Tag: FCA

OIG Releases Special Fraud Alert About Suspect Payments in Marketing Arrangements Related to Medicare Advantage and Providers

On December 11, 2024, the Office of Inspector General for the U.S. Department of Health and Human Services (“OIG”) issued a special fraud alert warning about certain marketing schemes that involve questionable payments and referrals between Medicare Advantage (“MA”) health plans, health care professionals, and third-party marketers (e.g., agents and brokers) and that can mislead MA enrollees into choosing specific health plans or providers that may not be in the MA enrollees’ best interests or meet their needs (“MA Marketing Alert”). As we have previously advised, special fraud alerts are few and far between—OIG has only issued six in the past 20 years. The importance of the MA Marketing Alert, like its predecessors, should not be taken for granted because it may be instructive as to subsequent enforcement action taken by OIG and/or the U.S. Department of Justice (“DOJ”).

In the MA space, historical enforcement actions taken by both OIG, under their administrative authorities, and DOJ, under the False Claims Act (“FCA”), have related to alleged MA risk adjustment payment inflation schemes. See, e.g., DaVita, Sutter Health, Beaver Medical, Martin’s Point, and Cigna. While allegations of this nature continue to be a focus area (e.g., in OIG’s work plans), a light is also now being shone on inappropriate marketing schemes that could violate the Federal anti-kickback statute (“AKS”). And, based on historical empirical data connecting DOJ’s enforcement actions taken subsequent to OIG’s issuance of special fraud alerts, that light may broaden and brighten.

For example, in July 2022, OIG issued a special fraud alert about arrangements involving telemedicine companies. In a footnote, OIG provided three enforcement actions resolved under the FCA as examples of allegedly problematic arrangements. After providing the footnote examples, OIG described bullet-pointed “Suspect Characteristics” that tracked the allegedly inappropriate characteristics of the footnote examples. Since the alert’s issuance, DOJ has recovered millions under the FCA and also criminally charged and convicted many individuals and entities for allegedly submitting or causing the submission of more than $3.1 billion (in 2023 and 2024 pursuant to DOJ’s nationwide takedowns) in allegedly fraudulent Medicare claims resulting from telemedicine schemes.

While the MA Marketing Alert provides footnotes of only two enforcement actions resolved under the FCA as examples of allegedly problematic arrangements, the bullet point list of “Suspect Characteristics” is broader than and reaches beyond the footnote examples. This may signal OIG’s awareness of and current investigations into allegedly inappropriate arrangements relating to “Suspect Characteristics” that have yet to be settled or resolved.

It is possible that there may be forthcoming enforcement actions in these areas. And they may follow the same trend of enforcement actions taken by DOJ relating to telemedicine schemes after OIG’s July 2022 special fraud alert. We also note that the MA Marketing Alert aligns with the Centers for Medicare & Medicaid Services’ recently finalized regulatory updates relating to MA health plan marketing arrangements with agents, brokers, and Third-Party Marketing Organizations, which will be effective January 1, 2025, and prohibit such parties from creating direct or indirect incentives “that would reasonably be expected to inhibit an agent or broker’s ability to objectively assess and recommend which plan best fits the health care needs of a beneficiary.” Proskauer’s Health Care Group will continue to monitor these developments in and provide updates about these areas of scrutiny and enforcement.

© 2024 Proskauer Rose LLP.
For more mon Fraud, visit the NLR Criminal Law Business Crimes section

FCA Enforcement & Compliance Digest — Fall 2024 False Claims Act Newsletter

Welcome to the Fall 2024 issue of “FCA Enforcement & Compliance Digest,” our quarterly newsletter in which we compile essential updates on False Claims Act (FCA) enforcement trends, litigation, agency guidance, and compliance tips. We bring you the most recent and significant insights in an accessible format, concluding with our main takeaways — aka “And the Fox Says…” — on what you need to know.

In this Fall 2024 edition, we cover:

  1. Enforcement Trends: Manufacturers challenge AKS intent requirement as reflected in recent denials of OIG Advisory Opinion requests.
  2. Litigation Developments: Implications of Florida judge’s ruling that the FCA qui tam provision is unconstitutional.
  3. Compliance Corner: What health care companies need to know about AI.
  4. ICYMI: Federal Court Permits Investors to Resume Kickback Suit Against Teva

1. Enforcement Trends

Do Violations of the AKS Require a ‘Corrupt’ Intent? Manufacturers Challenge the OIG’s Interpretation of the Statute

In a series of recent lawsuits filed by the pharmaceutical industry against the US Department of Health and Human Services (HHS) Office of the Inspector General (OIG), manufactures are challenging the OIG’s interpretation of the Anti-Kickback Statue (AKS), arguing that violations of the statute require a corrupt intent. While courts have so far ruled in OIG’s favor, should a court accept this argument, the AKS regulatory landscape could be upended, providing health care providers and suppliers the opportunity to develop and implement arrangements that have historically been prohibited by the OIG.

The challenges to OIG’s interpretation of the AKS come in the context of OIG Advisory Opinion requests submitted by the manufacturers (or a related charity) proposing various forms of patient assistance programs under which the manufacturers or their related charities offer financial assistance to patients on the manufacturers’ products. The OIG denied each of the Advisory Opinion requests, finding that the proposed forms of patient assistance would constitute remuneration intended to induce patients to purchase the manufacturers’ drugs in violation of the AKS.

The OIG has consistently reiterated its opposition to manufacturer-operated patient assistance programs, with both the OIG’s 2005 Special Advisory Bulletin: Patient Assistance Programs for Medicare Part D Enrollees and the 2014 Supplemental Special Advisory Bulletin: Independent Charity Patient Assistance Programs noting that manufacturers cannot provide co-pay assistance to federal health care program beneficiaries, as doing so would constitute a kickback. However, the guidance also described the parameters under which independent charities can provide co-pay assistance, including assistance to federal health care program beneficiaries (i.e., Medicare beneficiaries). One of the key factors with respect to the operation of charitable patient assistance programs, is the independence of the charities operating the programs. While the independent charities are primarily funded by manufacturers, to be considered independent for OIG’s purposes, the charities must retain independence from donors. This means the donors cannot influence the design or operation of the patient assistance programs, and the programs cannot favor patients on the donor’s drug (e.g., assistance cannot be contingent upon the patient being prescribed a donor’s drug).

In three separate litigations, Pfizer Inc. v. United States Department of Health and Human Services, Vertex Pharmaceuticals Incorporated v. United States Department of Health and Human Services et al., and Pharmaceutical Coalition for Patient Access v. United States of America et al., manufacturers are challenging OIG’s long-held position that manufacturers cannot provide patient assistance, including co-pay assistance, to federal health care program beneficiaries. In doing so, the goal of the manufacturers is to provide assistance to patients, including co-pay support, either directly or through a charity that is not considered independent by OIG’s standards due to the relationship of the proposed charities to the manufactures and the level of influence by the manufacturers over the proposed charities. In each litigation, the manufacturer or, in the case of the Pharmaceutical Coalition for Patient Access (PCPA), the charity controlled by the manufacturers, is challenging an unfavorable Advisory Opinion issued by OIG concluding that the proposed patient assistance programs would constitute remuneration intended to induce patients to use a particular manufacturer’s products.

Under the arrangements proposed by Pfizer and PCPA, the proposed charities would be funded exclusively by manufacturers and would only provide support to patients on those funders’ drugs. In Pfizer’s Advisory Opinion request, the company proposed two potential co-pay assistance programs: (1) a direct co-pay assistance program and (2) a Pfizer-supported charity co-pay assistance program. Similar to the proposed Pfizer-supported charity co-pay assistance program, PCPA, an organization funded by manufacturers of Part-D-covered oncology drugs, proposed to create its own patient assistance program that would provide co-pay assistance to patients who meet certain qualifying criteria and then invoice each participating manufacturer for “the total amount of cost-sharing subsidies provided to eligible Part D enrollees.”

Vertex’s Advisory Opinion request focused on a proposed “Fertility Preservation Program” under which Vertex would pay fertility providers through a third-party vendor for the treatments provided to patients enrolled in the program. While this proposed program involved coverage of related treatment costs (i.e., the costs of the fertility treatments) rather than coverage of the co-pay costs associated with the Vertex drug itself, OIG nonetheless applied the same reasoning as in the Pfizer and PCPA opinions, concluding that the program would constitute remuneration to the patients in violation of the AKS.

In each litigation, the manufacturer (or, in the case of PCPA, the manufacturer-related charity) is challenging OIG’s position that the manufacturer’s subsidies constitute “remuneration” meant “to induce” patients to purchase manufactures’ products. The manufacturers argue that the AKS criminalizes conduct that “leads or tempts to the commission of crime” through “remuneration” that corrupts medical decision-making, as part of a quid pro quo transaction. In other words, according to the manufacturers, “to induce” requires a corrupt intent. Therefore, because the manufactures’ efforts to assist patients with meeting Medicare co-pay obligations or gaining access to Medicare-covered treatments (or treatments otherwise covered by the federal health care programs) are not done with malice or corrupt intent, such programs would not violate the AKS.

To date, no court has agreed with the manufacturers’ position. While Vertex is still pending trial in the District Court for the District of Columbia, the District Court for the Southern District of New York ruled against Pfizer, noting that “the law is clear that absent an express carve-out, the Anti-Kickback Statute prohibits any remuneration intended to induce someone to purchase or receive a drug or medical service.” Similarly, the District Court for the Eastern District of Virginia ruled against PCPA, concluding that HHS OIG’s “interpretation of the AKS adheres faithfully [to] the statute’s plain text, comports with its context, and does not offend its history.” On appeal, the Second Circuit affirmed the District Court’s decision in Pfizer, finding that an AKS violation does not require “corrupt intent.” Pfizer then appealed to the US Supreme Court, which denied certiorari. PCPA’s case is currently on appeal with the Fourth Circuit.

Should the Vertex court or a court of appeals agree that the statutory terms “induce” and “remuneration” should be construed more narrowly and require a corrupt intent to violate the AKS, AKS regulatory interpretation and much of OIG’s guidance could be called into question. Arrangements that have historically been viewed as suspect by the OIG could be considered compliant to the extent the parties lacked a corrupt intent to violate the law.

And the Fox Says… Ongoing efforts challenging OIG’s statutory interpretation of the AKS demonstrate manufacturers’ interests in narrowing the scope of prohibited activities under the law. Providers and suppliers should continue monitoring the ongoing litigation and any future efforts to challenge OIG’s interpretation of the AKS, as any judicial narrowing of the interpretation could provide opportunities to develop innovative arrangements that may be beneficial to patients. Regardless, developing compliant arrangements to benefit patients can be complicated, and legal counsel can help to ensure you remain apprised of all relevant developments and assist in structuring compliant arrangements.

2. Litigation Developments

What Is the FCA Without Its Qui Player? A Look Into Zafirov’s Future Implications and the Enforceability of the FCA Without a Qui Tam Device

As we previously discussed, a Florida federal district court recently held in Zafirov v. Florida Medical Associates LLC that the FCA qui tam provision is unconstitutional. The court reasoned that a relator who litigates an FCA lawsuit on behalf of the United States is not a properly appointed “officer” under Article II of the US Constitution and, thus, does not have the authority to serve in that position. This article examines several questions: What does FCA enforcement look like without a qui tam device? What questions did Zafirov leave unresolved? And what should one expect in the coming years as this issue is litigated on appeal and among other courts?

Can the government successfully enforce the FCA without a qui tam device? If, in the end, the qui tam provision is voided, that does not spell doom for the FCA. This is because the government still has the authority to file FCA actions itself and could hire many more attorneys to investigate and prosecute them. The government also has other mechanisms to entice whistleblowers to come out of the woodwork and inform it of wrongdoing. For example, recently, the US Department of Justice (DOJ) announced the “Corporate Whistleblower Awards Pilot Program.” This enforcement program compensates whistleblowers who inform the DOJ of original and truthful information concerning corporate misconduct. If the information leads to a successful forfeiture of over $1 million, the whistleblower is compensated. Currently, however, the program does not cover FCA claims. But the DOJ or US Congress could theoretically expand this program, or create a new one, to attract whistleblowers who have information concerning FCA violations. Under such a program, the government’s litigation of FCA claims would not be all that different from what happens currently. Rather than intervene in a meritorious FCA case brought by a relator, the government would file its own case based on information provided by a whistleblower. This would avoid the constitutional pitfalls identified in Zafirov. A post-qui tam landscape will certainly see fewer FCA claims being filed overall, but the government would likely file more FCA claims than it does now.

Still, many questions remain unresolved under Zafirov concerning the extent to which relator suits are constitutionally permissible. In Zafirov, the relator was litigating an FCA suit in which the United States declined to intervene. But what happens if the United States does intervene and takes over the case? Are those suits permissible? Does the relator act as an “officer” if her role is just limited to filing a lawsuit? Could the government get around Zafirov by intervening in more cases? Or are all FCA lawsuits filed by a relator invalid ab initio even if the government intervenes? If so, would Congress have to create a mechanism to appoint a relator as an officer for FCA purposes? In short, it is unclear how broadly Zafirov will be read. On one hand, it could be read to only apply to non-intervened cases. On the other hand, the very act of filing a complaint on behalf of the United States may require a constitutional appointment, and the government’s intervention would not cure that taint. These questions will remain unresolved until they are addressed by the Supreme Court.

Only time will tell what will happen as this issue percolates in the courts. Already, several circuit courts have upheld the constitutionality of the qui tam provisions. In the district courts located in circuits that have not yet addressed this issue, defendants are filing dispositive motions arguing that the relator’s appointment is unconstitutional. Though the decision in Zafirov is currently an outlier, it soon may not be as more courts consider arguments that rely on Zafirov’s reasoning.

And the Fox Says… Zafirov is significant because it may be the first blow to a significant enforcement mechanism on which the government heavily relies. But the qui tam provision’s fate is not set in stone. The relator in Zafirov will almost certainly appeal the decision to the Atlanta-based Eleventh Circuit Court of Appeals. That court’s decision may then be appealed to the Supreme Court. The appeals process for Zafirov may take years before the Supreme Court grants certiorari on the issue (if it does at all). In the meantime, the issue is not going away, and Zafirov is unlikely to be a one-off case. Those who are in the throes of an FCA investigation or litigation should raise this issue as a possible litigation risk or as an affirmative defense. The best possible time to raise this issue amid litigation is on a Rule 12(b)(6) motion to dismiss. Even if a case is past this point, Zafirov supports the position that such an argument is not waived, given that the issue goes to the relator’s very authority to bring the suit. So, defendants litigating a case brought by a relator should raise this issue as soon as possible. We at ArentFox Schiff will continue to monitor developments to help our clients navigate this ever-changing legal landscape.

3. Compliance Corner

AI Under the DOJ Microscope: How Health Care Companies Should Respond

Many companies, including health care companies, have incorporated artificial intelligence (AI) into their business practices. While historically, AI has largely been unregulated, that is starting to change. Recently, state governments have begun regulating the use of AI in the health care setting, as our colleagues summarized here regarding recently passed California legislation requiring health care facilities, clinics, and physician practices in the state to disclose the use of AI in communications regarding patient clinical information. Now, AI has the attention of the DOJ.

This past March, Deputy Attorney General Lisa Monaco indicated the DOJ’s interest in AI, stating at the American Bar Association’s 39th National Institute on White Collar Crime that “fraud using AI is still fraud.” Following Monaco’s statement, in September, the Criminal Division of the DOJ updated its Evaluation of Corporate Compliance Programs (ECCP) guidelines to require DOJ prosecutors to consider whether a company’s compliance program safeguards against misuse of AI or other emerging technologies. As a brief primer, the ECCP is a DOJ document that prosecutors use to evaluate the effectiveness of a corporate compliance program in determining whether to criminally charge a company. The document is published publicly and provides helpful insight into the DOJ’s expectations for companies as they build and implement their corporate compliance programs.

Under the updated guidance, the DOJ emphasizes that companies need to assess AI-related risks as part of their overall enterprise risk management systems. Specifically, a corporate compliance program must consider whether it has specific policies and procedures to prevent “any potential negative or unintended consequences” resulting from the use of AI in its business practices and compliance program. Additionally, a company should proactively conduct risk analyses of its use of AI and mitigate the potential for “deliberate or reckless misuse of technologies” by company insiders. Other key considerations are whether the company trains its employees on the use of AI, whether there is a baseline of human decision-making used to assess AI-generated content, and how the company implements accountability over the use of AI.

In its September update, the DOJ also revised a section of the ECCP, asking whether compliance personnel have access to relevant data sources to allow for “timely and effective monitoring and/or testing” of policies, controls, and transactions. A key consideration is whether the assets, resources, and technology available to compliance programs are comparable to those available elsewhere in the company. An imbalance in access to technology and resources may indicate a compliance program’s inability to detect and mitigate risks, particularly if a business unit is given unfettered access to AI tools while compliance lags behind.

Compliance officers at health care companies should take steps now to ensure that the implementation and use of AI within their organizations do not raise any compliance red flags. Consider the recent Texas Attorney General settlement with Pieces Technologies, a company that markets generative AI products, which resolved allegations that the company made misleading statements regarding the accuracy of its products. As part of the settlement, Pieces agreed to provide more explicit disclosures to customers related to how the company’s products should be used and the potential harm that could result from the products.

Providers using such technologies may encounter data privacy and security risks, including cybersecurity risks such as ransomware and malware attacks, bias and fairness concerns with respect to the training of the AI systems that may result in preference for a particular drug or treatment, and reliability and accountability concerns affecting a health care professional’s ability to provide patient care. With that being said, the DOJ could conduct investigations similar to the Pieces investigation against health care providers that use AI without considering these risks.

To help mitigate the risks associated with AI, including in the event of a DOJ investigation, compliance officers should be involved during all stages of discussions around AI initiatives, including through implementation and use. Compliance officers should ensure their companies have appropriate policies and procedures governing the use of AI once it is introduced to their organizations and provide training to employees both on the AI technology and on the policies governing its use. Finally, compliance officers should ensure they have the necessary access to AI systems to conduct compliance oversight measures. Such oversight measures may include assessing AI-related risks as part of their organization’s annual risk assessment, conducting AI-related auditing, and monitoring to help identify potential issues with the technology as they arise.

And the Fox Says… The DOJ’s AI-focused compliance guidance is a call to action for companies to proactively address the legal and regulatory implications of AI technologies, reminding them that the age of AI requires more than just innovation — it demands robust compliance strategies. Companies that conduct regular risk assessments of their practices must consider the use of AI, update policies and procedures to address its use, provide compliance teams with equal data access, and regularly update training on the lawful use of these technologies. Empowering compliance personnel and working with outside compliance experts to make these regular updates will put a company in a good position to meet these new standards. By embracing these guidelines, companies can mitigate legal and regulatory risks while leveraging the capabilities of AI technologies.

4. In Case You Missed It

Our most popular blog post from the last quarter: Federal Court Permits Investors to Resume Kickback Suit Against Teva.

© 2024 ArentFox Schiff LLP
For more on the FCA, visit the NLR Criminal Law Business Crimes section

Unitary Executive Theory Surfaces in Court: District Court Rules Qui Tam Provisions of the False Claims Act Unconstitutional

On September 30, 2024, the United States District Court for the Middle District of Florida ruled that filing claims on behalf of the government under qui tam provisions of the False Claims Act (FCA) is unconstitutional in United States of America ex rel. Clarissa Zafirov v. Florida Medical Associates, LLC, et al. The ruling, made by Judge Kathryn Mizelle, a 33-year-old Trump-appointee, declares that False Claims Act whistleblowers undermine executive power by filing qui tam lawsuits.

The Zafirov decision follows a recent dissent by Supreme Court Justice Clarence Thomas in which he questioned the constitutionality of the FCA’s qui tam provisions. It also follows a political movement pushing the Unitary Executive Theory in the United States judicial courts.

This controversial decision mischaracterizes the qui tam provisions of the FCA and will likely be appealed to the Eleventh Circuit. Should the ruling stand, however, it and other similar challenges to the constitutionality of the FCA’s qui tam provisions will cripple what has been America’s number 1 anti-fraud law. Since the False Claims Act was modernized in 1986, qui tam whistleblower cases have allowed the government to recover more than $52 billion from fraudsters, over $5 billion of which came in cases where the government chose not to intervene.

Applying the ‘Unitary Executive’ Theory to Paint Whistleblowers as ‘Self-Selected Private Bounty Hunters’

Originally passed during the Civil War, the False Claims Act contains qui tam provisions enabling whistleblowers, also known as ‘relators’, to report government contracting fraud and work directly with government investigators. Once the whistleblower brings forward the suit, the government may intervene and continue to prosecute the litigation as the plaintiff. However, in the interest of accountability, the qui tam provision of the FCA permits the whistleblower to pursue a case even if the United States declines prosecution. Whistleblowers who file successful qui tam lawsuits are eligible to receive up to 30% of recovered damages.

The question of the constitutionality of the False Claims Act’s qui tam provisions was notably raised in a dissent by Justice Clarence Thomas in the 2023 Supreme Court case U.S., ex rel. Polansky v. Executive Health Resources. While Polansky discussed the issue of a relator pursuing a lawsuit after the government declines to intervene, Thomas raised a separate issue of constitutionality in his dissent. He stated that “there are substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interests of the United States in litigation.” In a one-paragraph concurrence, Justice Brett Kavanaugh, joined by Justice Amy Coney Barrett, invited challenges to the constitutionality of the FCA’s qui tam provisions, writing that “In my view, the Court should consider the competing arguments on the Article II issue in an appropriate case.”

Judge Mizelle, a former clerk of Justice Thomas, drew heavily upon Justice Thomas’ dissent in her decision. Echoing Thomas’ dissent in Polansky, JudgeMizelle concluded that the qui tam provision “directly defies the Appointments Clause by permitting unaccountable, unsworn, private actors to exercise core executive power [litigating on behalf of the government] with substantial consequences to members of the public.” The District Court thus agreed with the defendants that the FCA’s qui tam provisions indeed violates the Appointments Clause of Article II of the Constitution.

The Zafirov ruling relies upon the ‘unitary executive theory,’ a constitutional law theory that states the President of the United States has sole authority over the executive branch and that power cannot be limited by Congress.

According to then-Assistant Attorney General William Barr’s 1989 Memo Constitutionality of the Qui TamProvision of the False Claims Act, which repeatedly cited by both the judgment and the U.S. Chamber of Commerce amicus brief, the move to enable private citizens to file on behalf of the government represents a breach of the separation of powers allowing “Congress to circumvent the Executive’s check.” Barr rebrands whistleblowers as “private bounty hunters” and claims that the 1986 amendments which reincorporated the FCA’s qui tam provisions was a tactic by Congress to override presidential powers. Barr maintains that “only a unitary executive” that is, “only the President” can “take care that the laws be faithfully executed.”

In a dissent in the 1988 Supreme Court case Morrison v Olsen, Justice Antonin Scalia interpreted the ‘Unitary Executive’ to have unchecked authority to appoint and remove executive officials, claiming that the firing of an independent counsel without cause falls within the limitless power of the President over the executive.

The Middle District of Florida ruling draws on Scalia’s rationale arguing that the right to pursue a qui tam case denies the President the executive authority of appointment of the relator. Under the FCA, however, whistleblowers are granted certain rights. For example, the executive must guarantee a whistleblower the “right to continue as a party” with or without the United States intervening and wait for the relator’s approval before settling the action.

The court agrees with the defendants’ argument that the FCA therefore “den[ies] the President necessary removal authority and sufficient supervisory control over [the relator].”

The court contends that the physician-turned-whistleblower Zafirov was “an improperly appointed officer” in violation of the Appointments Clause and the Take Care and Vest Clause of the Article. According to the ruling, by filing a qui tam against Medicare fraud, Zafirov was granted “core executive power” without any “proper appointment under the Constitution.”

A Mischaracterization of Qui Tam Whistleblowing

Judge Mizelle’s decision in United States ex rel. Zafirov v. Fla. Med. Assocs. first mischaracterizes the FCA’s qui tam as a breach of presidential power instead of as a provision that strengthens checks and balances. Second, the court ignores case law outlining government prerogatives over relators such that they are not menacing to the core Executive powers.

The revived qui tam provision of 1986 was a legislative move to improve government accountability over fraud—neither expanding Congressional oversight nor the size of government—by mobilizing private citizens rather than public agents. The Florida court wrongfully elevates the status of a relator to an ‘officer’ responsible to the government. A citizen pursuing a claim on behalf of the government is not and does not pretend to be an extension of the Executive Office and, therefore not subject to administrative appointment procedure. Rather the relator is a private person, and the government is a third party to the case. The Vt. Agency of Natural Res. v. United States ex rel. Stevens majority opinion also written by Justice Scalia discussing whether relators have judicial standing under Article III, qualifies that the relator is on “partial assignment of the Government’s damages claim.” A ‘partial assignee’—to which only some rights are transferred—may “assert the injury suffered by the assignor” (the U.S.) so long as the harm done is sufficient. Scalia reiterates the ‘representational standing’ of relators and makes no remarks on its challenge to the Unitary Executive. Judge Mizelle’s reliance on Morrison v Olsen to claim that like an independent counsel, a relator should also qualify as an officer ignores the Stevens Supreme Court ruling distinguishing relators as a type of assignee.

Mizelle also raises that relators seem to enjoy unbridled authority over the Executive by initiating a qui tam suit without government intervention. While Mizelle points to 31 U.S.C. § 3730 (c) to demonstrate the unchecked power of the relator, she neglects the numerous limitations specified in § 3730 (c)(2), including the broad power of the government to dismiss the qui tam action after intervening notwithstanding any objections from the relator. She frames the government intervention as “the government’s ability to pursue a parallel action and to exert limited control [which] does not lessen a relator’s unchecked civil enforcement authority to initiate.” In truth, the statute and years of judicial history maintain the government’s absolute discretion over whether to intervene in or completely stop the case by dismissing the action.

Contrary to Judge Mizelle’s belief, relators are not free from potential government intervention even when independently pursuing the case. On the contrary, relators are not able to independently pursue any binding action on the government unimpeded by the government. While Zafirov independently pursued the claim for five years, the government could have intervened and then dismissed the claim at any time. If the government intervenes, underlined in 31 U.S.C. § 3730 (c)(2), the government is empowered to settle the action with the defendant notwithstanding any objections from the relator and to restrict their participation in the course of the litigation. The fact that the government may choose not to intervene at one point does not divest them of their ability to intervene later and exercise significant authority over the relator.

Implications: Crippling the False Claims Act

Judge Mizelle’s decision seeks to end the historic success of the qui tam provision of the FCA by declaring the government’s most effective mechanism of detecting fraud as unconstitutional. While the decision does not invalidate the FCA nationally, this case could be the first step in a series of appeals that may elevate the issue to the Supreme Court.

The government’s largest obstacle to fighting white-collar crime such as fraud is detection. The diffuse and indirect nature of fraud requires those with insider knowledge to assist the government in pursuing corruption. In terms of the effectiveness of the qui tam provision, between 1987 and 2022, the Department of Justice Civil Fraud Division recovered $22.1 billion without the help of whistleblowers versus $50.3 billion with the help of whistleblower lawsuits. Since the 1986 amendments to the FCA, whistleblowers have been the direct source of approximately 70% of civil fraud recoveries by the federal government. From the Medicare billing fraud committed in Florida Medical Associates to Russian money laundering, the United States may lose its most effective tool to fight fraud fraud if the qui tam provisions of the FCA are ruled unconstitutional.

Copyright Kohn, Kohn & Colapinto, LLP 2024. All Rights Reserved.
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section.

Is It the End of the False Claims Act As We Know It? District Court Rules Qui Tam Provisions Unconstitutional

In a first-of-its-kind ruling on 30 September 2024, Judge Kathryn Kimball Mizelle of the US District Court for the Middle District of Florida held in United States ex rel. Zafirov v. Florida Med. Assocs., LLC that the qui tam provisions of the False Claims Act (FCA) are unconstitutional. No. 19-cv-01236, 2024 WL 4349242, at *18 (M.D. Fla. Sept. 30, 2024). Specifically, Judge Mizelle found that qui tam relators in FCA actions qualify as executive branch “Officers” who are not properly appointed, thereby violating the Appointments Clause of Article II of the US Constitution.

The holding adopts Appointments Clause arguments that have been gaining traction in recent Supreme Court opinions. It also addresses some of the “serious constitutional questions” that Justice Clarence Thomas had raised regarding the FCA’s qui tam provisions in his dissent in the Supreme Court’s June 2023 decision in United States ex rel. Polansky v. Exec. Health Res., Inc., 599 U.S. 419, 449 (2024) (Thomas, J., dissenting). Notably, Judge Mizelle’s decision in Zafirov is contrary to a number of other decisions post-Polansky that rejected similar constitutional arguments.

The decision is sure to be appealed to the Eleventh Circuit and it remains to be seen whether Judge Mizelle’s rationale will withstand appellate scrutiny. In any event, for the time being, the defense bar has a new tool in its arsenal to seek dismissal of qui tam FCA actions. Moreover, if the decision stands, it will have broad ramifications on the FCA, which has provided for qui tam actions (a form of “whistleblower” activity) since the FCA’s enactment in 1863. Cases filed by qui tam relators have comprised the largest portion of overall FCA recoveries for years, accounting for 87% of FCA recoveries in the most recent fiscal year. For additional data on qui tam cases, see our firms’ recent white paper here.

Summary of the Decision

In 2019, the relator, a board-certified family care physician, filed a qui tam FCA action against her employer and several other providers, as well as Medicare Advantage Organizations (MAOs). The relator alleged that the providers acted in concert with the MAOs to artificially increase the risk adjustment scores of Medicare Advantage enrollees, in turn increasing the defendants’ capitated payments from the government.

After a lengthy procedural history involving multiple rounds of motions to dismiss, in February 2024, the defendants sought judgment on the pleadings, arguing that the FCA’s qui tam provisions violate the Appointments, Vesting, and Take Care Clauses of Article II of the US Constitution. The defendants also argued that historical practice does not cure the qui tam provisions’ constitutional defects. The United States intervened solely to defend the constitutionality of the FCA’s qui tam provisions, with several amici curiae also filing briefs.

The court did not reach the Vesting and Take Care Clause arguments but agreed with defendants that the qui tam provisions violate the Appointments Clause. Analyzing that question, the court first found that qui tam relators are “Officers of the United States” because: (1) relators exercise significant authority by possessing civil enforcement authority on behalf of the United States; and (2) relators occupy a “continuing position” established by law given that the FCA prescribes their statutory duties, powers, and compensation and the position is analogous to other temporary officials that wield core executive power, such as bank receivers and special prosecutors. Second, the court found that Article II of the US Constitution contains no qui tam exception, rejecting arguments that historical practice confirms the qui tam provisions’ constitutionality. The court stated that “[w]hen the Constitution is clear, no amount of countervailing history overcomes what the States ratified.” Third, the court found that because a relator is an Officer, the relator must be appointed by the president, the head of an executive department, or a court. Because relators are self-appointed by initiating their own FCA actions, the court held that the qui tam provisions violate the Appointments Clause and dismissed the action.

Key Takeaways

  • Although noteworthy, Zafirov is an outlier among the multiple decisions pre- and post-Polansky that have addressed the qui tam provisions’ constitutionality. The case is also expected to be appealed by both the relator and the United States to the Eleventh Circuit. Of note, the Eleventh Circuit is currently considering an appeal of a separate Appointments Clause ruling that found a special counsel was improperly appointed in United States v. Trump.
  • This issue could also make its way to the Supreme Court. In addition to Justice Thomas’ comments noted above, Justices Brett Kavanaugh and Amy Coney Barrett (in a concurrence in Polansky) acknowledged that “[t]here are substantial arguments that the qui tam device is inconsistent with Article II” and suggested that the Court consider those arguments in an “appropriate case.” Time will tell whether Zafirov is that case.
  • The anti-whistleblower holding in Zafirov stands in sharp contrast to other recent notable developments that encourage whistleblower activity, including the US Department of Justice’s Corporate Whistleblower Awards Pilot Program and similar initiatives, as well as recent US Securities and Exchange Commission enforcement actions.
  • Despite the expected appeals, the success in Zafirov raises important issues for FCA defendants and the defense bar to evaluate, and the decision may open the door to similar arguments in other FCA qui tam actions. For one, it remains to be seen what impact Zafirov should have where a defendant is considering settling in a nonintervened case and whether a conditional settlement that preserves the right to appeal the constitutional issue is appropriate. Other courts may also draw different lines, including if and how the government’s decision to intervene impacts the constitutional analysis. These will all be important issues for affected companies and FCA practitioners to consider and keep an eye on.

Our Firm’s FCA lawyers will continue to closely monitor these developments.

Copyright 2024 K & L Gates
For more on the False Claims Act, visit the NLR Criminal Law Business Crimes section.

Walgreens Settles for $106.8 Million Over FCA Violations

On September 13, the US Department of Justice (DOJ) announced that Walgreens Boots Alliance Inc. and Walgreen Co. (collectively, Walgreens) agreed to pay $106.8 million to resolve allegations of violating the False Claims Act (FCA) and state statutes. The allegations pertain to billing government health care programs for prescriptions that were never dispensed. The government alleged that from 2009 until 2020, Walgreens submitted claims to federal health care programs for prescriptions that were processed but never picked up by beneficiaries. This resulted in Walgreens receiving 10s of millions of dollars for prescriptions that were never actually provided to health care beneficiaries.

Under the resolution, Walgreens agreed to enhance its electronic pharmacy management system to prevent future occurrences and self-reported certain conduct. In addition, Walgreens refunded $66,314,790 related to the settled claims, which allowed Walgreens to receive credit under the DOJ’s guidelines for taking disclosure, cooperation, and remediation into account in FCA cases.

Under the settlement agreement, the federal government received $91,881,530, and the individual states received $14,933,259 through separate settlement agreements. The settlement will resolve three cases pending in the District of New Mexico, Eastern District of Texas, and Middle District of Florida under the qui tam, or whistleblower, provision of the FCA. Whistleblowers Steven Turck and Andrew Bustos, former Walgreens employees, will receive $14,918,675 and $1,620,000, respectively, for their roles in filing the suits.

The DOJ’s press release can be found here.

CVS Health Subsidiary Settles FCA Allegations for $60 Million

On September 16, Chicago company Oak Street Health, a subsidiary of CVS Health, agreed to pay $60 million to resolve allegations that it violated the FCA by paying kickbacks to third-party insurance agents in exchange for recruiting seniors to Oak Street Health’s primary care clinics from September 2020 through December 2022.

According to the DOJ, in 2020, Oak Street Health developed a program called the Client Awareness Program. Under the program, which was developed to increase patient membership, seniors who were eligible for Medicare Advantage received marketing messages designed to generate interest in Oak Street Health. Upon receipt of these messages, third-party insurance agents organized three-way phone calls with Oak Street Health employees for the interested seniors. Oak Street Health paid agents around $200 per beneficiary referred or recommended as part of this service. Instead of basing referrals and recommendations on the best interest of the seniors, these payments allegedly encouraged agents to base referrals and recommendations on Oak Street Health’s financial interests.

The DOJ’s press release can be found here.

Dunes Surgical Hospital Settles for $12.76 Million Over FCA Violations

On September 16, South Dakota companies Siouxland Surgery Center LLP, d.b.a. Dunes Surgical Hospital, United Surgical Partners International Inc. (USPI), and USP Siouxland Inc. agreed to pay approximately $12.76 million to settle FCA allegations related to improper financial relationships between Dunes and two physician groups. Since July 1, 2014, USPI has maintained partial ownership of Dunes through USP Siouxland, a wholly owned subsidiary of USPI. Following an internal investigation, Dunes and USPI disclosed the arrangements at issue to the government.

From at least 2014 through 2019, Dunes allegedly made financial contributions to a nonprofit affiliate of a physician group whose physicians referred patients to Dunes. According to the complaint, those payments allegedly funded the salaries of referring employees. Other allegations include that Dunes provided a different physician group with below-market-value clinic space, staff, and supplies. The DOJ alleged that these arrangements violated both the Anti-Kickback Statute and the Stark Law, which are “designed to ensure that decisions about patient care are based on physicians’ independent medical judgment and not their personal financial interest.”

Following Dunes’ and USPI’s internal compliance review and independent investigation, the companies promptly took remedial actions and disclosed such arrangements to the DOJ. The companies also provided the government with detailed and thorough written disclosures and cooperated throughout its investigation, resulting in cooperation credit for the companies.

Under the settlement, Dunes and USPI will pay $12.76 million to the federal government for alleged violations of the FCA, and approximately $1.37 million to South Dakota, Iowa, and Nebraska for their share of the Medicaid portion of the settlement.

The DOJ’s press release can be found here.

California Man Convicted for Paying Illegal Kickbacks for Patient Referrals to Addiction Treatment Facilities

On September 11, a federal jury convicted Casey Mahoney, 48, of Los Angeles, for paying nearly $2.9 million in illegal kickbacks for patient referrals to his addiction treatment facilities in Orange County, California. The facilities involved are Healing Path Detox LLC and Get Real Recovery Inc.

According to court documents and evidence presented at trial, Mahoney paid illegal kickbacks to “body brokers” who referred patients to his facilities. These brokers appeared to pay thousands of dollars in cash to patients to induce them to procure treatment at Mahoney’s facilities. Mahoney allegedly concealed these illegal kickbacks through sham contracts with the body brokers. The contracts purportedly required fixed payments and prohibited payments based on the volume or value of patient referrals, when in reality, payments were negotiated based on patients’ insurance reimbursements and the number of days Mahoney could bill for treatment. Mahoney also allegedly laundered the proceeds of the conspiracy through payments to the mother of one of the body brokers, falsely characterizing them as consulting fees.

The Eliminating Kickbacks in Recovery Act formed the basis of the charges against Mahoney. He was convicted of one count of conspiracy to solicit, receive, pay, or offer illegal remunerations for patient referrals, seven counts of illegal remunerations for patient referrals, and three counts of money laundering. He is scheduled to be sentenced on January 17, 2025, and faces a maximum penalty of five years in prison for the conspiracy charge, 10 years in prison for each illegal remuneration count, and 20 years in prison for each money laundering count.

The DOJ’s press release can be found here.

© 2024 ArentFox Schiff LLP

by: D. Jacques Smith, Randall A. Brater, Michael F. Dearington, Nadia Patel, Hillary M. Stemple, and Rebekkah R.N. Stoeckler of ArentFox Schiff LLP

For more news on FCA Violations visit the NLR Criminal Law Business Crimes section.

Litigation Against Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) play a large role in the pharmaceutical medication distribution industry and have faced a great deal of litigation in recent years. This blog entry looks at cases against PBMs brought under the U.S. False Claims Act (FCA), as well as those brought as class actions on behalf of various kinds of groups.

FCA Actions

Cases brought against PBMs under the FCA typically involve allegations of fraudulent billing practices, false statements, and kickback schemes. These cases often address whether PBMs have caused false claims to be submitted to government healthcare programs, such as Medicaid, and whether they have engaged in practices that violate the FCA and other related statutes.

First, PBMs may violate the FCA by failing to pay reimbursements to individuals, other business entities, and/or state or federal agencies. In United States v. Caremark, Inc., the U.S. Court of Appeals for the Fifth Circuit held that the district court erred in finding that the Defendant PBM did not impair an obligation to the government within the meaning of the FCA by unlawfully denying reimbursement requests from state Medicaid agencies.

Second, PBMs may violate the FCA by billing individuals, other business entities, and/or state or federal agencies for services that were never rendered. In United States ex rel. Hunt v. Merck-Medco Managed Care, L.L.C., the U.S. District Court for the Eastern District of Pennsylvania addressed allegations that the PBM billed for services not rendered and fraudulently avoided contractual penalties it would otherwise have had to pay. The Court found that the Complaint sufficiently alleged that the PBM caused false claims to be presented to an agent of the United States, satisfying the statutory requirements of the FCA.

Third, PBMs may violate the FCA by overcharging individuals, other business entities, and/or state or federal agencies for services. For example, in two cases that were settled in 2019 in the Western District of Texas and the Northern District of Iowa, two subsidiaries of Fagron Holding USA LLC settled with the U.S. for over $22 million in connection with such a scheme. In the first, Fagron subsidiary Pharmacy Services Inc. (PSI) and its affiliates were accused of submitting fraudulent compound prescription claims to federal healthcare programs, manipulating pricing through sham insurance programs, paying kickbacks to physicians, and illegally waiving copays. In the second, Fagron subsidiary B&B Pharmaceuticals Inc. faced claims under the FCA for setting an inflated average wholesale price for Gabapentin.

Finally, PBMs may violate the FCA by engaging in kickback schemes with drug manufacturers or other entities. These schemes may also involve waiving copays and the provision of unnecessary services to patients. One notable case involves AstraZeneca LP, a pharmaceutical manufacturer, which agreed to pay $7.9 million to settle allegations that it engaged in a kickback scheme with Medco Health Solutions, a PBM. The allegations included providing remuneration to Medco in exchange for maintaining exclusive status of AstraZenica’s heartburn relief drug Nexium on certain formularies, which led to the submission of false claims to the Retiree Drug Subsidy Program. Similarly, Sanford Health and its associated entities agreed to pay $20.25 million to resolve FCA allegations related to false claims submitted to federal healthcare programs. The allegations included violations of the Anti-Kickback Statute and medically unnecessary spinal surgeries, with one of Sanford’s top neurosurgeons receiving kickbacks from his use of implantable devices distributed by his physician-owned distributorship.

Class Actions

Class action cases against pharmacy benefit managers (PBMs) often involve allegations of deceptive practices, breach of fiduciary duty, and violations of contractual obligations. These cases typically involve issues such as the improper handling of rebates, kickbacks, inflated drug costs, and the failure to act in the best interest of plan participants.

First, PBMs may subject themselves to liability by failing to pass on negotiated rebates or other types of savings to their members. In Corr. Officers’ Benevolent Ass’n of the City of N.Y. v. Express Scripts, Inc., a union alleged that PBM managers failed to pass on negotiated rebates to its members, instead keeping them for their own benefit. The court found sufficient allegations to support claims of deceptive practices and breach of fiduciary duty, allowing these claims to proceed.

Second, and far more commonly, PBMs face liability for engaging in antitrust violations. Such liability typically arises when PBMs collude with one another to fix drug processes or otherwise improperly influence the market for medications and/or other medical services. For example, in In re Brand Name Prescription Drugs Antitrust Litig., a class of retail pharmacies alleged that drug manufacturers and wholesalers conspired to deny them discounts. The court found sufficient evidence of violations to proceed to trial. Similarly, in Independent Pharmacies vs. OptumRx, more than 50 independent pharmacies filed a class action lawsuit against OptumRx, a division of UnitedHealth Group, alleging that OptumRx failed to comply with state pharmacy claims reimbursement laws, leading to illegal price discrimination and reimbursement violations. Lastly, in Elan and Adam Klein, Leah Weav, et. al v. Prime Therapeutics, Express Scripts, and CVS Health, the Plaintiffs brought a action lawsuit against three major PBMs – Prime Therapeutics, Express Scripts, and CVS Health – on behalf of EpiPen purchasers with ERISA health plans for contributing to EpiPen price inflation through rebates and breaching their fiduciary duty to plan members.

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In short, because PBMs play such a large role in the pharmaceutical medication distribution industry, there are many ways that they can subject themselves to liability under the FCA, pursuant to a class action, or otherwise. As the place of PBMs in this marketplace continues to grow, we can expect that litigation against them will do likewise. Potential plaintiffs seeking to bring claims against a PBM should consult with an experienced attorney in order to determine all of the causes of action that may be available to them.

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1United States v. Caremark, Inc., 634 F.3d 808 (5th Cir. 2011).
2United States ex rel. Hunt v. Merck-Medco Managed Care, L.L.C., 336 F. Supp. 2d 430 (E.D. Pa. 2004).
3 Corr. Officers’ Benevolent Ass’n of the City of N.Y. v. Express Scripts, Inc., 522 F. Supp. 2d 1132.
4In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599.

© 2023 Young Law Group. All rights reserved
For more news on Litigation against PBMs, visit the NLR Litigation Trial Practice section.

DOJ Implements New Whistleblower Reward Program

Companies who submit healthcare claims to private payors, provide financial services to customers, interact with domestic or foreign public officials, or otherwise operate in highly regulated industries should take note that the Department of Justice (DOJ) has taken another significant step in its ongoing effort to encourage new whistleblowers with information about potential corporate criminal malfeasance to report that information to the government. On August 1, 2024, the DOJ announced its long awaited Corporate Whistleblower Awards Program. The program seeks to fill “gaps” in existing whistleblower programs by providing awards of up to 30% of forfeited proceeds for reporting criminal conduct that is not otherwise covered by an existing system for awarding whistleblowers. The silver lining for companies is that the program incentivizes the whistleblowers to cooperate with the company’s internal compliance function. DOJ also provides for a presumptive declination of criminal charges for companies that self-report to DOJ within 120 days of the time the issue is first raised internally by the whistleblower, providing strong incentives for companies to investigate issues quickly.

The program represents the DOJ’s latest effort to increase the number of voluntary self-disclosures of corporate criminal activity. In January 2023, the DOJ announced its revised Corporate Enforcement and Voluntary Self Disclosure Policy, which sought to expand the incentives for companies to voluntarily self-disclose misconduct, cooperate with DOJ investigations, and take prompt and full remedial measures. The policy’s primary incentive was the prospect of a presumed declination for companies who followed its mandates.

As we discussed in a previous post, efforts to increase voluntary self-disclosures continued in April 2024 when the DOJ launched a Pilot Program on Voluntary Self Disclosures for Individuals. That initiative expanded the scope of potential whistleblowers by including those complicit in wrongdoing, granting them eligibility for immunity from prosecution in return for reporting the activity. In substance, that structure incentivized both individual wrongdoers and the corporations for whom they worked to be the first to report criminal activity. By pitting the would-be whistleblowers and the companies against each other, the DOJ effectively constructed a prisoners’ dilemma where the government stood to benefit regardless of which party acted first.

The program is a different verse from the same hymnal. It offers a different (but more traditional) incentive for whistleblowers – the opportunity for financial reward – while maintaining the goal of increasing the number of voluntary self-disclosures. The program seeks to achieve that objective by motivating those who are aware of misconduct, but perhaps are otherwise unable to qualify for a bounty under the current framework or otherwise uninterested in reporting the activity without a personal benefit.

The Basic Framework

Under the program, eligible individuals who voluntarily provide original information to the government in certain areas of focus and cooperate with the resulting investigation stand to receive 30% of any criminal or civil forfeitures over $1 million in accordance with a defined payment priority. The program lays out a basic structure for determining whether an individual is entitled to an award, but also affords the DOJ substantial discretion in deciding whether to make such awards, and in what amount. The key elements are:

  • Areas of focus – The program identifies four subject matter areas: 1) violations by financial institutions, their insiders and agents involving money laundering, fraud, and fraud against or non-compliance with regulators; 2) foreign corruption and bribery and violations of money laundering statutes; 3) domestic corruption violations including bribes and kickbacks paid to domestic public officials; and 4) healthcare offenses involving private or non-public healthcare benefit programs and fraud against patients, investors or other non-governmental entities in the healthcare industry, or other violations of federal law not covered by the federal False Claims Act (FCA).
  • Eligible individuals – The program excludes several categories of individuals, including those eligible to report under other whistleblower programs and those who “meaningfully participated” in the criminal activity reported (although those who played a “minimal role” can still participate).
  • “Original information” – Essentially, independent non-public knowledge or analysis in the individual’s possession is considered “original” information. Notably, information can be deemed “original” if it “materially adds to the information that the Department already possesses.” Information that the individual has already reported through the company’s internal whistleblower, legal or compliance procedures can still be deemed “original,” provided the individual also reports that information to the government within 120 days of reporting internally. Privileged information is not considered “original” unless the crime, fraud or other exception to state attorney conduct rules apply.
  • “Voluntary” submission – The information must be reported before the DOJ or any federal law enforcement or civil enforcement agency initiates any inquiry relating to the subject matter.
  • “Cooperation” – Individuals who report must also cooperate fully with the DOJ’s investigation, including by participating in interviews, testifying before a grand jury or at trial, producing documents and, if requested, working in a “proactive manner” with federal law enforcement. This could include clandestine activities to gather evidence, such as recording phone calls or wearing a wire.
  • Criteria for determining amount of award – The program lists several factors that could militate in favor of increasing or decreasing the whistleblower’s financial award. Increases may be justified by the significance of the information provided, by the nature and extent of assistance provided, and, notably, by participation in internal compliance programs. Decreases may be appropriate where the reporting individual was a minimal participant in the underlying activity, or where the individual unreasonably delayed reporting, interfered with the company’s internal compliance and reporting systems, or had management or oversight responsibilities over the offices or personnel involved in the conduct.
  • Payment priority – When the victim is an individual, he or she must first be compensated “to the fullest extent possible” before a whistleblower can recover. When the victim is a corporate entity or government agency, the whistleblower jumps the line and is compensated first.
  • Relationship to the Corporate Enforcement and Voluntary Self Disclosure Policy – While the program incentivizes whistleblower reports to the DOJ, a simultaneous amendment to the self-disclosure policy provides that “if a whistleblower makes both an internal report to a company and a whistleblower submission” to the DOJ, companies who self-report that conduct within 120 days of the internal report “will still qualify for a presumption of a declination[.]” This amendment underscores the DOJ’s focus on increasing self-disclosures, inasmuch as it effectively removes the need for them to be truly “voluntary.” A company that receives a complaint through its whistleblower program may still be eligible under the self-disclosure policy even if the individual has already reported the conduct to the DOJ, but it has a limited time to investigate and decide whether to self-report the conduct.

Key Takeaways

Reading the tea leaves, we see several potentially significant takeaways for companies evaluating the program’s likely impact.

  1. As a starting point, companies should evaluate whether and to what extent their operations create new reporting opportunities under the program, and thus necessitate action. That process should involve answering the following questions:
    • Does the company operate in one of the areas of focus? If so, the program creates new opportunities and incentives for whistleblowers, and the company must assess whether it is prepared to address an increase in reports and to recognize that a reporter may have already disclosed information to the DOJ.
    • Is the company publicly traded? If so, the company is already subject to the Sarbanes-Oxley Act (SOX), which should mean that systems are already in place to receive, investigate and determine whether to take action, including potentially making a voluntary self-disclosure. The program provides an opportunity to reassess the efficacy of those systems but should not necessarily require the creation of new ones. Note that even those companies with existing whistleblower programs should consider the need to expand those systems to cover new areas of focus. For example, a company with a SOX whistleblower policy should consider the need to expand its scope to cover domestic corruption violations, which may not otherwise be covered.
    • Does the company submit claims to government payors? If so, it is already subject to the FCA and should already have a system in place to analyze internal compliance concerns. If that system focuses on or prioritizes issues regarding government payors, the company should expand its focus to include claims and conduct regarding private payors, which may now be subject to whistleblower bounties under the program.
  2. For privately held companies operating in the areas of focus that are not subject to the FCA, the program necessitates a thorough and candid assessment of the risk the program creates. Depending on the extent of that danger, companies should consider the following measures:
    • Create, or enhance as necessary, internal reporting mechanisms to receive and evaluate whistleblower reports.
    • Publicize the company’s expectation that employees should promptly report concerns internally about potential violations of law or company policy, making clear that no retaliation will result from reports made in good faith.
    • Design a process for investigating whistleblower reports based on their nature and seriousness. Establish criteria for identifying those that can be investigated by HR, those that require the involvement of in-house counsel, and those that must be handled by outside counsel. If there is any possibility of criminal exposure, ensure an appropriate investigation is conducted and concluded in time to allow the company to determine whether to self-report in the 120-window for a presumptive declination.
  3. All companies should have in place a system for quickly and accurately evaluating whether to voluntarily self-disclose violations. This process is a multi-factor calculus that considers a range of factors, including primarily the merits of the underlying information and the amount of financial loss or gain that resulted. While decision-making in this context varies by situation, one essential element remains constant: the need for accurate information regarding the nature, scope and effect of the underlying conduct.

Only time will tell exactly how the program will impact the number and nature of whistleblower reports. But companies can take practical steps now to gauge whether and to what extent they are likely to be affected and begin installing the measures necessary to minimize the risk that might otherwise result.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section

The DOJ’s New Corporate Whistleblower Awards Pilot Program: A Victory for Wall Street – A Setback for Accountability

On August 1, 2024, the U.S Department of Justice announced the rules governing its new corporate whistleblower program. Unfortunately for whistleblowers, the Justice Department based its new program on proposals long advocated by the U.S. Chamber of Commerce and Wall Street special interests.

These Wall Street-friendly features contain most of the major elements of a long dreamed of “wish list” sought by the very companies that have been successfully prosecuted as a result of whistleblower disclosures. This wish list includes: making the payment of awards discretionary, capping the amount of awards, blocking the best informants from coverage, pushing whistleblowers into internal compliance programs instead of having them report directly to the government, and placing a major caveat on the right to file anonymous claims.

In adopting this Wall Street wish-list, the Justice Department ignored the empirical data demonstrating that programs which reject these proposals, such as the Dodd-Frank Act, have proven to be the most successful fraud-detection whistleblower laws.

New Program Announced

Deputy Attorney General (DAG) Lisa Monaco first announced the DOJ’s decision to establish  a new whistleblower award program during her keynote remarks at the American Bar Association’s 39th National Institute on White Collar Crime on March 7. She recognized the importance of paying monetary awards to whistleblowers and how such programs have created massive opportunities to pursue major fraud prosecutions:

“Ever since Dodd-Frank created whistleblower programs at the SEC and the CFTC, those agencies have received thousands of tips, paid out many hundreds of millions of dollars, and disgorged billions in ill-gotten gains from corporate bad actors.”

“These programs have proven indispensable — but they resemble a patchwork quilt that doesn’t cover the whole bed. They simply don’t address the full range of corporate and financial misconduct that the Department prosecutes.

“So, we are filling these gaps.”

Monaco detailed that the Pilot Program would use existing statutory authorities under the little-used Asset Forfeiture Whistleblower Award Law, 28 U.S.C. § 524, as a basis for paying whistleblower awards. This law, in existence since 1984, was, for years, ignored by the DOJ. For example, in FY 2023, the United States obtained $3.4 billion from asset forfeitures but only used $13 million to compensate whistleblowers or informants. All whistleblower payments were made by the Drug Enforcement Authority ($12 million) or the FBI ($1 million)).

The failure to pay whistleblowers from the Fund has contributed to the Fund’s massive balance. As of the end of FY 2023, the Fund had $8.5 billion in assets. The Justice Department’s annual Asset Forfeiture Fund report confirmed that whistleblower-initiated cases were a major driving force in adding billions to the Fund. The report identified income from the Danske Bank money laundering case as the largest contributor to increasing the Fund’s assets. As Danske Bank itself admitted, that scandal, and the resulting enforcement actions were initiated by a whistleblower report, and the DOJ admitted that $1.2 billion was deposited into the Fund from that case.

Significantly, Congress entrusted the Justice Department to establish rules for paying whistleblowers or other informants. Unlike other whistleblower award laws such as the False Claims or Dodd-Frank Acts, Congress did not establish mandatory guidelines limiting the ability of the Department to compensate whistleblowers. Instead, the Justice Department could establish progressive and pro-whistleblower regulations to fully achieve the goals behind establishing the Fund. As explained by the Justice Department, the Fund is supposed to be “an essential component of the Department’s efforts to combat the most sophisticated criminal actors and organizations – including terrorist financiers, cyber criminals, fraudsters, human traffickers, and transnational drug cartels.”

Thus, whistleblower advocates were optimistic when the DAG announced the DOJ’s intent to use its authority under the Asset Forfeiture Fund to build a new corporate whistleblower program. Not only had the DAG acknowledged the success of the Dodd-Frank model for incentivizing informants, but the DOJ also clearly understood the international nature of many of the crimes resulting in asset forfeiture (including the DOJ’s acknowledgment that the Fund was created to combat “transnational drug cartels,” “human traffickers” and “terrorist financiers”). Advocates hoped that the Justice Department would incorporate policies outlined in the United States Strategy on Countering Corruption into the new program. Under this Strategy, the United States pledged to act in “solidarity” with whistleblowers and bolster human rights defenders, investigative journalists, and other key players in the worldwide fight against corruption.

After the DAG’s announcement,, the Justice Department engaged in “listening sessions” to “gather information” so they could “design a thoughtful, well-informed program.” Numerous whistleblower experts met with the Justice Department team crafting the new program and provided input. Additionally, written guidance was provided by leading whistleblower law firms, a former SEC Commissioner with expertise on the Dodd-Frank whistleblower law, and all the major whistleblower advocacy groups, including 23 international anti-corruption organizations, the National Whistleblower Center, Transparency International (USA), The Anti-Fraud Coalition (TAF), and the Government Accountability Project. These persons and groups endorsed a framework modeled on the Dodd-Frank Act consistent with the legal structure explained in the paper “Why Whistleblowing Works: A New Look at the Economic Theory of Crime.” 

The groundwork was set for the creation of a highly effective, transnational anti-corruption whistleblower program, that was designed to close gaps in existing laws, and use the billions in assets sitting in the Asset Forfeiture Fund to incentivize reporting and ensure that whistleblowers were properly compensated.

What Happened? The DOJ Adopts Proposals Advocated by Anti-Whistleblower Corporate Lobbyists

For years, the U.S. Chamber of Commerce and numerous corporations (many of which have pleaded guilty to committing frauds) have lobbied against highly successful qui tam whistleblower award laws. They actively lobbied to water-down both the Dodd-Frank and False Claims Act. Given the unquestionable effectiveness of these qui tam laws, the Chamber and its numerous members that were found to have committed frauds promoted tactics that would impede the ability of whistleblowers to use the laws or obtain compensation.

In December 2010, the Chamber urged the SEC to implement proposed rules that would have crippled the Dodd-Frank Act, but the SEC rejected those proposals. In 2013, the Chamber issued a comprehensive report, entitled “Fixing the False Claims Act,” which likewise urged Congress to enact legislation that would cripple the False Claims Act. Congress ignored these proposals.

However, the Justice Department adopted the main proposals advocated by the Chamber, all of which have been discredited by empirical evidence. By following the lead of the Chamber of Commerce, Justice ignored guidelines Congress incorporated into the leading whistleblower award laws, and instead yielded to the lobbying power of Wall Street.

MANDATORY AWARDS

All of the successful whistleblower award laws require the government to pay qualified whistleblowers a mandatory award if they adhere to the criteria established by law or regulation. The mandatory nature of the award laws is the single most important feature of every successful whistleblower qui tam law. The most successful whistleblower laws in the United States require the payment of an award, not less than 10% and not more than 30% of the monies collected by the United States. Thus, whistleblowers are not compensated by taxpayer funds, but instead monies obtained from the fraudsters they report are used to pay the awards.

What did Justice Do?

Although the Justice Department had the discretion to follow the precedent under Dodd-Frank, False Claims, and AML laws, it ignored these precedents and created a discretionary program. In other words, the Justice Department can deny a fully qualified whistleblower, for any reason or no reason. There is no appeal. The Justice Department’s written regulations are clear: “The Department’s Award Determination is entirely discretionary, and neither appealable nor subject to judicial review.”

A whistleblower whose information results in hundreds of millions of dollars in recoveries, but who suffers tremendous retaliation, simply has no right to an award.

Not surprisingly, all discretionary whistleblower award laws have failed. Why should a whistleblower risk everything if the government has no obligation whatsoever to live up to its end of the bargain?

LIMITS ON AWARD AMOUNTS

The successful whistleblower award laws have no caps on the amount of an award. Awards are based on the quality of information provided, the cooperation a whistleblower provides to the government, the risks or sacrifices of the whistleblower, and the size of the frauds or crimes the whistleblower uncovers and reports. All awards are tied to the amount of actual recovery collected from the fraudster.

The Chamber of Commerce has tried, for years, to cap or limit the amount of an award. They fully understand that the handful of very large awards drives thousands of whistleblowers to come forward. Large awards publicize the programs, send a message that the government will honor its commitments, and incentivizes well-paid and high-level executives to become whistleblowers. Thus, capping the amount of an award is the number one goal of the corporate lobbyists attempting to weaken or undermine whistleblower rights.

In 2018 the SEC instituted a rulemaking proceeding which would have limited the amount of awards paid to whistleblowers in large cases. The initial proposal was approved in a 3-2 vote (all of the SEC Commissioners more supportive of Wall Street interests voted for limiting the size of awards). The proposal was debated internally within the SEC for two years, and leading whistleblower experts and advocates provided empirical evidence that large awards were a cornerstone to the program, incentivized some of the most important whistleblowers, and had a deterrent effect on wrongdoing.

Based on the objective evidence the Commission, 5-0, withdrew the proposal and rejected a rule that would have limited awards in large cases.

What did Justice Do?

Breaking with 35-years of Congressional legislation and ignoring the empirical evidence concerning the importance of large awards, the Justice Department, in an unprecedented move, decided to cap the amount of awards. This was the most significant victory Wall Street, and the Chamber of Commerce obtained, and it sets a terrible precedent.

Incredibly, the Justice Department instituted a rule that was even more regressive than the proposal made by the Chamber of Commerce. In its report Fixing the False Claims Act, the Chamber advocated changing the False Claims Act’s mandatory minimum 15% award, to a sliding scale that would create a “Graduated Reduction” in a whistleblower’s award. The amount of awards would be slowly reduced, and ultimately whistleblowers would only obtain “1 to 3 percent of amounts recovered above $100 million.”

The Justice Department took an even more extreme position. They adopted the Chamber’s recommendation to gradually reduce the size of an award, but instead of permitting tiny awards in large cases, they decided to zero these awards out, and pay nothing. Under the DOJ criteria, a whistleblower would not be entitled to any compensation based on recoveries that topped $500 million and would be subjected to a 5% cap on recoveries above $100 million. These caps need to be understood in the context of the right of the DOJ to reduce or deny awards at will. The DOJ capped the maximum amount of awards, yet established no minimum award, and provided itself with authority to pay no awards to fully qualified whistleblowers. The Chamber of Commerce never went this far in its proposal to undermine the False Claims Act.

CRIMINAL CULPABILITY

All the existing award laws have addressed the issue of the potential criminal culpability of the whistleblower. The original False Claims Act fully recognized this issue when it was signed into law by President Abraham Lincoln on March 2, 1863. The Senate sponsors of the bill explicitly called for participants in the frauds to step forward and use the law to assist the government in detecting these types of crimes. The Senate sponsor of the original False Claims Act recognized that it “takes a rogue to catch a rogue” and the primary intent of the award laws was to induce persons involved in the criminal conspiracy to turn on their fellow conspirators.

Thus, all successful whistleblower award laws permit participants in the frauds to turn in their co-conspirators and collect an award. This aspect of the law is perhaps the most important tool in incentivizing highly placed whistleblowers to step forward. In the context of asset forfeiture, there are no better sources of who the bad actors are who are hiding their assets than the bankers who opened their accounts. All of the laws prohibit persons convicted of the crime they are reporting from collecting an award. But likewise, all of the laws encourage participants, such as international bankers, to step forward.

What did Justice Do?

The Chamber of Commerce and its corporate allies have long advocated against the primary goal of the qui tam laws, i.e. to induce conspirators to turn on their co-conspirators. The fact that “trusted” persons sitting around a corporate board when the company is discussing paying a bribe sends chills within corporate America. In 2010,, the Chamber of Commerce made its position on this issue perfectly clear: “Exclude culpable individuals from award eligibility . . . corporate employees should not be rewarded if they engage in, perpetuate, or fail to take action to stop internal wrongdoing. Individuals who participated in wrongdoing should be excluded from award eligibility.”

Although Congress has continuously rejected such a broad disqualification, and the SEC explicitly rejected this proposal submitted by the Chamber and numerous corporate allies, the Justice Department has now adopted the essence of this position. Under the DOJ’s rules, the vast majority of participants in any fraud are now blocked from obtaining an award.

The DOJ regulation bars anyone who “meaningfully participated” in the fraud. This would cover the overwhelming majority of the best sources of information, and would give comfort to corporate insiders knowing that their co-conspirators could not obtain an award if they turned them in. The only exception would be for those who had a “minimal role,” i.e. those who would have the least valuable information, such as a secretary who may have mailed a letter related to the fraud. The regulation states: “An individual is not eligible for payment if they meaningfully participated in the criminal activity, including by directing, planning, initiating, or knowingly profiting from that criminal activity” (emphasis in original).

CONFIDENTIAL REPORTING

Dodd-Frank and the new AML whistleblower award law permits confidential and anonymous filing.

What did Justice Do?

Although the Justice Department permits anonymous filings, the regulations require that an anonymous whistleblower be identified whenever the Justice Department requests it. The regulation states: “The Department reserves the right to require information regarding your identity at any time the Department, in its sole discretion, deems it necessary to the prosecution of a case or to meet the Department’s legal obligations, policies, or procedures.”

Thus, DOJ can waive confidentiality and anonymity at-will, unbound by the legal restraints contained in Dodd-Frank and the AML whistleblower laws.

INTERNAL REPORTING

The DOJ’s new program strongly encourages whistleblowers to make internal reports to the very companies they suspect are violating the law. Similarly, the program provides companies who “self-report,” even after whistleblowers disclose violations of law to the government, major benefits and radical reductions in the amount of fines and penalties.

According to the DOJ factsheet:

“DOJ recognizes the value of companies’ internal compliance programs and has designed the pilot program to encourage employees to report misconduct internally before submitting information to DOJ.” (emphasis added).

This focus on encouraging whistleblowers to report to their companies ignored the fact that the very companies that benefit from these internal reports have lobbied and successfully fought in court to strip whistleblowers of protection against retaliation. In other words, the DOJ is encouraging employees to engage in a behavior that is not protected under federal law, and can result in their being fired and harassed, without legal protections.

All whistleblower laws protect employees who report to the government. But the following laws do not:

  • Commodity Exchange Act: No protection for internal disclosures.
  • Security Exchange Act/Foreign Corrupt Practices Act: No protection for internal disclosures.
  • Federal Obstruction of Justice Whistleblower Law: No protection for internal disclosures.
  • Anti-Money Laundering and Sanctions Whistleblower Law: No protection for internal disclosures for any employees who work for FDIC insured institutions or credit unions.
  • Asset Forfeiture Whistleblower Award (Fund): No protection for internal disclosures.

A recent study published in SSRN demonstrated that 92% of all corporate whistleblower retaliation cases arise from employees who make internal disclosure, while only 5% of retaliation cases arise from employees who report to the government, but avoid internal compliance programs.

It is extremely troubling that the DOJ would encourage whistleblowers to engage in behaviors that are not protected under federal law, will result in many of them losing the ability to report confidentially, and that the empirical evidence demonstrates is the most dangerous method for an employee to report concerns.

Moreover, the DOJ ignored the fact that Wall Street, led by the Chamber of Commerce, strongly argued that internal reporting should not be protected under the Dodd-Frank Act. The Chamber succeeded in having the Supreme Court overturn an SEC regulation that protected internal whistleblower disclosures from protection under law and resulted in stripping employees who reported to corporate counsel, corporate boards, corporate audit committees, or corporate compliance programs from all protections against retaliation under Dodd-Frank.

Options for Whistleblowers

The DOJ’s Corporate Whistleblower Awards Pilot Program represents a colossal lost opportunity to use a Fund created by Congress to combat major financial crimes to incentivize and compensate whistleblowers and otherwise encourage human rights defenders to assist in reporting domestic and international corruption. The Fund has billions of dollars that could have been creatively, aggressively and effectively utilized to fill loopholes in current laws and implement the important recommendations of the United States Strategy on Countering Corruption.

However, existing whistleblower award laws, that do not share the defects of the DOJ Pilot Program, can still be used by whistleblowers. Given the broad scope of these laws, much of the negative impact of the Justice Department’s regulations can be mitigated. Dodd-Frank can be used to report foreign bribery by most corporations worldwide; the Anti-money laundering laws can be used to hold banks and financial exchanges accountable, and to report violations of U.S. sanctions; the IRS program can be used to report tax evasion and permits awards for IRS investigations related to asset forfeiture; and finally, the Commodity Exchange Act can be used to report foreign corruption in the international commodities markets.

Employees who report directly to federal law enforcement authorities are also fully protected under the federal obstruction of justice laws. Under the obstruction law passed as part of the Sarbanes-Oxley corporate reform law, employers who fire employees for reporting to federal law enforcement are subjected to fines and up to ten years in prison.

These numerous (and highly effective) laws do not contain the problems that undermine whistleblower rights under the DOJ Pilot Program, and they should be used whenever available.

Conclusion

The Justice Department adopted proposals long sought after by Wall Street special interests and the Chamber of Commerce and created a program that delivered on the corporate wish-list for undercutting the effectiveness of whistleblower award programs. By making the program discretionary, capping the amount of awards, blocking the best informants from coverage, and placing a major caveat on the right to file anonymous claims, the Justice Department’s program runs counter to the significant amount of empirical evidence concerning the specific policies and procedures necessary to operate a successful program. Worse still, it creates a dangerous precedent for future whistleblower laws.

To understand just how terrible discretionary programs with compensation caps are and why Congress has repeatedly rejected them since 1986, one need only look at older and discredited award programs.

For example, between 1989 and 2010, the SEC had a discretionary award program covering whistleblowers who disclosed insider trading. The SEC Inspector General reviewed that program and found that it was a total failure and was unable to stop frauds like the ENRON scandal or frauds associated with the 2008 financial collapse.

The Inspector General described the program and its operation over its eleven years of existence as follows:

“All bounty determinations, including whether, to whom, or in what amount to make payments, are within the sole discretion of the SEC.”

“Since the inception of the SEC bounty program in 1989, the SEC has paid a total of $159,537 to five claimants.”

Thus, in July 2010, Congress repealed this discredited law and passed Dodd-Frank, which has mandatory award laws, no caps, and no discretion to deny qualified whistleblowers compensation.

The old IRS law and the False Claims Act of 1943 had similar problems, and both laws were amended to make the payment of awards mandatory, eliminate all caps, and end the discretion of government agencies to deny awards. All of the modern award laws also permit whistleblowers to challenge any denial in court.

The Justice Department had the discretion to create a highly effective program based on the Dodd-Frank Act. They dropped the ball. Now Congress needs to fix the mess Justice created.

In the meantime, whistleblowers should continue to use the highly effective award laws: the False Claims Act, the Dodd-Frank Act, the AML Whistleblower Improvement Act and the Foreign Corrupt Practices Act. Whistleblowers should also take advantage of the strong protections offered under the federal obstruction of justice statutes by reporting concerns directly to law enforcement.

The Justice Department did get one thing right. As part of its pilot program, Justice ruled that whistleblowers who are covered under the existing highly effective whistleblower laws cannot obtain any awards under the pilot program. Intentionally or not, this was the best advice Justice could give to whistleblowers: Make sure you use the existing laws and not rely on the pilot program.

Copyright Kohn, Kohn & Colapinto, LLP 2024. All Rights Reserved.
For more on Whistleblowers, visit the NLR Criminal Law Business Crimes section

Acting U.S. Attorney Levy Forecasts False Claims Act COVID Cases Targeting Private Lenders Of CARES Act Loans That Failed In Their Obligation To Safeguard Government Funds

Acting U.S. Attorney Joshua Levy discussed the enforcement priorities for the Massachusetts U.S. Attorney’s Office (USAO) during a Q&A session on May 29, 2024, and made clear that the historical focus of the office remains the top priority: detecting and combating health care fraud, waste, and abuse. In particular, both Levy and Chief of the USAO’s Civil Division, Abraham George, have recently indicated that the government will pursue large dollar COVID fraud cases both criminally and civilly. As we have discussed previously, we expect False Claims Act (FCA) COVID cases to materialize in the coming years as the government zeroes in on wrongdoers via enhanced data analytics and AI tools as well as via traditional investigative methods and the forthcoming Whistleblower Rewards Program.

Recent COVID FinTech Lender, Kabbage, $120 MM False Claims Act Settlement

The recent Kabbage settlement is illustrative of the types of COVID cases the office is looking to bring pursuant to the FCA. Acting U.S. Attorney Levy discussed the settlement, publicized in May, with now-bankrupt online lender, Kabbage Inc. Kabbage allegedly knowingly processed and submitted thousands of false claims for Paycheck Protection Program (PPP) loan forgiveness, loan guarantees, and processing fees. The PPP – a loan program for small businesses created via the Coronavirus Aid, Relief, and Economic Security (CARES) Act – was administered the federal Small Business Administration (SBA). The CARES Act authorized private lenders to approve PPP loans for eligible borrowers who could later seek forgiveness for the loans if borrowers used the loans for eligible expenses, including employee payroll.

Among other things, participating PPP lenders were obligated to 1) confirm borrowers’ average monthly payroll costs by PPP loan documentation; and 2) follow applicable Bank Secrecy Act/Anti-Money Laundering (BSA/AML) requirements. SBA guaranteed any unforgiven or defaulted PPP loans as long as the private lender adhered to PPP requirements.

Private lenders received a fixed fee calculated as a percentage of the loan amount. Here, U.S. Attorney Levy’s office alleged that Kabbage awarded inflated and fraudulent loans to maximize its profits, then sold its assets and left the remaining company financially depleted, leading to bankruptcy. Kabbage was allegedly aware of the following errors as of April 2020, failed to correct them, and continued to make improper loan disbursements after learning of the issues:

  1. double-counting state and local taxes paid by employees when calculating gross wages;
  2. failing to exclude annual compensation above $100,000 per employee; and
  3. improperly calculating employee leave and severance payments.

Kabbage also allegedly failed to implement appropriate fraud controls to comply with the PPP, BSA, and AML by knowingly:

  1. removing underwriting steps to facilitate processing a high volume of loan applications and maximizing loan processing fees;
  2. setting substandard fraud check thresholds;
  3. relying on automated tools that were inadequate in identifying fraud;
  4. devoting insufficient personnel to conduct fraud reviews;
  5. discouraging its fraud reviewers from requesting information from borrowers to substantiate their loan requests; and
  6. submitting to the SBA thousands of dubious PPP loan applications that were fraudulent or highly suspicious.

The settlement, which will result in the U.S. securing up to $120 million pursuant to bankruptcy proceedings, resolves qui tam complaints brought by two separate whistleblowers: an accountant who submitted PPP loan applications to multiple lenders and a former analyst in Kabbage’s collection department.

Predictions for Future COVID Fraud Enforcement

Acting U.S. Attorney Levy’s comments make clear that we can expect to see FCA COVID cases targeting private lenders of CARES Act loans that failed in their obligation to safeguard government funds. To date, COVID fraud prosecution has largely targeted “low-hanging fruit” criminal cases, such as those involving submission of false information to obtain COVID relief funding that the recipient spends on luxury items. We discussed in April that the COVID Fraud Enforcement Task Force (CFETF) and a bipartisan group of Senators had, via a report and draft legislation, pleaded with Congress to increase funding to prosecute COVID fraud. Investigations such as those involving Kabbage require a large investment of resources and, as U.S. Attorney Levy commented, his office must prioritize large-dollar COVID fraud cases most likely to result in specific and general fraud deterrence.

As we have written previously, the government is playing a long game tracking COVID fraud. The Justice Department’s CFETF reported in April that to date, the DOJ had seized or forfeited $1.4 billion in stolen relief funds as well as bringing criminal charges against 3,500 defendants and 400 civil settlements. With a ten-year statute of limitations and increasingly more accurate data analytics tools, we expect the DOJ will continue to identify and recover misappropriated funds from large and lower dollar fraudsters. So long as COVID fraud enforcement remains a well-funded priority of the government, we anticipate a steady stream of FCA COVID settlements involving lenders and borrowers. The government is casting a wide net to recoup the nearly $300 billion in COVID fraud estimates. We will continue to monitor and report on developments.

©1994-2024 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.
For more on COVID, visit the NLR Coronavirus News section.

UK Regulators Publish Final Securitisation Rules

On 30 April 2024, the Financial Conduct Authority (FCA) published a policy statement (PS24/4) setting out its final firm-facing rules relating to securitisations and summarising feedback to its earlier consultation for the UK securitisation markets (CP23/17). The Prudential Regulation Authority (PRA and together with the FCA, the Regulators) also published a policy statement, in parallel with PS24/4, on its final firm-facing rules for those firms over which it has supervisory responsibility (PS7/24). This also follows the PRA’s own parallel consultation (CP15/23).

Background 

As part of the UK’s post-Brexit regulatory reforms, the UK government is working to repeal and replace retained EU financial services law with new UK domestic rules. In July 2023, the UK government published a draft statutory instrument (SI) to replace the UK’s onshored version of the Securitisation Regulation (UK SR).

Following the publication of the SI, the PRA launched CP15/23 on its proposed firm-facing requirements on 27 July 2023 and the FCA launched its parallel consultation CP23/17 on 7 August 2023. Both of these consultations are explored in further detail in our previous article (available here). While there is some duplication between the two rulebooks, the Regulators noted that they have coordinated their approach with a view to creating a coherent framework.

The Final Rules 

In PS24/4, the FCA has sought, among other things, to incorporate the feedback received on its draft rule proposals set out in its final rules, which are called the ‘Securitisation (Smarter Regulatory Framework and Consequential Amendments) Instrument 2024’.

PS24/4 makes the following key amendments to CP23/17:

  1. Timeline for implementation. The Regulators have confirmed the implementation timeline for the requirements (see the Next Steps section below), which allows for a six-month transition period for pre-implementation securitisations.
  2. Due diligence – public vs private securitisations. The FCA has adjusted the wording of its final rules to accommodate both public and private securitisations. Specifically, they refer to information provided ‘before pricing or original commitment to invest’ (in appropriate places) to reflect that private securitisations do not have “pricings” per se. In addition, the FCA has included guidance to reflect the fact that ‘pricing’ in the Simple, Transparent and Standardised (STS) template is to be understood as also including the ‘original commitment to invest’.
  3. Due diligence – disclosures by ‘manufacturers’. The FCA has adjusted the due diligence requirements for secondary market investors in relation to disclosures made by ‘manufacturers’ (i.e., the term used by the FCA as shorthand for originators, original lenders, sponsors and/or securitisation special purpose entities, each as defined in the UK SR) by:
    i) introducing a distinction between primary and secondary market investments, so that secondary market investors are not required to conduct due diligence on documents and information that are no longer relevant (e.g., information provided prior to initial pricing such as at issuance, etc.); and
    ii) clarifying that investors are required to conduct due diligence on the most up-to-date information available at the time of the investment, as opposed to documents from the timing of ‘pricing’ or ‘commitment’.
  4. Delegation. The FCA has clarified that it is possible for an institutional investor to delegate its due diligence requirements to an entity that is not an institutional investor, subject to the institutional investor retaining the responsibility for compliance with due diligence requirements. In practice, this means that institutional investors will no longer be able to delegate the responsibility for compliance with the due diligence requirements to AIFMs that are not authorised in the UK, as such AIFMs no longer fall within the definition of an ‘institutional investor’ under the SI.
  5. Risk-retention. The FCA has clarified the scope of the prohibition on hedging of the material net interest required to be retained under the risk retention requirements. Specifically, the FCA has confirmed that hedging in these circumstances is permitted for institutional investors so long as it does not compromise the alignment of interest, in line with the EU’s Risk Retention Technical Standards (Commission Delegated Regulation (EU) 2023/2175). In addition, the FCA confirms that there is no need for risk retention in the context of securitisations of own-issued debt instruments, including covered bonds.
  6. Alignment with the PRA. PS24/4 aligns its drafting with that of the PRA rulebook in areas where the rules are similar – both in the language and ordering of the FCA’s rules. The FCA has stated that in a number of cases, however, it has retained the language on which it consulted where, for example, it considered it provided clarity. In non-shared areas, such as STS provisions, the FCA has retained the language and structure of the rules as proposed in CP23/17.

The FCA’s final rules will be included in the FCA’s securitisation sourcebook (known as SECN) alongside the final FCA securitsation reporting templates, which are in the same form as those currently in effect. Similarly, the PRA’s final rules will be implemented into the PRA rulebook by adding a new Securitisation Part, with consequential amendments to the Liquidity Coverage Ratio (CRR) Part and the Non-Performing Exposures Securitisation (CRR) Part.

Next Steps 

The implementation date for the FCA and PRA rules is 1 November 2024, subject to revocation of the UK SR and related technical standards.

The commencement order that will bring into force the revocation of the UK SR and related technical standards has not yet been laid before Parliament. HM Treasury anticipates making this commencement order later this year once the SI comes into force. The FCA has stated that it will consider delaying or revoking the rules if the commencement order is not made.

The Regulators plan to consult on further changes to their securitisation rules in Q4 2024/Q1 2025, although timings are potentially subject to change. In this second consultation, the Regulators plan to review the definition of public and private securitisations and the associated reporting regime, among other areas for policy consideration.

EU Divergence

HM Treasury and the Regulators have generally sought to retain the existing onshored Securitisation Regulation and associated technical standards in the FCA and PRA rulebooks, save for some targeted adjustments. These adjustments will lead to some potentially notable divergence between the UK’s new regime and the regime in the EU, including in relation to the following:

  • Template requirements. While the EU requires institutional investors to ensure disclosure templates are completed regardless of whether the sponsor, originator or SSPE are located in or outside of the EU, UK institutional investors are only required to ensure that certain prescribed information is provided, regardless of the format. Instead, UK sponsors, originators and SSPEs are under a separate obligation to comply with transparency requirements including the use of disclosure templates.
  • Originator sole purpose test. SECN references certain factors to be taken into account when assessing whether an originator has been established and is operating for the “sole purpose” of securitising exposures. The EU regime has a similar test, but focuses on whether the securitisation and related risk retention assets are the “sole or predominant source of revenue” of the originator. The UK’s regime does not set the same hurdle for meeting the sole purpose test, instead referring more generally to the retainer’s ability to meet its payment obligations.
  • Change of risk retainer. Under the EU’s rules the holder of a retained interest may not sell, transfer or otherwise surrender its rights in relation to the retained interest, unless due to its insolvency, “legal reasons beyond its control”, or where there is retention on a consolidated basis. The new UK regime does not include “legal reasons beyond its control” as a reason to disapply the sale restriction.

PS24/4, PS7/24, CP23/17, and CP15/23 can be found here, here, here and here, respectively.

©2024 Katten Muchin Rosenman LLP
For more news on FCA Securitisation Rules, visit the NLR Financial Institutions & Banking section.