Whistleblowers Earn $435 Million under False Claims Act in FY 2014 as DOJ Recovers $5.69 Billion

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Whistleblowers earned a record amount of money in Fiscal Year 2014 as they were paid $435 million in rewards by the Department of Justice. The $2.3 billion in health care fraud recoveries was also outpaced by $3.1 billion in federal funds recovered from housing and mortgage fraud in the financial industry. It is the first time in more than 10 years that the health care industry has not had the largest fraud settlements under the False Claims Act.

We owe a tremendous debt to whistleblowers. More than half of the money recovered by the Department of Justice was initially filed under the False Claims Act’s qui tam provisions. This trend should continue in the near future as more than 700 lawsuits were filed by whistleblowers for the second straight year.

Although the Justice Department receives fewer tips than the SEC, which has been averaging around 3000 a year, the amount recovered thanks to the False Claims Act still exceeds the Dodd-Frank law by a significant amount.

This is the first time that recoveries under the nation’s most successful law in the fight against fraud have exceeded $5 billion.

Here is a quick recap of the ten largest settlements of fiscal year 2014 highlighted by the DOJ in their press release:

Bank of America – $1.85 billion
Johnson & Johnson – $1.1 billion
JPMorgan Chase – $614 million
SunTrust Mortgage – $428 million
U.S. Bank – $200 million
Amedisys – $150 million
Omnicare – $116 million
Community Health Systems – $98.15 million
Halifax Hospital Medical Center – $85 million
BNP Paribas – $80 million

We will continue to update this blog post as we digest the information released.  Here is the link to the DOJ press release.

Tax Court Rules Whistleblower Reward is Ordinary Income

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Despite arguments from whistleblowers to the contrary, the government continues to demand whistleblowers pay taxes on money awarded under the False Claims Act as ordinary income.

On Monday, the United States Tax Court held in Patrick v. Commissioner, 142 T.C. No. 5 (2014) that a qui tam award does not qualify as capital gains. If the petitioner had been successful, tax liability would have been reduced from the ordinary income tax rate to the lower capital gains rate. The decision reaffirms an earlier opinion on the same issue. See Alderson v. United States, 686 F.3d 791 (9th Cir. 2012).

The Internal Revenue Code treats rewards as ordinary income similar to wages and salaries for the purpose of calculating tax liability. Treas. Reg. §1.61-2(a)(1). An award from a qui tam lawsuit is considered a reward included within gross income. Roco v. Commissioner, 121 T.C. 160, 164 (2003).

Petitioner argued a qui tam award is instead a “gain from the sale or exchange of a capital asset”. 26 U.S.C. § 1222(1), (3). The Tax Court analyzed both whether a “sale or exchange” occurred and whether it is a “capital asset.” It rejected both contentions.

The Tax Court disagreed with the argument that the government purchases information from the relator according to a contractual right established in the False Claims Act. The Petitioner analogized to the transfer of a trade secret which is considered a capital gain. However, the court rejected the notion there is a transfer of rights to the Government.

The Tax Court also declined to find the petitioner had a property right which would constitute a capital asset. Petitioner advanced the contention that relators have a property interest in the information they disclose to the Government. In rejecting the argument, the Court declined to consider the information the property of the relator because they did not demonstrate “a legal right to exclude others from use and enjoyment” of it.

The ruling reinforces the importance of seeking the advice of a qualified accountant or tax lawyer after receiving an award under whistleblower laws.

McEldrew Young helps whistleblowers report fraud and misconduct to the government through the SEC, CFTC and IRS whistleblower programs as well as the False Claims Act. If you would like to speak to Eric L. Young or another attorney at McEldrew Young about becoming a whistleblower, please call 1-800-590-4116 or complete our contact form.

Photo Credit.

For-Profits Enrollment Drops: The Secret Is Out

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For-Profits: The Secret Is Out

On November 2, 2012, Tuition IO reported that for-profit colleges are starting to suffer from significant drops in enrollment lately likely caused by increased competition from nonprofit colleges as well as increasing numbers of students becoming informed about the dangers of for-profit schools. In short, the secret is out on for-profits enrollment drops. The author believes it is terrific news “that students are becoming aware of the problematic nature of for-profits and are seeking out a better value elsewhere.”

Enrollment at Apollo Group (a corporation that owns several for-profit schools) stock dropped by 14% last quarter.  Similarly, The Washington Post Company’s, Kaplan, experienced a similar decline.  According to the Department of Education, for-profit college enrollment has dropped by 2.8%.  “Students are choosing to seek associates degrees from community colleges as a cost effective precursor to a four-year college, rather than enrolling in a for-profit college.”  The author believes that looming threats of increased government regulations are inducing for-profits to place a heightened focus on student success, rather than just packing them into the classroom.

Students also seem to be letting go of the now dated assumption that higher education is a blanket solution to all of life’s problems and concerns about student debt and a difficult job market are inducing many to take a more proactive approach to their education by thoughtfully examining the value of the education for which they are essentially indenturing themselves.

To learn more about whistleblowing and for a free confidential consultation, contact Eric Young at Young Law Group today at (800) 590-4116 or email to eyoung@young-lawgroup.com.

https://www.tuition.io/blog/2012/11/the-secret-is-out-on-for-profits-gettin-a-new-student-loan-plan/

Supreme Court to Hear Appeal of KBR over False Claims Act Lawsuit

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Last week, the Supreme Court granted certiorari in the case of Kellogg Brown & Root Services v. U.S. ex rel. Carter, adding another appeal involving a whistleblower to its schedule in the fall. The petition initiated by KBR asked the Court to review the appropriate statute of limitations and the application of the first to file bar in False Claims Act litigation.

The history of the case is a bit unusual. Benjamin Carter, the relator who worked for the defendant in Iraq, filed a qui tam complaint in 2006. The complaint was amended in 2008 to include allegations of false billing for labor costs. This complaint was dismissed by the district court because of similar allegations in a pending relator complaint filed prior to Carter’s allegations.

As those familiar with the False Claims Act are aware, the statute bars a person from bringing a “related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5). This is commonly known as the “first to file” bar.

While on appeal, the complaint by the other relator was dismissed. Carter filed a new complaint in 2010. However, since his 2008 appeal was still pending, the new complaint was dismissed because of his own pending appeal. Strategically, Carter dismissed the appeal of the 2008 complaint.

By the time Carter refiled his complaint, another relator had filed against the company with similar allegations. The district court held that this pending complaint barred Carter’s latest complaint. Because a significant amount of time had passed since the events underlying this litigation, the district court also held that most of the allegations were now barred by the statute of limitations of the False Claims Act, set forth in § 3731(b).

Carter appealed successfully to the Court of Appeals. The Fourth Circuit held that the statute of limitations in the case was tolled by the Wartime Suspension of Limitations Act (WSLA). It also authorized him to refile his complaint because there were no other pending actions.

The defendant now contests those issues on appeal.

It contends that the WSLA applies solely to criminal cases brought by the government. It makes three key arguments:

1. The WSLA does not apply to civil fraud cases where the U.S. government is not a party;

2. The WSLA does not apply when the government has not formally declared war; and

3. The WSLA does not modify the ten year statute of repose in the False Claims Act. In other words, the WSLA does not indefinitely toll the statute of limitations.

The Supreme Court will also review whether a previous lawsuit, not dismissed on the merits, bars a subsequent relator from filing a qui tam lawsuit because of the “first to file” requirement of the False Claims Act. The defendant contends dismissal is appropriate because the government has already been put on notice of the fraud.

KBR is the second case involving a whistleblower to be scheduled by the Supreme Court. In May, it agreed to hear the appeal of Homeland Security in the case of TSA air marshall Robert MacLean, Department of Homeland Security v. MacLean. MacLean informed the media that the TSA had discontinued posting air marshals on certain overnight flights because of budget concerns despite an alert about a plot to hijack airlines. He was terminated when the TSA learned of his role blowing the whistle. The Federal Circuit Court of Appeals sided with MacLean in his retaliation claim under the Whistleblower Protection Act.

The Supreme Court has already weighed in on two cases involving whistleblowers this year.

A few weeks ago in June, the Supreme Court decided Lane v. Franks. Lane, in his capacity as director of a statewide program for underprivileged youth, terminated an individual on the payroll that had not been reporting to her office. Subsequently, Lane was compelled to testify in the ex-employee’s criminal trial. He alleged that he was terminated in retaliation for the testimony. In a 9-0 opinion written by Justice Sotomayor, the Court held that the First Amendment protects a public employee providing truthful sworn testimony, compelled by subpoena, outside the course of the employee’s ordinary job duties.

In March, it extended SOX protections against retaliation to whistleblowers who work at private contractors to public companies in Lawson v. FMR LLC. The decision reversed the First Circuit decision denying protection to two employees of a privately held financial institution providing services to mutual fund clients.

$14 Million Award Signals SEC Is Embracing Its Whistleblower Program

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Young law Group, Philadelphia. On October 1, 2013, the Securities and Exchange Commission (“SEC”) announced the payment of a $14,000,000 award to an, as yet, anonymous whistleblower, whose information led to the recovery of significant funds.  The award, the largest to date issued by the SEC, is a significant victory in the fight against securities fraud.  While the details of the case are sparse, given the mandatory award structure, described below, the SEC likely recovered up to $140,000,000 in sanctions and penalties against an individual or organization that violated the nation’s securities laws.

Frustrated by a culture of risky and irresponsible behavior of Wall Street, Congress passed The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010.  This sweeping legislative reform included substantial incentives and protections designed to encourage individuals, with knowledge of securities violations, to bring tips to the SEC.  To help facilitate this goal, Dodd-Frank also created the SEC’s Office of the Whistleblower, which processes information from whistleblowers and pays rewards in the event of a successful SEC recovery.  Whistleblowers, whose original information leads to sanctions over $1,000,000, receive a mandatory award of ten to thirty percent of the SEC’s entire recovery.  A key component of the SEC Whistleblower program is that whistleblowers can remain anonymous, if they so choose, so long as they are represented by counsel.

“Our whistle-blower program already has had a big impact on our investigations by providing us with high quality, meaningful tips” SEC Chairman Mary Jo White said in a statement. “We hope an award like this encourages more individuals with information to come forward.”

The SEC’s whistleblower program is still in its infancy and prior to this recent announcement, award payments have been relatively small.  In fact, before the SEC’s October 1st announcement, the largest award payment to date was $125,000.  However, this recent award is extremely promising to whistleblower advocates, as it indicates the SEC’s intent to fully utilize this invaluable tool in its enforcement arsenal.  No doubt, further announcements of even larger whistleblower awards are to come.

Young Law Group, P.C., represents whistleblowers in the United States and abroad, in a variety of cases, including IRS Whistleblowers, False Claims Act (Qui Tam), and SEC related fraud.  For a free confidential consultation with one of our SEC whistleblower attorneys, please call Eric L. Young, Esquire at (215) 367-5151 or email to eyoung@young-lawgroup.com.

 

E-Rate Funds Not Protected By False Claims Act, According to Fifth Circuit

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If you discover fraud in the FCC’s E-rate program, don’t file in the Fifth Circuit. Earlier this month, the Fifth Circuit Court of Appeals held that E-rate funds are not “provided” by the Federal Government and reversed a lower court decision on that basis.

The appellate decision raises serious questions on the viability of qui tam lawsuits in this area going forward. Defendants accused of improperly billing the FCC’s E-rate program have paid nearly $50 million in settlements to the United States Government over the years.

In U.S. ex rel. Shupe v. Cisco Systems, Inc., No. 13-40807 (5th Cir. July 7, 2014)(per curiam), the relator alleged that the telecommunications company presented false claims for payment to the government’s E-Rate program, which is funded out of the Universal Service Fund (“USF”) and administered by the Universal Service Administrative Company (“USAC”).

USAC is an independent, not-for-profit corporation assigned to administer the USF by the FCC. The USF is funded by private corporations at the direction of Congress in the Telecommunications Act of 1996 and does not receive federal funds from the treasury.

The False Claims Act defines a “claim” in relevant part as “any request or demand … for money or property … if the United States Government … provides or has provided any portion of the money or property requested or demanded.” 31 U.S.C. § 3729(b)(2)(A)(ii)(I).

Because treasury money does not fund the USF, and the money is not collected by tax, the Fifth Circuit concluded that the government did not provide any portion of the money paid out because of the false claim. “[T]he Government ‘provides any portion’ of the money requested under §3729(c) when United States Treasury dollars flow to the defrauded entity or if the false claim is submitted to a Government entity.” Shupe, slip op. at 5.

The Court of Appeals explicitly rejected the Government’s argument that funds paid by a corporation at the direction of Congress are government funds protected by the False Claims Act. It also disagreed with the contention that substantial FCC oversight was sufficient to bring the false statements within the False Claims Act even though the money was ultimately disbursed by a private organization.

At the moment, this is a blow to whistleblower actions to protect privately funded programs created by Congress and not administered by a government body. In the case, the United States argued that the FCC would ultimately end up administering the program if the False Claims Act did not apply to it as currently structured. If other courts agree with the Fifth Circuit, the United States will need to restructure the program, and others like it, in order to protect it from fraud.

For-Profits Spend Big on Advertising

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Voxxi: For-Profits Spend Big on Advertising

On November 29, 2012, Voxxi reported that for-profit colleges are spending big money on advertising.  For-profit colleges allocate enormous amount of funding toward marketing and surprising little amount of money goes towards education.  The Department of Education states that approximately 12 percent of all students participating in higher education attend for-profit colleges and schools which are privately owned and operated by a profit-seeking business.

According the article who cited Reuters, the for-profit University of Phoenix spent upwards of $400,000 a day on advertisements and that the University of Phoenix is the heaviest advertising spender, doubling daily spending on Google advertising over just a one-month period.  Several other big-name for-profit schools are spending, including ITT Educational Services Inc. and are among the top 25 Google advertisers.

Many for-profit schools are struggling and are cutting back funding in other areas. University of Phoenix spent hundreds of thousands of dollars a day attempting to draw in new enrollees, but recently announced it would be closing half of its locations and cutting 800 jobs to save $300 million by the year 2014.

For-profit schools face increasing low enrollment numbers and high drop-out rates.  New regulations will require all for-profit schools to meet a minimum student success rates.  Secretary of Education Arne Duncan stated “[t]hese new regulations will help ensure that students at these schools are getting what they pay for: solid preparation for a good job.”  “We’re giving career colleges every opportunity to reform themselves but we’re not letting them off the hook, because too many vulnerable students are being hurt.”

Secretary Duncan further stated “[w]e’re asking companies that get up to 90 percent of their profits from taxpayer dollars to be at least 35 percent effective.”  “This is a perfectly reasonable bar and one that every for-profit program should be able to reach. We’re also giving poor performing for-profit programs every chance to improve. But if you get three strikes in four years, you’re out.”

To learn more about whistleblowing and for a free confidential consultation, contact Eric Young at Young Law Group today at (800) 590-4116 or email to eyoung@young-lawgroup.com

http://www.voxxi.com/for-profit-college-advertising-costs/

SEC Foreign Corrupt Practices Act Guide

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SEC Publishes a Foreign Corrupt Practices Act Resources Guide

The United States Securities and Exchange Commission (“SEC”) published a new resource guide for the Foreign Corrupt Practices Act (“FCPA”).  The FCPA prohibits the payment of bribes to foreign officials to assist in obtaining or retaining business.  The FCPA can apply to prohibited conduct anywhere in the world and extends to publicly traded companies and their officers, directors, employees, stockholders, and agents. Agents can include third party agents, consultants, distributors, joint-venture partners, and others.

The FCPA also requires issuers to maintain accurate books and records and maintain adequate internal controls to provide reasonable assurances that transactions are executed and assets are accessed and accounted for in accordance with management’s authorization.

FCPA sanctions can be significant.  The SEC may bring civil enforcement actions against issuers and their officers, directors, employees, stockholders, and agents for violations of the anti-bribery or accounting provisions of the FCPA. Companies and individuals that have committed violations of the FCPA may have to disgorge their ill-gotten gains plus pay prejudgment interest and substantial civil penalties.

The sanctions for FCPA violations can be significant. The SEC may bring civil enforcement actions against issuers and their officers, directors, employees, stockholders, and agents for violations of the anti-bribery or accounting provisions of the FCPA.  Companies and individuals found in violation of the FCPA may have to disgorge their ill-gotten gains plus pay prejudgment interest and substantial civil penalties. Companies may also be subject to oversight by an independent consultant.

The SEC, among other things, enforces the Foreign Corrupt Practices Act and under the new SEC whistleblower program allows those who come forward with Foreign Corrupt Practices violations to share in any penalty imposed by the SEC.

The SEC report is available here:  http://www.sec.gov/spotlight/fcpa.shtml

McEldrew Young represents whistleblowers globally reporting to the U.S. Government. For a free confidential consultation with one of our Foreign Corrupt Practices Act whistleblower lawyers, please call Eric L. Young, Esquire at 1-800-590-4116 or contact us.

Financial Professionals Win Big in Appeals Court Ruling

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The Association for Financial Professionals features Eric L. Young and James McEldrew analysis of the Third Circuit Court of Appeals ruling that historic Sarbanes Oxley legislation empowers financial professionals to assert their professional ethics and standards questioning the legality of bills and invoices on the “reasonable belief” that their employers are engaging in fraudulent activities in the April issue of Payments.

The article is accessible at http://www.afponline.org/pub/store/pubs/payments.html, a free access site requiring registration for the full text of the article.

Whistleblower accuses DuPont of Failing to Report Environmental and Health Issues

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A whistleblower lawsuit filed under the False Claims Act accuses DuPont of failing to report a chemical leak of cancer-causing gas from a plant in Louisiana, according to The Times-Picayune.

The Toxic Substances Control Act requires manufacturers, processors and distributors of chemical substances to report when a substance poses a substantial risk of injury to health or the environment. Failure to submit a report constitutes a violation of the law with a civil penalty of up to $25,000 for each day in violation.

The False Claims Act imposes civil liability for knowingly and improperly avoiding an obligation to pay money to the U.S. Government. This is known as a reverse false claims act case because it involves the avoidance of an obligation to pay rather than a wrongful payment by the federal government.

The leak of sulfur trioxide was reportedly ongoing for months. The chemical is used in the manufacturing process at the chemical plant, which is located near a residential neighborhood and school.

The lawsuit was filed by Jeffrey Simoneaux, a 22 year employee of DuPont working in the Burnside sulfuric acid plant. Simoneaux reported the leak to his superiors and says he lost out on a potential job opportunity at the company as a result.

Even though it isn’t the largest segment of cases under the False Claims Act, environmental fraud is not unusual. Past environmental lawsuits under the Federal False Claims Act have also involved false claims for payment by the U.S. Government for environmental cleanup and disposal of toxic waste.

States have also pursued false claims against companies recently for payments made in cleanup efforts. In February, Massachusetts settled a claim under the state version of the False Claims Act for false claims made by Shell Oil in the cleanup of contaminated gas stations. Shell sought and received payments from the Underground Storage Tank Petroleum Product Cleanup Fund even though insurance reimbursed Shell for the cost of the cleanup. They paid a total of $4 million to the state and cleanup fund in order to settle the case.

Young Law Group represents whistleblowers reporting fraud through the False Claims Act. If you would like a free, confidential consultation with an attorney at McEldrew Young regarding reporting fraud, please call 1-800-590-4116 or complete our contact form.

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