DOJ Issues New FCPA Guidance and Launches Self-Reporting Pilot Program

The US Department of Justice has announced the creation of a one-year pilot program intended to encourage companies to self-report bribery violations and provide extensive cooperation in exchange for reduced penalties, ranging from reductions in fines to declinations.

On April 5, the Fraud Section of the US Department of Justice (DOJ) issued its “Foreign Corrupt Practices Act Enforcement Plan and Guidance” (Guidance) outlining the following “three steps in [its] enhanced FCPA enforcement strategy”:

  1. The intensification of its investigative and prosecutorial efforts by substantially increasing its FCPA law enforcement resources.

  2. The strengthening of its coordination with foreign law enforcement.

  3. Its implementation of an “FCPA enforcement pilot program” to encourage voluntary disclosure, cooperation, and remediation.[1]

While the first two steps have been championed in prior DOJ press releases and speeches, the third step—the creation of the FCPA enforcement pilot program—is an important development that has the potential to change the voluntarily disclosure calculus in connection with FCPA matters.

The Guidance applies “to organizations that voluntarily self-disclose or cooperate in FCPA matters during the pilot period, even if the pilot thereafter expires.”[2]

Intensification of DOJ’s Investigative and Prosecutorial Efforts

The Fraud Section plans to more than double the size of its FCPA Unit by “adding 10 more prosecutors to its ranks”[3]—a staffing goal that was previously announced by Assistant Attorney General for the Criminal Division Leslie Caldwell at an FCPA conference in November 2015.[4] The Guidance also cites the FBI’s establishment of “three new squads of special agents devoted to FCPA investigations and prosecutions,” a hiring initiative that was announced approximately a year ago.

Strengthening of DOJ’s Coordination with Foreign Law Enforcement

The second part of the Guidance builds on previous statements by senior DOJ leaders that they “are greatly aided by our foreign partners”[5] and “it is safe to say [in 2013] that we are cooperating with foreign law enforcement on foreign bribery cases more closely today than at any time in history.”[6]

FCPA Enforcement Pilot Program—Eligibility and Potential Benefits

The most important part of the Guidance is the Fraud Section’s announcement of a one-year “FCPA enforcement pilot program,” which provides for “mitigation credit” that takes into consideration three essential factors: (1) voluntary disclosure, (2) full cooperation, and (3) remediation. In cases in which the above three factors are met but a criminal resolution is nonetheless warranted, “mitigation credit” can include “up to a 50% reduction off the bottom end of the Sentencing Guidelines fine range, if a fine is sought” and the avoidance of a third-party compliance monitor.”[7] Moreover, the Guidance states that, in appropriate cases, where the above factors are fully satisfied, DOJ “will consider a declination of prosecution.”[8]

Voluntary Self-Disclosure

A company must voluntarily disclose an FCPA violation to the Fraud Section in order to be eligible for the full mitigation credit. As a preliminary matter, the disclosure must be truly voluntary—a disclosure that the “company is required to make, by law, agreement, or contract” would not constitute voluntary self-disclosure for purposes of this pilot.[9] Second, the disclosure must occur “prior to an imminent threat of disclosure or government investigation” and be “within a reasonably prompt time after becoming aware of the offense,” with the burden on the discloser to demonstrate timeliness.[10] Finally, the disclosure must include “all relevant facts known to [the company], including all relevant facts about the individuals involved in any FCPA violation.”[11]

DOJ’s voluntary disclosure requirement follows a recent announcement by the US Securities and Exchange Commission (SEC) that companies subject to FCPA enforcement actions are required to self-report their potential misconduct to be eligible for deferred prosecution agreements and non-prosecution agreements. Full Cooperation

The Guidance sets forth nearly a dozen requirements for companies seeking cooperation credit under the pilot program.[12] Those requirements can be distilled into the following four categories:

  • Disclosure of Relevant Facts: Companies are expected to disclose “all facts relevant to the wrongdoing at issue” on a timely basis, including “all facts related to involvement in the criminal activity by the corporation’s officers, employees, or agents” and “all facts relevant to potential criminal conduct by all third-part[ies].” Disclosure is expected to be “proactive” rather than “reactive,” and facts relevant to the investigation should be voluntarily provided “even when [companies are] not specifically asked to do so.” In addition, disclosures are expected to include “all relevant facts gathered during a company’s independent investigation.”

  • Preservation and Disclosure of Documents: All relevant documents—as well as “information related to their provenance”—are expected to be collected, preserved, and disclosed. This expectation extends to “overseas documents” and important details about those records such as their location and the individuals who discovered them. In some cases, prosecutors may insist that companies provide translations of foreign-language documents. Finally, it is expected that companies will assist with the “third-party production of documents . . . from foreign jurisdictions.”

  • Making Individuals Available for Interviews: Upon request, companies are expected to “mak[e] available for [DOJ] interviews those company officers and employees who possess relevant information,” including—where appropriate and possible—individuals located overseas, as well as those who no longer work for the company.

  • Conducting Transparent and Coordinated Internal Investigations: Companies are expected to provide timely updates about their internal investigations and, where requested, ensure that such investigations do not conflict with those being conducted by the government.

The Guidance notes that “cooperation comes in many forms,” and that the Fraud Section “does not expect a small company to conduct as expansive an investigation in as short a period of time as a Fortune 100 company.”[13]

Remediation

The final requirement is that of “timely and appropriate remediation,” and the following items generally will be required in order for companies to receive remediation credit:

  • Implementation of an Effective Compliance Program: While the criteria depend on the size and resources of the organization, the following factors are normally considered:

    • Whether the company has established a “culture of compliance”

    • Whether the company has sufficient compliance resources

    • The quality and experience of the compliance personnel

    • The independence of the compliance function

    • Whether the company’s compliance program has performed an effective risk assessment and tailored the compliance program based on that assessment

    • How a company’s compliance personnel are compensated and promoted

    • Auditing of the program to assure its effectiveness

    • The reporting structure of compliance personnel within the company

  • Discipline of Culpable Employees: It is expected not only that companies discipline culpable employees, but that they have systems that provide for the possibility of disciplining others with oversight of the responsible individuals.

  • Acceptance of Responsibility and Implementation of Reforms: Companies are expected to recognize the seriousness of the misconduct, accept responsibility for it, and implement reforms to identify and reduce the risk of similar violations.[14]

Credit

Where the above conditions are met but a criminal resolution is warranted, the Fraud Section’s FCPA Unit (1) may accord up to a 50% reduction off the “bottom end” of the Sentencing Guidelines fine range, if a fine is sought; and (2) generally should not require appointment of a monitor if a company has, at the time of resolution, implemented an effective compliance program.

Furthermore, where the same conditions are met, the Fraud Section’s FCPA Unit will consider a declination of prosecution. In doing so, prosecutors must balance the importance of encouraging disclosure against the seriousness of the offense. In assessing the seriousness of the offense, prosecutors are to consider the involvement by executive management in the FCPA misconduct, the size of the ill-gotten gains in relation to the overall revenue of the company, a history of noncompliance by the company, and any prior resolutions by the company with DOJ within the past five years.

Finally, if the company cooperates and remediates, but has not voluntarily disclosed, the Fraud Section’s FCPA Unit may provide partial mitigation credit, but will agree to no more than a 25% reduction off the bottom of the Sentencing Guidelines fine range.[15]

Implications

This Guidance comes after what has been a growing perception that voluntary disclosures have slowed significantly due to a lack of transparency, consistency, and clarity as to what the benefits are, if any, to self-disclosing. Whether the pilot program succeeds in encouraging self-disclosures will likely depend on the perception of companies and defense counsel of the fairness and openness of the application of the criteria in the Guidance.


[1] US Dep’t of Justice, Memorandum from Andrew Weissmann titled “The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance” (Apr. 5, 2016) (Guidance)

[2] Guidance at 3.

[3] Id. at 1.

[4] Stephen Dockery, “US Justice Dept. Boosting Foreign Corruption Staff,” Wall Street Journal (Nov. 17, 2015)

[5] US Dep’t of Justice, “Assistant Attorney General Leslie R. Caldwell Speaks at American Conference Institute’s 31st International Conference on the Foreign Corrupt Practices Act” (Nov. 19, 2014)

[6] See id.; see also US Dep’t of Justice, “Acting Assistant Attorney General Mythili Raman Delivers Keynote Address at the Global Anti-Corruption Congress” (June 17, 2013)

[7] Guidance at 8.

[8] Id. at 9.

[9] Id. at 4.

[10] Id.

[11] Id.

[12] Id. at 5-6.

[13] Id. at 6.

[14] Id. at 7-8.

[15] Id. at 8-9.

Department of Justice Launches Targeted Elder Justice Task Forces

Woman Pushing Man in WheelshairOn March 30, the Department of Justice (“DOJ”) announced the formal launch of 10 regional Elder Justice Task Forces designed to identify nursing homes and other long-term care (“LTC”) facilities that provide “grossly substandard care” to residents.

Similar to DOJ’s previously launched Medicare Fraud Strike Force and Health Care Fraud Prevention & Enforcement Action Team (“HEAT”) initiative, the newly created Elder Justice Task Forces will focus on coordination and information sharing among federal, state and local enforcement agencies to combat suspected cases of physical abuse and financial fraud. Each task force will consist of representatives from the U.S. Attorneys’ Offices, state Medicaid Fraud Control Units, state and local prosecutors’ offices, the Department of Health and Human Services, state Adult Protective Services agencies, Long-Term Care Ombudsman programs and other law enforcement officials.

Part of the larger DOJ Elder Justice Initiative, the task forces will have a national footprint with locations in the following districts: Northern District of California, Northern District of Georgia, District of Kansas, Western District of Kentucky, Northern District of Iowa, District of Maryland, Southern District of Ohio, Eastern District of Pennsylvania, Middle District of Tennessee and the Western District of Washington.

The new Elder Justice Task Forces signal heightened interest and attention on the LTC industry, a move that comes on the heels of last summer’s Centers for Medicare and Medicaid Services’ proposed rule to overhaul requirements for participation by LTC facilities in federal health care programs.

© 2016 BARNES & THORNBURG LLP

Olympus to Pay $632.2 Million to Resolve Allegations of Kickbacks

Olympus Corporation of the Americas, the United States’ largest distributor of endoscopes and related medical equipment, recently agreed to pay $623.2 million to resolve criminal charges and civil claims, according to a United States Department of Justice (DOJ) press release on March 1, 2016. The settlement is a result of a qui tam action alleging violations of the Federal False Claims Act (FCA), Federal Anti-Kickback Statute (AKS), and analogous state statutes for paying kickbacks to physicians and hospitals to induce the purchase of Olympus medical and surgical equipment. Olympus was required to enter into a Corporate Integrity Agreement and a Deferred Prosecution Agreement that, among other things, includes an executive financial recoupment program that will cause company executives to forfeit certain compensation if they are associated with future misconduct.

The relator and government alleged that, because the Olympus equipment used for treatment was purchased as a result of a kickback, Olympus caused the physicians and hospitals to file false claims for treatment under Medicare, TRICARE, and Medicaid in violation of the FCA and state law. The kickbacks themselves were prohibited under the AKS. Both federal laws have separate penalties that were combined in this settlement, which is a reminder to the health care industry that liability under the FCA and AKS can reach staggering amounts.

What Providers Should Know

  • If an employee raises a compliance concern, investigate and appropriately address the concern. Do not retaliate. While the Olympus relator was a former Chief Compliance Officer with a long employment history at Olympus, individuals at all levels and experiences may have insight into company practices sufficient to identify areas of compliance vulnerability (thereby later arming themselves with information sufficient to file a qui tam action should the company choose to ignore individuals’ concerns or otherwise fail to correct non-compliance).

  • Prohibited remuneration under the AKS may take many forms. For instance, the remuneration that Olympus allegedly provided to physicians and hospitals included free use of medical equipment, unprotected discounts, payments disguised as grants for educational or research programs, payments to physicians in excess of fair market value for speaking engagements, vacations, meals, and entertainment.

  • If referring health care providers receive remuneration, the compensation arrangements should be carefully structured to meet applicable AKS safe harbors. Providing remuneration in the form of medical equipment discounts, leases or payments for speaking engagements may increase a company’s exposure under the AKS. Where such remuneration is provided, it is best to structure the arrangement with relevant AKS safe harbor protection.

  • An effective and robust compliance program is essential. In addition to allegations of kickbacks, the federal government also focused on Olympus’ alleged lack of appropriate training, knowledgeable compliance staff, and compliance programs to prevent and identify violations of the AKS and other federal health care laws.

Background and Alleged Misconduct – Kickbacks and More Kickbacks

The relator in the qui tam action was an 18-year employee of Olympus and was appointed to be Chief Compliance Officer of Olympus in 2009. Prior to 2009, Olympus had no compliance department. As the Chief Compliance Officer, the relator alleged that the he began to try to “eliminate the illegal and systemic practices” described below, but was met with inaction, retaliation, harassment, and severe resistance. In March 2010, Olympus relieved the relator of all his compliance duties and months later terminated his employment. The relator thereafter filed a qui tam action against Olympus.

The relator and government alleged that, from 2006 to 2011, Olympus induced physicians and hospitals to purchase Olympus endoscopes and other medical and surgical equipment by way of the following:

  • Providing free medical equipment and discounts to hospitals and physicians to induce them to purchase surgical consumables produced by Olympus.

  • Paying sales reps stipends of $2,300 that were meant to be used to entertain physicians.

  • Paying physicians tens of thousands and as much as $100,000 per year for consulting services, often without written agreements.

  • Providing physicians and hospitals with millions of dollars worth of free medical equipment, categorized as “permanent loans,” “leases,” “promotions,” “demo units,” “samples,” and “trade-ins.”  In one case, the relator and the government alleged that Olympus provided a physician with approximately $400,000 in endoscopes and other equipment to use without charge in the physician’s private practice, allegedly resulting in one hospital’s decision to purchase millions of dollars of Olympus products.

  • Leasing products to physicians on a debt forgiveness program under which Olympus wrote off debt if the physician entered into a new lease for new products.

  • Paying physicians honorariums for speaking engagements, often without speaker agreements.

  • Paying out grants of hundreds of thousands of dollars from a grant committee made up entirely of sales reps, marketing people, and customer relation personnel.

  • Paying for physicians’ golf trips and vacations, including week-long trips to Japan with sightseeing excursions and lavish entertainment included.

Relator alleged that, because of the aforementioned conduct, Olympus facilitated more than $600 million in sales, earning more than $230 million in gross profits.

Agreements to the Olympus Settlement

The Olympus settlement contains three written agreements: a Civil Settlement Agreement, a Deferred Prosecution Agreement (DPA), and a Corporate Integrity Agreement (CIA). Collectively, these agreements reiterate the monetary and non-monetary consequences to settling allegations of kickbacks and also provide invaluable insight into the government’s view of an effective compliance program.

  • Civil Settlement Agreement. To settle civil claims, Olympus agreed to pay the federal government and affected state governments $306 million total plus interest, with $263.16 million going to the federal government and the remaining $42.84 million to be divided among the states. The realtor was awarded $43.4 million from the federal government’s share. Olympus also agreed to enter into a CIA with the government for five years as part of the civil settlement agreement.

  • Deferred Prosecution Agreement. The DPA indicates that the federal government will file on, or shortly after, the effective date of the DPA a criminal complaint charging Olympus with conspiracy to commit violations of the AKS. Under the DPA, Olympus agreed to pay the federal government $306 million plus interest in exchange for a three-year deferral of criminal prosecution, provided Olympus takes specific remedial actions. Such remedial actions include: (i) the development and implementation of an effective corporate compliance program; (ii) retention of an independent monitor to evaluate and monitor compliance with the DPA and review Olympus’ procedures and practices related to tracking loaned equipment, selecting and paying consultants, considering and awarding grants, and training and education programs; (iii) performance of specific duties by Olympus’ Chief Compliance Officer; and, (iv) enhancement and maintenance of existing training and education programs for all sales, marketing, legal, and compliance employees and senior executives. The DPA also includes an executive financial recoupment program that will cause company executives to forfeit certain compensation if they are associated with future misconduct. If Olympus fulfills its obligations, the government will not thereafter pursue a criminal conviction and will seek dismissal of the criminal complaint the federal government filed in connection with the alleged conduct.

  • Corporate Integrity Agreement. Olympus entered into a five year CIA with the government to review and approve its compliance program, in exchange for the government’s promise not to seek exclusion of Olympus from Medicare, Medicaid, or TRICARE. The CIA sets forth many general obligations for Olympus to meet, including: (i) compliance responsibilities of specific Olympus employees and the board of directors; (ii) development and implementation of a health care compliance code of conduct and policies and procedures regarding the operation of Olympus’ compliance program; (iii) training and education programs; (iv) risk assessment and mitigation; and, (v) establishment of a mechanism, e.g., compliance hotline, to enable individuals to disclose any identified issues or questions with compliance

The CIA further directs Olympus to meet the following specific requirements related to the alleged misconduct:

  1. Consulting arrangements. Olympus must require all consultants who are health care professionals to enter written agreements describing the scope of work to be performed, the fees to be paid, and compliance obligations for the consultant. Olympus will pay consultants according to a centrally managed, pre-set rate structure that is determined based on a fair-market value analysis.

  2. Grants and Charitable Contributions. Olympus must establish a grants management system that will be the exclusive mechanism through which requestors may request or be awarded grants.

  3. Management of Field Assets. Olympus must establish a system to manage medical and surgical equipment and products provided to health care professionals on a temporary basis.

  4. Review of Travel Expenses. Olympus must establish processes for the review and approval of travel and related expenses for health care professionals.

What Is The FTC Looking at When It Reviews Merger Agreements?

In our last post, we spoke about a proposed merger between office supply chains Office Depot and Staples. As we noted, Office Depot shareholders recently voted to go forward with the acquisition, but the Federal Trade Agreement still has to review the agreement and make a decision, which could make or break the process.

FTC_FederalTradeCommission-SealIn reviewing any merger agreement the Federal Trade Commission—or the Department of Justice, depending on which agency reviews the agreement—an important consideration is the impact the transaction will have on the market. Speaking generally, federal law prohibits mergers that would potentially harm market competition by creating a monopoly on goods or services.

According to the FTC, competitive harm often stems not from the agreement as a whole, but from how the deal will impact certain areas of business. Problems can arise when a proposed merger has too much of a limiting effect based on the type of products or services being sold and the geographic area in which the company is doing business.

With that having been said, most mergers—95 percent, according to the FTC—present no issues in terms of market competition. Those that do present issues are often resolved by tweaking the agreement so as to address any competitive threats. In cases where the reviewing agency and the businesses cannot agree on a solution, litigation may be necessary, but it often isn’t.

Any company that plans on going forward with a merger or acquisition needs to have a clear understanding of the law and the review process. This is especially the case if issues come up regarding competitive threats.

© 2015 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.

Department of Justice Settles Virtual Currency Enforcement Action

The US Attorney’s Office in the Northern District of California recently settled an enforcement action against Ripple Labs Inc., a Delaware corporation providing virtual currency exchange services. According to the settlement agreement, Ripple Labs was not registered with the Financial Crimes Enforcement Network (FinCEN) as a money services business (MSB) pursuant to the Bank Secrecy Act of 1970 while engaged in currency trading, and lacked required anti-money laundering controls.

Ripple Labs is a virtual currency exchange service dealing in XRP, the second-largest cryptocurrency by market capitalization after Bitcoin. Between at least March and April 2013, Ripple Labs sold XRP in its exchange. During the time of the sales, Ripple Labs was not registered with FinCEN. In March 2013, FinCEN’s released guidance clarifying the applicability of registration requirements to certain participants in the virtual currency arena. Ripple Labs also lacked an adequate anti-money laundering program, and did not have a compliance officer to assure compliance with the Bank Secrecy Act.

The settlement agreement reached by Ripple Labs and the US Department of Justice (DOJ) called for a $450,000 forfeiture to the DOJ, as well as a civil money penalty of $700,000 to FinCEN. Ripple Labs agreed to cooperate with any DOJ or regulatory request for information. In addition, Ripple Labs agreed to operate its XRP exchange as an MSB registered with FinCEN and to maintain all necessary registrations. Ripple Labs also agreed to implement and maintain an effective anti-money laundering program, complete with a compliance officer and training program. Finally, Ripple Labs agreed to conduct a review of prior transactions for evidence of illegal activity, as well as monitor transactions in the future to avoid potential money laundering or illegal transfer activity.

U.S. Department of Justice Settlement Agreement (May 5, 2015)

Quicken Loans Takes on the DOJ & HUD

Quicken Loans, the nation’s largest Federal Housing Administration (FHA)-backed mortgage lender,filed suit on Friday, April 17 in the United States District Court in Detroit against the United States Department of Justice (DOJ) and the Department of Housing and Urban Development (HUD). In the suit, Quicken alleged that it is a target of a probe in “which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into publicly ‘admitting’ wrongdoing.” Quicken says the government threatened to file a lawsuit against it unless the company paid damages based on a sampling of its loans backed by the FHA. The government wanted payment of damages to be coupled with an admission by Quicken that its lending practices were “significantly flawed,” and that it had committed wrongdoing.

The company says that the public statements the government wanted it to make were blatantly false. Quicken also asserts that, before filing its lawsuit, it had already provided the DOJ with more than 85,000 documents, including 55,000 emails. In addition, the DOJ, without filing any lawsuit against Quicken, has conducted hundreds of hours of depositions from numerous Quicken team members. Three years later, the DOJ inquiry has (according to Quicken) resulted in the threat of a federal lawsuit based on “faulty analysis of a miniscule number of cherry-picked mortgages from the nearly 250,000 FHA loans the company has closed since 2007.”

According to FHA statistics, Quicken has originated the government agency’s best performing loan portfolio. The FHA’s publicly available data appears to establish that Quicken has the lowest “compare ratio” — the default rate of a single lender compared to FHA’s total mortgage portfolio — in recent years.

Not surprisingly, the DOJ responded by filing its own lawsuit against Quicken on Thursday, April 23, contending that it made hundreds of improper loans through the FHA lending program, allegedly costing the agency millions of dollars. The Justice Department contends that from September 2007 through December 2011, Quicken knowingly submitted claims — or caused the submission of claims — on hundreds of bad loans, and encouraged an underwriting process in which employees disregarded the program rules and falsely certified that loans met the requirements.

The F.H.A. — which allows borrowers to make down payments of as little as 3.5 percent — has already paid millions of dollars in insurance claims on the improperly underwritten loans, according to the complaint; it said many additional loans had become at least 60 days delinquent and could result in further claims.

The Justice Department, which has filed the suit under the False Claims Act, has already reached settlements with several lenders over their F.H.A. lending practices, including JPMorgan Chase, SunTrust, U.S. Bank, and Bank of America.

It is likely that many other lenders, feeling unduly scrutinized by government agencies, are cheering Quicken’s decision to file suit and are more than a little sympathetic to Quicken’s position in the two suits currently pending (which may be consolidated at some point). The prospects for success for Quicken in the suit that it filed, however, are not necessarily bright. The government generally has immunity, and great discretion even when it does not have immunity, with respect to how it conducts its investigations or settles enforcement actions.

Nevertheless, the lawsuit may at the very least succeed in forcing government agencies to explain and justify their conduct, which might have an effect strongly desired by numerous lenders feeling “targeted” by those agencies. Specifically, the effect of reining in the excesses of governmental enforcement efforts, and making responsible government officials more inclined either to forgo certain investigations entirely, or streamline them in ways that place lesser burdens on companies that, after all, should be presumed not to be liable until the government actually proves otherwise.

© 2015 Bilzin Sumberg Baena Price & Axelrod LLP Authored by:  Philip R. Stein

Quicken Loans Takes on the DOJ & HUD

Quicken Loans, the nation’s largest Federal Housing Administration (FHA)-backed mortgage lender,filed suit on Friday, April 17 in the United States District Court in Detroit against the United States Department of Justice (DOJ) and the Department of Housing and Urban Development (HUD). In the suit, Quicken alleged that it is a target of a probe in “which the DOJ is ‘investigating’ and pressuring large, high-profile lenders into publicly ‘admitting’ wrongdoing.” Quicken says the government threatened to file a lawsuit against it unless the company paid damages based on a sampling of its loans backed by the FHA. The government wanted payment of damages to be coupled with an admission by Quicken that its lending practices were “significantly flawed,” and that it had committed wrongdoing.

The company says that the public statements the government wanted it to make were blatantly false. Quicken also asserts that, before filing its lawsuit, it had already provided the DOJ with more than 85,000 documents, including 55,000 emails. In addition, the DOJ, without filing any lawsuit against Quicken, has conducted hundreds of hours of depositions from numerous Quicken team members. Three years later, the DOJ inquiry has (according to Quicken) resulted in the threat of a federal lawsuit based on “faulty analysis of a miniscule number of cherry-picked mortgages from the nearly 250,000 FHA loans the company has closed since 2007.”

According to FHA statistics, Quicken has originated the government agency’s best performing loan portfolio. The FHA’s publicly available data appears to establish that Quicken has the lowest “compare ratio” — the default rate of a single lender compared to FHA’s total mortgage portfolio — in recent years.

Not surprisingly, the DOJ responded by filing its own lawsuit against Quicken on Thursday, April 23, contending that it made hundreds of improper loans through the FHA lending program, allegedly costing the agency millions of dollars. The Justice Department contends that from September 2007 through December 2011, Quicken knowingly submitted claims — or caused the submission of claims — on hundreds of bad loans, and encouraged an underwriting process in which employees disregarded the program rules and falsely certified that loans met the requirements.

The F.H.A. — which allows borrowers to make down payments of as little as 3.5 percent — has already paid millions of dollars in insurance claims on the improperly underwritten loans, according to the complaint; it said many additional loans had become at least 60 days delinquent and could result in further claims.

The Justice Department, which has filed the suit under the False Claims Act, has already reached settlements with several lenders over their F.H.A. lending practices, including JPMorgan Chase, SunTrust, U.S. Bank, and Bank of America.

It is likely that many other lenders, feeling unduly scrutinized by government agencies, are cheering Quicken’s decision to file suit and are more than a little sympathetic to Quicken’s position in the two suits currently pending (which may be consolidated at some point). The prospects for success for Quicken in the suit that it filed, however, are not necessarily bright. The government generally has immunity, and great discretion even when it does not have immunity, with respect to how it conducts its investigations or settles enforcement actions.

Nevertheless, the lawsuit may at the very least succeed in forcing government agencies to explain and justify their conduct, which might have an effect strongly desired by numerous lenders feeling “targeted” by those agencies. Specifically, the effect of reining in the excesses of governmental enforcement efforts, and making responsible government officials more inclined either to forgo certain investigations entirely, or streamline them in ways that place lesser burdens on companies that, after all, should be presumed not to be liable until the government actually proves otherwise.

© 2015 Bilzin Sumberg Baena Price & Axelrod LLP Authored by:  Philip R. Stein

CPSC & DOJ Sue Michaels Stores for Failing to Report Product Safety Hazard and Filing Misleading Information

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

For the first time in recent memory, the Department of Justice (DOJ) and Consumer Product Safety Commission (CPSC) jointly announced the filing of a lawsuit in federal court for the imposition of a civil penalty and injunctive relief for violation of the Consumer Product Safety Act (CPSA). The lawsuit is against arts and crafts retailer Michaels Stores and its subsidiary Michaels Stores Procurement Co. Inc. (collectively, “Michaels” or “the Company”)  for failing to timely report a potential product safety hazard to the CPSC. Unlike other CPSC civil penalty actions involving DOJ, this penalty does not already have a negotiated consent decree in place and it appears that the case could be fully litigated.

The complaint alleges that Michaels knowingly violated the CPSA by failing to timely report to the CPSC that the glass walls of certain vases were too thin to withstand normal handling, thereby posing a laceration hazard to consumers.  According to the complaint, multiple consumers suffered injuries, including nerve damage and hand surgeries, from 2007 to late 2009.

Michaels allegedly did not report the potential defect to the Commission until February 2010.  Of course, we only know one side of the allegations, and Michaels will respond to those allegations in the coming weeks. The Company did state that “it believes the facts will show it acted promptly and appropriately.”

WaterNotably, the complaint also alleges that when Michaels filed an initial report with the CPSC in 2010, it provided “only the limited information required to be furnished by distributors and retailers” under the CPSA.  However, and critically, as the complaint sets forth in more detail, manufacturers—whose definition under the CPSA includes importers of record—are required to provide more information to the Commission than retailers.

According to the government, Michaels’ report conveyed the false impression that the Company did not import the vases, even though the Company was the importer of record and thus was required to submit significantly more information as themanufacturer of the vases.  The lawsuit alleges that Michaels made this misrepresentation in order to avoid the responsibility of undertaking a product recall.

As for the remedy, the government is seeking a civil penalty (in an unidentified amount) and various forms of injunctive relief, including the enactment of a stringent compliance program to ensure future compliance with CPSC reporting obligations.  This requested relief is similar to what the CPSC has required in almost all civil penalty agreements with other companies over the past few years.

What makes this complaint so newsworthy is that the government and Michaels plan to litigate the imposition of a civil penalty.  As noted above, this is not a frequent occurrence because companies tend to settle civil penalty claims rather than litigate. Given how infrequently civil penalties are litigated and the lack of any legal precedent guiding civil penalty negotiations under the heightened $15 million penalty limits, any judgment likely would have a wide-ranging impact on all future civil penalty negotiations between companies and the CPSC.

As we have previously stated, we expect the Commission to remain active in 2015 in bringing enforcement actions against companies for violations of the CPSA and other safety statutes.

We will watch this case closely and update our readers on any noteworthy developments.

ARTICLE BY

Consumer Product Matters Blog

CPSC & DOJ Sue Michaels Stores for Failing to Report Product Safety Hazard and Filing Misleading Information

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

For the first time in recent memory, the Department of Justice (DOJ) and Consumer Product Safety Commission (CPSC) jointly announced the filing of a lawsuit in federal court for the imposition of a civil penalty and injunctive relief for violation of the Consumer Product Safety Act (CPSA). The lawsuit is against arts and crafts retailer Michaels Stores and its subsidiary Michaels Stores Procurement Co. Inc. (collectively, “Michaels” or “the Company”)  for failing to timely report a potential product safety hazard to the CPSC. Unlike other CPSC civil penalty actions involving DOJ, this penalty does not already have a negotiated consent decree in place and it appears that the case could be fully litigated.

The complaint alleges that Michaels knowingly violated the CPSA by failing to timely report to the CPSC that the glass walls of certain vases were too thin to withstand normal handling, thereby posing a laceration hazard to consumers.  According to the complaint, multiple consumers suffered injuries, including nerve damage and hand surgeries, from 2007 to late 2009.

Michaels allegedly did not report the potential defect to the Commission until February 2010.  Of course, we only know one side of the allegations, and Michaels will respond to those allegations in the coming weeks. The Company did state that “it believes the facts will show it acted promptly and appropriately.”

WaterNotably, the complaint also alleges that when Michaels filed an initial report with the CPSC in 2010, it provided “only the limited information required to be furnished by distributors and retailers” under the CPSA.  However, and critically, as the complaint sets forth in more detail, manufacturers—whose definition under the CPSA includes importers of record—are required to provide more information to the Commission than retailers.

According to the government, Michaels’ report conveyed the false impression that the Company did not import the vases, even though the Company was the importer of record and thus was required to submit significantly more information as themanufacturer of the vases.  The lawsuit alleges that Michaels made this misrepresentation in order to avoid the responsibility of undertaking a product recall.

As for the remedy, the government is seeking a civil penalty (in an unidentified amount) and various forms of injunctive relief, including the enactment of a stringent compliance program to ensure future compliance with CPSC reporting obligations.  This requested relief is similar to what the CPSC has required in almost all civil penalty agreements with other companies over the past few years.

What makes this complaint so newsworthy is that the government and Michaels plan to litigate the imposition of a civil penalty.  As noted above, this is not a frequent occurrence because companies tend to settle civil penalty claims rather than litigate. Given how infrequently civil penalties are litigated and the lack of any legal precedent guiding civil penalty negotiations under the heightened $15 million penalty limits, any judgment likely would have a wide-ranging impact on all future civil penalty negotiations between companies and the CPSC.

As we have previously stated, we expect the Commission to remain active in 2015 in bringing enforcement actions against companies for violations of the CPSA and other safety statutes.

We will watch this case closely and update our readers on any noteworthy developments.

ARTICLE BY

Consumer Product Matters Blog

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.

OF