Whistleblower Law Blog
Topic: Fraud Types
Fiscal 2015 was arguably the most successful year in the short history of the whistleblower program at the Securities & Exchange Commission: In the 12 months ended September 30, almost 4,000 tips were received from whistleblowers around the world — a record number — and more than $37 million was paid out in rewards.
The whistleblower program was created by the Dodd-Frank Act of 2010: Under the statute, people who report securities violations may be eligible for a reward if the SEC uses their information to recover more than $1 million for taxpayers.
The 2015 tallies are reported in the SEC program’s new annual report. Beyond the monetary rewards being paid to whistleblowers, the report highlights a number of steps taken by the SEC to help insiders who share information about corporate wrongdoing.
The first known case interpreting the Affordable Care Act’s repayment provision, United States. ex rel. Robert Kane v. Healthfirst, was recently approved for settlement talks after the United Stated District Court for the Southern District of New York denied Healthfirst’s motion to dismiss.
Effective March 23, 2010, the Affordable Care Act requires health care providers to report and return an overpayment to Medicare or Medicaid within sixty days of identification. The ACA also requires health care providers to submit a statement identifying the reasons for overpayment. The ACA authorizes civil monetary penalties of $10,000 per item or claim, as well as treble damages, for a provider who fails to report and return known overpayments.
In 2011, Healthfirst fired Kane four days after he circulated an email with a spreadsheet documenting over 900 improperly billed claims worth more than $1 million in potential overpayments.
In United States ex rel. Michaels et al. v. Agape Senior Community Inc. et al., the United States District Court for the District of South Carolina certified its ruling rejecting the Plaintiff-Relators’ use of statistical sampling to prove liability and damages, setting the ruling for interlocutory appeal by the U.S. Court of Appeals for the Fourth Circuit. On September 29, 2015, the Fourth Circuit agreed to review whether statistical sampling can be used to prove liability in a fraud case.
In Agape, the Plaintiff-Relators claimed that Defendants, a network of twenty-four nursing homes, committed fraud by submitting false Medicare, Medicaid, and Tricare claims and seeking reimbursement for nursing home-related services. The government declined to intervene. The case involves claims for at least 10,166 patients. The district court found that “each claim asserted here presents the question of whether certain services furnished to nursing home patients were medically necessary,” meaning that each claim for each patient is distinct and unique from the other claims.
As previously reported, prosecutors charged a Michigan oncologist, Farid Fata, with numerous criminal counts with the underlying allegation that Dr. Fata intentionally gave chemotherapy to healthy patients in order to maximize Medicare payments. Dr. Fata pled guilty to a majority of these charges.
U.S. District Judge Paul Borman sentenced Fata to 45 years in prison as Fata wept in court. Fata apologized for misusing his talents because of “power and greed.” While the sentence was considerably less than the 175 years sought by U.S Attorney Barbara McQuade’s prosecutors, McQuade said that the 45 year sentence was close to a life sentence for Fata. McQuade also expressed surprise that the case had uncovered such egregious conduct.
On May 21, 2015, Senator Chuck Grassley urged tighter policing of the Medicare Advantage program by the Department of Justice. Grassley relied on an investigative report by the Center for Public Integrity, which found that between 2008 and 2013, the Center for Medicare and Medicaid Services has paid more than $70 billion in improper payments to Medicare Advantage plans. Medicare Advantage plans are offered by private insurance companies that contract with Medicare to provide Part A and Part B benefits to beneficiaries.
According to a recent GAO report, the government “could save billions of dollars” by reducing abuse of Medicare Advantage’s payment system. Whistleblower lawsuits are one of the least costly and most effective tools for the government in fighting fraud. Through qui tam actions, whistleblowers are able to bring suit under seal and on behalf of the government to help the government recover funds it paid out as a result of false statements submitted for payment. Whistleblowers in qui tam actions are entitled to 15-25% of the government’s recovery.
Federal Court in South Carolina Holds That A Complaint Is Not Barred by The FCA’s First-to-File Rule If the Earlier-Filed Complaint was Voluntary Dismissed
The United States District Court for the District of South Carolina held that the False Claims Act’s (FCA) first-to-file rule requires that another complaint must be pending. Thus, the voluntary dismissal of an earlier-filed complaint clears the way for subsequent complaints, and no comparison of content of the complaints is necessary to allow the later-filed case to proceed.
On March 17, 2015, the First Circuit Court of Appeals reversed a District Court decision, holding that a counseling services’ failure to comply with state licensing requirements is a condition to payment under the False Claims Act.
The False Claims Act qui tam case at issue, US ex rel. Escobar v. Universal Health Services, Inc., was filed in the United States District Court for the District of Massachusetts. The suit alleges that Julio Escobar and Carmen Correa’s daughter, Yarushka Rivera, who died of a seizure in 2009, was treated by unlicensed and unsupervised staff at Arbor Counseling Services, a facility owned and operated by Universal Health.
Universal Health, according to the complaint, provided mental health services by unlicensed, unaccredited, and unsupervised therapists in violation of regulations set by MassHealth, a healthcare program administered by the Commonwealth of Massachusetts. Under MassHealth, mental health providers are required to employ qualified staff members as a condition to payment.
An unlicensed therapist employed by United Health then prescribed Trileptal to Rivera. Trileptal is a behavioral medication allegedly known to cause seizures after abrupt withdrawal. On May 13, 2009, Rivera suffered a fatal seizure after the unlicensed Universal Health therapist discontinued the medication.
In March 2014, the District Court dismissed the suit, concluding that Escobar’s claims were not actionable under the FCA because licensing requirements involve conditions for participation, rather than payment. Further, the District Court held that the FCA is designed to address financial fraud on the government rather than police general regulatory compliance.
The First Circuit, in reversing the District Court’s decision, held that Universal Health’s claims for reimbursement were within the meaning of the FCA. The Court of Appeals reasoned that services are only reimbursable when MassHealth standards are met.
In arriving at this decision, the First Circuit “ask[ed] simply whether the defendant, in submitting a claim for reimbursement, knowingly misrepresented compliance with a material precondition of payment.”
On February 25, 2015, MetLife Home Loans LLC agreed to pay the U.S. Government $123.5 million to settle claims alleging that the company originated and underwrote loans insured by the Federal Housing Administration (FHA) to unqualified borrowers.
John Walsh, the U.S. Attorney for the District of Colorado, brought a False Claims Act action against Met Life Bank N.A., which merged into MetLife Home Loans LLC in June 2013. MetLife Home Loans is a wholly owned subsidiary of MetLife Inc., as was MetLife Bank before the merger.
The U.S. Government alleged that from September 2008 through March 2012, MetLife Bank knowingly submitted for FHA insurance numerous mortgage loans that did not meet Department of Housing and Urban Development (HUD) underwriting requirements. When FHA-insured loans default, the financial institution that originated the loans can submit insurance claims to the U.S. government. Therefore, when FHA-insured loans originated by MetLife Bank defaulted, U.S. taxpayers got stuck with the bill.
During the relevant period, MetLife Bank was as an FHA-approved Direct Endorsement Lender. Such lenders are authorized to originate, underwrite, and certify mortgages for FHA insurance. The FHA relies on Direct Endorsement Lenders to ensure that only loans that comply with HUD regulations are submitted for FHA insurance.
MetLife Bank’s internal findings showed that senior executives, including the CEO and the bank’s directors, had information showing that a substantial percentage of the loans were not eligible for FHA insurance. MetLife Bank’s records show that, between January 2009 and August 2010, between 25 percent and 60 percent of MetLife Bank’s FHA-insured loans had compliance deficiencies labeled “material/significant.” Despite these deficiencies, MetLife Bank moved many loans out of this category to the more favorable category of “moderate.” As one employee put it in an e-mail, “Why say significant when it feels so good to say moderate.”
Between January 2009 and December 2011, MetLife Bank self-reported only 321 FHA insured mortgages to HUD as materially violating HUD regulations, despite having internally identified 1,097 loans that it should have reported.
Although the government brought the FCA charges against MetLife Bank on its own, the False Claims Act allows private citizens (called “relators”) to file suits on behalf of the government for similar violations, such claims are known as a qui tam claims. On March 19, 2014, Keith Edwards, a former executive at JP Morgan, received a $69.3 million reward for blowing the whistle and disclosing allegations that JP Morgan violated the FCA by submitting toxic mortgages to the government for insurance.
In 2014, the U.S. government recovered nearly $6 billion through the False Claims Act.
Dow Chemical Company, a multinational corporation headquartered in Midland, Michigan, settled a case with a former employee, Kimberly Wood, who alleged that Dow terminated her in retaliation for blowing the whistle on it and its CEO Andrew Liveris’s improper spending and other financial wrongdoing.
Wood, a fraud investigator at Dow, alleged that Dow and Liveris violated Securities and Exchange Commission rules by exceeding the budget for a project by $13 million; paying for numerous unreported personal expenses for Liveris (including family trips to the Super Bowl, World Cup, and Masters Tournament); making payments, at the direction of Liveris, to certain charities, including Liveris’s own charity; excessive use of a corporate jet; improperly hiding cost overruns; and engaging in financial statement fraud.
On October 9, 2013, Wood reported an instance of financial statement fraud. The very next day, Dow notified Wood that it would terminate her employment by the end of the month. Wood sued Dow, alleging that it retaliated against her because of her protected activity in violation of the anti-retaliation provisions of the Sarbanes-Oxley Act of 2002 (SOX), 18 U.S.C. § 1514A. Under SOX, employers are prohibited from retaliating against employees who report certain illegal or unethical conduct. Employees are also protected when making disclosures about shareholder fraud or violations of any SEC rules and regulations.
In December 2014, the United States District Court for the Eastern District of Michigan denied Dow’s motion to dismiss Wood’s complaint. In its ruling, the Court held that SOX plaintiffs need not allege actual management knowledge of protected activity—it’s enough to allege sufficient facts from which such knowledge may be reasonably inferred. At that time the court denied its motion to dismiss, Dow said that it would defend its case “vigorously.” But just two months later, in February 2015, the parties announced that they reached an amicable settlement. The terms of the settlement are confidential.
The False Claims Act allows private citizens with knowledge of false claims to bring civil actions on behalf of the United States government and to share in the recovery from these actions. These private citizens, known as relators, may receive a portion of the government’s recovery even if the actions are settled. The following are examples of three settled false claims (or “qui tam”) actions in which the relators received large monetary sums as their share.
AstraZeneca entered into a settlement agreement for $7.9 million with the United States to resolve allegations that the company agreed to provide remuneration to a pharmacy benefits manager in exchange for maintaining exclusive status to formularies. The relator received $1.42 million from the settlement.
California-based C.R. Laurence Co. Inc., Florida-based Southeastern Aluminum Products Inc., and Texas-based Waterfall Group LLC agreed to pay $2,300,000, $650,000 and $100,000, respectively, to resolve a qui tam action. The action alleged that the companies schemed to elude customs duties on imports. The relator received a $555,000 reward. Customs regulations are in place to level the playing field between companies who purchase products domestically and those who import their products. Evading customs regulations poses serious harm to United States manufacturers.
Ageless Men’s Health, LLC agreed to pay $1.6 million to the United States to resolve allegations that it billed Medicare and Tricare for medically unnecessary evaluation and management services. Medicare and Tricare will only reimburse for medically necessary procedures. The relator and the United States alleged that Ageless Men’s Health improperly billed for each office visit during which a testosterone shot was administered. The relator will receive $250,000 from the settlement.