Category: Whistleblower

$11M Settlement of FCA Lawsuit Against Marinello Schools of Beauty

Marinello Schools of Beauty

For-profit beauty school chain Marinello Schools of Beauty was sued for allegedly defrauding the federal government through embellished and often falsified claims of enrollment, post-graduate employment, and entitlement to federal funding. Marinello officials stated they “strongly and categorically” deny the allegations made in the suit, calling them “utterly false” and adding that the settlement did not constitute an admission of wrongdoing. However, the U.S. Department of Education’s decision to bar the schools from accessing taxpayer money in the form of federal financial aid funds crippled Marinello’s financial position and forced the closure of all 56 U.S. campuses earlier this year. The whistleblowers’ settlement of $11 million represents a success for taxpayers and the students with outstanding federal loans who otherwise would not have been able to seek compensation from the schools post-closure.

The Marinello School of Beauty was founded in 1905 and later accredited by the National Accrediting Commission of Career Arts. Over time Marinello grew to an operation of 56 schools throughout several states including California, Connecticut, Kansas, Massachusetts, Nevada, and Utah. Following the U.S. Department of Education’s recent decision to rescind Marinello’s access to federal funding all campuses were forced to close on February 4, 2016. The government’s funding proved critical to Marinello campuses; without federal aid, Marinello was short on cash, enough to halt operations altogether and create difficulty for taxpayers to recover any part of the $51 million in federal financial funds Marinello collected in the 2014-2015 school year alone. Not only did federal aid enable the schools to enroll and train thousands of students, it also incentivized Marinello to lure more students into the school to claim government funds by any means necessary. According to the whistleblowers, the scope of the school’s alleged transgressions ranged from the falsification of high school diplomas of new entrants to encouraging false reports of income on students’ federal financial aid applications. The U.S. Department of Education also alleged that despite charging several thousand dollars for books and supplies, Marinello failed to provide students with requisite training equipment.

In a press statement regarding the settlement Marinello Beauty Schools claimed that “[d]espite all the false accusations and baseless litigation, which were also maliciously made against Marinello’s shareholders and former management, what little resources that were left had to fight these claims were exhausted and there was no choice other than to settle.” As part of the recovery for this False Claims Act lawsuit, the six former employees who brought the case to the government’s attention will receive a larger share of the $11 million settlement (25%-30%) while the rest returns to the U.S. government. Although only a small proportion of the total amount of money Marinello received under fraudulent pretenses, the $11 million settlement represents whistleblowers’ success in recovering money from the schools themselves rather than from taxpayers.

ARTICLE BY Tycko & Zavareei Whistleblower Practice Group

© 2016 by Tycko & Zavareei LLP

Bristol-Myers Squibb Agrees To Pay $30 million To Settle Whistleblower Case Brought Under The California Insurance Fraud Prevention Act

Bristol-Myers Squibb whistleblower
Intimidation of whistleblower concept and whistle blower stress symbol representing the pressure experienced for exposing corruption with shadows of people who do not follw the rules as a red whistle shaped as a human head.

In 1993, the California Legislature enacted the Insurance Frauds Prevention Act (“IFPA”) in a unique effort to combat rampant insurance fraud that was driving up the cost of insurance premiums for citizens throughout the state. In particular, California lawmakers sought to deter fraudulent activity related to automotive insurance, workers’ compensation, and healthcare claims.

With regard to the latter, the IFPA expressly recognizes that “[h]ealth insurance fraud is a particular problem for health insurance policyholders. Although there are no precise figures, it is believed that fraudulent activities account for billions of dollars annually in added health care costs nationally. Health care fraud causes losses in premium dollars and increases health care costs unnecessarily.”

One of the specific fraudulent practices the IFPA is designed to prevent is the payment of unlawful kickbacks to doctors for prescribing certain medicines.

This month, after nearly a decade of litigation, Bristol-Myers Squibb agreed to pay $30 million to settle an IFPA lawsuit that was filed in 2007 by three former Bristol-Myers employees. The whistleblowers alleged that Bristol-Myers Squibb violated the IFPA by employing and using sales representatives for the purpose of defrauding private commercial health insurers by using kickbacks to procure patients or clients. The kickbacks were designed to increase physician prescriptions of several drugs produced by Bristol-Myers Squibb including Pravachol, used to lower cholesterol. Enticements included:

  • Box suites at sporting events where physicians were provided tickets, food, drinks, and parking.
  • Enrollment in a Lakers basketball camp for doctors and their children.
  • Pre-paid golf outings at luxurious golf courses.
  • Tickets for physicians and their families to see Broadway plays in California cities.
  • Monetary incentives given to doctors responsible for prescription-drug decisions for formularies.
  • Lavish dinners, resort hotel trips, and concert tickets, given to doctors who were large-volume prescribers, to induce more prescriptions in the future.

In addition to the $30 million payment, the settlement agreement with the California Insurance Commissioner Dave Jones requires Bristol-Myers Squibb to affirm its commitment to abiding by California laws regulating its sales representatives’ interactions with doctors, including compliance with pertinent provisions of the IFPA.

The Bristol-Meyers settlement is a prime example of how regular citizens can use the IFPA to hold wrongdoers accountable for fraudulent acts that harm the public. The IFPA provides for civil penalties of $5,000 and $10,000 per insurance claim that is made as a result of fraud (so, here, every prescription doctors wrote as a result of the kickback scheme that was then submitted for payment by an insurer), plus an additional assessment of up to three times the amount of each claim for compensation.  In addition, the IFPA vests the court with authority to grant additional relief as needed to protect the public interest. This additional relief can take the form of an injunction, which prohibits future fraudulent conduct—and can change industry practices.

How the IFPA works

Codified at section 1871 of the California Insurance Code, the California Insurance Fraud Prevention Act (“IFPA”) allows members of the public to bring whistleblower lawsuits in the name of the State against anyone who submits a fraudulent insurance claim to a California insurance provider. Some of the most common types of fraud prohibited by the IFPA include:

  • Providing kickbacks to doctors to prescribe certain medications.
  • Billing for healthcare services that were not provided.
  • Submitting multiple claims for a single health service.
  • Knowingly causing an auto accident for the purpose of submitting false insurance claims.
  • Underreporting the number of employees to avoid paying proper workers’ compensation insurance.
  • Providing kickbacks to insurance agents for sending business to a particular automotive repair business.

Once an IFPA violation has been identified, the complaint is filed under seal in state court and served on the local district attorney and the California insurance commissioner. The district attorney and insurance commissioner then have 60 days (or longer) to decide whether or not to intervene in the case. If either the district attorney or the commissioner decides to intervene, government attorneys may take a leading role in the prosecution, or they may allow the relator (the technical term for the whistleblower or other private citizen who initiates the lawsuit) to take the lead with the government in a supporting role.

In cases where government attorneys intervene to assist with the prosecution of the case, the relator is entitled to collect 30-40% of any recovery from the defendant, whether that recovery is achieved through settlement or a favorable judgment. For purposes of determining the relator’s share, the “total recovery” is the amount remaining after the government and the relator have been reimbursed for reasonable attorneys’ fees, costs and expenses incurred during the case.

If the government does not intervene, the relator may proceed with the case with her own counsel. If she chooses to proceed without the government’s help, she stands to recover 40-50% of any eventual recovery. Whether the government intervenes or not, the exact percentage of the relator’s recovery will depend upon “the extent to which the person substantially contributed to the prosecution of the action.” Moreover, if the court determines that the relator’s case is based primarily on information that was already publicly available, such as news articles or public hearings, the relator’s share of the recovery is reduced to a maximum of 10% of the recovery.

In addition to steep penalties for fraudulent acts and generous payments to the relator in successful cases, the IFPA has specific provisions aimed at protecting whistleblowers from retaliation for reporting fraudulent practices. The Act states that employees who suffer retaliation as a result of their involvement in reporting insurance fraud are entitled to complete relief, which includes reinstatement in a position with seniority equal to what the employee would have had absent the retaliation, plus twice the amount of back pay the employee is due, with interest. In addition, employees who are discriminated against in violation of the statute are entitled to attorneys’ fees and reasonable litigation costs.

ARTICLE BY Kristen L. Sagafi of Tycko & Zavareei LLP

© 2016 by Tycko & Zavareei LLP

Whistleblower Wins Big in Case that Tests Limits of Confidentiality Agreements

Intimidation Of Whistleblower

Confidentiality agreements are common in corporate America. Many companies require new employees to sign them as part of the hiring process. In some industries like healthcare, privacy policies are elevated to a legal requirement. Can these agreements be used to stop an employee from reporting his or her employer for fraud or turning documents over to an attorney? The answer is “no” but there are some limits on what an employee can take and do with the information. The most recent case to examine the issue comes from the Northern District of Illinois.

On May 9th, U.S. Magistrate Judge Sidney Schenkier dismissed a counterclaim brought by LifeWatch Services against a whistleblower in a federal False Claims Act case.

Matthew Cieszynski was a certified technician working for LifeWatch. His job was to conduct heart monitoring tests. LifeWatch conducts remote heart monitoring testing throughout the United States. Patients can wear heart monitor devices anywhere in the world and have those devices monitored through telemetry. Cieszynski’s job was to look for unusual or dangerous heart arrhythmias. The testing results would be passed to the patients’ cardiologists who use the data to diagnose and treat various heart ailments.

When first hired by the company in 2003, Cieszynski signed a confidentiality agreement that said in part, “you agree that both during your employment and thereafter you will not use for yourself or disclose to any person not employed by [LifeWatch] any Confidential Information of the company…” The agreement also restricted Cieszynski’s ability to access computer systems and records or remove information from the company’s premises.

In 2006, Cieszynski signed a HIPAA confidentiality statement.

Years later, Cieszynski became concerned that LifeWatch was sending some of the heart monitoring work offshore to India in violation of Medicare regulations. He became especially concerned that some of the Indian workers were not properly certified to review and interpret the heart monitoring data.

In 2012, Cieszynski believed that a patient died because of an improper diagnosis made by an unlicensed offshore technician. That is when he became a whistleblower and filed a False Claims Act lawsuit in federal court. In order to file his lawsuit, he provided what he believed were important company documents to his lawyer. Those were later turned over to the government.

Under the Act, complaints are filed under seal and served on the government instead of the defendant. This allows regulators and prosecutors to investigate the merits of the case in secret. Usually the case is unsealed when the government decides to intervene or allow the whistleblower’s counsel to pursue the case. Until unsealed, the whistleblowers identity is not disclosed.

When the complaint was unsealed, LifeWatch Services discovered that Matt Cieszynski was the person who brought the suit.  Their response was to file a counterclaim against Cieszynski for violating his employment agreement and the separate HIPAA nondisclosure agreement.

On May 9th, Magistrate Judge Schenkier dismissed LifeWatch’s counterclaim in a case widely watched by both members of the plaintiffs and defense whistleblower bar.

In dismissing the counterclaims, Judge Schenkier discussed the “strong policy of protecting whistleblowers who report fraud against the government.”

The court recognized the legitimate need for companies to protect confidential information. Those needs must be carefully balanced against the need to prevent “chilling” whistleblowers from coming forward, however.

In deciding that the counterclaim against Cieszynski should be dismissed, the court examined a number of factors. Those include:

  • What was the intent of the whistleblower when taking the documents? Here Cieszynski took them for the sole purpose of reporting what he believed to be fraud. There was no evidence that he sought to embarrass the company.

  • How broad was the disclosure? In this case there was no disclosure to the public or competitors. Cieszynski only provided documents to his lawyer and the the government.

  • The scope of the documents taken from the employer. Although LifeWatch claimed Cieszynski took more documents than were necessary to prosecute his case, the court said it wouldn’t apply hindsight and require a whistleblower to know exactly what documents the government might need. Since the documents were reasonably related to what the government could need, Judge Schenkier elected not to second guess Cieszynski.

There are limits to what a person can take and what he or she can do with those documents. For example, disclosing trade secrets to competitors or releasing sensitive healthcare information to the public will not likely elicit sympathy from the court.

In a case like this, however, courts will give the benefit of doubt to the whistleblower. Especially when there has been no public disclosure and no real harm to the defendant. Although LifeWatch claimed harm, the court found the only harm was the “fees and costs associated with pursuing the counterclaim – which is a self-inflicted wound.”

Corporate counsel should think long and hard before bringing counterclaims against whistleblowers. Not only are courts generally unsympathetic to these challenges, the fee shifting provisions of the False Claims Act can make these cases expensive for the defendants. Under the False Claims Act, defendants must pay the relator’s (whistleblower) lodestar legal fees if the relator prevails.

Article By Brian Mahany of Mahany Law

© Copyright 2016 Mahany Law

FAA and OSHA Enter into Agreement to Strengthen Enforcement of AIR21 Whistleblower Protection Law

The FAA and OSHA have entered into a Memorandum of Understanding to facilitate coordination and cooperation concerning enforcement of the AIR21 whistleblower protection law.

The DOL and FAA both play a critical role in enforcing the whistleblower protection provision of AIR21. FAA has responsibility to investigate complaints related to air carrier safety and has authority under the FAA’s statute to enforce air safety regulations and issue sanctions to airmen and air carriers for noncompliance with these regulations. FAA enforcement action may include air carrier and/or airman certificate suspension and/or revocation and/or the imposition of civil penalties. Additionally, FAA may issue civil penalties for violations of 49 U.S.C. § 42121. OSHA has the responsibility to investigate employee complaints of discrimination and may order a violator to take affirmative action to abate the violation, reinstate the complainant to his or her former position with back pay, and award compensatory damages, including attorney fees.

Under the MOU, OSHA will promptly notify FAA of any AIR21 whistleblower retaliation complaints and will provide the FAA with all investigative findings and preliminary orders, investigation reports, and orders associated with any hearing or administrative appeal related to the complaint. And when a whistleblower notifies the FAA of retaliation involving air carrier safety, the FAA will promptly provide OSHA with a copy of the complaint and will advise the whistleblower that an AIR21 complaint must be filed with OSHA within 90 days of the retaliation. And the FAA will provide OSHA with the general results of any investigation conducted, to include whether or not FAA concluded there was a violation of a federal regulation, order, or standard relating to air carrier safety.

ARTICLE BY Jason Zuckerman of Zuckerman Law

© 2015 Zuckerman Law

Wine Seller Victory in Illinois Qui Tam Lawsuit

Wine sellers received a second positive update just this week in the qui tam winery lawsuits in the Circuit Court of Cook County, Illinois. On September 3, 2015, Judge Margaret Ann Brennan granted Motions to Dismiss filed by Co-Defendants, 1-800-Flowers.com, Inc. and TSG, LLC in a two-count False Claims Act complaint. In Count I, the Relator alleged that the out-of-state wine-seller defendants failed to pay local sales tax, owed through obligations under the Illinois Liquor Control Act; and Count II was the all too familiar allegation that defendants failed to collect and remit tax on shipping and handling charges for the wine they sold and shipped into Illinois.

Whisle with closed zipper - 3D concept

After months of briefing and a lengthy oral argument, Judge Brennan granted our Motions to Dismiss both Counts I and II of Relator’s Second Amended Complaint. Regarding Count I, Judge Brennan said that the Wine Shippers License, required to be held by wine sellers in Illinois pursuant to the Illinois Liquor Control Act (“LCA”), does not obligate local tax collection or remittance as argued by Relator. Specifically, Relator alleged that because the out-of-state wine sellers failed to comply with the LCA by improperly selling some wine that they did not produce, that they must be considered Illinois retailers and thus must collect and remit local tax. The parties agreed that Defendants did collect and remit the 6.25% use tax required on sales made into Illinois, but Judge Brennan noted that it would take an absurd leap in interpreting the LCA to conclude that it obligated Defendants to collect local sales tax as well. Important points were also made that local tax is based on the location where the seller is in the “business of selling” and that all of the “selling activities” occurred outside Illinois. Also, the LCA contains its own remedies for failing to comply with the Wine Shippers License, none of which relate to tax collection.

Regarding Count II, Judge Brennan was convinced that the Defendants’ disclosure of shipping and handling charges deducted from their gross receipts on their monthly Illinois returns (ST-1s) was sufficient to take this claim out of a knowingly made, False Claims Act issue. The Defendants met their obligation of monthly filing and there was no proof that the Department felt Defendants should have been collecting and remitting tax on the shipping and handling charges. Even if it was ultimately deemed inaccurate in an audit by the Department, it was still a truthful disclosure to the Department, not a knowing, false statement.

What Does “with Prejudice” Mean?

Significantly, Judge Brennan dismissed the claims with prejudice, meaning the Relator cannot re-plead claims, in this case, for a fourth time. The only options for the Relator at this point would be a Motion to Reconsider (unlikely because the Judge was emphatic and thorough in her decision) or to appeal the decision to the Illinois Appellate Court. Because these same issues are in hundreds of other cases before Judge Mulroy, it is unlikely that Relator will appeal this one-off decision by Judge Brennan. If Relator appeals and the dismissal is upheld, that would create legal precedent that would hurt Relator in all of his other cases pending and yet to come before Judge Mulroy.

So while it is great news that Judge Brennan decided correctly on these issues, where Judge Mulroy has consistently held that questions of fact remain and the defendants are thus forced to pay large settlement amounts or litigate through trial, the sobering news is that her ruling is not legal precedent for Judge Mulroy, another Circuit Court Judge; and it is Judge Mulroy who oversees the vast majority of the winery qui tam lawsuits.

Moving Your Case to a New Judge

You are most certainly asking at this point: How do we move our case to Judge Brennan? Because of the protections put in place against forum and judge shopping, it is extremely difficult and depending on how far you are into the case, potentially impossible. The first step would seem to be a simple one, however, by taking advantage of the Illinois law allowing for a substitution of judge as long as no substantive rulings have been made by the judge yet.

Article By David S. Ruski of Horwood Marcus & Berk

© Horwood Marcus & Berk Chartered 2015. All Rights Reserved.

Jury Awards $1.6M to Sarbanes-Oxley Whistleblower

A New York federal jury awarded $1.6M in compensatory damages to a whistleblower in a Sarbanes-Oxley whistleblower retaliation lawsuit. The verdict is consistent with a recent trend of large jury verdicts in whistleblower retaliation claims, including a six million dollar verdict in the Zulfer SOX case. According to the verdict form, the full amount of the verdict awarded to whistleblower Julio Perez was for compensatory damages. Under the whistleblower provision of SOX, there is no cap on compensatory damages.

While employed at Progenics Pharmaceuticals as a Senior Manager of Pharmaceutical Chemistry, Perez worked with representatives of Progenics and Wyeth to develop Relistor, a drug that treats post-operative bowel dysfunction and opioid-induced constipation. In May 2008, Progenics and Wyeth issued a press release stating that the second phase of trials “showed positive activity” and that the two companies were “pleased by the preliminary findings of this oral formulation” of Relistor. Within two months of the issuance of the press release, Wyeth executives sent a memo to Progenics senior executives informing them that the second phase of clinical trials failed to show sufficient clinical activity to warrant a third phase of trials. The Wyeth memo specifically stated: “Do not pursue immediate initiation of Phase 3 studies with either available oral tablets or capsule formulations.”

Perez saw the confidential Wyeth memo and on August 4, 2008, he sent a memo to Progenics’ Senior Vice-President and General Counsel in which he alleged that Progenics was “committing fraud against shareholders since representations made to the public were not consistent with the actual results of the relevant clinical trial, and [Plaintiff] think[s] this is illegal.” The next day, Progenics’ General Counsel questioned Perez about the confidential Wyeth memo. Progenics then terminated Perez’s employment, claiming he had refused to reveal how he had obtained the Wyeth memorandum.

Perez brought suit under SOX, alleging that Progenics terminated his employment because of his August 4, 2008 Memorandum, and denying that he refused to answer questions about his access to the Wyeth memo. Progenics again claimed that it terminated Perez’s employment because he failed to explain how he got the memo. The memo’s intended recipients denied giving Perez a copy of the memo. During the litigation, Perez argued that the memo was distributed widely within Wyeth and that he had not “misappropriated” it.

Following an investigation, OSHA did not substantiate Perez’s SOX complaint. Perez removed his SOX complaint to federal court in November 2010. On July 25, 2013, Judge Kenneth Karas issued an order denying Progenics’ motion for summary judgment. The case was hard-fought, with more than 120 docket entries concerning pre-trial matters. Perez was represented by counsel when he filed his SOX claim in federal court, but proceeded pro seshortly before Progenics moved for summary judgment through trial.

Recent Sarbanes-Oxley Whistleblower Jury Verdicts

On March 5, 2014, a California jury awarded $6 million to Catherine Zulfer in her SOX whistleblower retaliation against Playboy, Inc. (“Playboy”).  Zulfer, a former accounting executive, alleged that Playboy had terminated her in retaliation for raising concerns about executive bonuses to Playboy’s Chief Financial Officer and Chief Compliance Officer.  Zulfer v. Playboy Enterprises Inc., JVR No. 1405010041, 2014 WL 1891246 (C.D.Cal. 2014).  She contended that she had been instructed by Playboy’s CFO to set aside $1 million for executive bonuses that had not been approved by the Board of Directors.  Id.  Zulfer refused to carry out this instruction, warning Playboy’s General Counsel that the bonuses were contrary to Playboy’s internal controls over financial reporting.  Id.  After Zulfer’s disclosure, the CFO retaliated by ostracizing Zulfer, excluding her from meetings, forcing her to take on additional duties, and eventually terminating her employment.  Id.  After a short trial, a jury awarded Zulfer $6 million in compensatory damages and also ruled that Zulfer was entitled to punitive damages.  Id.  Zulfer and Playboy reached a settlement before a determination of punitive damages.  The $6 million compensatory damages award is the highest award to date in a SOX anti-retaliation case.  Id.

The Ninth Circuit recently affirmed a SOX jury verdict awarding $2.2 million in damages, plus $2.4 million in attorneys’ fees, to two former in-house counsel.  Van Asdale v. Int’l Game Tech., 549 F. App’x 611, 614 (9th Cir. 2013).  The plaintiffs, both former in-house counsel at International Game Technology, alleged that they had been terminated in retaliation for disclosing shareholder fraud related to International’s merger with rival game company Anchor Gaming.  Id.  Specifically, plaintiffs alleged that Anchor had withheld important information about its value, causing International to commit shareholder fraud by paying above market value to acquire Anchor.  Van Asdale v. Int’l Game Tech., 577 F.3d 989, 992 (9th Cir. 2009).  When the plaintiffs discovered the issue, they brought their concerns about the potential fraud to their boss, who had served as Anchor’s general counsel prior to the merger. Id. at 993.  International terminated both plaintiffs shortly thereafter. Id. 

In addition, a former financial planner at Bancorp Investments, Inc. who alleged that he was terminated for disclosing trade unsuitability obtained a $250,000 jury verdict in the Eastern District of Kentucky in late 2013.   Rhinehimer v. Bancorp Investment, Inc., 2013 WL 9235343 (E.D.Ky. Dec. 27, 2013), aff’d 2015 WL 3404658 (6th Cir. 2014).

Zulfer, Van Asdale, and Rhinehimer highlight the importance of the removal or “kick out” provision in SOX that authorizes SOX whistleblowers to remove their claims from the Department of Labor to federal court for de novo review 180 days after filing the complaint with OSHA.

ARTICLE BY Jason Zuckerman of Zuckerman Law

© 2014 Zuckerman Law

Whistleblower Award Update 2015

Drinker Biddle and Reath LLP a leading law firm with a national footprint

There was not much activity from the SEC Office of the Whistleblower (OWB) in the months since it announced the highest whistleblower award to date in September 2014, but that changed in February when it issued a number of denials.

Awards:

In the Matter of the Claim for Award, Exchange Act Rel. No. 72947. On August 29, 2014, the SEC issued its first award under the Dodd-Frank Act to an employee who performed audit and compliance functions. The employee, who had compliance responsibilities, received an award of $300,000. Generally, information provided to an individual with compliance responsibilities is not considered “original.” Such an employee is entitled to an award, however, if they first report the misconduct to the company and it subsequently fails to take action within 120 days. See 17 C.F.R. §§ 240.21F-4(b)(4)(iii)(B),v(v). This exception applied to the claimant because he reported the conduct to his supervisor 120 days prior to submitting it to the Commission.

In the Matter of the Claim for Award, Exchange Act Rel. No. 73174. In September 2014, the SEC announced a record-breaking whistleblower award of $30 million. The significance of this award was discussed in a previous blog post.

In the Matter of the Claim for Award, Exchange Act Rel. No. 74404. The SEC did not announce its next whistleblower award until March 2015. This award was the first ever to a former corporate officer who learned of a violation as a result of another employee reporting misconduct through corporate and compliance channels. Typically, officers who learn about fraud through another employee or through a compliance process are not eligible for an award under the whistleblower program. See 17 C.F.R. § 240.21F-4(b)(4)(iii)(A). However, the SEC’s bounty rules provide an exception that makes an officer eligible for an award if he or she provides the information to the SEC more than 120 days after other responsible personnel possessed the information and failed to adequately act on it. See 17 C.F.R. § 240.21F-4(b)(4)(v)(C). The former corporate officer fell within that exception and the SEC awarded the officer between $475,000 and $575,000 for reporting original, high-quality information regarding misconduct under the Dodd-Frank Act.

Denials:

In the Matter of Pipeline Trading Systems LLC, Notice of Covered Action 2011-194. Pipeline Trading Systems LLC (“Pipeline”) and two of its top executives agreed to pay $1 million for the company’s failure to disclose to customers that a majority of orders placed on its “dark pool” trading platform were filled by a trading operation affiliated with Pipeline. The SEC denied the claimant an award because he did not meet the definition of a “whistleblower” under the Exchange Act. (Denial Order Aug. 15, 2014).

In the Matter of the Claim for Award, Exchange Act Rel. No. 72947. On August 29, 2014, the SEC denied an award to a second claimant because the information provided did not lead to the successful enforcement of the covered action and did not contribute to the ongoing investigation.

SEC v. James Roland Dial, Case No. 4.12-CV-01654 (S.D. Tex. 2012), Notice of Covered Action 2012-66. The defendants caused Grifco International Inc. to issue more than 13 million unrestricted securities to themselves and then sold the securities shortly after into a rising artificial market (caused by their dissemination of false and misleading information). The defendants were ordered to pay disgorgement and prejudgment interest. The SEC denied the claimant an award because (1) claimant did not provide “original information” within the meaning of Section 21F(a)(1) of the Exchange Act and Rule 21F-4(b)(1)(iv), (2) the information provided by claimant did not lead to successful enforcement of a covered judicial or administrative action within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a) and 21F-4(c), and (3) claimant was not a “whistleblower” within the meaning of Section 21F(a)(6) of the Exchange Act and Rule 21F-2 because he did not provide information relating to a possible violation of the federal securities laws in accordance with the procedures set forth in Rule 21F-9(a) under the Exchange Act. (Denial Order Feb. 13, 2015).

SEC v. Harbert Management Corporation, HMC-New York, Inc. and HMC Investors, LLC, 12-cv-5029 (S.D.N.Y. 2012), Notice of Covered Action 2012-89. Here, the SEC denied the claimant an award because (1) he did not provide information that led to the successful enforcement within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c), and (2) he failed to submit information in the form and manner that is required under Rules 21F-2(a)(2), 21F-8(a) and 21F-9(a) & (b) of the Exchange Act. (Denial Order Feb. 13, 2015).

SEC v. Kenneth Ira Starr, 10 civ 4270 (S.D.N.Y. 2010), Notice of Covered Action 2012-129. On March 3, 2011, Starr was sentenced to 90 months in prison, ordered to pay more than $30 million in restitution, and ordered to forfeit more than $29 million in connection with his misappropriation of investor funds in connection to a series of cases filed against him by the government, which included charges of money laundering, wire fraud, fraud by an investment advisor, and misappropriation of client funds. This specific action arose from Starr’s misappropriation of at least $8.7 million of his clients’ money. The SEC denied the claimant an award because he or she did not provide information that led to the successful enforcement within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c). (Denial Order Feb. 13, 2015).

SEC v. George Wesley Harris, No. 3:09-cv-01809-M (N.D. Tex. 2009), Notice of Covered Action 2011-206. The Northern District of Texas entered a $4.8 million judgment against Harris and his co-defendants for operating a fraud scheme that promised returns for investing in oil drilling projects in Texas and New Mexico. The SEC denied the award because (1) claimant did not provide information that led to the successful enforcement within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a) and 21F-4(c), and (2) claimant also did not provide the Commission with original information within the meaning for Section 21F(b)(1) of the Exchange Act because Claimant’s submission was not derived from claimant’s independent knowledge or independent analysis. The SEC further noted that the claimant made a false statement on the Form WB-APP, which was signed under penalty of perjury, by stating he or she was “the 44th President of the United States.” (Denial Order Feb. 13, 2015).

The OWB denied two other claims, one on February 13, 2015, and one on February 16, 2015, in orders that make it impossible to tell the name or nature of the underlying action. Both claims were denied, however, because the information provided by the whistleblowers did not provide information that led to the successful enforcement of an action within the meaning of Section 21F(b)(1) of the Exchange Act and Rules 21F-3(a)(3) and 21F-4(c). Specifically, the information did not (1) cause the Commission to (i) commence an examination, (ii) open or reopen an investigation, or (iii) inquire into different conduct as part of a current Commission examination or investigation under Rule 21F-4(c)(1) of the Exchange Act; or (2) significantly contribute to the success of a Commission judicial or administrative enforcement action under Rule 21F-4(c)(2) of the Exchange Act.

Finally, the Second Circuit upheld the SEC’s denial of an award to a whistleblower who provided information to the SEC before the enactment of the Dodd-Frank Act in July 2010. Styker v. S.E.C., No. 13-4404-ag, 2015 U.S. App. LEXIS 3765 (2d Cir. Mar. 11, 2015). The whistleblower submitted information from 2004-2009 to the SEC, which eventually led to a $24 million settlement with Advanced Technologies Group. The Second Circuit rejected the whistleblower’s argument that the SEC went beyond its congressionally mandated authority, and it deferred to the SEC’s interpretation of the law that information submitted prior to July 2010 does not qualify for an award. Id. at *8-9.

ARTICLE BY

William L. Carr
Daniel E. Brewer
Lucas B. Michelen

Federal Government to Receive a $75 Million Settlement from CHSPSC in Alleged Medicaid Fraud Scheme: Community Health Systems Professional Services Corp.

Tycko & Zavareei LLP

On February 2, 2015, the Department of Justice (DOJ) announced that Community Health Systems Professional Services Corporation (CHSPSC) and three of its CHS affiliated hospitals in New Mexico, agreed to pay the government $75 million to settle allegations that it violated the False Claims Act (FCA) when it manipulated the Medicaid funding program by making illegal donations to New Mexico county governments in order to receive higher federally funded Medicaid payments.  The alleged improper donations from CHS were made to Chaves, Luna and San Miguel counties in the state of New Mexico.

The Sole Community Provider Program (SCP) is a federal and state funded program that is specifically designed to reimburse SCP hospitals for medical expenses incurred by uninsured and indigent patients.  Payments received by SCP hospitals are processed under New Mexico’s federal and state Medicaid Plan.  Under the SCP, the federal government will share 75 percent of patient claims incurred by SCP hospitals contingent on New Mexico’s state and local government’s ability to pay the remaining 25 percent under the matching share of the SCP.  One of the stipulations for receiving the funds is that the state and county government’s 25 percent share has to consist of state or county funds, and not impermissible “donations” from private hospitals.

According to the qui tam lawsuit filed by Robert Baker, a former CHSPSC revenue manager, on behalf of the government, between 2001 and 2010, CHS hospitals in the state of New Mexico filed claims to recover uninsured or indigent medical expenses under the SCP program.  However, the funds used to pay the state and local counties 25 percent share were donated by CHS.  This ongoing alleged illegal practice by CHS violated the FCA, and caused the state of New Mexico to present false claims to the United States for payments made to CHS under the SCP program.  In addition, the government also alleged that CHS concealed the true nature of these donations to avoid detection by federal and state authorities, and as a result of its scheme, received SCP payments which were funded by the United States in the amount of three times CHS’ “donations.”  The whistleblower, Mr. Baker, will receive approximately $18.6 million as his reward for having disclosed the fraud to the government under the False Claims Act.

ARTICLE BY

Whistleblower Practice Group
OF
Tycko & Zavareei LLP

Whistleblower to Receive $23 Million in Office Depot Case

Mahany & Ertl Law Firm, Tax and Fraud Practice, Milwaukee, Wisconsin

“Our actions speak louder than words. We are accountable: doing what we say we’re going to do efficiently and on time.” These words come directly from Office Depot’s vision statement, part of the company’s code of ethics. Last week, Office Depot agreed to pay $68,500,000.00 to settle charges that it defrauded California government customers.

Evidently, actions really do speak louder than words!

The suit against Office Depot was originally filed by a whistleblower on behalf of the State of California. By the time it was resolved, over 1000 California cities, counties, school districts and other agencies are eligible to share in the settlement money.

David Sherwin, a former account manager in the company’s business solutions division, originally filed the suit. Sherwin filed his complaint under the California False Claims Act, a law which allows a whistleblower with original knowledge of fraud against the state to file a complaint in the name of the state and keep a percentage of whatever the government collects.

Sherwin claimed that Office Depot was violating pricing agreements negotiated through the U.S. Communities Government Purchasing Alliance, a non-profit organization that helps government agencies get the lowest prices on goods and services. Under the agreement, Office Depot was required to give participating government agencies the same low prices that had been negotiated through the Alliance.

Instead of giving member agencies the lowest prices, Sherwin said that the company sometimes put customers into higher pricing plans without their knowledge and did not drop prices when a more favorable price had been worked out through the Alliance.

Although it agreed to pay over $68 million to settle the charges, Office Depot admitted no wrongdoing and said Sherwin’s claims had “no merit.”

The story has a bittesweet ending in that Sherwin is entitled to $23 million in whistleblower award monies but died only a month after testifying in the case. His estate will receive the award.

This isn’t Office Depot’s first brush with whistleblower suits and fraud allegations. In 2010, the company paid $4.5 million to settle overcharging claims brought by the State of Florida. The company is also reportedly being investigated in New York, Texas and Arizona.

California isn’t the only state with a whistleblower law on its books. A total of 29 states have similar laws, often called False Claims Acts, which allow a whistleblower to keep a portion of whatever monies are collected by the government. To qualify, you must have original source (inside) information about a fraud involving taxpayer funds or a taxpayer funded program. Many of the claims are associated with Medicare, Medicaid, procurement contracts and residential mortgage lending. The latter are eligible for whistleblower awards because the government backs most mortgages.

ARTICLE BY

Brian Mahany
OF
Mahany & Ertl

New Jersey Pharmaceutical Company Agrees to Pay $39 Million to Settle Alleged Anti-Kickback Violations

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On January 9, 2015, the Department of Justice (DOJ) announced that pharmaceutical company Daiichi Sankyo, headquartered in New Jersey, agreed to pay the Government $39 million to settle claims that it violated the Anti-Kickback Statue and the False Claims Act (FCA) by allegedly incentivizing physicians to prescribe Daiichi drugs by providing kickbacks to those doctors.  The drugs prescribed as a result of those alleged kickbacks were billed under the Medicare or Medicaid Program, and thus paid for, at least in part, by the government.  This lawsuit was filed by former Daiichi sales representative Kathy Fragoules under the qui tam whistleblower provision of the FCA.  Fragoules will receive an award of $6.1 million, which represents approximately 15 percent of the settlement amount, for exposing Daiicho Sankyo’s alleged illegal practices.

The qui tam lawsuit, originally filed on behalf of the government by Fragoules, claims that for a period of six years, from January 1, 2005 to March 31, 2011, Daiichi Sankyo allegedly devised a scheme to promote several of its drug products by offering monetary kickbacks to physicians that prescribed Daiichi drugs to their patients.  The Physician Self-Referral Statue and the Anti-Kickback Statue prohibit anyone from knowingly and willfully offering, paying, soliciting, or receiving remuneration in order to induce business reimbursed under the Medicare or Medicaid programs.  However, according to the government, Daiichi allegedly orchestrated kickback compensation to physicians in the form of speaker fees by allegedly funneling payment to health care providers through the Daiichi’s Physician Organization and Discussion programs known as PODs.  In doing so, the government claims that Daiichi knowingly and willfully violated the FCA.

Physician drug ordering and prescribing decisions continue to be influenced by the drug industry.  Last year, the DOJ reported billions in settlements in connection with the pharmaceutical industry arising out of violations of the Physician Self-Referral Statue and the Anti-Kickback Statue.  The government also paid out millions in awards to individuals and whistleblowers that exposed these alleged illegal practices through the filing of qui tam lawsuits under the FCA.  A whistleblower who files a case against a company that has committed fraud against the government, may receive compensation of up to 30 percent of the amount ultimately recovered by the government.

ARTICLE BY

Jonathan Tycko
OF
Tycko & Zavareei LLP