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Study Finds Whistleblowers are the Fraud-Finding Pros

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Back in the fear-infused days of fall 2001, when it seemed that a plane full of terrorists and Anthrax-wielding snipers was lurking around every corner, a whistleblower was helping to uncover the Enron scandal–just before the company imploded. Sherron Watkins was Vice President of Corporate Development at Enron, and she identified serious problems at the company and brought these issues to the attention of CEO Kenneth Lay (who of course proceeded to do his own thing). Watkins later testified before Congress and the Senate in the aftermath of Enron’s meltdown.

Enron and other corporate frauds piqued the interest of academia, and now a new study in The Journal of Finance has found the best fraud “sniffer dogs” in the corporate world are not regulators but whistleblowers–specifically employees. The study is entitled “Who Blows the Whistle on Corporate Fraud?”. The authors, finance professors Alexander Dyck, Adair Morse, and Luigi Zingales, were intrigued by the fact that the legislature acted quickly to fight corporate fraud by enacting the Sarbanes-Oxley Act (SOX), but no substantive research was ever conducted on who was actually identifying fraud.

The researchers analyzed 216 cases of alleged corporate fraud between 1996 and 2004, including Enron and its loathsome brethren in fraud, WorldCom and HealthSouth. Their most important conclusion was that employees were the whistleblowers in 17 percent of the cases–more than any other actors. Employees were far more effective in identifying fraud than the SEC–the government agency responsible for regulating the securities industry. In fact, the SEC detected only 6.6 of the fraud cases, ranking behind analysts (13.8%) and short sellers (14.5%).

The second major conclusion of the study is that there is little incentive for most whistleblowers to uncover fraud. One researcher notes that

Auditors, analysts, and employees do not seem to gain much and, in the cases of employees, seem to lose outright from whistleblowing.

The only actors who seem to benefit outright from being whistleblowers are journalists involved in major cases and (drumroll) employees who have access to a qui tam suit. The researchers conclude that there should be more financial compensation structures for whistleblowers who come forward, which they describe as “sharpening the incentives of those who are endowed with information.”

This study provides important empirical evidence regarding the essential role qui tam whistleblowers  play in today’s regulatory environment. Hopefully legislators will pay attention and expand the system of monetary incentives to reward more corporate fraud finders. Employees who blow the whistle on corporate fraud have the most to lose from their actions, so they deserve to be compensated for doing the right thing.

Ernst and Young Under the Gun

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In the game of “Life,” (the Milton Bradley version, mind you) each piece of paper money bears the image of a fanciful character. One of the most memorable is that of “G.I. Luvmoney” (Art Linkletter). It seems that the spirit of old G.I. Luvmoney may have been hovering over not only failed investment bank Lehman Brothers but also its bookkeeper, Ernst and Young.  A whistleblower is claiming in a blistering letter that Ernst and Young engaged in unethical accounting practices. Lehman’s response to the whistleblower? Lay him off, of course, and conveniently blame it on broader downsizing.

The whistleblower, Matthew Lee, a senior VP in Lehman’s finance division, made six major allegations of accounting fraud in a memo he sent to Lehman’s senior managers in May 2008. Lehman asked E & Y to investigate, and Lee highlighted Lehman’s questionable “Repo 105″ transactions which were used to hide as much as $50 billion off Lehman’s balance sheet in order to temporarily reduce its debt levels.

According to a 2,200 page report by a court-appointed examiner, sufficient evidence exists to bring malpractice claims against E & Y for failing to disclose or investigate Repo 105. E & Y may face both civil claims as well as criminal penalties.

The worst part of all this is that not one but two major corporations could have acted upon red flags raised by Michael Lee, but failed to do so. Now, one is defunct and the other faces serious penalties. E & Y already paid a $8.5 million fine to the S.E.C. in December 2009 for allowing another client to avoid restating its earnings in 2002 when accounting rules changed. It appears they may not have learned their lesson.

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YLG Beefs Up Its Wage and Hour Practice

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With the down turn in the economy over the last several years, there has been an exponential increase in the number of employers who are violating federal and state overtime and other wage protections. In fact, the U.S. Department of Labor recently announced that due to the increase in these violations, that it was successful in obtaining additional funding for enforcement purposes. While additional government investigations and enforcement are welcome it is not enough.

In an effort to provide additional support and expertise to our clients who have been deprived of payment of all wages for hours worked, YLG recently added former DOL Wage and Hour enforcement specialist, Timothy Dronson, Esquire, to the team. While with the DOL, Mr. Dronson fought for employees through the United States and enforced a number of federal laws including, the Fair Labor Standards Act, the Family Medical Leave Act, the Employee Polygraph Protection Act, and the Service Contract Act.

Mr. Dronson investigated and prosecuted a number of actions while with the DOL involving both large and small companies alike. He is intimately familiar with the methods employers use to avoid paying wages and overtime for all time worked and looks forward to working with YLG attorneys to provide quality representation to those in need.

The River Styx Co-Pay

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In Greek mythology, the River Styx served as the boundary between Earth and the Underworld. In order to cross the river, a dead person had to pay the ferryman, Charon, a fee. The ancients would place a coin in the mouth of the deceased in order to pay this fee, as it was believed that those unable to pay would never be able to cross into the underworld (and who really wants the semi-dead walking among us, anyway?).

According to a report in the New York Post, however, the dead seem to possess special powers that enable them to bill Medicaid for services, regardless of whether they are able to pay their way across the River Styx. A state audit conducted by the New York State Office of the Medicaid Inspector General (OMIG) has found that health-care providers allegedly billed Medicaid for services provided to 287 patients who were actually dead.

One glaring example of the health care fraud involved Bellevue Hospital in Manhattan, which accepted a dead Medicaid patient to harvest the cadaver’s organs, but then billed Medicaid for treatment.  According to the Post, other outrageous behavior included the following:

  • A dead patient’s Medicaid card was used at three dentists in a week;
  • Providers billed Medicaid for “scheduled patients” before actually treating them;
  • A family accepted delivery of a new bed paid for by Medicaid after the patient died;
  • A doctor requested delivery of his patient’s prescription to his office after she died.

Some of the providers claim the erroneous billing was the result of honest clerical errors, while others claim that they actually billed for the services while the patients were still alive. One pharmacy in Long Island billed Medicaid $28,000 for prescriptions written for 17 dead customers (“honest” clerical error?). In regard to clerical mistakes that result in Medicaid being charged for dead people’s treatment, Medicaid Inspector General Michael Sheehan observes

We don’t know how often it happens, but we think that it is a sign of general billing problems. What we tell people is, ‘If your billing system is so weak it bills for dead people, you are bound to have other billing problems, too.’

Those benefiting from billing Medicaid for dead folks run the gamut from big pharmacy chains to doctors to family members of the departed. Most people probably wouldn’t want to be remembered as a fraudulent Medicaid charge, making this type of fraud totally disrespectful to the dead (and, of course, the living taxpayers who foot the bill, too).

Sold Out by USDA?

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Hopefully you’re not about to tuck into a plate of veal cutlet or sausage right now.  The latest whistleblower to be undermined by the very agency he worked for–the USDA–is veterinarian Dr. Dean Wyatt. For the past 18 years, Dr. Wyatt has had the enviable position of monitoring slaughtering operations for the USDA’s Food Safety and Inspection Service (FSIS).  Dr. Wyatt recently monitored operations at Seaboard Farms, a hog-slaughtering plant, and Bushway Packing, a veal calf-slaughtering plant.

Dr. Wyatt observed repeated handling violations at the plants, and, as it was his job to do so, reported these violations to his employer, USDA.  Instead, USDA allegedly sided with the plants and ultimately retaliated against Dr. Wyatt by giving him a rock/hard place ultimatum: transfer or be fired.

Dr. Wyatt’s information led to an undercover investigation by the Humane Society of the United States at the Bushway plant, which uncovered widespread inhumane treatment. As a result, USDA closed down the Bushway plant for violations of the Humane Methods of Slaughter Act and began a criminal investigation.

Taxpayers, animals, and consumers would have been much better served, however, if the USDA had actually listened to its own employee in the first place. As Dr. Wyatt testified before the House Oversight Committee’s Domestic Policy Subcommittee on March 5, 2010,

Food integrity and humane handling whistleblowers should not have to rely on an undercover video investigation in order for USDA supervisors to take their disclosures seriously. It seems almost unbelievable to me, but I have been ignored by my own people and have suffered physically, emotionally, and financially in the process. More importantly, animal welfare and food safety have suffered as well.

In a recent editorial, Humane Society CEO Wayne Pacelle makes the important observation that the FSIS has become part of the law enforcement problem because it has grown too close to the slaughter industry. Pacelle notes that the meat industry receives large federal subsidies, and it basically calls the shots at USDA. Dr. Wyatt’s painful experience reveals just how corrupted the situation has become.

The Government Accountability Office has released a report sharply criticizing USDA, and one would hope that changes are in the works. In the meantime, we are lucky to have whistleblowers like Dr. Wyatt who endure intense hardships in order to stop serious misconduct.

Amendments to the False Claims Act

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The False Claims Act, also known as Lincoln’s Law, has undergone some major amendments over the years. This is an important time for the act, considering that some of the most significant amendments in decades were just passed a few months ago.

As we blogged previously, the False Claims Act celebrated its birthday on March 2nd. In honor of unofficial False Claims Act week, here are the most important amendments to the FCA over the years.

In 1943, the act was amended, and its power seriously limited.  Congress decided that the act was being abused, and decided to defang the FCA. The relator’s share of the proceeds was reduced, and the relator’s right to bring a qui tam suit was eliminated if the government had prior knowledge of the fraud–even if the government had known about the fraud but made no attempt at self-help in order to correct the problem! All of this basically rendered the FCA useless.

After 1943, qui tam suits came to a screeching halt. The False Claims Act was basically a castrato until 1986, when amendments were passed to strengthen the act in part due to President Reagan’s consternation over the amount of government money being lost to waste. This was during the time that the $900 toilet seat and the $500 dollar hammer entered the American consciousness. The 1986 amendments greatly strengthend the FCA and made it the fraud-fighting tool it is today.  Among the amendments were an increase in the relator’s share, granting of treble damages, and whistleblower protections for employees. Iowa Senator Chuck Grassley helped make the 1986 amendments possible, and he continues to be a champion in the fight against fraud.

In 2009, the most significant changes to the FCA since the 1986 amendments were implemented through the Fraud Enforcement and Recovery Act of 2009 (FERA). FERA expands the scope of the FCA, and, among other things, increases protections for qui tam relators beyond employees to include contractors and agents. FERA also redefines a “claim” for FCA purposes to include “any request or demand, whether under a contract or otherwise for money or property and whether or not the United States has title to the money or property” that is 1) presented directly to the United States, or 2) “to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a government program or interest’ and the government provides or reimburses any portion of the requested funds.”

Based on the legislative history following 1986, Congress seems to have come to its senses regarding the FCA. Hopefully legislators will continue to amend the FCA only in ways that further strengthen it.

For additional information about this whistleblower law and any amendments since this post was written, please contact one of our Philadelphia False Claims Act lawyers.

Happy Birthday, False Claims Act

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Personal Injury Lawyers Philadelphia PA

The False Claims Act, also known as Lincoln’s Law, was passed by Congress on March 2, 1863, making the law a ripe old 147 (although it doesn’t hold a candle to the giant tortoise, which can reportedly live 255 years).  The law’s origins as a measure designed to combat fraud stemming from military contracts during the Civil War couldn’t be more relevant today, as the government is paying  a record amount of money to military contractors in Iraq and Afghanistan.

Regarding unscrupulous military contractors, Abraham Lincoln opined

Worse than traitors in arms are the men who pretend loyalty to the flag, feast and fatten on the misfortunes of the Nation while patriotic blood is crimsoning the plains of the South and their countrymen moldering the dust.

Considering what transpired during the Civil War, it’s easy to understand how Lincoln came to this conclusion. During the Civil War, military contractors sold sick and mangy mules and horses, defective rifles and ammunition, rancid rations, and other second-rate provisions to the Union Army.

Further discussion of the Act’s history may be found in United States ex rel. Williams v. NEC Corp., 931 F.2d 1493, 1496-98 (11th Cir. 1991) and United States ex rel. S. Prawer & Co., 24 F.3d at 324-26.

Although defective helicopters may have replaced mangy mules,  the False Claims Act remains an effective tool for fighting fraud 147 years since its passage. The beauty of the FCA is its adaptability–it is now used to fight fraud in areas far beyond its original intent – such as health care fraud.

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Drug Companies Up to Their Old Tricks

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We hear what seem like the same old stories over and over, but here it goes again. Yet another drug company has entered into a multi-million dollar settlement with the government over allegations that it engaged in health care fraud by falsely claimed eligibility for federal reimbursement for its drug.

The U.S. attorney’s office in Boston alleged that Eon Labs Inc., a subsidiary of Swiss drug giant Novartis AG, misrepresented the regulatory status of its drug  Nitroglycerin SR and failed to advise the government that the drug did not qualify for Medicaid coverage. The whistleblower lawsuit under the False Claims Act claimed that Eon kept going with the fraud even after the FDA determined that there was little evidence that the drug was effective.

The trouble all started for Eon in 1999, when the FDA determined that there was a lack of evidence that Nitroglycerin SR was effective at treating angina pectoris as Eon claimed it was. The FDA then published a notice in the Federal Register proposing to withdraw approval of the drug. Under Section 505(e) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. § 355(e)), the FDA can withdraw approval for various reasons. These include evidence based on new tests or methods that show that the drug is not safe or effective.

As of the date in 1999 when the FDA proposed withdrawing approval, Nitroglycerin was no longer eligible for federal reimbursement. However, until September 2008, Eon kept right on with what it was doing, submitting false quarterly reports to the Centers for Medicare and Medicaid Services that misrepresented the drug’s regulatory status in order to get paid.

The qui tam action is United States ex rel. Constance Conrad v. Eon Labs, Inc., et al., No. o2-CV 11738 (D. Mass.).

The health care whistleblower, Constance Conrad, will receive approximately $525,000 out of the settlement. This is a just reward for informing the government of fraud spanning more than a decade!

For additional information about the False Claims Act and whistleblowing, please contact one of our False Claims Act attorneys.

Fraud in Body Armor

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Everyone in the line of fire needs body armor these days, even the dogs. The problem is, manufacturers keep making shoddy body armor–and ripping off taxpayers in the process. In particularly disgraceful fashion, a body armor manufacturer allegedly sold a fabric called Zylon to the government to protect law enforcement officers and servicemembers–all the while knowing that the material was defective.

Lincoln Fabrics Ltd., a Canadian company (visit its website and see how it touts the military applications of its products), wove the fabric which was used in the manufacture of vests sold by several companies. The government alleged that Zylon degraded quickly, especially in hot and humid conditions, and that Lincoln knew about the problems as early as 2001 but continued to manufacture and sell the fabric until 2005. At that point, the National Institute of Justice issued a report detailing Zylon’s degradability, and its use was stopped.

Lincoln will pay the government $4 million to settle the lawsuit, and it joins several other scurrilous members of the body armor industry that have gotten themselves entangled in False Claims Act lawsuits based on their use of Zylon. The U.S. has already settled with some companies for $54 million, and the hits keep on coming. There are lawsuits pending against Toyobo Co., Honeywell Inc., Second Chance Body Armor, Inc. and First Choice Armor Inc.

If you have evidence of a company selling defective goods to the military or other government agencies, please contact one of our Philadelphia whistleblower attorneys for a free initial consultation.

Recent Qui Tam Cases Part 3: Governments Behaving Badly

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Are you a state or local government employee? Keep a close eye on your employer–they may be ripping off taxpayers and the federal government– and setting themselves up for a qui tam suit. Furthermore, guess who ends up footing the bill for all those hours the state or municipality spends on formulating a defense?  Some recent cases illustrate that states and other local governments are not immune from greed when the federal government is doling out the cash.

New York State and New York City recently entered into a record-breaking settlement with the federal government to resolve claims that they submitted false claims for reimbursement for school-based health care services and transportation for Medicaid-eligible kids between 1990 and 2001. In July 2009, the city and state agreed to pay $540 million to settle the fraud allegations. All you New Yorkers out there already being skewered by New York’s relentless tax impalements, get ready to help out with the settlement!

Since the 1990s, the federal government has paid billions in reimbursements to New York State and City through the Centers for Medicare and Medicaid Services, a component of the Department of Health and Human Services. New York received these matching funds for services provided to the poor and disabled in the state. According to the allegations, New York State failed to provide proper guidance to the agencies receiving the funds, and later passed on claims for services that the state knew were not covered or properly documented. New York City allegedly submitted false claims to the state for speech therapy reimbursement, which the state submitted to the federal government along with the rest of the mess. The qui tam relator in this case was an astute speech therapist in upstate New York, who will walk away with $10 million as her share of the settlement.

In May 2009, the Maine Department of Education agreed to pay the U.S. $1.5 million to settle allegations that the department submitted false information to the U.S. Department of Education regarding the Maine Department of Education’s eligibility to receive federal funds under the Migrant Education Fund. The Migrant Education Fund provides federal financial assistance for the special educational needs of migrant children, but states must follow specific criteria in identifying these children. The Maine Department of Education and other defendants allegedly falsely represented the number of eligible migrant children living in the state over a three year period, thereby defrauding the government.

Finally in March 2009, San Mateo, California, jumped on the Medicare/Medicaid fraud bandwagon when it paid the government $6.8 million to resolve False Claims Act allegations. The allegations were originally filed by a qui tam whistleblower who was also a county employee. According to the government’s suit, the San Mateo Medical Center inflated its bed count in order to fraudulently receive higher Medicare payments. In addition, San Mateo County allegedly improperly obtained federal funds under Medicaid for services that were actually ineligible and were supposed to be reported to the California Department of Mental Health as such.

For a free initial consultation concerning cases involving a government employee or state sovereign immunity, please contact one of our False Claims Act whistleblower attorneys.

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