illegal activities can form the basis of qui tam lawsuits against for-profit institutions.

First, once a for-profit college has been approved to participate in Title IV programs, it enters into a “program agreement” with the Department of Education for the duration of its participation. Under the program agreement, the for-profit college agrees to handle the administration of Title IV student aid in a certain manner, and refrain from participating in a number of specifically prohibited acts.

At least one court-the U.S. Court of Appeals for the Ninth Circuit-has decided that the program agreement is a certification of compliance with the provisions of the Higher Education Act, and that a failure to comply with its terms can lead to a false claim under the False Claims Act. As a result of that decision, the University of Phoenix, one of the country’s largest for-profit colleges, paid $78.5 million dollars to settle a qui tam lawsuit alleging that it gave incentive payments to its recruiters, in violation of a prohibition incorporated into the terms of all program agreements with the Department of Education.

In recent years, other for-profit colleges have been the target of qui tam lawsuits arising out of the way the colleges compensated recruiters. For example, in 2010, Grand Canyon Education agreed to pay $5.2 million to settle a qui tam lawsuit alleging that it improperly paid compensation to recruiting representatives from 2001 through 2010. And in early 2010, a qui tam whistleblower complaint against South University Online and its parent company was unsealed. That complaint also alleged that the school gave its admissions representatives improper, enrollment-based compensation, such as paid vacations, iPods, and gift cards.

For-profit college fraud can also stem from ongoing obligations to submit information to the Department of Education and other agencies for continuing eligibility to participate in Title IV federal aid programs. Many of these submissions present opportunities for for-profit colleges to potentially falsely certify their ability to achieve and maintain eligibility for Title IV programs.

For example, as a condition of eligibility, for-profit colleges must be accredited by an accrediting agency and have a valid state license to operate. Accreditation and state licensing, in turn, require the for-profit institution to report student achievement information, such as annual graduation rates and placement rates. Many of the state and accrediting agencies establish minimum thresholds for these rates. For example, to maintain accreditation, a for-profit college must typically report a 70% placement rate for its graduates. Additionally, under limited circumstances, a for-profit college is required to report placement and graduation rates directly to the Department of Education each time it submits an application for initial and recertification of its eligibility to receive Title IV funds. If a for-profit college submits false graduation of placement rates to an accrediting agency, state licensing agency, or the Department of Education, it could open itself to liability under the False Claims Act.

Kaplan University has been targeted with at least four whistleblower qui tam lawsuits, based on such allegations that it submitted false information to certify its eligibility to receive Title IV funds. The Kaplan lawsuits were brought by former instructors, deans, department directors, and admissions representatives, and the accusations of misconduct are diverse. One lawsuit alleges that Kaplan inflated grades and manipulated placement data by falsely reporting that graduates employed as cashiers or a telemarketer were working in “accounting management” or “business administration fashion merchandising.” Another lawsuit filed by a former Kaplan director of education alleges the school knowingly enrolled students it could not place in the externships the students needed to graduate, only to later drop them out of the program, and keep the students’ federal aid. One former Kaplan admissions adviser filed his lawsuit after he allegedly found boxes of diplomas for phantom students who never attended class and informed the school’s regional assistant director, who told him keep things quiet and “be a team player.” And the broadest complaint was filed by a former Kaplan dean of paralegal students and two other plaintiffs, alleging, among other things, that the school engaged in enrollment compensation fraud. Three of the lawsuits were consolidated by the Judicial Panel on Multi-District Litigation, and are pending in federal court in Florida. The fourth, which was not consolidated with the other three, is pending in federal court in Nevada.

Qui tam whistleblowers have provided unparalleled assistance to the government in its oversight of the for-profit college industry. Given these wide-spread and increasing allegations of fraud and misconduct, the for-profit sector’s access to its main source of revenue-Title IV funds-will likely be scrutinized until industry practices have been reformed.

Note: Tycko & Zavareei LLP is currently representing former students of Corinthian Colleges, Inc. d/b/a Everest College – one of the nation’s largest for-profit colleges – in class action litigation arising out of alleged misrepresentations to prospective students during the enrollment process.

4. DOJ Releases False Claims Act Statistics

By Lorenzo Cellini, Associate

Fiscal Year 2010 proved to be a record breaking year for False Claims Act (“FCA”) cases, according to recently published statistics from the U.S. Department of Justice (“DOJ”). The total amount of funds recovered by the government either through settlements or judgments was nearly $2.4 billion: the largest annual recovery ever. Consistent with the increase in overall FCA recoveries, whistleblower rewards (also known as relator’s shares) were also the largest on record: the government awarded approximately $385 million to whistleblowers in FCA cases. Nearly $2 billion of the overall recovery was attributable to FCA cases related to fraud on federal healthcare programs, including Medicare and Medicaid. A distant second was fraud in connection with Department of Defense programs at approximately $240 million. And the balance was spread among all other federal programs.

The total number of FCA cases referred to the DOJ was also the highest ever recorded. This uptick is encouraging in the sense that more whistleblowers are having the courage to step forward and expose fraud upon the public fisc. This may well be the result of the 2009 amendments to the FCA, which made the law a more effective tool. On the other hand, the increase in the number of cases is problematic when viewed in conjunction with the statistics regarding the government’s immediate caseload. The DOJ is currently investigating 1,246 cases and has 139 active cases in which it has intervened. Thus, this significant backlog of cases coupled with the increase in cases filed this year, may lead to longer delays in intervention decisions, or result in the government declining to intervene in cases that it might have intervened in but for its lack of resources to deal with the higher caseload. So, while these newly released statistics demonstrate that the government is continuing to aggressively investigate and prosecute FCA cases, they also highlight the need for even more resources to be devoted to these cases in order to decrease the current backlog, and to offset continued increases in newly filed cases.

It is also worth noting that these statistics under-represent the impact of qui tam and whistleblower cases. The DOJ statistics do not include money recovered by state or local governments. Particularly with respect to cases involving fraud on the Medicaid system-approximately half of which is funded by state governments-the settlements and judgments often return substantial sums to state governments. In addition, the DOJ statistics do not include portions of settlements that are attributed to criminal charges, which are often brought by DOJ as a result of disclosures made in qui tam lawsuits.

5. The Top Settlements Of 2010

The eight largest False Claims Act settlements of 2010 alone accounted for recovery by the government of approximately $3.3 billion, and whistleblower rewards of more than $350 million. All eight involved pharmaceutical companies. Those eight settlements, in high-to-low order, are as follows:

• Pharmaceutical giant GlaxoSmithKline agreed to pay $750 million to resolve criminal and civil allegations relating to the sale of adulterated drugs. The qui tam lawsuit was brought on behalf of the government by whistleblower Cheryl Eckard, a former quality assurance manager for Glaxo, who filed the lawsuit after she was terminated from the company. As a reward for disclosing Glaxo’s fraud to the government, Ms. Eckard will receive a record $96 million share of the settlement-the largest reward ever received by a single whistleblower.
• Botox bust: Pharmaceutical company Allergan agreed to pay $600 million to resolve allegations that it unlawfully marketed Botox for off-label uses. As a reward for disclosing Allergan’s unlawful activity to the government, the whistleblowers will receive a $37.8 million share of the settlement.
• Pharmaceutical manufacturer AstraZeneca agreed to pay $520 million to settle a False Claims Act lawsuit alleging that the company engaged in off-label drug marketing and an unlawful kickback scheme in connection with the anti-psychotic drug Seroquel. As a reward for disclosing the unlawful conduct of AstraZeneca to the government, the whistleblower will receive more than $45 million from the settlement.
• Pharmaceutical companies Abbott Laboratories, B. Braun Medical, and Roxane Laboratories agreed to pay $421.5 million to settle False Claims Act lawsuits alleging that the companies defrauded Medicare and Medicaid by falsely reporting inflated prices for numerous pharmaceutical products knowing that the government relied on those prices to establish reimbursement rates to healthcare providers. The whistleblowers will receive an $88.4 million share of the overall settlement as a reward for disclosing the fraud to the government.
• Forest Pharmaceuticals agreed to pay more than $313 million to settle civil and criminal allegations that the company engaged in unlawful practices in connection with the sale and marketing of its drugs, including promoting drugs for off-label uses, submitting claims for payment to the government for drugs that no longer qualified for coverage by federal healthcare programs, and payment of illegal kickbacks to physicians to induce them to prescribe drugs manufactured by Forest. As a reward for disclosing Forest’s unlawful activity, the whistleblowers will receive a $14 million share of the settlement.
• Pharmaceutical manufacturer Dey Inc. agreed to pay $280 million to settle a False Claims Act case alleging that the company falsely reported inflated prices for its drugs, which resulted in government healthcare programs such as Medicare and Medicaid paying higher reimbursement rates to healthcare providers for the drugs than would have been the case had Dey reported prices truthfully. As a reward for disclosing Dey’s fraud upon the government, the whistleblowers will receive a $67.2 million share of the overall settlement.
• Pharmaceutical company Novartis agreed to pay $237.5 million to settle False Claims Act lawsuits asserting that the company engaged in an unlawful off-label marketing scheme in connection with its anti-epileptic drug Trileptal and paid illegal kickbacks to physicians to encourage them to prescribe Trileptal, as well as other Novartis drugs.
• Irish pharmaceutical manufacturer, Elan Corporation, agreed to pay $214.5 million to resolve allegations that it unlawfully marketed the anti-seizure medication Zonegran for off-label uses. As a reward for disclosing Elan’s fraud to the government, the whistleblower will receive a $10 million share of the overall settlement.

6. The False Claims Act In The Supreme Court

By Andrea Gold, Associate

During 2010, the U.S. Supreme Court decided one False Claims Act case, and granted certiorari in another. Both cases involve the scope of the so-called “public disclosure bar.” Added in the 1986 amendments to the Act, the public disclosure bar was intended to curb “parasitic” lawsuits by relators who simply regurgitate fraud allegations that have already been publicly disclosed. Since its inception, courts around the country have analyzed the scope of the public disclosure bar, trying to determine what constitutes public disclosure. And the public disclosure bar has now caught the attention of the Supreme Court.

On March 30, 2010, the U.S. Supreme Court decided Graham County Soil and Water Conversation District v. U.S. ex rel. Wilson, 130 S. Ct. 1396, 176 L. Ed. 2d 225 (2010) reh’g denied, 130 S. Ct. 3351, 176 L. Ed. 2d 1241 (2010). In that case, the Court held for the first time that a private whistleblower could not bring suit on behalf of the government based on information she learned in an official report issue by a state or local administrative agency. Specifically, the Court examined the reference to “administrative” reports, audits, and investigations in Section 3730(e)(4)(A) of the False Claims Act, deciding whether the term encompassed reports by both federal and state/local agencies. Employing a strict textual analysis of the language of that section, the Court held that it did.
Relator Wilson, who was employed by a local government office tasked with remediating areas of North Carolina damaged by floods, notified local and federal officials about possible fraud in the administration of the federal contracts. Both the county and the state also issued reports detailing the possible fraud. Wilson brought suit under the False Claims Act, but her case was dismissed by the trial court on the grounds that it was merely based on publicly disclosed information in the reports.

On appeal, the U.S. Court of Appeals for the Fourth Circuit held that only federal administrative reports could trigger the public disclosure bar. But the Supreme Court disagreed. The Supreme Court focused on the public disclosure bar as a whole, and noted that the term “administrative” had been used in other instances to refer to state and county hearings. The Court also rejected Wilson’s attempts to rely on legislative history, stating that “the drafting history of the public disclosure bar raises more questions than it answers.” In short, the Court advanced a broad reading of the public disclosure bar and rejected any claim that it was exclusively federal.

The impact of the Court’s decision in Graham County on future cases is quite limited, however. New amendments to the False Claims Act-specifically, to the public disclosure bar-were included in the healthcare reform legislation passed in late March of 2010. Specifically, under the amended public disclosure bar, information is only considered publicly disclosed if it is disclosed in a federal criminal, civil, or administrative hearing, or a federal report, hearing, audit or investigation. The addition of the term “federal” in the amendment presumably excludes information that is disclosed in state and local hearings, reports, etc. and thus effectively overrules the Court’s holding in Graham County on a going-forward basis.

On September 28, 2010, the Supreme Court granted certiorari review of the decision in U.S. ex. rel. Kirk v. Schindler Elevator Company, 601 F.3d 94 (2d Cir. 2009), another case about the meaning and scope of the False Claims Act’s public disclosure bar. The core issue in Kirk is whether the “report…or investigation” language of the public disclosure bar includes a federal agency’s response to a Freedom of Information Act (FOIA) request. 31 U.S.C. § 3730(e)(4).

The relator, Daniel Kirk, is a Vietnam veteran and worked at Schindler Elevator for several years. In 2003, he was demoted and later resigned. The following year, Kirk complained to the Department of Labor, arguing that his demotion violated the Vietnam Era Veterans Readjustment Assistance Act (VEVRAA). His claim was denied by the Agency and he then brought a False Claims Act action in federal court.

In his lawsuit, Kirk alleged, inter alia, that Schindler did not comply with the provisions of VEVRAA that required it to file annual reports detailing its hiring and placement of veterans. According to Kirk, Schindler obtained federal contracts by falsely certifying that it had filed the reports or by filing false reports. Kirk’s complaint was supported by documents he obtained via FOIA requests submitted by his wife, as well as his own personal knowledge.

Kirk’s case was dismissed by the district court, which held that his claims fell within the public disclosure bar. See United States ex rel. Kirk v. Schindler Elevator Corp., 606 F. Supp. 2d 448 (S.D.N.Y. 2009). The Second Circuit disagreed, holding that basing a False Claims Act complaint on information obtained via FOIA requests did not constitute a “public disclosure” unless the FOIA material was itself an “administrative report or investigation.”

In granting certiorari, the Supreme Court presumably hopes to resolve a growing circuit split. In its opinion in Kirk, the Second Circuit noted that “[o]ur sister Circuits are divided on this issue.” Indeed, the Second Circuit’s decision in Kirk is in contrast to decisions by the First, Third, Fifth and Tenth Circuits, which have each held that FCA allegations based on information obtained via FOIA requests fall within the public disclosure bar. The Supreme Court’s decision is expected in 2011.

7. Check out our website and blog

For the past couple of years, we’ve had a website and a blog devoted exclusively to qui tam litigation and whistleblower law. The website is FraudFighters.net, and the blog is FraudFighters.WordPress.com. We update the blog fairly regularly, whenever we get news of a significant development in the law, or a big settlement or other result in a case. Want to learn more about the other types of cases our firm is handling? Our general firm website is tzlegal.com.