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.

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SEC Priorities for 2014 Include Reverse Churning and IRA Rollovers

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The SEC released its annual Examination Priorities for the new year in January. Among the list are two practices which may steer investors to accounts with higher fees than are warranted by their investment goals and situation. Specifically, the SEC expressed concern that investors may be overpaying in fee-based accounts and IRA rollovers when lower cost options are available.

Reverse Churning Possible at Financial Institutions

Fee-based accounts were initially developed in response to concerns about churning. Traditional accounts were commission-based, imposing a fee in order to conduct transactions. Brokers were incentivized to encourage trading even when it was not appropriate for the client’s investment strategy. However, issues with fee-based accounts cropped up shortly after they were implemented and drew attention from regulators.

Raymond James was fined by the National Association of Securities Dealers in 2005 for its fee based accounts. Raymond James converted nearly 3,000 accounts which had not made a trade for more than one year into fee-based accounts. Raymond James also didn’t monitor accounts to determine whether they were still appropriate for the program. Brokerage accounts where the customer stopped trading continued to be charged on a fee-based model.

UBS was sued by the New York attorney general’s office in 2007 for steering inappropriate customers into a fee-based account called InsightOne. UBS failed to screen the accounts to exclude investors with minimal trading activity, high cash levels and no-load mutual funds. Once it did implement guidelines for appropriate accounts, it allowed brokers to circumvent them. UBS settled the lawsuit for $23.3 million in 2007.

The SEC has expressed concern that this conduct may be happening again. It is known as reverse churning, which involves charging a fee for investment services that is not warranted by the activity or investment goals of the client. It may be seen in wrap fee programs, where a client is charged a fixed fee for investment advice and trade execution.

Sales and Marketing of IRA Rollovers Also Questioned

There have been a number of major news stories regarding retirement investments in the past two months. One which may have gotten lost in the shuffle is the regulatory scrutiny of sales and marketing practices of financial institutions running 401(k) plans and IRAs. When employees leave their employer, they have a number of options for the funds in their employer’s 401(k) plan. But the vast majority of the money is converted into an IRA at financial institutions.

This trend has drawn the attention of regulators. Both FINRA and the SEC listed IRA rollovers as a priority for 2014. Although consumer preference for rollover to IRA programs at financial institutions may be the result of current rules making rollover easier, there is concern it has been exacerbated by financial institution marketing favoring their own IRA program.

A GAO report issued in March 2013 found plan service providers were recommending plan participants roll over to an IRA. The GAO expressed concern about the potential conflict of interest and found it difficult to get the information necessary to make an informed decision about rolling over a 401(k).

If a financial institution is engaged in reverse churning or deceptively marketing their IRA, it violates the nation’s securities laws. Whistleblowers can play an important role in stopping these practices by reporting them to the SEC through the whistleblower program. In addition to the satisfaction of putting an end to the securities fraud, eligible whistleblowers are entitled to share in the recovery by the SEC.

McEldrew Young helps whistleblowers report fraud and securities law violations to the SEC. If you would like to speak to Eric L. Young or another SEC whistleblower attorney, please call 1-800-590-4116 or complete our contact form.

The Top 12 Tax Scams in 2014

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The IRS just released its annual list of the Dirty Dozen tax scams to watch out for this year.  The list identifies fraud the IRS sees against both the government and taxpayers.

Here is the list:

1. Identity Theft

Identity theft topped the list of tax schemes again in 2014. It made its first appearance on the list in 2011 and has been number one since 2012. The IRS has warned taxpayers heavily about the growing problem this tax season.

Tax identity theft occurs when an individual uses your personal information to file a return on your behalf without your authorization. If the IRS doesn’t recognize the return as fraudulent, they may end up paying out a refund to the individual committing fraud rather than you. When you later file your return, the IRS will deny it as a duplicate return. It may take months for the IRS to sort out the problem and issue the tax return to the correct individual.

The IRS denies millions of suspicious returns every year, but a significant amount still slip through. An audit by the Treasury Inspector General for Tax Administration found 1.1 million potentially fraudulent returns processed in 2011 for a suspected loss of $3.6 billion.

2. Pervasive Telephone Scams

This fraud is new to the list in 2014. Scam artists are making fake phone calls on behalf of the IRS in order to steal identities and financial information. They may replicate the IRS number on your caller ID or give out a fake badge number to identify themselves. You may also receive a follow up email. The IRS advises you to call the IRS number to pay tax obligations and report the call if it is suspicious.

3. Phishing

Individuals are still sending fake emails and advertising fake websites in order to learn key financial information about you, such as your social security number or credit card information. If you fall for the scam, they use it to commit identity theft or financial theft. Phishing was the top problem on the Dirty Dozen list in 2009.

4. False Promises of “Free Money” from Inflated Returns

Scammers are soliciting tax return business with the promise of hefty tax refunds. Taxpayers then pay them for bad advice as the scammers often file false claims for rebates or tax credits.

5. Return Preparer Fraud

Although most tax professionals are honest individuals, some aren’t. The National Consumer Law Center says there are “more regulatory requirements for hairdressers than tax preparers” in 46 states. Unscrupulous return preparers will commit refund fraud, submitting fake returns to the IRS or pocketing the refund of clients. This led the 2010 list of tax fraud.

6. Hiding Income Offshore

Offshore tax evasion continues despite high profile prosecutions and the IRS Offshore Voluntary Disclosure Program. U.S. citizens must pay U.S. taxes on income earned overseas. Taxpayers who have financial accounts overseas are also subject to reporting and disclosure requirements. Nevertheless, individuals continue to use offshore accounts and foreign trusts to avoid their tax obligations. Unreported overseas income was the top fraud on the list in 2011.

7. Impersonation of Charitable Organizations

Scam artists impersonate charities to collect money or financial information from unsuspecting taxpayers.

8. False Income, Expenses or Exemptions

Taxpayers are still filing excessive claims for the fuel tax credit and claiming extra income to maximize the Earned Income Tax Credit.

9. Frivolous Arguments

The IRS has a list of frivolous positions which taxpayers have erroneously claimed in order to avoid tax obligations. These arguments have been reject by courts and their use by taxpayers is subject to additional penalties.

10. Falsely Claiming Zero Wages or Using False Form 1099

Taxpayers are fraudulently filing a corrected Form 1099 or Form 4852 (Substitute Form W-2) in order to reduce their taxable income.

11. Abusive Tax Structures

Tax scheme promoters often hype the creation of multiple entities in order to obscure income and ownership of assets and avoid tax obligations through multi-layer transactions.

12. Misuse of Trusts

Although trusts are often used legitimately for tax and estate planning, the IRS also sees improper trusts used to illegitimately avoid tax obligations. Private annuity trusts and foreign trusts are identified by the IRS as two examples increasingly used incorrectly.

Learn more about these scams from the IRS report.

McEldrew Young represents individuals reporting tax fraud to the IRS whistleblower program. If you would like a free, confidential legal consultation about becoming a tax whistleblower, please call 1-800-590-4116 or fill out the contact form to speak to Eric L. Young or another attorney at McEldrew Young.

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U.S. Businesses Discover Less Fraud Through Internal Efforts

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Corporations have put millions of dollars into compliance programs in order to detect fraud and employee misconduct internally. A new survey from PricewaterhouseCoopers, however, provides some statistics calling into question the results of those efforts. U.S. organizations learned of 32 percent of fraud by external measures or accident in the past two years, according to the US Supplement to PwC’s 2014 Global Economic Crime Survey. The number is up sharply from the 2011 report, when 85 percent of fraud was discovered through internal mechanisms.

The trend may have been strengthened by government whistleblower programs. The PwC survey also provided an early look into the effect of Dodd-Frank on internal whistleblower reports, which began in 2011. “Since 2011, there has been an observed inverse relationship between whistle-blowers and law enforcement; fraud being reported by whistle-blowing declined whereas fraud being reported to law enforcement has increased.” Incentives from the government may have led employees to forgo internal reporting, according to PwC.

The survey doesn’t attempt to reconcile its conclusion with the evidence found in the National Business Ethics Survey (NBES). It found most employees still attempt internal reporting first. According to the NBES, “only 20 percent of reporters ever choose to tell someone outside of their company, the same percentage as in NBES 2011.”

Also in contrast to the NBES, which reported fraud at historic lows, the PwC survey found fraud increasing at those U.S. organizations reporting fraud. The two areas where the survey revealed fraud growth were accounting fraud and bribery/corruption. PwC assigned the blame for rising corruption on U.S. organizations expanding internationally into high-risk countries in order to pursue economic opportunities. The growth in these two areas provides further support for the prospect of growth in investigations and enforcement under the Foreign Corrupt Practices Act in 2014.

McEldrew Young represents whistleblowers reporting to the DOJ, IRS, SEC and CFTC through their whistleblower programs and the False Claims Act. If you would like a free, confidential consultation with Eric Young or another attorney regarding a potential claim, please call 1-800-590-4116 or fill out our contact form.

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Lesson From Fifth Circuit: Don’t Delay Filing Your False Claims Act Lawsuit

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It may be tempting to report misconduct to the government outside of the formal procedures provided by whistleblower laws. It would be comparatively easy for a whistleblower to send the government a fraud report through a letter, email or hotline without legal representation as soon as they discover it. Two whistleblowers were unfortunately denied a share of the government’s recovery by the Fifth Circuit on Friday in U.S. ex rel. Babalola v. Sharma, No. 13-20182, slip op. (5th Cir. Feb. 14, 2014) because they did.

The relators discovered Medicare and Medicaid fraud at the medical clinics where they were employed. They submitted an anonymous letter to various government agencies detailing the crime in 2007. The Government investigated and the Defendants pleaded guilty to criminal charges in 2010. The Defendants were ordered to pay $43 million to Medicare, Medicaid and private insurers as restitution in 2011. The award was later reduced to $37 million.

During the appeal, the relators filed their qui tam lawsuit under the False Claims Act in November 2011. On a motion for partial summary judgment, the Government sought to deny the relators a share of the proceeds from the criminal prosecution. The District Court agreed with the Government.

The False Claims Act provides for recovery by a relator even if they have previously disclosed the fraud to the government. It requires the dismissal of lawsuits based on publicly disclosed information unless the relator is the “original source” of the information. 31 U.S.C. § 3730(e)(4)(A). An individual is the original source if they “voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based” prior to the public disclosure. 31 U.S.C. § 3730(e)(4)(B). This rule encourages whistleblowers to come forward early and report fraud to the Government.

However, in their specific case, the whistleblowers delayed filing a complaint under the False Claims Act until the Government had already received an award for restitution in the criminal proceedings. When the Department of Justice declined to intervene in their action, the relators sought to have the criminal proceeding considered an “alternate remedy” under § 3730(c)(5).

Section 3730(c)(5) permits the Government to pursue an alternate remedy to the relator’s civil suit under the False Claims Act. “Notwithstanding subsection (b), the Government may elect to pursue its claim through any alternate remedy available to the Government, including any administrative proceeding to determine a civil monetary penalty.” 31 U.S.C. § 3730(c)(5). However, if the Government does pursue an alternate remedy, the relator is entitled to share in the proceeds as if it had been recovered through their False Claims Act lawsuit. “If any such alternate remedy is pursued in another proceeding, the person initiating the action shall have the same rights in such proceeding as such person would have had if the action had continued under this section.” Id.

The Fifth Circuit agreed with the Department of Justice and the District Court. The criminal prosecution was not an alternate remedy because it was filed prior to the qui tam action. The Court of Appeals reasoned, from the text of the statute and the definition of the word alternate, that the qui tam proceeding must exist in order for the government to elect an alternate remedy to it. Babalola, slip op. at 7. As the relators did not file their complaint until after the Government pursued the criminal prosecution, they were not entitled to recover a portion of the proceeds as an alternate remedy.

If, instead of sending the anonymous letter to the government, the whistleblowers had filed a lawsuit under the False Claims Act, they may have been entitled to recover a portion of the funds. See United States v. Bisig, 2005 WL 3532554 (S.D. Ind. Dec. 21, 2005)(criminal prosecution is an alternative remedy under the False Claims Act). As it stands now, the whistleblowers will need to continue their lawsuit under the False Claims Act in order to earn their whistleblower reward.

The concurring opinion by Judge James Dennis points out how this result is at odds with a central goal of the False Claims Act.

Babalola and Adetunmbi could have withheld their information and allowed the fraud to continue while they searched for an authority to represent their interests in a qui tam suit. But they did not — they took the path of the Good Samaritan and without delay provided the government with the evidence needed to purse the defrauders …. For all their efforts, Babalola and Adetunmbi received nothing. Had Babalola and Adetunmbi first filed their qui tam suit before providing their information to the government, then they would have been entitled, under § 3730(d)(1), to an award of between fifteen to thirty percent of the government’s proceeds.

Babalola, slip op. at 15-16 (Dennis, J., concurring).

McEldrew Young represents whistleblowers in litigation under the False Claims Act. If you would like a free, confidential consultation with an attorney regarding a potential claim, please call 1-800-590-4116.

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FDA Examines Drug Quality from Overseas Facilities.

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The United States Food and Drug Administration has stepped up enforcement efforts against overseas exporters of drugs to the U.S. in light of recent reports of drug quality and manufacturing issues. Facilities in India, the second largest exporter of prescription and over-the-counter drugs, have been under especially heavy scrutiny.

Last year, Ranbaxy Laboratories paid $500 million to resolve civil and criminal actions for improper manufacturing, storage and testing of generic drugs. Dinesh Thakur, a former Director & Global Head of Research Information & Portfolio Management at Ranbaxy, reported the misconduct at Ranbaxy and received $48 million from the government as a whistleblower.

Ranbaxy was the largest drug manufacturer in India by revenue. Drugs from two of its facilities were banned by the FDA in 2008. Two more overseas facilities operated by Ranbaxy were banned more recently, in September 2013 and January 2014. The most recent inspection of the Toansa facility found staff retesting active pharmaceutical ingredients after they failed quality tests.

Indian drug maker Wockhardt has also had imports from two manufacturing plants suspended by the FDA in the last year, according to Bloomberg. The FDA discovered issues with quality testing at the facilities, located in Chikalthana and Waluj, during inspections.

In addition to quality testing concerns, counterfeiting has also been a major issue. Counterfeit drugs often don’t contain the active pharmaceutical ingredients which provide medical benefits to patients from the drug’s consumption. China is believed to be a large source of counterfeits but the FDA has had difficulty inspecting facilities there in the past.

Quality concerns overseas are troubling because the majority of drugs consumed in the United States now have some foreign component. Nearly 80% have active pharmaceutical ingredients from foreign countries, usually China or India, and nearly 40% are manufactured outside of the United States. The percentage is even higher when name brand prescription drugs are excluded. More than forty percent of OTC and generic pharmaceuticals are made in India.

Problems with overseas manufacturing may have developed because of disparities between domestic and foreign inspection rates. The FDA conducts strict inspections of drug manufacturing facilities in the United States every two years and has authority to conduct surprise inspections. In 2011, a GAO study found foreign drug manufacturers were inspected far less frequently. They estimated that overseas facilities were inspected once every ten years. As a result, Congress passed legislation to give the FDA broader authority to conduct inspections of drug facilities overseas. If they are refused entry for an inspection, the FDA can now block entry of drugs from the facility into the United States.

The FDA is also establishing an Office of Pharmaceutical Quality to improve the detection of quality issues in brand name, generic and over-the-counter drugs. The office will be focused on enforcing existing requirements and will not impose new quality restrictions. The interim director of the office is Janet Woodcock, director of the Center for Drug Evaluation and Research at the FDA.

These problems have also come to the attention of Congress. There is a Congressional hearing set for February 26th in order to further investigate substandard generic drugs from overseas. Cleveland Clinic doctor Harry Lever, among others, will testify about his experience with cardiology drugs manufactured in India.

The Young Law Group represents whistleblowers bringing forth claims of health care fraud under the False Claims Act. If you wish to report evidence of drug quality problems at a pharmaceutical manufacturer in the United States or abroad, please call 1-800-590-4116 or fill out the contact form for a free, confidential consultation.

Blockbuster Year Predicted for the FCPA in 2014

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Less than two months in to the new year, individuals are already predicting a massive year for prosecutions and settlements in Foreign Corrupt Practices Act cases, according to the South China Morning Post. The Foreign Corrupt Practices Act was passed in 1977 to halt bribery of foreign officials by United States companies. It also requires public companies to maintain accurate books and records as well as an effective system of internal accounting controls.

The year started off with a large, $384 million dollar settlement by Alcoa. One of its majority-owned units pleaded guilty to bribing members of Bahrain’s royal family and officials. A consultant hired by the unit bribed government officials in order to retain a contract with state-owned Aluminum Bahrain.

This announcement was followed up in late January by a decision from an Administrative Law Judge at the SEC who censured the Chinese affiliates of Big Four accounting firms KPMG, Deloitte Touche Tohmatsu, PricewaterhouseCoopers and Ernst & Young. They cited Chinese law in refusing to provide audit work papers to regulators conducting accounting fraud investigations of their clients. The decision prohibits the units from conducting audits on U.S. listed companies for six months. It is suspended pending the outcome of their appeal.

The Department of Justice has begun a criminal investigation into conduct by six major financial firms in Libya, according to Compliance Week. The Libyan Investment Authority invested up to $1 billion in Goldman Sachs, JPMorgan Chase, Credit Suisse, Societe Generale and Och-Ziff Capital Management. Goldman has been under investigation by the SEC since at least 2011.

Finally, Avon has just increased its settlement reserve for a FCPA investigation conducted by the SEC and DOJ to $89 million. It estimated settlement negotiations may impose liability of up to $132 million for bribery to Chinese officials. According to Bloomberg, the company has spent more than $300 million in its internal investigation and compliance reviews over the past five years. Chinese and U.S. authorities are investigating other major corporations for bribery as well.

New investigations by the SEC into bribery overseas could also be strengthened by the SEC Whistleblower program. The SEC has reported an increase in tips from international whistleblowers. Foreign tips are eligible for an award the same as tips submitted domestically.

Eric L. Young and the attorneys of McEldrew Young represent whistleblowers submitting tips to the SEC. If you would like to report a violation of the Foreign Corrupt Practices Act, please call Eric at 1-800-590-4116 or fill out the contact form to schedule a free, confidential consultation with one of our FCPA whistleblower attorneys.

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Workplace Misconduct Falls to Historic Low

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A biennial survey of workers at for-profit companies declared victory for ethics and compliance programs in 2013. Whistleblowers, however, still face retaliation at alarming levels when they report issues.

According to the Ethics Resource Center, workplace misconduct has steadily and significantly dropped since 2007 when it hit an all time high. Reports of corporate misconduct are now at their lowest since the Ethics Resource Center started conducting the biennial survey in 1994. The results of the survey were released in the 2013 National Business Ethics Survey of the U.S. Workforce in early February.

It will be interesting to see whether the survey results are confirmed by whistleblower statistics in the next few years. The drop in workplace misconduct stands in stark contrast to reports of record whistleblower rewards and increasing submissions to whistleblower programs. There are potential explanations for the discrepancy, of course. Prosecutions for fraud are a lagging indicator, as investigations and enforcement take time. Increased submissions could be explained by the recency of changes in whistleblower law and higher publicity about awards for external reporting.

Despite Drop, Workplace Misconduct Continues.

This doesn’t mean the work of whistleblowers is over. Although misconduct may have fallen to historically low levels, 41 percent of workers surveyed still reported observing misconduct on the job. Among the reports, significant misconduct in 2013 happened at troubling percentages:

– Four percent observed a coworker accepting gifts or kickbacks from suppliers or vendors.
– Four percent observed a coworker offering something of value to influence a client or customer.
– Three percent observed a coworker falsifying and/or manipulating financial reporting information.
– Two percent observed a coworker offering something of value to influence a public official.
– Two percent observed a coworker making improper political contributions to officials or organizations.

Another concern raised by the survey is the percentage of misconduct by supervisors and senior management. Managers and supervisors accounted for sixty percent of total misconduct. Senior managers were involved in an amazing 26 percent of the misconduct reported in the survey. The prevalence of high level misconduct might set a bad example for workers and could lead to an increase in misconduct in the future.

Retaliation against reporters of misconduct also remains near an all time high. Although corporate ethics may have improved, more than one in five individuals who report misconduct at work faced some form of retaliation as a result. The number reached a record high in 2011, when 22 percent reported retaliation by a supervisor or coworker. If high levels of retaliation continue, whistleblowers may become less likely to come forward. The strength of anti-retaliation protections in the whistleblower laws will become even more important.

McEldrew Young represents whistleblowers reporting securities, tax and health care fraud to the government. For a free confidential consultation, please call Eric L. Young, Esquire at 1-800-590-4116 or complete our online contact form.

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False Claims Act Case Over Customs Duties Near Settlement

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When the Department of Justice reported its Fiscal Year 2013 results, it put the use of the False Claims Act to fight health care fraud front and center.  Whistleblowers are not limited to bringing lawsuits against hospitals and drug companies, however.  The False Claims Act applies broadly to fraud against the government.  A number of companies operating outside the health care industry, including J.P. Morgan, have found that out.  Symantec, for example, recently reported potential liability of $145 million under a False Claims Act investigation.  Another wasn’t even providing services to the government under a contract.  Instead, it violated the False Claims Act by underreporting the value of imported products for customs duties.

When companies import products, they must pay duties according to the value of the imported merchandise.  The customs value is not merely the material costs of manufacturing.  It also includes the value of additional materials and services involved in making the imported merchandise, known as assists.  The value of an assist is apportioned across all of the products manufactured with the assist.  If a company intentionally excludes the assist from the value reported to U.S. Customs and Border Protection, it violates the False Claims Act.

OtterBox, a maker of smartphone and tablet cases, is now in settlement talks in the False Claims Act lawsuit brought against it by Bonnie Jimenez in 2011, according to court documents providing additional time to finalize a settlement.  Jimenez, the former Supply Chain Director at OtterBox, accused OtterBox of understating the value of imported items to Customs from 2007 to 2011.  As a result, OtterBox paid lower customs duties to the U.S. Government on imported smartphone cases.

As Otterbox would import smartphone cases from a Chinese manufacturer, it did not report engineering and tooling costs performed overseas in the value of its products.  In one example cited in the lawsuit, Otterbox imported 3,000 cases for Blackberry phones at a cost of $2.13 from a Chinese manufacturer in April 2010.  The additional value was estimated at between $2,500 and $12,000 per mold, which should have been apportioned across the manufactured products.  Because it did not report the additional value of the assist, it did not pay the proper amount of import taxes.

Any settlement must be approved by the Department of Justice, the U.S. Attorney’s Office and the Department of Homeland Security.   United States Customs and Border Protection is a division of the Department of Homeland Security.

McEldrew Young represents whistleblowers reporting fraud to the government through the False Claims Act.  For a free confidential consultation, please call Eric Young, Esq. at 1-800-590-4116 or complete our online contact form.

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New York Recovers $851 Million Lost to Medicaid Fraud and Misspending.

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New York, home to one of the nation’s largest Medicaid programs, recovered $851 million in taxpayer funds in 2013. The amount nearly doubled New York’s previous record recovery, $468 million in 2012. The money recovered accounted for dollars lost by the program due to fraud, waste or other misspending. The state did not specifically identify the amount of money recovered through qui tam lawsuits under the New York State False Claims Act or the Federal False Claims Act.

It appears nearly a quarter of the money recovered was from the federal government. According to the press release from the New York Governor’s office, the Office of the Medicaid Inspector General (“OMIG”) identified $496 million in inappropriate Medicare billing. OMIG identified situations where the federal Medicare program should have paid for home health services to consumers with both Medicare and Medicaid. In dual eligibility situations, home health care providers are supposed to bill Medicare first and then bill the state Medicaid program for the remainder. Medicaid improperly reimbursed the health care provider instead. New York recovered $211 million of the mispayments in 2013.

New York also identified two notable incidents of health care fraud in 2013. In the first, a group of individuals living in a gated beachfront community enrolled fraudulently in the Medicaid program. They fabricated information on their applications in order to become eligible. Six individuals were prosecuted by the Brooklyn District Attorney for their role in the fraud. In the second, auditors discovered inadequate and missing documentation at the Abbott House in Irvington, NY. Abbott House received reimbursement for some services that were performed without a rehabilitation plan and billed for more days of services than it had documentation. OMIG recovered more than $254,000.

The announcement of record recoveries in 2012 and 2013 follows controversy over the appointment of Medicaid Inspector General James C. Cox to the position. James G. Sheehan, the state’s first Medicaid inspector and Cox’s predecessor, was dismissed by the Cuomo administration after complaints of aggressive audits and unfair tactics. Sheehan’s office was responsible for recouping $1.5 billion in Medicaid fraud and misspending in four years. Governor Cuomo directed Cox to pursue a more cooperative approach to audits, according to the New York Times.

Waste and abuse in New York’s Medicaid program has been well documented. The Committee on Oversight and Government Reform identified billions of federal tax dollars misspent on the program in a report issued in 2013. The report identified excessive salaries to Medicaid-funded organization executives, abuses of eligibility rules and overpayments to New York development centers. Efforts to reform the program to curb abuse come at the same time as the United States is cracking down on federal tax dollars lost due to health care fraud. The Department of Justice identified $2.6 billion recovered from health care fraud in its 2013 Fiscal Year. The government also recovered $443 million on behalf of state Medicaid programs.

McEldrew Young represents whistleblowers reporting fraud to the government through the False Claims Act. For a free confidential consultation, please call Eric L. Young, Esquire at 1-800-590-4116 or complete our online contact form.

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