fraud Archives - The National Law Forum

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.

You See Health, Whistleblower Saw Fraud: Uncovering a $23 Million Healthcare Fraud Scheme

A whistleblower’s vigilance has led to the revelation of alleged Medicare and TRICARE fraud involving UCHealth, a healthcare system with locations throughout the state of Colorado. University of Colorado Health agreed to a $23 million settlement to resolve allegations of improper coding for emergency room visits subsequently billed to government-funded healthcare programs. The qui tam provisions of the False Claims Act empower whistleblowers—individuals with non-public knowledge of fraud against the government—to file a lawsuit on behalf of the government. The qui tam whistleblower in this case will receive $3.91 million or 17% of the settlement.

Summary of the Allegations

According to court documents, from November 1, 2017, through March 31, 2021, certain UCHealth hospitals allegedly engaged in a fraudulent practice concerning Evaluation & Management (E/M) emergency department facility claims. These claims, submitted to both Medicare and TRICARE, are intended to compensate hospitals for resources associated with patient visits, including medical evaluations and management.

UCHealth’s alleged fraudulent activity centered around the misuse of Current Procedural Terminology (CPT) codes, specifically CPT 99285. This code represents the “highest level of severity” in emergency department visits and requires comprehensive medical evaluations and examinations, and high-complexity decision-making. However, UCHealth reportedly manipulated the coding process by automatically assigning the highest severity code, CPT 99285, based on the frequency of vital sign monitoring rather than the actual severity of the patient’s condition or resource utilization. According to the settlement agreement, employees had complained about the overuse of the highest severity code, and the hospital system had been flagged by the Centers for Medicare & Medicaid Services (CMS) as being a “High Outlier” for that CPT code as well.

Upcoding Fraud Scheme

Upcoding and improper billing to Medicare and TRICARE are forms of healthcare fraud that involve misrepresenting the services provided to obtain higher reimbursements than justified. Upcoding occurs when a healthcare provider submits claims for more expensive services or procedures than were actually performed, such as billing for a comprehensive exam when only a basic consultation was provided. Improper billing includes practices such as double billing for the same service, billing for services not rendered, or charging for medically unnecessary procedures. These fraudulent activities exploit government-funded programs, increasing costs for taxpayers and undermining the integrity of healthcare systems.

The Whistleblower’s Journey

The case began when Timothy Sanders, a concerned individual, filed a qui tam lawsuit on April 28, 2021, under the False Claims Act. This legal action initiated an investigation into UCHealth’s billing practices. Whistleblowers are integral in exposing fraudulent activities within healthcare systems, as they possess insider knowledge that can lead to substantial recoveries for the government. By filing a qui tam lawsuit, individuals, such as the healthcare fraud whistleblower in this case, can bring fraudulent activities to light, potentially leading to significant financial repercussions for the involved parties. With whistleblowers, as the Principal Deputy Assistant Attorney General said, “We will pursue health care providers that defraud the taxpayers by knowingly submitting inflated or unsupported claims.”

The CTA Filing Deadline is Approaching. Is Your BOIR Filed Yet?

The clock is ticking—just 49 days remain until the one-year filing deadline for the Corporate Transparency Act (CTA)! Entities established before January 1, 2024, must submit a beneficial owner information report (BOIR) by December 31, 2024.

The CTA is a new reporting requirement that came into effect on January 1, 2024. The CTA requires any entity created by or registered to do business by the filing of a document with a secretary of state, or another similar office, to report its information and its beneficial owners to the Financial Crimes Enforcement Network (FinCEN), which is a bureau of the United States Treasury. The goal is to decrease money laundering and fraud.

We previously published advisories on the general application of the CTA and its specific application to entities created for estate planning purposes. The rules and guidelines about which we previously reported are largely unchanged. A reporting company still needs to report its legal name, all trades and d/b/a names, address, and beneficial owners. Beneficial owners are those with substantial control or who own or control 25% or more of the reporting company, directly or indirectly. The reporting company needs to report each beneficial owner’s name, date of birth, residential address, and an identifying number and image from one of four acceptable identification documents.

Although the CTA was declared unconstitutional by a federal district court in Alabama, the ruling only prevents the CTA’s enforcement on the parties directly involved in the case. The court did not issue a nationwide ruling to prevent the law from being enforced. Thus, other companies are expected to continue filing BOIRs. The Alabama case is currently on appeal and oral arguments were held at the end of September 2024.

FinCEN has been periodically updating its Frequently Asked Questions to provide some clarification since the CTA became effective. We outline the most relevant guidance below:

General Updates:

Entities that are created before January 1, 2024, even if dissolved sometime in 2024 before the December 31, 2024, deadline, must still report their information and beneficial owners by December 31, 2024.
Entities that are created in 2024 have 90 days to file the BOIR. Entities created on or after January 1, 2025, will have 30 days to file the BOIR. Entities that are created in 2024 but are wound up, dissolved, or otherwise cease to exist must still file the BOIR with FinCEN.
Beneficial ownership is determined in the aggregate. This means that companies need to analyze each beneficial owner to determine if he or she indirectly/directly substantially controls or owns 25% or more of a reporting company. For example, Individual X owns 10% of Company Y. Individual X is also trustee of a trust that owns 20% of Company Y. Individual X needs to be reported as a beneficial owner because he owns an aggregate 30% of the company.
Beneficial owners may now apply for a FinCEN Identifier here. This allows the beneficial owners to report their information to FinCEN directly, obtain an Identifier number, and simply provide the Identifier to those reporting companies of which he or she is a beneficial owner. This prevents a beneficial owner from having to share personal and sensitive information with a company. This also streamlines the process for any change in the beneficial owner’s information. Each beneficial owner can log into FinCEN and simply update the information within 30 days of the change rather than first providing it to the reporting company and then the company filing a new BOIR to update the information.

a. In order to create a FinCEN Identifier, an individual will have to create a login.gov account. This is the account that the federal government is using to streamline many of its services, such as, global entry and applying for federal jobs.

5. Reporting companies may complete and submit a BOIR online here. A company could also submit a PDF of the report at the same link if it chose to complete a paper copy. There is no fee to submit online. There are also many vendors offering a service to assist with the process and submit the report for a fee.

Real Estate/Corporate Updates:

6.FinCEN clarified that the subsidiary exemption applies when a subsidiary’s ownership interests are entirely controlled or wholly owned, directly, or indirectly, by any of the following types of exempt entities: (1) Securities reporting issuer; (2) Governmental authority; (3) Bank; (4) Credit union; (5) Depository institution holding company; (6) Broker or dealer in securities; (7) Other Exchange Act registered entity; (8) Investment company or investment adviser; (9) Venture capital fund adviser; (10) Insurance company; (11) State-licensed insurance producer; (12) Commodity Exchange Act registered entity; (13) Accounting firm; (14) Public utility; (15) Financial market utility; (16) Tax-exempt entity; or (17) Large operating company. Further, if a reporting company’s ownership interests are controlled or wholly owned by more than one exempt entity, the reporting company may still qualify for the subsidiary exemption if the entities are unaffiliated; however, every controlling or owning entity must itself be an exempt entity in order for the reporting company to qualify for the subsidiary exemption.

Trusts and Estates Updates:

7.If there is a corporate trustee, the reporting company will be reporting those individual beneficial owners that indirectly own or control at least 25% of the ownership interests of the reporting company through the ownership in the corporate trustee. This will be determined by multiplying the percentage of ownership of the corporate trustee with the trust’s ownership/control of the reporting company. For example, if Individual A owns 70% of the corporate trustee of a trust, and that trust holds 30% of the reporting company, Individual A holds or controls 21% of the reporting company (70% x 30 = 21). If Individual A owned 90% of the corporate trustee, then it would own/control 27% of the reporting company (90% x 30 = 27) and the company must report Individual A as a beneficial owner. There may be other beneficial owners if someone else at the corporate trustee exercises substantial control over the reporting company.

A reporting company may submit the corporate trustee’s information in lieu of each beneficial owner’s information only if all of these conditions are met:

a. The corporate entity is an exempt entity from the reporting requirements.

b. The individual owns or controls 25% of the reporting company only through the corporate trustee.

c. The individual does not exercise substantial control over the reporting company.

A company can obtain its own FinCEN Identifier when it submits an initial BOIR for its beneficial owner(s). This way, such company may be reported as a beneficial owner, such as a corporate trustee that meets the above requirements. For example, when LLC A reports Individual A as its beneficial owner, LLC A has the option of clicking a button to obtain its own FinCEN Identifier.

8. An individual who has the power to remove a trustee, remove and replace a trustee, and/or appoint an additional trustee is deemed to have substantial control through the power to change the person who makes decisions for the trust, and thereby, the reporting company. While this is not explicit in the Frequently Asked Questions, it is consistent with FinCEN’s position that someone who has the power to remove a senior officer of a reporting company is a beneficial owner.

While this is an extensive list, it is by no means an exhaustive list, and various circumstances not discussed above may change how the CTA applies in a particular case.

No More Fraud Vampires: Whistleblowers Put a Stake in Phlebotomy Unlawful Kickback Scheme

31 October 2024. Two whistleblowers “stopped the bleeding” caused by an alleged kickback scheme perpetrated by a mobile phlebotomy service based in California. Veni-Express, Inc. and its owners have agreed to pay $135,000 to settle allegations of violating the Anti-Kickback Statute and False Claims Act. While the award for the two whistleblowers has not yet been determined, False Claims Act qui tam whistleblowers may be rewarded between 15-25% of the settlement.

Overview of the Case

According to the allegations, from 2015 to 2019, Veni-Express allegedly submitted false claims to federal health care programs for services that were not actually performed. These services included venipuncture procedures during homebound patient visits and non-reimbursable travel mileage claims for the visits. The fraudulent activities were reportedly conducted with the oversight of the company’s owners, Myrna and Sonny Steinbaum.

Additionally, between July 2014 and June 2015, Veni-Express allegedly paid unlawful kickbacks to Altera Laboratories, also known as Med2U Healthcare LLC, to market their services. These kickbacks were disguised as a percentage of company revenue.

Unlawful Kickbacks and Phantom Billing

The Anti-Kickback Statute (AKS) is a federal law that prohibits healthcare providers from offering, soliciting, or receiving anything of value to induce or reward referrals for services covered by federally funded healthcare programs, such as Medicare and Medicaid. When providers violate the AKS, they compromise patient care by prioritizing financial gain over medical necessity, which can lead to unnecessary, costly, or substandard treatments. Phantom billing, which involves charging Medicare and Medicaid for services never provided, drains funds that could otherwise be used for essential care for beneficiaries. It leads to increased healthcare costs, putting a strain on federally funded healthcare programs and potentially causing cuts or restrictions in services. This fraudulent practice also erodes trust in the healthcare system, which can prevent beneficiaries from seeking the care they need. As the Special Agent in Charge for the Department of Health and Human Services Office of the Inspector General said about the case, “Improper incentives and billing Medicare for services never actually provided divert taxpayer funding meant to pay for medically necessary services for Medicare enrollees.”

Settlement Details

The settlement agreement is based upon the parties’ ability to pay, requiring Veni-Express to pay $100,000, with additional payments contingent upon the sale of company property. Myrna Steinbaum will pay $25,000, while Sonny Steinbaum will contribute $10,000.

Whistleblower Involvement

The whistleblowers in the qui tam actions were a former phlebotomist and a laboratory technical director. The qui tam provision in the False Claims Act allows private citizens with knowledge of fraud to report fraud schemes to the government and share in the government’s recovery.

Implications for Healthcare Professionals

This whistleblower settlement serves as a cautionary tale for healthcare professionals, emphasizing the need for strict adherence to regulatory standards. It underscores the power industry insiders have to speak up and put an end to fraud schemes that taint the healthcare profession.

Texas-Sized Fraud: Corporate Relator Takes on Laboratory Referral Kickback Scheme

17 October 2024. In a qui tam whistleblower settlement, Jeffrey Madison, the former CEO of Little River Healthcare in Rockdale, Texas, has agreed to pay over $5.3 million to resolve alleged violations of the Anti-Kickback Statute. This successful whistleblower lawsuit illustrates the critical role of whistleblowers in uncovering fraudulent schemes and upholding ethical standards within the healthcare industry. The corporate whistleblower in this qui tam action, STF LLC, could be rewarded between 15-25% of the government’s recovery.

Understanding the Case

The allegations against Madison stem from violations of the False Claims Act, specifically linked to illegal payments made to physicians to induce laboratory referrals. These actions contravened the Anti-Kickback Statute, a federal law designed to ensure that medical decisions, particularly those about Medicare, Medicaid, or TRICARE beneficiaries, are based on patient welfare rather than financial incentives.

Key Allegations:

Kickback Scheme: The lawsuit alleged that between January 2015 and June 2018, Little River Healthcare, under Madison’s leadership, engaged in a scheme involving paying commissions to recruiters. These recruiters, using management service organizations (MSOs), funneled kickbacks to physicians who referred laboratory tests to Little River.

False Certifications: Madison was accused of knowingly falsely certifying compliance with the Anti-Kickback Statute in Medicare cost reports, resulting in fraudulent claims to federal healthcare programs, including Medicare, Medicaid, and TRICARE.

Disguised Payments: An additional component involved Dr. Doyce Cartrett Jr., who was allegedly paid $2,000 monthly to refer his laboratory testing business to Little River. These payments were allegedly disguised as “medical director fees” despite Dr. Cartrett rendering no medical director services.

The Importance of the Anti-Kickback Statute

Violations of the Anti-Kickback Statute can significantly harm patients by distorting medical decision-making priorities and eroding trust in healthcare providers. When healthcare decisions are influenced by financial incentives rather than patient welfare, there is a risk that unnecessary or substandard care is administered, potentially leading to adverse health outcomes. Patients may receive treatments not based on their individual needs but on the financial gains of unscrupulous providers. This not only affects the quality of care but also contributes to rising healthcare costs, ultimately burdening patients and taxpayers financially. Upholding the statute is crucial in ensuring that patient care is determined by medical necessity and clinical expertise.

The Role of Whistleblowers

This case underscores the vital role of whistleblowers in identifying and exposing fraudulent activities. By coming forward, whistleblowers not only protect taxpayer dollars but also ensure that healthcare decisions remain focused on patient care. As the Acting Special Agent in Charge of the Department of Defense Office of Inspector General, Defense Criminal Investigative Services, Southwest Field Office said about the case, “Our nation’s uniformed military service members and their families should never have to question the integrity of their healthcare providers. Medical decisions influenced by greed destroy the fundamental element of trust in patient care.” Healthcare fraud whistleblowers reporting unlawful kickback schemes under the False Claims Act can help restore that trust.

The Murky Waters of Wash Trading Digital Assets – DOJ Charges 18 Individuals and Entities

The United States Attorney’s Office for the District of Massachusetts recently unsealed what it described as the “first-ever criminal charges against financial services firms for market manipulation and ‘wash trading’ in the cryptocurrency industry.” The SEC also filed parallel civil charges alleging violations of Securities for the same alleged schemes.

The government has charged eighteen individuals and companies, including four cryptocurrency market makers, with engaging in illegal market manipulation through “wash trading” digital assets. According to the DOJ and SEC filings, although these individuals purported to offer “market making services,” they were actually engaged in offering “market-manipulations-as-a-service” by engaging in artificial trading of digital assets to give the false appearance that there was an active (and heavily traded) market for those tokens.

How this case came to the DOJ’s attention is as novel as the legal theory behind the charging documents. According to DOJ spokespeople, the investigation started with a tip from the SEC about one of the companies at issue. Further investigations into that company—along with the help of cooperating witnesses—led authorities to set up a sham crypto firm, NextFundAI, and create a token associated with the firm. Posing as NextFundAI, the government communicated with the defendants—market makers who allegedly offered to trade and manipulate the price of NextFundAI’s token by wash trading, or trading the token back-and-forth between crypto wallets they controlled.

While there may be rules against wash trading in traditional securities markets (see, e.g., 26 U.S. Code § 1091), the rules are as clear in the digital asset space. Indeed, the regulatory vacuum facing the digital asset industry makes it difficult for those in the industry to avoid eventual regulatory action, and what many have referred to as “regulation by enforcement.” This is particularly true where the technological realities of digital assets do not fit squarely within the existing legal framework. There may be disagreement about the purpose or intent behind a cryptocurrency transaction where one individual is transferring cryptocurrency between wallets that person or entity controls. But there may not be a misrepresentation or fraudulent act inherent in this type of transaction. Indeed, the transaction itself (including the wallet address of the sender and recipient) is likely immediately and accurately recorded on the public blockchain. So, according to the government, the “fraud” is the intent behind the trades – to manipulate the market by artificially generating trade volume to signal interest and activity in the token.

The government’s allegations are also interesting because in addition to the wire fraud charges (18 U.S.C. § 1343), which generally do not require proof that the digital asset at issue is a security, the government has charged the defendants with conspiracy to commit market manipulation (18 U.S.C. § 371), which requires the government to prove that the token at issue is a security. This charge is significant because it will require the DOJ to prove at trial that the tokens at issue are securities.

Although several individuals involved have already pleaded guilty, there are several defendants who appear to be testing the government’s novel theory in court. We anticipate that this will be the first of many similar investigations and enforcement actions in the digital asset space.

Court Affirmed Holding That Plaintiffs Did Not Have Standing To Sue Regarding A Charitable Trust

In Dao v. Trinh, a group of five individuals who contributed money for membership in a religious community sued the person who they alleged misapplied their money for the benefit of a different religious community. No. 14-23-00131-CV, 2024 Tex. App. LEXIS 3208 (Tex. App.—Houston [14th Dist.] May 9, 2024, no pet. history). The plaintiffs brought fraud claims for alleged misrepresentations and breach of contract. The defendant filed a plea to the jurisdiction, alleging that the plaintiffs did not have standing to sue. The trial court entered an order dismissed the plaintiff’s claims with prejudice and expressly found that the plaintiffs lacked standing to bring their fraud and breach of contract claims.

The court of appeals affirmed. The court first discussing standing to sue over a charitable trust:

No party disputes that the Cao Dai organization in question, for which Trinh is the founder and director, is a “charitable trust”. This is particularly significant because the attorney general “is the representative of the public and is the proper party to maintain” a suit “vindicating the public’s rights in connection with that charity.” A private individual has standing to maintain a suit against a public charity only if the person seeks vindication of some peculiar or individual rights, distinct from those of the public at large. Moreover, a private individual must similarly establish standing in a case such as this, brought against the trustee of a public charity in connection with their office or service.

Id. The court concluded that whether framed as a fraud or breach of contract claim, the plaintiffs did not have standing to sue for the return of their donations:

Based on the holding in Eshelman, we conclude the Temple Donor Parties’ allegations and proof for their fraud claims pertaining to their donations to a charitable fails to establish standing to bring their claims (whether under a fraud theory or conditional gift theory); that is, the facts alleged and undisputed do not vindicate of some peculiar or individual rights, distinct from any other donor or from the public at large.

Id.

FCC’s New Notice of Inquiry – Is This Big Brother’s Origin Story?

The FCC’s recent Notice of Proposed Rulemaking and Notice of Inquiry was released on August 8, 2024. While the proposed Rule is, deservedly, getting the most press, it’s important to pay attention to the Notice of Inquiry.

The part which is concerning to me is the FCC’s interest in “development and availability of technologies on either the device or network level that can: 1) detect incoming calls that are potentially fraudulent and/or AI-generated based on real-time analysis of voice call content; 2) alert consumers to the potential that such voice calls are fraudulent and/or AI-generated; and 3) potentially block future voice calls that can be identified as similar AI-generated or otherwise fraudulent voice calls based on analytics.” (emphasis mine)

The FCC also wants to know “what steps can the Commission take to encourage the development and deployment of these technologies…”

The FCC does note there are “significant privacy risks, insofar as they appear to rely on analysis and processing of the content of calls.” The FCC also wants comments on “what protections exist for non-malicious callers who have a legitimate privacy interest in not having the contents of their calls collected and processed by unknown third parties?”

So, the Federal Communications Commission wants to monitor the CONTENT of voice calls. In real-time. On your device.

That’s not a problem for anyone else?

Sure, robocalls are bad. There are scams on robocalls.

But, are robocalls so bad that we need real-time monitoring of voice call content?

At what point, did we throw the Fourth Amendment out of the window and to prevent what? Phone calls??

The basic premise of the Fourth Amendment is “to safeguard the privacy and security of individuals against arbitrary invasions by governmental officials.” I’m not sure how we get more arbitrary than “this incoming call is a fraud” versus “this incoming call is not a fraud”.

So, maybe you consent to this real-time monitoring. Sure, ok. But, can you actually give informed consent to what would happen with this monitoring?

Let me give you three examples of “pre-recorded calls” that the real-time monitoring could overhear to determine if the “voice calls are fraudulent and/or AI-generated”:

Your phone rings. It’s a prerecorded call from Planned Parenthood confirming your appointment for tomorrow.
Your phone rings. It’s an artificial voice recording from your lawyer’s office telling you that your criminal trial is tomorrow.
Your phone rings. It’s the local jewelry store saying your ring is repaired and ready to be picked up.

Those are basic examples, but for them to someone to “detect incoming calls that are potentially fraudulent and/or AI-generated based on real-time analysis of voice call content”, those calls have to be monitored in real-time. And stored somewhere. Maybe on your device. Maybe by a third-party in their cloud.

Maybe you trust Apple with that info. But, do you trust someone who comes up with fraudulent monitoring software that would harvest that data? How do you know you should trust that party?

Or you trust Google. Surely, Google wouldn’t use your personal data. Surely, they would not use your phone call history to sell ads.

And that becomes data a third-party can use. For ads. For political messaging. For profiling.

Yes, this is extremely conspiratorial. But, that doesn’t mean your data is not valuable. And where there is valuable data, there are people willing to exploit it.

Robocalls are a problem. And there are some legitimate businesses doing great things with fraud detection monitoring. But, a real-time monitoring edict from the government is not the solution. As an industry, we can be smarter on how we handle this.

A Tribute to Whistleblowers: Bitcoin Billionaire to pay $40 Million to Settle Tax Evasion Suit

Michael Saylor, the billionaire bitcoin investor, will pay a record $40 million to settle allegations that he defrauded Washington D.C. by falsely claiming he lived elsewhere to avoid paying D.C. taxes. The suit – discussed in of one of our previous blogs – was originally brought by a whistleblower, Tributum, LLC., and the D.C. Attorney General intervened in the lawsuit in 2022. The settlement marks the largest income tax fraud recovery in Washington D.C. history.

Though Saylor claims he has lived in Florida since 2012, the suit alleged that Saylor actually resided in a 7,000-square-foot penthouse, or on yachts docked on the Potomac River in the District of Columbia. Furthermore, the Attorney General alleged that from 2005 through 2021, Saylor paid no income taxes. Saylor first improperly claimed residency in Virginia to pay lower taxes, then created an elaborate scheme to feign Florida residency to avoid income taxes altogether, as Florida has no personal income tax. Court filings state that MicroStrategy, Saylor’s company, submitted falsified documents to prove his residency.

According to a court filing, MicroStrategy kept track of Saylor’s location, and those records show that he met the 183-day residency threshold for D.C., meaning he was obligated to pay income taxes to the District. As we mentioned in our previous blog on the case, the complaint summarizes this tax fraud scheme as “depriv[ing] the District of tens of millions of dollars or more in tax revenue it was lawfully owed, all while Saylor continued to enjoy the full range of services, infrastructure, and other fruits of living in the District.” Despite this, he allegedly made bold claims to his friends, “contending that anyone who paid taxes to the District was stupid,” according to the Attorney General.

About the case, the D.C. Attorney General further stated that “No one in the District of Columbia, no matter how wealthy or powerful they may be, is above the law.” Holding even evasive billionaires accountable is an important part of keeping the integrity of our systems intact and ensuring that we all pay our fair share. Under the District of Columbia False Claims Act , private citizens can report tax evasion schemes , while the federal False Claims Act has a “tax bar,” so tax fraud is not actionable under that law. The IRS Whistleblower program instead offers recourse.

In addition to the $40 million settlement, Saylor has agreed to comply with D.C. tax laws. The amount of the whistleblower award in the case is still being determined, but whistleblowers are entitled to 15-25% of the government’s recovery in a qui tam False Claims Act settlement.

Whistleblower Tax Fraud Lawsuit Against Bitcoin Billionaire Settles for $40 Million

MicroStrategy’s founder is alleged to have falsified tax documents for ten years. The settlement resolves the first whistleblower lawsuit filed under 2021 amendments to the DC False Claims Act.

Key Takeaways
On June 3, the District of Columbia Office of the Attorney General announced the $40 million settlement with Michael Saylor
It is the largest income tax recovery in D.C. history
The settlement, which resolves a qui tam lawsuit filed under the DC False Claims Act, underscores the power of whistleblowers in combatting tax fraud
On June 3, the District of Columbia Office of the Attorney General (OAG) made a landmark announcement. The billionaire founder of MicroStrategy Incorporated, Michael Saylor, settled a tax fraud lawsuit for a staggering $40 million. This case, stemming from a qui tam whistleblower suit filed under the District’s False Claims Act, marks a significant milestone in the fight against tax fraud. The OAG declared this as the largest income tax recovery in D.C. history, underscoring the importance of this case.

The DC False Claims Act
This settlement is not just a victory for the District but also a testament to the power of whistleblowers. Under the 2021 extension of the D.C. False Claims Act, individuals have the power to file qui tam suits against large companies and suspected tax evaders. The 2021 amendments even offer monetary awards to those who report tax cheats. This settlement, the first settlement under these amendments, serves to put would-be tax cheats on notice.

As the District of Columbia expands its arsenal against tax fraud, other states should take note. The DC False Claims Act, now covering tax fraud, has become a powerful tool in the fight against financial misconduct. With the District joining the ranks of Delaware, Florida, Illinois, Indiana, Nevada, New York, and Rhode Island as states where false claims suits may be brought based on tax fraud claims, the fight against tax cheats looks promising.

The Case Against Saylor
In 2021, unnamed whistleblowers filed a lawsuit against Saylor, alleging that he had defrauded the District and failed to pay income taxes from 2014 to 2020. The OAG independently investigated these claims and filed a separate complaint against Saylor. The District’s lawsuit alleged that Saylor claimed to be a resident of Florida and Virginia to avoid paying over $25 million in income taxes. Another suit was filed against MicroStrategy, claiming it falsified records and statements that facilitated Saylor’s tax avoidance scheme.

The District’s allegations against Saylor paint a picture of a lavish lifestyle. Saylor is accused of unlawfully withholding tens of millions in tax revenue by claiming to live in a lower tax jurisdiction to avoid paying D.C. income taxes. The OAG’s investigation revealed that Saylor owned a 7,000-square-foot luxury penthouse overlooking the Potomac Waterfront and docked multiple yachts in the Washington Harbor. He purchased three luxury condominium units at 3030 K Street NW to combine into his current residence and a penthouse unit at the Eden Condominiums, 2360 Champlain St. NW. The Attorney General compiled several posts from Saylor’s Facebook, in which he boasted about the view from his D.C. residence.

Whistleblower Tax Fraud Lawsuit Against Bitcoin Billionaire Settles For $40 Million

Furthermore, the OAG found evidence that Saylor purchased a house in Miami Beach, obtained a Florida driver’s license, registered to vote in Florida, and falsely listed his residence on MicroStrategy W-2 forms. Attorney General Brian L. Schwalb stated, “Saylor openly bragged about his tax-evasion scheme, encouraging his friends to follow his example and contending that anyone who paid taxes to the District was stupid.”

The lawsuits allege that records from Saylor’s security detail provide Saylor’s physical location and travel from 2015 to 2020 and show that across six years, Saylor spent 449 days in Florida and 1,397 days in the District. Saylor allegedly directed MicroStrategy employees to aid his scheme to avoid paying District income taxes. The District claims that for the last ten years, MicroStrategy has falsely reported its income tax exemption on Saylor’s wages, claiming he was tax-exempt due to his residential status.

Saylor agreed to pay the District $40 million to resolve the allegations against him and MicroStrategy.

A copy of the settlement can be found here.

by: Whistleblower Law at Kohn Kohn Colapinto of Kohn, Kohn & Colapinto

For more on Whistleblowers, visit the NLR Criminal Law / Business Crimes section.

Tag: fraud

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

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