Presentation by Tony MastandoNovember 13, 2014

False Claims Act: Procurement Fraud from the Relator’s

Perspective

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Brief History of the FCA

Signed by President Lincoln during the height of the Civil War to stop rampant profiteering against the federal government and Union troops

Evolution of the FCA to other types of government programs

Dismantled in 1943 but resurrected under President Reagan in 1986 when re-incentivized relators

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Structure of an FCA Action

Private right of action. Private/public partnership at the government’s option

Cases may be initiated by whistleblowers, and the government has an opportunity to investigate and intervene

3-headed prosecution: Relator / DOJ-AUSA / Agency

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Why Should the Government Want Relators?

Congress has long recognized that the government, with limited resources, is overmatched in the fight against fraud. U.S. ex rel. Marcus v. Hess, 317 U.S. 537, 560 (1943) (Jackson, J., dissenting)

Gather evidence and organize the caseBring potential fraud cases to the

government’s attentionJumpstart the government’s

investigation with insider’s knowledge

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Government As Lead Partner

The government has unique tools to investigate claims

If the government formally joins the litigation by intervening, it bears primary responsibility for prosecuting the action. 31 U.S.C. § 3730(c)(1)

The government can also dismiss the action or settle the lawsuit over the whistleblower’s objection. 31 U.S.C. § 3730(c)(2)

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What’s the Benefit?

The government may recover treble damages and significant statutory fines

Whistleblowers may obtain a percentage of the government’s damages

Protect the government fisc and procurement processes

Removal of unsafe or substandard materiel

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What’s At Risk?

Defendantso Moneyo Reputationo Distraction o Suspension & debarment

Relatorso Reputation and relationshipso Employmento Cost of defense for frivolous or vexatious

suits. 31 U.S.C. 3730(d)(4)

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Who Can Be a Relator?

“Any Person.” 31 U.S.C. § 3729(b)(1)o Individualso Government entitieso Corporationso Associationso Not Pro Se

• See, e.g., U.S. ex rel. Mergent Servs. v. Flaherty, 540 F.3d 89, 93 (2d Cir. 2008); Stoner v. Santa Clara City Office of Educ., 502 F.3d 1116, 1127 (9th Cir. 2007)

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Actions Creating Liability?

False Claims. 31 U.S.C. § 3729(a)(1) False Statements. 31 U.S.C. § 3729(a)

(1)(B)Conspiracy. 31 U.S.C. § 3729(a)(1)(C)Reverse FCA. 31 U.S.C. § 3729(a)(1)

(G)

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What is a Violation of the FCA?

Any person who knowingly submits a false claim for payment to the government

Any person who knowingly makes a false record or statement material to a false claim

Any person who causes another to submit a false claim for payment to the government (e.g., subcontractor)

Any person who knowingly conceals or avoids an obligation to pay money to the government (“reverse false claims”)

Persons who conspire to violate the Act

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Definitions: Claim

“Any request or demand, whether under a contract or otherwise, for money or property” that is “presented to an officer, employee, or agent of the United States” or to a contractor working on a government program. 31 U.S.C. § 3129(b)(2)

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Definitions: Material

False Statements Material to A False Claim: any person who knowingly makes a false record or statement material to a false claim. §3729(a)(1)(B)

Material means having a natural tendency to influence, or be capable of influencing, the payment or receipt of money or property

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Definitions: Knowingly

Knowing and knowingly are defined aso Actual knowledge of the information; oro Deliberate ignorance of truth or falsity; oro Reckless disregard of truth or falsity. 31

U.S.C. § 3729(b)(1)(A)Specific intent to defraud is not

required. 31 U.S.C. § 3729(b)(1)(B)Not a negligence standard

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Damages

Treble damagesStatutory penalties: a fine of $5,500

to $11,000 for each and every false claim

Relator’s attorneys’ fees and costs

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Relator’s Share of the Recovery

If the government intervenes: 15-25%. 31 U.S.C. § 3730(d)(1)

If government does not intervene: 25-30%. 31 U.S.C. § 3730(d)(2)

The relator’s share may be lowered if the whistleblower planned and initiated the fraud. 31 U.S.C. § 3730(d)(3)

If the relator is convicted of criminal conduct arising from his role in the fraud: 0% and dismissed from case. 31 U.S.C. § 3730(d)(3)

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Statute of Limitations

Six years from the date of violation; or Three years after the date when the

material facts were known, or reasonably should have been known, by the responsible government official for a maximum of 10 years. 31 U.S.C. § 3731

Wartime Suspension of Limitations Act, see U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013) (cert. granted)

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Quirky

First to File RuleFederal Rule 9(b)Public Disclosure Bar & the Original

Source Exception

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First to File Rule

“No other person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5)

This encourages whistleblowers to report fraud as soon as possible

Practice Point: Relators may join forcesPractice Point2: Relators’ counsel join

forces

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Rule 9(b) Particularity Requirement

Who, what, where, when and howHeightened Pleading Standard

“Adequate basis for a reasonable inference that false claims were submitted.”o Circuits: 1st, 5th, 7th, 9th , 10th and DC

“Omniscient” Pleading Standard “Pleading the details of an actual claim submitted to the Government”o Circuits: 4th, 6th, 8th, 11th

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Public Disclosure Bar & Original Source Exception

Until recently, courts were barred from hearing cases that were based on “public disclosures”

Even if an FCA suit is based on facts that are publicly available, the lawsuit can proceed if the relator can demonstrate that she was the “original source” of the information.

“For purposes of this paragraph, "original source" means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.“ 31 U.S.C. 3730(e)(4)(B)

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Liability Related to Procurement Cases

Failure to disclose conflict of interest. U.S. ex rel. Davis v. District of Columbia, 679 F.3d 832 (D.C. Cir 2012)

Collusive bidding. Murray & Sorrenson, Inc. v. United States 207 F.2d 119 (1st Cir. 1953), cited in S. Report No. 99-345.

Conspiracy to defraud government. U.S. ex re. Westrick v. Second Chance, 2010 West Law 623466 (D.D.C. 2010)

“Defective pricing” in violation of the Truth in Negotiations Act. U.S. ex rel. Campbell v. Lockheed Martin, 282 F. Supp. 2d 1324 (M.D. Fal. 2003)

Delivering defective transmission parts that cause two Chinook helicopters to crash. “United States Settles False Claims Act lawsuit for $7.2 million Allowed Claim with Ohio Company” (DLJ Press Release March 7, 1997)

Failure to adhere to the “quality assurance requirements” required in contract. Varljen v. Cleveland Gear Co., 250 F.3d 426 (6th Cir. 2001)

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Procurement Related Cases Failure to comply with the reporting requirements of the

Vietnam Era Veterans Readjustment Act. United States ex rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94 (2nd Cir. 2010)

Failure to meet quality requirements in sale of goods or services to Government. United States v. Bornstein, et al., 423 U.S. 303 (1976), cited in S. Report No. 99-345

Failure to perform required testing. “U.S. Settles False Claims Case Involving Teledyne for $500,000” (DOJ Press Release December 6, 1994)

False claims to federal agencies for travel reimbursements. “PricewaterhouseCoopers, LLP to Pay U.S. $41.9 Million to Settle False Claims Involving Claims for Travel” (DOJ Press Release July 11, 2005)

Knowing failure to perform a material requirement of contract without disclosing the nonperformance. U.S. ex rel. Fallon v. Accudyne Corp., 921 F. Supp. 611 (W.D. Wis. 1995)

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Procurement Related Cases

Falsely certifying compliance with Small Business Administration minority contracting program. AB-Tech Construction v. U.S., 31 Fed Cl. 429 (1994)

Falsely certifying compliance with statute, regulation, or contract term that is a “prerequisite to payment.” U.S. ex rel. Mikes v. Straus, 274 F.3d 687 (2nd Cir. 2001)

Falsely certifying that company paid “prevailing wage” required under the David-Bacon Act. U.S. ex rel. Plumbers and Steamfitters Local Union v. C.W. Roen Construction Co., 183 F.3d 1088 (9th Cir. 1999)

Falsely stating eligibility to participate in government program. Alperstein v. United States, 291 F.2d 455 (5th Cir. 1961), cited in S. Report No. 99-345

Inflated cost estimates. U.S. v. General Dynamics, 19 F.3d 770 (2nd Cir. 1994)

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Procurement Related Cases Misrepresenting costs of a subcontractor. Harrison v.

Westinghouse Savannah River Co., 176 F.3d 776 (4th Cir. 1999)

Obtaining contract based on false information. U.S. ex rel. Schwedt v. Planning Research Group, 59 F.3d 196 (D.C. Cir. 1995)

Overcharging under a government contract. United States ex rel. Green v. Northrop Corp., 59 F.3d 953 (9th Cir. 1995)

“Reverse False Claim” for material misrepresentations to avoid paying money owed to the government. United States v. Bourseau, 531, F.3d 1159 (9th Cir. 2008)

Sale of defective bullet-proof vests. “Canadian Firm Pay $4 Million to Settle Lawsuit in Connection with Sale of Defective Bullet-Proof Vests (DOJ Press Release, February 12, 2010)

Sale of defective or inferior products. Henry v. United States, 424 F.2d 677 (5th Cir. 1970), cited in S Report No. 99-345

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Procurement Related Cases Selling office supplies to government agencies manufactured in countries

ineligible under the Trade Agreements Act. “Office Depot Pays United States $4.75 Million to Resolve False Claims Act Allegations” (DOJ Press Release, September 19, 2005)

False Certification of Small Business Loan. “New York Small Business Lender to Pay U.S. $26.3 Million to Resolve False Claims Act Allegations” (DOJ Press Release, May 6, 2010)

Steering contracts toward companies owned by themselves, their spouses, and others, resulting in kickbacks and inflated contract prices. “Dynamics Research Corporations to Pay $15 Million to Resolve Allegations of Kickbacks and False Claims Related to Air Force Contracts” (DOJ Press Release, August 13, 2009)

Subcontractor causes a prime contractor to submit a false claim to the government. United States ex rel. Drescher v. Highmark, Inc., 305 F. Supp. 2d 451 (E.D. Pa. 2004)

Submitting an “inventory sheet with false information” causing the government to “undervalue the purchase price” paid by the company. U.S. v. Pemco Aeroplex, Inc., 195 F.3d 1234 (11th Cir. 1999) (en banc)

Submitting false progress reports stating that computer software was compliant with contract requirements. United States ex rel. Schwedt v. Planning Research Corp. 59 F.3d 196 (D.C. Cir 1995)

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Thoughts/Observations

There are a lot of these cases.o DOJ 2013 Fraud Statistics, Civil Division:

http://www.justice.gov/sites/default/files/civil/legacy/2013/12/26/C-FRAUDS_FCA_Statistics.pdf

Happens all over the countryAll involve a lie, not mere inadvertenceWell-known companiesMany involve companion statutes (TINA, Anti-

kickback, Fair Labor Standards Act, Foreign Corrupt Practices Act, David-Bacon Act, etc.)

Most common: mischarging, false certification, substandard product or service, delivering fewer items than promised

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POGO’s Top 10

POGO's Federal Contractor Misconduct Database of 100 (http://www.contractormisconduct.org)

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Considering an FCA Case

Federal money must be involved, or state money if in a state with a mini-FCA

The company must have knowingly submitted a false claim to the government; mere waste or mismanagement isn’t enough.

Government employees – special considerations

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Evaluating a Potential Case

Sizable o Significant Dollarso Fraudster’s ability to payo Safety issues

Memorandum to counsel: explain the fraud, documents, witnesses

Credibility of potential relatorStrategically selecting venue

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Preparing and Filing FCA Complaint

Informal discussions with affected Agency and/or AUSA (optional)

Disclosure Statement serve on local US Attorney’s Office and the Attorney General of the United States

File in federal district court under sealo Conceal the identity of relator?

Do NOT serve the defendantsRemains under seal for 60-daysTypically the government requests (and

receives) 6-month extensions of the seal

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During Investigation

No disclosuresPrepare the relator for interview Assist in the formulation of CIDs,

review of documentsMay want Relator to record

conversationsPartial unsealing

o Other relatorso Defendants

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Intervention Decision

Four optionso Intervene in one or more countso Decline to intervene in one or more

countso Move to dismiss the complainto Settle with the defendant prior to

deciding to interveneUnsealing of the complaintIf intervene, DOJ amends complaint

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Factors for Intervention

Primary considerations o Credibility of the relatoro How provable the intentional nature of

the fraud iso The pervasiveness of the fraud and the

amount of damageso Likelihood damages are collectable

Secondary considerationso Workload/expertiseo How well-developed the case is

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Protection from Retaliation If an employee is fired, demoted, harassed, or otherwise

discriminated against for filing a False Claims Act suit A whistleblower must generally establish three elements

o (1) the employee engaged in a protected activity,o (2) the employer knew that the employee engaged in a protected activity, and o (3) the employer terminated or otherwise discriminated against the employee as

a result of the protected activity Protected activity includes actions taken while an employee is

“collecting information about a possible fraud, before [the employee] has put all the pieces of the puzzle together.” US ex rel. Yesudian v. Howard Univ., 153 F.3d 731, 740 (D.C. Cir. 1998). Assembling the puzzle can include investigation by the employee of false or fraudulent claims, but does not cover mere dissatisfaction with his treatment on the job or mere investigation of the employer’s violation of federal or state regulations. See, e.g., Hoyte v. American National Red Cross, 518 F.3d 61, 67-70 (D.C. Cir. 2008). In order for an investigation or activity to be “protected” it must have a nexus to a potentially viable FCA violation – although threatened or actual litigation is not required

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Protection from Retaliation

Private sector employeeso Reinstatement with seniority statuso Special damages (e.g., attorneys’ fees)o Double back pay (plus interest). 31 U.S.C. §

3730(h)o 3-year statute of limitations

Government employees o Civil Service Reform Acto Whistleblower Protection Act of 1989 (WPA)o Whistleblower Protection Enhancement Act of 2012

(WPEA)o Office of Special Counsel

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Legal Challenges Faced by Relators

Counterclaims/countersuits o Defamationo Breach of Duty – loyalty, failure to reporto Conversion of company documentso Violation of employment agreementso Seeking costs

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Increasing Relator’s Share DOJ Guidelines start at statutory minimum and increased by:

o Prompt reporting of fraudo When learned of fraud, relator tried to stop or report to supervisor or

governmento The FCA case caused the fraud to stopo Warned of a significant safety issueo Exposed nationwide practiceo Relator provided extensive, firsthand detailso Government had no knowledge of fraudo Relator provided substantial assistance during the investigationo Relator was an excellent, credible witness at trial/depositiono Relators counsel provided substantial assistance o Cooperated during entire proceedingo Case went to trialo FCA recovery was smallo Filing of the complaint had a substantial adverse impact on the relator

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Decreasing Relator’s Share DOJ Guidelines: after increase, then decrease by:

o Relator participated in fraudo Substantial delay in reporting or filingo Relator’s counsel violated procedures by (a) serving on defendant,

not under seal (b) publicized case while under seal; (c) statement of material facts and evidence not provided

o Related had little knowledge or only suspicions of the fraudo Relator’s knowledge based primarily on public informationo Relator learned of the fraud in the course of public employmento Government already knew of the fraudo Relator and counsel provided little help after filing complaint or

hampered governmento Case required substantial effort by government to develop the factso Case settled shortly after filing or with little discoveryo FCA recovery was large

Burden on relator’s counsel to persuade the government

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Questions?

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Tony Mastandotony@MastandoArtrip.comwww.mastandoartrip.comPhone: (256) 532-2222

or (800) 434-7195