Whistleblower Law Newsletter

In This Issue

1. Top 10 Settlements Of 2011

2. Blowing The Whistle On Fraud In The Banking Industry

3. Landmark Ruling Holds That Retaliation Against Whistleblower Can Give Rise To RICO Claim

4. Contractor Fraud In Iraq And Afghanistan

1. Top 10 Settlements Of 2011

By Lorenzo Cellini, Associate

1. Quest Diagnostics agreed to pay $241 million to settle a case brought under the California False Claims Act that alleged that the company overbilled California’s Medicaid program for diagnostic and testing services. The lawsuit was filed by whistleblowers Chris Riedel and his company Hunter Laboratories, a Quest competitor that was placed at a disadvantage due Quest’s alleged unlawful practices.
2. Oracle Corporation agreed to pay $199.5 million to settle a False Claims Act lawsuit alleging that the company provided false or misleading information to the Government Services Administration (GSA) that resulted in the Government paying more for Oracle products and services than it would have paid had Oracle provided accurate information. This was the largest settlement ever obtained for fraud upon the GSA. Oracle’s alleged misconduct was brought to the attention of the Government by whistleblower Paul Frascella, a former Oracle employee.  As a reward for disclosing his employer’s alleged fraud, he received $40 million from the settlement.
3. Novartis’s Sandoz unit agreed to pay $150 million to resolve claims that the company overbilled the federal Government and the States for its pharmaceuticals. The False Claims Act case was originated by relator Ven-a-Care, a Florida pharmacy that has brought numerous similar actions against the world’s largest pharmaceutical companies. Of the $150 million, $75 million will go to the state of California, approximately $39 million to the state of Florida, and $35 million to the Federal Government. The relator will receive approximately $8.3 million from the California and Florida recoveries. The relator’s share from the Federal recovery was not disclosed.
4. Maxim Healthcare Services, Inc., one of the nation’s leading providers of home health care services, agreed to pay $150 million to resolve allegations in a False Claims Act lawsuit that the company billed for services that were not rendered, not properly documented, or were performed in unlicensed offices. This qui tam case was brought to the attention of the Government by Richard West, who was receiving home nursing services through Maxim. Mr. West will receive a $15.4 million share of the settlement.
5. Verizon Communications, Inc. agreed to pay the Government approximately $93.5 million to settle a False Claims Act lawsuit alleging that the company improperly invoiced the Government Services Administration for a variety of federal, state, and local taxes and surcharges in violation of government-wide voice and data telecommunications services contracts.
6. Medline Industries, Inc. agreed to pay $85 million to settle a False Claims Act lawsuit accusing the company of paying unlawful kickbacks to hospitals that purchased Medline supplies that were paid for by Medicare and Medicaid. Medline’s alleged misconduct was brought to the attention of the Government by whistleblower Sean Mason, who will receive a $23.4 million share of the settlement.
7. New York City agreed to pay the Federal Government $70 million to resolve allegations that the City defrauded the Medicaid program. Dr. Gabriel Ethan Feldman was the determined whistleblower in this qui tam case. He continually tried to raise public awareness surrounding New York City’s alleged abuse of Medicaid and finally filed his case in 2009.  Dr. Feldman will be receiving $14.7 million as his reward for bringing the City’s alleged fraud to the attention of the Government.
8. LHC Group Inc., another one of the nation’s largest home health care providers, has agreed to pay the Government $65 million to settle allegations that the company violated the False Claims Act by submitting false bills to Government health care programs such as Medicare and Tricare for services that were medically unnecessary. The government was made aware of LHC’s fraud by whistleblower Judy Master.  Ms. Master discovered the fraud while she worked for a consulting firm LHC had used.  She will be receiving over $12 million from the settlement.
9. LabCorp agreed to pay $49.5 million to resolve a lawsuit under the California False Claims Act asserting that the company overbilled California’s Medicaid program for testing services and paid unlawful kickbacks to doctors for patient referrals. This case was also brought to the attention of the California Attorney General’s Office by Chris Riedel and his company Hunter Laboratories, a LabCorp competitor turned whistleblower.
10. Pharmaceutical manufacturers Serono Laboratories, EMD Serono, Inc., Merck Serono S.A., and Ares Trading S.A. agreed to pay $44.3 million to resolve allegations that the company violated the False Claims Act by paying kickbacks to health care providers to induce them to prescribe the drug Rebif. The qui tam lawsuit was originally brought by whistleblower Tim Amato, who will receive a $5.19 million share of the settlement.

2. Blowing The Whistle On Fraud In The Banking Industry

By Jonathan Tycko, Partner

The qui tam provisions of the False Claims Act are well-known, and the recently-enacted SEC and IRS whistleblower laws have received widespread publicity. But another similar law has seen little use, despite being on the books for more than 20 years, and despite applying broadly to a sector of the economy—the banking industry—where the potential for large scale fraud is ever-present. Insiders who blow the whistle on fraud or other unlawful conduct by banks, or on banks, may be eligible for substantial rewards under this law.

The law that provides the whistleblower rewards is the Financial Institutions Anti-Fraud Enforcement Act of 1990 (“FIAFEA”). To understand FIAFEA, however, requires an understanding of another statute, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). FIRREA, which was enacted in the wake of the savings and loan crises of the 1980s, gives the U.S. Attorney General the power to bring civil actions seeking statutory penalties for violations of various criminal laws that apply to the banking industry. For example, the Attorney General can bring a civil action under FIRREA for any of the following:

• Bank fraud, which is defined broadly to include any “scheme or artificae” to “defraud a financial institution”;
• Either mail fraud or wire fraud, if the fraud affects a bank;
• Fraud in connection with loan applications;
• Receiving commissions or gifts in exchange for procuring loans;
• Embezzlement or misapplication of funds by a bank officer or employee;
• Fraud in connection with various types of reports that banks must make to government agencies or officers; or
• Concealing assets from a government conservator, receiver or liquidator of a bank.

Indeed, the first two categories noted above—“bank fraud,” and mail or wire fraud—are so broadly defined, that almost any fraud on a bank by its customers, or any fraud by a bank’s own employees, officers or directors, may come within the scope of the FIRREA civil penalties provision.

The year after FIRREA was passed, Congress enacted FIAFEA. The goal of FIAFEA was to encourage whistleblowers with information about fraud on or by banks to come forward with that information, so that the Attorney General could use that information to ferret out FIRREA violations. Under FIAFEA, a whistleblower must file a “declaration” with the Attorney General—in practice, with the Civil Division of the Department of Justice (“DOJ”)—laying out the information known to the whistleblower. The “declaration” is similar to the “disclosure statement” typically filed with DOJ in qui tam cases under the False Claims Act. If the information in the declaration gives rise to liability under FIRREA, and if the government obtains “funds or assets” as a result, then the whistleblower is entitled to an award.

The awards available to whistleblowers under FIAFEA can be quite large. The primary award provision of FIAFEA provides that “[t]he declarant shall be entitled to 20 percent to 30 percent of any recovery up to the first $1,000,000 recovered, 10 percent to 20 percent of the next $4,000,000 recovered, and 5 percent to 10 percent of the next $5,000,000 recovered.” So, if the government recovers $10 million or more, then the whistleblower reward would range from a low of $850,000 to a high of $1.6 million.

FIAFEA also contains a unique provision relating to the role of a whistleblower’s attorney. Within one year of the date that the whistleblower files his or her declaration, DOJ must provide the whistleblower with written notice of the status of its investigation into the whistleblower’s allegations. One option available to DOJ is to stated in this notice that the allegations “have not yet been addressed.” If DOJ chooses that option, then the whistleblower can request that DOJ award a contract to the whistleblower’s own attorney to pursue the case. DOJ must then either award such a contract, or bring a claim on its own based upon the whistleblower’s allegations. If DOJ chooses to award a contract to the whistleblower’s attorney, then FIAFEA provides that it should be a contingency fee contract. In other words, the whistleblower’s attorney is given a stake in the outcome of the litigation separate and apart from the reward available to the whistleblower.

In sum, FIAFEA provides very strong financial incentives for whistleblowers to come forward with evidence of fraud in the banking industry, and separate financial incentives for attorneys to represent these whistleblowers.

Despite these incentives, FIAFEA has been used only sporadically. The reason for this, I believe, is simply that the availability of FIAFEA whistleblower rewards is not well known either in the legal world, or within the banking industry. DOJ has recently signaled that it is interested in increasing the use of FIRREA to attack fraud in the banking industry, and in receiving new FIAFEA whistleblower declarations to aid in this effort. Accordingly, we may soon seen in increase in FIAFEA whistleblower filings, followed by an increase in rewards being paid to banking industry whistleblowers.

Landmark Ruling Holds That Employer’s Retaliation Against Whistleblower Can Give Rise To RICO Claim

By Andrea Gold, Associate

On December 15, 2011, the United States Court of Appeals for the Seventh Circuit issued a landmark opinion in DeGuelle v. Camilli, Appeal No. 10-2172, holding that a company’s retaliatory actions against a whistleblower gave rise to liability under the Racketeer Influenced and Corrupt Organizations Act (“RICO”). In coming to this conclusion, the Seventh Circuit took a broad, commonsense view of the requisite level of interrelatedness necessary between the retaliation suffered and the underlying fraud.

The Plaintiff, Michael J. DeGuelle, worked in the tax department of S.C. Johnson & Son, Inc. (“SCJ”) and, in April of 2009, was fired after blowing the whistle on multiple instances of tax fraud within the company. DeGuelle alleged that, over a period of approximately eight years, he was instructed by several of his superiors to participate in a complex tax fraud scheme, which included mail fraud and record destruction. Initially, although DeGuelle expressed serious concerns with these requests to his department superiors, he complied. However, in October of 2007, he complained directly to human resources. And, although human resources officials claimed to investigate his allegations of fraud, DeGuelle was soon met with retaliation by his superiors. In March of 2008, he received a negative performance review even though, just two months prior, he had received an award for his excellent work performance. Undeterred, DeGuelle continued to meet with his superiors and human resources managers throughout 2008 and 2009 regarding the fraud. And, on more than one occasion, SCJ tried to silence DeGuelle by offering him severance packages that included “confidentiality” requirements. DeGuelle rejected SCJ’s offers and ultimately filed a complaint with the Department of Labor. He was terminated shortly thereafter, allegedly for attaching confidential business information to his DOL filing. SCJ also sued DeGuelle for breach of contract and conversion and allegedly defamed DeGuelle in the local media.

In February of 2010, DeGuelle brought suit against SCJ in the Eastern District of Wisconsin, alleging that his former employer committed several RICO violations and then unlawfully retaliated against him for reporting its misconduct. Section 1962(c) of RICO makes it unlawful for an employee of an enterprise engaged in interstate commerce to “conduct or participate, directly or indirectly, in the conduct of such enterprise’s racketeering activity” with such “racketeering activity” defined as, amongst other things, mail fraud and witness tampering. In order to show the “pattern of racketeering activity” required by RICO, a plaintiff must demonstrate a “relationship” between the predicate acts or, as the Supreme Court has put it, “the same or similar purposes, results, participants, victims, or methods of commission, or otherwise are interrelated by distinguishing characteristics and are not isolated events.” H.J. Inc. v. Northwestern Bell Telephone Co., 492 U.S. 229, 240 (1989). In DeGuelle, because the only injury or damage suffered by Mr. DeGuelle flowed from SCJ’s retaliation, those retaliatory actions must have been sufficiently related to the predicate acts of actual fraud in order to prove the requisite “pattern of racketeering activity.”

The District Court dismissed DeGuelle’s case, holding that no such pattern of racketeering existed because the fraudulent activity consisted of two unrelated schemes—tax fraud and retaliation—that involved different players, motives, and victims. The lower court also noted that, since none of the retaliatory acts alleged occurred before DeGuelle blew the whistle on the tax fraud, it could not be said that SCJ was trying to cover up its unlawful behavior.

On appeal, the Seventh Circuit reversed the District Court. The Court of Appeals noted that “under the district court’s reasoning, retaliation cannot be related to the underlying wrongdoing for purposes of RICO because the retaliatory acts will always occur after the underlying wrongdoing has been disclosed.” But, as the Seventh Circuit explained:

Retaliatory acts are inherently connected to the underlying wrongdoing exposed by the whistleblower. Although there may not be the same victim or results, in most cases retaliatory acts and the underlying scheme are interrelated by distinguishing characteristics and are not isolated events. Accordingly, we believe a relationship can exist between § 1513(e) predicate acts and predicate acts involving the underlying cause for such retaliation.

In expounding on what sort of “relationship” must be shown, the Court stated that a fact-intensive inquiry is required. As to DeGuelle, the Court focused on several “key allegations linking the predicate acts” such as plaintiff’s allegations that most (although not all) of the same actors were involved in both the fraud scheme and the retaliation. The Court also stated that the temporal relationship between the predicate acts—namely, that “over a five month period, the company engaged in two acts of [witness] tampering, one act of mail fraud, and three actions of retaliation”—provided support for the necessary link between the fraud scheme and retaliation. Taken together, the Seventh Circuit held that the plaintiff’s allegations were sufficient to infer that the retaliation against DeGuelle was “part of the original conspirators’ agreement to conceal their fraud” and, therefore, reversed the decision below and remanded the case back to the District Court.

The DeGuelle Court’s broad view of the relationship between the predicate acts required to bring a RICO whistleblower claim recognizes the natural connection between retaliation and fraud and employs a commonsense approach to the analysis. This analysis should be adopted by sister circuits, providing an important and powerful avenue of redress for whistleblowers who suffer retaliation.

4. Contractor Fraud In Iraq And Afghanistan

By Jeffrey Kaliel, Associate

While U.S. involvement in the Iraq war has wound down, the government continues to spend billions of dollars annually on reconstruction and aid efforts in Iraq and Afghanistan. The government has relied heavily on contractors to participate in—and in many cases, lead— nearly every aspect of the wars and their aftermath. Unfortunately, government spending has been plagued by a significant amount of corruption. In September, 2011, the independent Commission on Wartime Contracting issued a report claiming that more than $60 billion in U.S. tax dollars had been squandered due to fraud and abuse in Iraq and Afghanistan over the past decade.

Allegations of fraud in Iraq and Afghanistan typically are focused in a few areas common to most False Claims Act lawsuits: double-billing for goods and services; inflating or overcharging for goods and services; charging for goods never delivered or services never performed; charging for goods or services that were inadequate, unsafe or failed to meet the contract specifications; and charging for services performed by untrained or unqualified contractors. However, the challenges of operating in unique wartime or post-wartime circumstances, performing such operations in foreign countries, and performing such operations amongst a population that may lack experience with Western rule of law norms, has helped create a veritable breeding ground for false claims. An earlier GAO report, from 2007, concluded that “there are a number of conditions that exist in Iraq that have led to, or will lead to, increased risk of fraud, waste and abuse of U.S. funds.”

A Virginia court’s ruling in 2006—eventually overturned by the U.S. Court of Appeals for the Fourth Circuit in 2009—had for a few years put a chill on False Claims Act cases originating overseas. A military contractor in Iraq, Custer Battles, was found by a jury in 2006 to have filed fake invoices and hugely inflated its costs. But the court ruled that only work paid for directly by the U.S Treasury was subject to the False Claims Act. This eliminated most of the company’s liability, since in the months after the Iraq invasion, American officials used seized Iraqi cash and Iraqi oil revenues to pay many contractors. The court also ruled that that American contracting officials abroad, like those with the Coalition Provisional Authority in Iraq, could not strictly be regarded as agents of the United States government within the False Claims Act. However, the Fourth Circuit reversed both of these rulings, and held that the company could not avoid paying $10 million in damages.

The Justice Department, with the participation of determined whistleblowers, has moved aggressively to bring cases under the False Claims Act. Notable lawsuits and settlements from the last few years include the following:

• In November, 2010, the engineering company Louis Berger Group Inc. settled criminal and civil claims brought against it regarding its handling of reconstruction contracts in Iraq and Afghanistan.  The company allegedly overbilled for overhead costs relating to work performed overseas.  To date, the $69 million settlement is the largest involving Iraq and Afghanistan contractors.
• In April, 2011, State Department contractors DynCorp International and the Sandi Group agreed to pay over $8 million to settle allegations that they submitted fraudulently inflated claims for the building of camps and for danger pay that was not actually provided to employees.
• In November, 2009, the Justice Department sued Lincoln Fabrics, Ltd. of Canada and its American subsidiary, Toyobo Co., Honeywell International, Inc. and others, alleging that their Zylon bullet-proof vests degraded quickly over time (especially in hot weather) and that the companies were aware of the defect.
• In April, 2011, the Justice Department sued engineering and logistics giant KBR, which was the main provider of support services to U.S. troops in Iraq. The suit alleges $103 million of costs billed to the government were for security personnel, when in fact the U.S. Army was already providing security for KBR workers.
• In September, 2011, Tamimi Global Company Ltd., a Saudi Arabian company, agreed to pay $7.4 million to settle criminal and civil allegations that it paid illegal kickbacks to get preferential treatment for the award of a subcontract to provide dining services in Camp Arifjan in Kuwait.
• Earlier this month Maersk Line Limited agreed to pay $31.9 million to resolve allegations that it submitted false claims to the United States in connection with contracts to transport cargo in shipping containers to support United States troops in Afghanistan and Iraq.
• In July 2011, Armor Group North America settled a False Claims suit for $7.5 million. The government had alleged that the company submitted false claims for payment on a State Department contract to provide armed guard services at the U.S. Embassy in Kabul, Afghanistan. Some of the contractor’s guards had visited brothels in Kabul, in violation of the federal Trafficking Victims Protection Act, and that the company’s management knew about the guards’ activities.
• Also last year, a United States Agency for International Development contractor, Academy for Educational Development, agreed to pay $5 million to settle claims that it had improperly supervised the distribution of funds intended for foreign assistance in Afghanistan and Pakistan.

An unfortunate reality is that the ongoing combat operations in Afghanistan, along with the continued reconstruction efforts in both Iraq and Afghanistan, will likely continue to provide opportunities for whistleblowers to reveal procurement fraud.