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New Orleans (Post-Katrina)Any large influx of federal aid associated with disaster relief presents the potential for fraud. Fortunately, whistleblowers who report these abuses under the False Claims Act stand to share in between 15% and 30% of the government’s recovery. After a natural disaster, the federal government, through the Federal Emergency Management Agency (FEMA), contracts with private companies to provide the affected communities with food, water, shelter, clothing, cleanup, etc. In addition, FEMA administers national insurance policies for those that live in flood prone areas. The need to act quickly combined with a lack of government oversight often results in the submission of fraudulent payment claims to the federal government, especially in large disasters. Examples of potential natural disaster fraud include:

  • Receiving federal funding for services not rendered or goods not provided
  • Receiving or providing kick-backs or other benefits in awarding government funding
  • Receiving federal funds for expenses paid for by another source
  • Inflating the cost of goods and services paid for by federal funding
  • Misclassifying expenses or falsifying records to justify federal aid
  • Collusion or price fixing schemes in connection with bidding on federal contracts; or
  • Using federal funds for personal or other non-qualifying uses

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StethoscopeOn Friday, the U.S. Department of Justice announced that Illinois-based global pharmaceutical and health care products company Abbott Laboratories (“Abbott”) has agreed to pay $5.4 million to settle a whistleblower’s allegations that it violated the False Claims Act by paying illegal kickbacks to doctors in order to induce them to implant the company’s carotid, biliary and peripheral vascular products.

United States ex rel. Peters et al. v. Abbott Laboratories, Inc. was filed by former Abbott employees Steven Peters and Douglas Gray and specifically alleged that the company violated the Anti-Kickback Act by paying prominent, well-known physicians for teaching assignments, speaking engagements, and conferences with the underlying expectation that these physicians would then arrange for the hospitals with which they were affiliated to purchase Abbott’s carotid, biliary and peripheral vascular products. Carotid and peripheral vascular products are used to treat circulatory disorders by increasing blood flow to the head and various parts of the body while biliary products are used to treat obstructions that occur in the bile ducts.

The qui tam provisions of the False Claims Act allow private parties to bring suit on behalf of the government and is a powerful tool for uncovering fraud. A successful suit entitles the whistleblower, also known as a relator, to between 15% and 30% of any final judgment or settlement. As part of the settlement reached in this case, Peters and Gray will receive a total payment of more than $1 million. Dating back to 1863, the False Claims Act has enabled relators with direct and independent knowledge of fraud by hospitals, health care facilities, health care providers, medical device manufacturers, and pharmaceutical companies to help recover taxpayer dollars. The statute also provides relators with considerable protection from employer retaliation. The government’s total recovery under the False Claims Act since January 2009 has amounted to $17 billion. Of this total, $12.2 billion was recovered from cases involving fraud on government health care programs.

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Medicine Test TubeYesterday, the FBI announced that Clean on Green PLLC (“Clean on Green”), a North Carolina drug and alcohol treatment center, its owner, and two of its employees have been indicted by a grand jury on bribery and conspiracy charges in connection with the treatment center’s contracts with the U.S. Probation Office. According to the indictment, each defendant was charged with one count of conspiracy to violate the federal False Claims Act.

Clean on Green had contracts with the U.S. Probation Office, the community corrections arm of the judiciary that administers probation and supervised release under federal law. The contracts required the treatment center to collect urine samples from individuals on pretrial release, supervised release, parole, or probation and to test the samples for controlled substances. The results were then to be reported to the U.S. Probation Office. The contract also required the treatment center to provide substance abuse assessments and counseling services to those under federal supervision. Between 2010 and 2012, Clean on Green allegedly failed to follow urine collection protocol to ensure that the test results were accurate and reliable. The reliability of such tests were essential in determining whether or not conditions of probation, release, or parole were being met. Individuals were allegedly allowed to submit false urine samples to avoid the detection of a controlled substance. Over the same time period, the treatment center and its employees allegedly allowed individuals to falsify sign in and sign out records to show attendance at required counseling sessions that were not actually attended. In some cases, employees of the treatment center received bribes to in exchange for allowing individuals to bypass the drug tests and required counseling sessions. Falsified forms and invoices for services provided were then allegedly submitted to the U.S. Probation Office.

Although the investigation in this case led to criminal charges, the federal government relies heavily upon civil actions by private citizens under the qui tam provisions of the False Claims Act to help uncover fraud that might have otherwise gone undetected. The statute prohibits the submission of false claims for government money or property. The False Claims Act awards a private citizen that is acting as a whistleblower (also known as a relator) between 15% and 30% of any final judgment or settlement and provides considerable protection from employer retaliation.

 

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College classroomOn Tuesday, the U.S. Department of Justice announced a $400,000 settlement with Texas businessman Larry Lehmann to resolve allegations that he violated the federal False Claims Act in connection with the Federal Communications Commission’s E-rate Program while acting as the CEO and managing partner of Acclaim Professional Services (“Acclaim”).

The Schools and Libraries Program of the Universal Service Fund is commonly known as the E-rate Program and was created by Congress as part of the Telecommunications Act of 1996. The program helps schools and libraries in the United States obtain affordable Internet access and internal networking by subsidizing eligible equipment and services. The Houston Independent School District (“HISD”) applied for and received E-rate subsidies for two years, from 2004 until 2006. Over this two-year period, Acclaim partnered with other companies to provide E-rate funded equipment and services to HISD.

United States ex rel. Richardson and Gillis v. Lehmann was initiated by two whistleblowers that had previously bid for contracts with HISD and the Dallas Independent School District (“DISD”). The government intervened in the suit and alleged that Lehmann violated the E-rate program’s competitive bidding requirements and HISD’s procurement rules by providing gifts such as tickets to sporting events to school district employees, and loans totaling $66,750 to an employee of the school district that was involved in the procurement and administration of HISD’s E-rate projects. The suit additionally alleged that Lehmann developed a scheme where HISD outsourced some of its employees to Acclaim, allowing them to continue to work for the school district while passing the cost on to the E-rate Program. Acclaim then allegedly disguised the cost of these employees by billing them as eligible goods and services in its E-rate program invoices.

The whistleblowers (also known as realtors) in this case originally filed their complaint on behalf of the United States under the qui tam provisions of the False Claims Act. The statute dates back to 1863 and allows a private party to bring suit on behalf of the government for fraudulent claims made by others for the receipt of government money or property. If the qui tam suit is successful, the defendant is liable for a civil penalty of between $5,500 and $11,000 for each individual false claim as well as three times the amount of damages sustained by the government. Relators are entitled to between 15% and 30% of any final judgment or settlement and considerable protection from employer retaliation. The relators’ share of the settlement in this case has not yet been determined. The settlement with Lehmann is, however, part of a broad investigation by the United States into E-rate program funding requests submitted by Texas school districts. The government has previously recovered $16.25 million from Hewlett-Packard, $850,000 from HISD, and $750,000 from DISD.

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GSAOn Monday, the General Services Administration’s (“GSA”) Office of Inspector General announced a $270,000 settlement with Supplies Now, Inc. (“Supplies Now”) to resolve allegations that the company violated the False Claims Act. The GSA alleged that Supplies Now falsely certified compliance with the Trade Agreements Act when it won a contract with the GSA to supply four federal buildings in Illinois with lamps.

Contractor Malcolm Wilson lost to Supplies Now in the competitive bidding process and suspected that the company may have won by submitting an estimate using prices of lamps manufactured in the People’s Republic of China (“China”). GSA Federal Supply Schedule Contracts are subject to the Trade Agreements Act, which can restrict the procurement of goods and services for government contracts. All products listed in the contract must be manufactured or substantially transformed in one of the designated countries. These countries include World Trade Organization Government Procurement Agreement countries, Free Trade Agreement countries, Least Developed countries, and Caribbean Basin countries. China is not a designated country. Pursuant to the Freedom of Information Act, Wilson filed a disclosure request with the U.S. Army Corps of Engineers, the agency responsible for overseeing the project, to learn the model of the lamps being provided by Supplies Now. Upon receiving the information, Wilson sent an email to the manufacturer of the lamps to find out where the products were made and was informed that they were made in China.

Wilson subsequently filed suit on behalf of the United States under the qui tam (or whistleblower) provisions of the False Claims Act. A whistleblower complaint is filed under seal and served upon the government. The government may then exercise its right to intervene following an investigation of the allegations. In this case, the settlement with Supplies Now was reached following the Justice Department’s decision to intervene and assume primary responsibility for pursuing the litigation. A whistleblower (also known as a relator) can, however, proceed with their claims even if the government declines to intervene. A successful suit entitles the relator to up to 30% of any final judgment or settlement. Wilson’s share of the settlement in this case has not yet been determined.

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Doctor looking at EKGOn July 29th, the US Attorney’s Office in Boston and the Department of Health and Human Services announced a settlement with Beth Israel Deaconess Medical Center that resolves False Claims Act allegations of improper Medicare billing.  Although the billing in question took place between June 2004 and March 2008, the Boston Globe has reported that the government subpoenaed records from Beth Israel Deaconess in 2010 in connection with the case.

According to the US Attorney’s Office release, the government’s False Claims Act case accused the hospital of inappropriately submitting claims for reimbursement to Medicare for one-day stay inpatient admissions for patients with congestive heart failure, chest pain, and certain digestive and nutritional disorders.  The government contended that such claims should not have been for inpatient services, but for observation services, as they were admitted only for the purpose of observation and discharged the next day.  According to the government, additional claims to Medicare for inpatient services for “zero day” (less than one day) admissions were also inappropriate.

Beth Israel Deaconess did not admit to any wrongdoing or liability as part of the settlement; according to the Globe, Beth Israel Deaconess general counsel Jamie Katz said in a written statement that the billing “involved an extremely technical issue.”

The federal False Claims Act imposes liability for the submission of false claims for payment to the government.  In addition, the statute also imposes liability for retaining overpayments received by the government.  Since passage of the Affordable Care Act, entitles that participate in federal health insurance programs have 60 days upon discovery of an overpayment to return the difference to the government.  For conduct to be actionable under the False Claims Act, it must have cheated the government knowingly, or acted in reckless disregard or deliberate ignorance of a claim or statement’s falsity.  Under the qui tam provision of the False Claims Act, whistleblowers are entitled to sue on the government’s behalf and to keep between 15% and 30% of any recovery.

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Supreme Court PillarsOn Friday, the U.S. Circuit Court of Appeals for the Fifth Circuit overturned a federal trial court decision and ruled that the government can seek enhanced penalties against private military contractor Kellogg Brown & Root, Inc. (“KBR”) in connection with its employees’ alleged violations of the Anti-Kickback Act, a statute that prohibits government contractors and subcontractors from using bribes to influence awards. The court held for the first time that the company could be found vicariously liable for its employees’ conduct under that statute. The decision is part of ongoing litigation between the government and KBR for violations of the federal False Claims Act that were first exposed by two industry whistleblowers.

KBR secured an indefinite delivery and indefinite quantity contract to provide global logistical services to the Army in 2001. Under the contract, the Army would issue task orders to KBR. The task orders could then be fulfilled by KBR on its own or by a KBR subcontractor. The contract permitted KBR to charge the Army markups of 1% as profit and an award fee of up to 2% for its use of subcontractors to fulfill the task orders. KBR would then periodically bill the Army for the cost of performing the task orders, including any costs incurred by its subcontractors. KBR subsequently used two subcontractors to assist in the transportation of military equipment and supplies to Iraq, Afghanistan, and Kuwait between 2002 and 2006. The government intervened in United States of America ex rel. Vera, et al. v. Kellogg Brown & Root, Inc., et al. in 2010 with respect to allegations that KBR transportation department employees received illegal kickbacks in the form of meals, drinks, golf outings, and tickets to sporting events from two KBR subcontractors, Eagle Global Logistics and Panalpina Inc. Both subcontractors have since settled with the government.

After the government intervened, it sought to recover enhanced penalties against KBR for “knowing” violations of the Anti-Kickback Act. Under that law, civil penalties equal to twice the amount of each kickback as well as up to $11,000 for each occurrence can be assessed against a defendant that is found liable. The government’s complaint alleged that KBR employees took 317 separate kickbacks totaling approximately $46,000. Under the False Claims Act, a defendant is liable for treble damages as well as between $5,500 and $11,000 for each individual false claim. If found liable, KBR would be responsible under the False Claims Act for any fraudulently received subcontract award fee percentage and profit percentage as well as any of the kickback costs incurred by its subcontractors that were then charged to the Army under the prime contract.

Dating back to 1863, the False Claims Act recognizes various types of fraud, including false claims made with respect to government defense contracts. Such contracts are especially susceptible to fraud as they account for approximately one-fifth of all government spending. Under the qui tam provisions of the False Claims Act, a private citizen acting as a whistleblower (also known as a relator) can sue on behalf of the United States to allege fraud. Following an investigation, the government will decide whether or not to intervene in the case. If the government does not intervene, a relator may still proceed with their claims. In this case for example, the government only chose to intervene with respect to certain allegations made by the relators. If the qui tam suit is successful, the relator is entitled to between 15% and 30% of any final judgment or settlement. Recent amendments to the False Claims Act have also given relators increased protection from employer retaliation.

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Pill Bottle MoneyPharmaceutical manufacturer Mallinckrodt LLC has agreed to pay $3.5 million to settle allegations that it made illegal payments to physicians to prescribe anti-depressants and sleep aids produced by the company. The improper payments allegedly created the submission of false claims to Medicare and Medicaid between January 2005 and June 2010 in violation of the federal False Claims Act and several parallel state false claims statutes.

The complaint filed in 2008 by former Mallinckrodt employee John Prieve alleged that the company paid physicians consulting fees and fees for their participation in speaking programs, meetings, for completing forms, and for clinical trials as an incentive to prescribe Restoril, Magnacet, Tofranil-PM, and their generic equivalents. Prieve alleged that the majority of the physicians would not have prescribed these drugs absent the financial incentives as the drugs were “third rate” and “outdated” being first approved by the FDA decades ago.

Prieve filed his complaint alleging fraud on government healthcare programs on behalf of the United States under the qui tam provisions of the False Claims Act. As the realtor, Prieve is entitled to up to 30% of any final judgment or settlement as well as protection from employer retaliation. Prieve will receive $603,000 for his role in exposing the alleged fraud in this case.

Approximately $3.17 million will be paid to the United States government, which both funds the Medicare program and contributes to the various Medicaid programs around the country. The remainder of the settlement funds will be divided between California, Maryland, Missouri, New York, Ohio, Rhode Island, Utah, and West Virginia.

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ElectricityOn Friday, a federal judge denied a motion to dismiss a whistleblower’s qui tam complaint that alleged that Bluebird Network LLC (“Bluebird”) violated the federal False Claims Act when it fraudulently received a $45 million grant from the government to provide broadband service to underserved areas and when it subsequently terminated the whistleblower as an act of retaliation for voicing his concerns regarding the alleged violation. In denying the motion to dismiss, the judge emphasized that the relator had provided sufficient information and detail for each of his allegations.

Relator Martin Schell was employed by Bluebird as the Vice President of Business Development starting in October 2010, and later as the Vice President of Operations until he was terminated in January 2011. In his complaint, Schell alleged that the company knowingly made false statements to the National Telecommunications and Information Administration (“NTIA”), an agency of the U.S. Department of Commerce, in order to gain a $45 million grant from the American Reinvestment Recovery Act Broadband Technology Opportunities Program. The broadband program is part of the 2009 stimulus package, enacted to promote economic development in rural communities with limited or no access to broadband internet.

Schell’s complaint alleges that Bluebird falsely represented that northern Missouri was an underserved area, even though there are a “plethora” of service providers in the area.  The complaint also alleges that in order to satisfy one condition of the government grant, Bluebird provided a letter that was executed as a “personal favor” from a local bank despite the bank having no intention of supplying the funds.  Schell’s complaint also contends that Bluebird falsely maintained that it had satisfied a grant condition of receiving an in-kind contribution from the State of Missouri when it had in fact received such contribution from the state through a separate transaction, in exchange for internet service below market value.

Schell’s complaint also includes an claim under the False Claims Act’s anti-retaliation provision, which protects individuals from discrimination or termination for efforts to stop violations of the False Claims Act or acts in furtherance of a False Claims Act case.  Schell alleges that after communicating with Bluebird’s CEO about the alleged misrepresentations to the government, his employment status was changed from hourly to salaried in January 2011 to effectively reduce his compensation, and that he was then summarily terminated in October 2011.  Under the False Claims Act, Schell may be entitled to several forms of relief for retaliation, including reinstatement, double back pay, interest, and special damages including attorneys’ fees.  He may also be entitled for up to 30% of any final judgment or settlement of the qui tam portion of the suit.

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Marketing White BoardOn June 27, a judge denied Sprint-Nextel Corporation’s (“Sprint”) motion to dismiss claims brought against it under the New York state False Claims Act and concluded that the complaint sufficiently alleged that Sprint had failed to both collect and pay more than $100 million in state sales tax since July of 2005 in a bid to gain an advantage over competitors such as AT&T and Verizon Wireless by making its services less expensive.

Originally filed by whistleblower Empire State Ventures LLC in March 2011 under the qui tam provision of the statute, New York Attorney General Eric Schneiderman intervened in the case in April 2012 following an investigation. According to the superseding complaint, Sprint allegedly knowingly failed to collect and pay the state sales tax on approximately 25% of its revenue from flat-rate plans and then concealed its failure to do so despite the fact that New York imposes a sales tax on the full amount of any flat-rate charge for wireless service. In addition to misleading the government, the complaint alleges that Sprint’s conduct misled millions of New York consumers who purchased the flat-rate plans by indicating in its contracts and on its website that it would collect and pay all requisite sales tax. As a result, the complaint alleges that these customers entered into their contracts with Sprint under false pretenses. In accordance with the statutory provisions, the lawsuit seeks three times the amount of underpaid taxes plus penalties and the release of effected Sprint customers from their contracts with the company without early termination fees.

Most states with False Claims Acts have modeled their statutes after the federal False Claims Act, incorporating qui tam provisions allowing the participation of whistleblowers.  Under the statutes, those with knowledge of fraud who step forward may recover a percentage of any final judgment or settlement. While the federal False Claims Act does not extend to evasion of tax liabilities, § 189.4(a) of the New York False Claims Act does allow whistleblower actions involving tax fraud provided that certain conditions are met. People ex rel. Empire State Ventures, LLC v. Sprint Nextel Corp. is significant as it is the first case prosecuted under the provision allowing qui tam tax fraud claims. If liable, Sprint could face over $300 million in damages.