Tag: settlement

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.

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.

© 2024 by Tycko & Zavareei LLP
For more news on Kickback Fraud Settlements, visit the NLR Criminal Law & Business Crimes section.

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.

© 2024 by Tycko & Zavareei LLP
For more news on Cryptocurrency Tax Evasion Settlements, visit the NLR Criminal Law & Business Crimes section.

Poor Oversight: Healthcare Company & Owner to Pay $1 Million for Care Plan Oversight Service Billing Fraud

The United States announced that Chicago-based healthcare company Apollo Health Inc. (Apollo), and its owner, Brian J. Weinstein, will pay $1 million to resolve False Claims Act allegations. The claims state that Apollo, under the direction of Weinstein, submitted bills to Medicare for services that were never performed. The case was brought by two whistleblowers who will be rewarded for their efforts.

From December 2014 through March 2017, Apollo allegedly submitted Medicare claims for care plan oversight services (CPO) that did not occur. CPOs detail a physician’s duties to supervise a patient receiving complex medical care. Weinstein allegedly directed Apollo to submit 12,592 CPO service claims for over two dozen providers employed by Apollo, despite Weinstein’s knowledge that no services had been rendered to Medicare patients, and no CPO services were documented in medical records.
Medicare fraud undermines the trust and integrity of the healthcare system, resulting in significant financial burdens on taxpayers. When individuals or organizations engage in fraudulent activities, such as billing for services not rendered or submitting false claims, they siphon funds from Medicare’s intended beneficiaries. Medicare fraud diminishes the resources available for legitimate healthcare services for truly ill Medicare beneficiaries.
The settlement resolves claims brought by two whistleblowers, also known as relators, under the qui tam provisions of the False Claims Act. Javar Jones and Louis Curet, the relators in the case, will receive 20% of the settlement amount for bringing the fraudulent activity to the United States’ attention. Whistleblowers who report fraud against the government via a qui tam lawsuit can earn a 15-25% share of the government’s recovery.

© 2024 by Tycko & Zavareei LLP
For more news on Whistleblower Settlements, visit the Criminal Law / Business Crimes section.

Judge Approves $92 Million TikTok Settlement

On July 28, 2022, a federal judge approved TikTok’s $92 million class action settlement of various privacy claims made under state and federal law. The agreement will resolve litigation that began in 2019 and involved claims that TikTok, owned by the Chinese company ByteDance, violated the Illinois Biometric Information Privacy Act (“BIPA”) and the federal Video Privacy Protection Act (“VPPA”) by improperly harvesting users’ personal data. U.S. District Court Judge John Lee of the Northern District of Illinois also awarded approximately $29 million in fees to class counsel.

The class action claimants alleged that TikTok violated BIPA by collecting users’ faceprints without their consent and violated the VPPA by disclosing personally identifiable information about the videos people watched. The settlement agreement also provides for several forms of injunctive relief, including:

  • Refraining from collecting and storing biometric information, collecting geolocation data and collecting information from users’ clipboards, unless this is expressly disclosed in TikTok’s privacy policy and done in accordance with all applicable laws;
  • Not transmitting or storing U.S. user data outside of the U.S., unless this is expressly disclosed in TikTok’s privacy policy and done in accordance with all applicable laws;
  • No longer pre-uploading U.S. user generated content, unless this is expressly disclosed in TikTok’s privacy policy and done in accordance with all applicable laws;
  • Deleting all pre-uploaded user generated content from users who did not save or post the content; and
  • Training all employees and contractors on compliance with data privacy laws and company procedures.

Article By the Privacy and Cybersecurity Practice Group at Hunton Andrews Kurth

For more privacy and cybersecurity legal news, click here to visit the National Law Review.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

Look at Me, Not Through Me: Supreme Court Limits Federal Jurisdiction for Post-arbitration Award Petitions

On 31 March 2022, the United States Supreme Court in Badgerow v. Walters limited federal subject matter jurisdiction over post-arbitration award petitions under the Federal Arbitration Act (FAA) §§ 9 and 10. After years of widening disagreement between circuit courts regarding when a federal court may exercise jurisdiction to confirm or vacate an award, the Supreme Court weighed in and held that federal courts may only exercise jurisdiction to confirm or vacate an award if the face of the application supports diversity or federal-question jurisdiction. One of the implications of this ruling is that many more post-arbitration proceedings to confirm or vacate an arbitration award may be channeled into state courts.

BACKDROP: FAA SECTIONS AT ISSUE

Section 4 states that a party seeking to compel arbitration can file suit in any court that, “save for” the arbitration agreement, would have federal jurisdiction over the underlying dispute.1

Section 9 provides that parties may apply to confirm an arbitration award in the United States court “in and for the district” where the award was made.2

Section 10 provides that parties may apply to vacate an arbitration award in the United States court “in and for the district” where the award was made.3

PRELUDE: VADEN

In its 2009 decision in Vaden v. Discover Bank, the Supreme Court found that federal-question jurisdiction could exist under a “look-through” approach in a § 4 petition to compel arbitration.4 In that case, two questions were presented: (1) whether a district court, when asked to compel arbitration, should “look through” the petition and compel arbitration if the court originally would have had federal jurisdiction; and (2) if so, may the court exercise jurisdiction over the § 4 petition when the original complaint rests on state law but the counterclaim rests on federal law?

The Supreme Court answered the first question affirmatively. In doing so, it emphasized that a “federal court may ‘look through’ a § 4 petition to determine whether it is predicated on an action that ‘arises under’ federal law; in keeping with the well-pleaded complaint rule.”5 However, the Court found that the district court could not exercise jurisdiction over the petition presented in that case, because the complaint was “entirely state-based” and “federal-court jurisdiction cannot be invoked on the basis of a defense or counterclaim.”6

Since Vaden, circuit courts have been divided over whether the “look-through” approach also applies to applications to confirm or vacate awards under FAA §§ 9 and 10. For example, the Fifth Circuit acknowledged the circuit split in Quezada v. Bechtel OG & C Constr. Servs., Inc., noting that the Third and Seventh Circuits decline to apply the look-through approach for confirmation, vacatur, or modification of arbitration awards, but the First, Second, and Fourth Circuits permit the look-through approach.7

Ultimately, a divided Fifth-Circuit panel in Quezada agreed with the majority and held that the Vaden look-through approach applies to applications to confirm or vacate arbitration awards.

OPENING ACTS: BADGEROW V. WALTERS IN THE LOWER COURTS

Badgerow v. Walters followed, implicating the Supreme Court’s Vaden decision and the Fifth Circuit’s Quezada decision on the issue of whether a federal court has subject-matter jurisdiction to review an application to confirm or vacate an arbitration award when the underlying dispute presents a federal question.

The plaintiff in Badgerow initiated arbitration against her former employer’s principals, alleging violation of federal employment law. The arbitration panel dismissed all of her claims, so she filed an action in state court to vacate the arbitration award. The defendants removed the action to the United States District Court for the Eastern District of Louisiana and filed a motion to confirm the award. Plaintiff moved for remand to state court, arguing that the district court did not have jurisdiction over the award; however, the district court denied remand and granted defendant’s motion to confirm the award.8

On appeal, the Fifth Circuit held that it was bound by its precedent in Quezada and applied the look-through approach.9 The Fifth Circuit thus affirmed the district court’s decision to exercise jurisdiction over the dispute.

Plaintiff filed a petition for writ of certiorari, which the Supreme Court granted on 17 May 2021.10

FEATURE: THE SUPREME COURT’S DECISION

In an 8-1 decision,11 the Supreme Court reversed and remanded the case, holding that FAA §§ 9 and 10 lack § 4’s “distinctive language directing a look-through” approach. Thus, without statutory language directing otherwise, “a court may look only to the application actually submitted to it in assessing its jurisdiction.”12 Noting that Congress could have replicated § 4’s look-through language in §§ 9 and 10 but chose not to, the Court held that a federal court only has jurisdiction over an application to confirm or vacate an arbitration award when the face of the application demonstrates diversity or federal-question jurisdiction.

Applying the new rule to the facts of plaintiff’s appeal, the Court explained that the parties were not contesting the federal employment dispute at this stage; rather, the parties were contesting enforcement of the arbitration award. Therefore, the Court held that federal jurisdiction was not appropriate because enforcement of the award, which was “no more than a contractual resolution of the parties’ dispute,” did not amount to federal-question jurisdiction and the parties were not diverse.

SOUVENIR: THE KEY TAKEAWAYS

Following the Supreme Court’s decision in Badgerow limiting federal subject matter jurisdiction over arbitration awards, counsel and parties seeking to confirm or vacate arbitration awards must analyze whether their application, on its face, supports an independent basis for federal subject-matter jurisdiction if they wish to bring their application in federal court. Without the “look-through” approach for §§ 9 and 10 petitions, and in particular where the parties to arbitration provisions are citizens of the same state (and thus lack diversity jurisdiction), state courts will more likely be the primary venue for post-award petitions.

FOOTNOTES

1 9 U.S.C. § 4.

2 9 U.S.C. § 9.

3 9 U.S.C. § 10.

4 Vaden v. Discover Bank, 129 S. Ct. 1262, 1268 (2009) (“A federal court may ‘look through’ a § 4 petition and order arbitration if,” notwithstanding the arbitration agreement, “the court would have jurisdiction over ‘the [substantive] controversy between the parties.’” (citations omitted)).

5 Id. at 1273.

6 Id. at 1269.

7 Quezada v. Bechtel OG & C Constr. Servs., Inc., 946 F.3d 837, 841 (5th Cir. 2020) (“After Vaden, a circuit split developed regarding whether the same look-through approach also applies to applications to confirm an arbitration award under section 9, to vacate under section 10, or to modify under section 11.”).

8 Badgerow v. Walters, — S. Ct. —-, 2022 WL 959675, at *3 (2022).

9 Badgerow v. Walters, 975 F.3d 469, 472–74 (5th Cir. 2020).

10 Badgerow v. Walters, 141 S. Ct. 2620 (2021).

11 Justice Breyer in dissent wrote that although the Court’s decision “may be consistent with the statute’s text,” practical application would create curious consequences, artificial distinctions, and results that are “overly complex and impractical.” Badgerow, 2022 WL 959675, at *10 (Breyer, J., dissenting).

12 Badgerow, 2022 WL 959675, at *3.

Copyright 2022 K & L Gates
For more articles about Supreme Court cases, visit the NLR Litigation section.

Electronic Medical Record Provider Pays $930,000 in First Civil Cyber-Fraud Initiative Settlement

For the first settlement as part of the Department of Justice’s Civil Cyber-Fraud Initiative, DOJ settled a case against medical services government contractor Comprehensive Health Services, LLC (CHS) for $930,000.  This settlement resolves allegations brought forth in two qui tam lawsuits, where four whistleblowers filed suit on behalf of the government under the qui tam provision of the False Claims Act.  Three of the whistleblowers received $15,000, in addition to attorneys’ fees, and one relator received $127,050 for reporting fraud.

“This settlement serves notice to federal contractors that they will be held accountable for conduct that puts private medical records and patient safety at risk,” said the United States Attorney for the Eastern District of New York.

CHS, as part of the medical services they provided to the U.S. government, was paid to implement a secure electronic medical record (EMR) system as part of contracts with the State Department and Air Force at various U.S. consulate and military locations in Iraq and Afghanistan.  The EMR system housed personal health information and medical records for anyone who received medical treatment at the locations CHS served, including U.S. service members, diplomats, officials, and contractors.  According to the allegations, CHS did not consistently store patients’ medical records on the secure EMR system and indeed left scans on a network drive which non-clinical staff could access.

As part of several contracts to which CHS was a party, CHS was supposed to provide medical supplies, including controlled substances subject to U.S. Food and Drug Administration (FDA) or European Medicines Agency (EMA) approval.  According to the allegations, CHS “knowingly, recklessly, or with deliberate ignorance” submitted claims for payment for controlled substances that they obtained by means not sanctioned by these contracts.  Not only did CHS lack a Drug Enforcement Agency license to export controlled substances, but CHS also obtained controlled substances by having their U.S.-based subsidiary request that a South African physician prescribe controlled substances, according to the allegations.  The South African physician prescribed these controlled substances, absent FDA or EMA approval, and a shipping company from the same country imported the substances to Iraq.

Government contractors are supposed to adhere to the terms of their contracts in order to receive reimbursement from the U.S. government.  This medical services provider ignored procurement guidelines to obtain controlled substances, undermining safety controls and misrepresenting their adherence to contract terms in providing medical services to U.S. military personnel.  The DOJ’s Civil Cyber-Fraud Initiative brings the power of the False Claims Act to bear on contractors whose job is to protect sensitive information and critical systems.  Representing that data is secure when it is, in fact, not is a violation of the False Claims Act and constitutes cyber-fraud.  As the Special Agent in Charge of the U.S. Department of State OIG, Office of Investigations noted, “…this outcome will send a clear message that cutting corners on State Department contracts has significant consequences.”

Whistleblowers raised data privacy concerns to CHS, but the contractor failed to implement better cybersecurity protocols in response to their concerns.  The Department of Justice has rewarded its first whistleblowers as part of the Civil Cyber-Fraud Initiative, and they’re just getting started.

© 2022 by Tycko & Zavareei LLP
For more articles about digital health, visit the NLR Health Care Law section.

Fitness App Agrees to Pay $56 Million to Settle Class Action Alleging Dark Pattern Practices

On February 14, 2022, Noom Inc., a popular weight loss and fitness app, agreed to pay $56 million, and provide an additional $6 million in subscription credits to settle a putative class action in New York federal court. The class is seeking conditional certification and has urged the court to preliminarily approve the settlement.

The suit was filed in May 2020 when a group of Noom users alleged that Noom “actively misrepresents and/or fails to accurately disclose the true characteristics of its trial period, its automatic enrollment policy, and the actual steps customer need to follow in attempting to cancel a 14-day trial and avoid automatic enrollment.” More specifically, users alleged that Noom engaged in an unlawful auto-renewal subscription business model by luring customers in with the opportunity to “try” its programs, then imposing significant barriers to the cancellation process (e.g., only allowing customers to cancel their subscriptions through their virtual coach), resulting in the customers paying a nonrefundable advance lump-sum payment for up to eight (8) months at a time. According to the proposed settlement, Noom will have to substantially enhance its auto-renewal disclosures, as well as require customers to take a separate action (e.g., check box or digital signature) to accept auto-renewal, and provide customers a button on the customer’s account page for easier cancellation.

Regulators at the federal and state level have recently made clear their focus on enforcement actions against “dark patterns.” We previously summarized the FTC’s enforcement policy statement from October 2021 warning companies against using dark patterns that trick consumers into subscription services. More recently, several state attorneys general (e.g., in Indiana, Texas, the District of Columbia, and Washington State) made announcements regarding their commitment to ramp up enforcement work on “dark patterns” that are used to ascertain consumers’ location data.

Article By: Privacy and Cybersecurity Practice Group at Hunton Andrews Kurth

For more cybersecurity legal news, click here to visit the National Law Review.
 
Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.

A Flurry of CFTC Actions Shock the Cryptocurrency Industry

The Commodity Futures Trading Commission (CFTC) sent shockwaves across the cryptocurrency industry when it issued a $1.25 million settlement order with Kraken, one of the industry’s largest market participants. The next day, the CFTC announced that it had charged each of 14 entities for offering cryptocurrency derivatives and margin trading without registering as a futures commission merchant (FCM). While the CFTC has issued regulatory guidance in the past and engaged in some regulatory enforcement activities, it has now established itself as a key regulator of the industry along with the US Securities and Exchange Commission (SEC), the US Department of Justice (DOJ) and the US Department of the Treasury (Treasury). Market participants should be aware that the CFTC will continue to take a more active role in regulation and enforcement of commodities and derivatives transactions moving forward.

The CFTC alleged that each of the defendants were acting as an unregistered FCM. Under Section 1a(28)(a) of the Commodity Exchange Act (the Act), 7 U.S.C. § 1(a)(28)(A), an FCM is any “individual, association, partnership, or trust that is engaged in soliciting or accepting orders for the purchase or sale of a commodity for future delivery; a security futures product; a swap . . . any commodity option authorized under section 6c of this title; or any leverage transaction authorized under section 23 of this title.” In order to be considered an FCM, that entity must also “accept[] money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result therefrom.” (See: 7 U.S.C. § 1(a)(28)(A)(II).) 7 U.S.C. § 6d(1), requires FCMs to be registered with the CFTC.

IN DEPTH

THE KRAKEN SETTLEMENT

On September 28, 2021, the CFTC issued an order, filing and settling charges against respondent Payward Ventures, Inc. d/b/a Kraken for offering margined retail commodity transactions in cryptocurrency—including Bitcoin—and failing to register as an FCM. Kraken is required to pay a $1.25 million civil monetary penalty and to cease and desist from further violations of the Act. The CFTC stated that, “This action is part of the CFTC’s broader effort to protect U.S. customers.”

The CFTC’s order finds that from approximately June 2020 to July 2021, Kraken violated Section 4(a) of the Act, 7 U.S.C. § 6(a)(2018) by offering to enter into, entering into, executing and/or confirming the execution of off-exchange retail commodity transactions with US customers who were not eligible contract participants or eligible commercial entities. The CFTC also found that Kraken operated as an unregistered FCM in violation of Section 4d(a)(1) of the Act, 7 U.S.C. § 6d(a)(1) (2018). According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all assets purchased using margins for the duration of a customer’s open margined position.

Margined transactions worked as follows: The customer opened an individual account at Kraken and deposited cryptocurrency or fiat currency into the account. The customer then initiated a trade by selecting (1) the trading pair they wished to trade, (2) a purchase or sale transaction and (3) a margin option. All trades were placed on Kraken’s central limit order book and executed individually for each customer. If a customer purchased an asset using margin, Kraken supplied the cryptocurrency or national currency to pay the seller for the asset. If a customer sold an asset using margin, Kraken supplied the cryptocurrency or national currency due to the buyer. Trading on margin allowed the customer to establish a position but also created an obligation for the customer to repay Kraken at the time the margined position was closed. The customer’s position remained open until they submitted a closing trade, they repaid the margin or Kraken initiated a forced liquidation based on the occurrence of certain triggering events, including limitations on the duration of an open margin position and pre-set margin thresholds. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days, however, customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated or could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur.

The CFTC asserted that these transactions were unlawful because they were required to take place on a designated contract market. Additionally, by soliciting and accepting orders for, and entering into, retail commodity transactions with customers and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken was operating as an unregistered FCM.

Coinciding with the release of the enforcement action against Kraken, CFTC Commissioner Dawn D. Sump issued a “concurring statement.” In it, she appeared to be calling upon the CFTC to adopt more specific rules governing the products that are the subject of the enforcement action. Commissioner Sump seemed to indicate that it would be helpful to cryptocurrency market participants if the CFTC clarified its position on the applicability of the Act, as well as registration requirements. The CFTC will likely issue guidance or rules to clarify its position on which cryptocurrency-related products trigger registration requirements.

CFTC CHARGES 14 CRYPTOCURRENCY ENTITIES

On September 29, 2021, the CFTC issued a press release and 14 complaints against cryptocurrency trading platforms. The CFTC is seeking a sanction “directing [the cryptocurrency platforms] to cease and desist from violating the provisions of the Act set forth herein.” Each of the platforms have 20 days to respond.

All of the complaints are somewhat similar in that the CFTC alleges that each of the cryptocurrency platforms “from at least May 2021 and through the present” have offered services to the public “including soliciting or accepting orders for binary options that are based off the value of a variety of assets including commodities such as foreign currencies and cryptocurrencies including Bitcoin, and accepting and holding customer money in connection with those purchases of binary options.”

The CFTC has taken the position that “binary options that are based on the price of an underlying commodity like forex or cryptocurrency are swaps and commodity options as used in the definition of an FCM.” (The CFTC has previously taken the position that Bitcoin and Ethereum constitute “commodities,” doing so in public statements and enforcement actions.) In a prominent enforcement action previously filed by the CFTC in the United States District Court for the Eastern District of New York, the court held that “virtual currency may be regulated by the CFTC as a commodity” and that it “falls well-within the common definition of ‘commodity’ as well as the CEA’s definition of commodities.” (See: CFTC v. McDonnell, et al., 287 F. Supp. 3d 213, 228 (E.D.N.Y. Mar. 6, 2018); CFTC v. McDonnell, et al., No. 18-cv-461, ECF No. 172 (E.D.N.Y. Aug. 23, 2018).) In the action the CFTC filed against BitMEX in October of 2020, it alleged that “digital assets, such as bitcoin, ether, and litecoin are ‘commodities’ as defined under Section 1a(9) of the Act, 7 U.S.C. § 1a(9). (See: CFTC v. HDR Global Trading Limited, et al., No. 20-cv-8132, ECF 1, ¶ 23 (S.D.N.Y. Oct. 1, 2020).)

The CFTC has previously taken the position that Bitcoin, Ethereum and Litecoin are considered commodities. However, in these recently filed complaints, the CFTC did not appear to limit the cryptocurrencies that would be considered “commodities” to just Bitcoin, Ethereum and Litecoin. Instead, the CFTC broadly referred to “commodities such as foreign currencies and cryptocurrencies including Bitcoin.” It remains to be seen which of the hundreds of cryptocurrencies on the market will be considered “commodities,” but it appears that the CFTC is not limiting its jurisdiction to just three. It is also an open question as to whether there are certain cryptocurrencies or cryptocurrency referencing financial products that the SEC and CFTC will determine are subject to the overlapping jurisdiction of both regulators, similar to mixed swaps under the derivatives rules.

The CFTC also singled out two of these cryptocurrency platforms, alleging that they issued false statements to the effect that it “is a registered FCM and RFED with the CFTC and member of the NFA.” The CFTC noted that neither of these entities were ever registered with the National Futures Association (NFA) and one of the NFA ID numbers listed “identifies an individual who was once registered with the CFTC but has been deceased since 2009.”

WHAT’S NEXT

While the SEC, Treasury and DOJ are often considered the most prominent federal regulators in the cryptocurrency space, this recent sweep by the CFTC is not the first time it has flexed its muscles. The CFTC went to trial and won in 2018, accusing an individual of operating a boiler room. In October 2020, the CFTC filed a case against popular cryptocurrency exchange BitMEX for failing to register as an FCM, among other counts. However, unlike those one-off enforcement actions, the recent actions targeting multiple market participants within two days is a big step forward for the CFTC. Cryptocurrency derivative trading has been rising in popularity over the last few years and it is unsurprising that the CFTC is taking a more active enforcement role.

It is expected that regulatory activity within the cryptocurrency space will increase from all US regulators, including the CFTC, SEC, Treasury and the Office of the Comptroller of the Currency, especially as cryptocurrency products are increasingly classified as financial products subject to regulation. While the CFTC and other regulators have issued some regulatory guidance, regulators appear to be taking a “regulatory guidance by enforcement action” strategy. Market participants will need to thoughtfully consider all relevant regulatory regimes in order to determine what compliance activities are necessary. As we describe, multiple classifications are possible.

© 2021 McDermott Will & Emery
For more on cryptocurrency litigation, visit the NLR Cybersecurity, Media & FCC section.

That Agreement Isn’t Worth the Paper It’s Printed On: Settlements, Consent Judgments, and Penn-America Insurance Co. v. Osborne

A settlement is in place. The parties to the litigation have executed an agreement that embodies their negotiations. Some walk away with a release. Others walk away with a check. Still others had their heart set on an assignment of claims against a third-party. Once the consideration changes hands, the parties submit a stipulation of dismissal, or the court enters a consent judgment. Does that mean the dispute is over? For most cases, it does. Occasionally, however, the dispute lives on or is inherited by a third-party against whom claims were assigned. This article explores the circumstances in which settlement agreements are subject to attack in West Virginia, either by the parties or by third-parties against whom they are sought to be enforced.

As a general matter, settlement agreements signal the end of a dispute. They are “highly regarded and scrupulously enforced, so long as they are legally sound.”1 Indeed, because “[t]he law favors and encourages the resolution of controversies by contracts of compromise and settlement . . . it is the policy of the law to uphold and enforce such contracts if they are fairly made and are not in contravention of some law or public policy.”2 In West Virginia, parties to a settlement may only re-open it if they overcome the heavy burden of establishing that the settlement was the result of an accident, mistake, or fraud.3 Given these high hurdles, it is the rare case that a litigant will be successful in directly challenging its own settlement agreement.4

But an agreement that resolves a matter among discrete parties does not necessarily fix the obligations of a non-consenting or non-party insurer. “Most attempts to resolve litigation without the consent of the defendant’s liability carrier involve three components: (1) an assignment of the defendant’s rights against his or her liability insurer to the plaintiff; (2) the plaintiff’s covenant not to execute against the defendant’s assets; and (3) a judgment establishing the defendant’s liability and the plaintiff’s damages.”5 Due to the potential that such agreements will arise from fraud or collusion, many courts “cast a suspicious eye” on them.6

Accordingly, a consent or confessed judgment against an insured party may be subject to attack when it is entered into without the participation of a relevant liability carrier. For instance, in West Virginia, “a consent or confessed judgment against an insured party is not binding on that party’s insurer in subsequent litigation against the insurer where the insurer was not a party to the proceeding in which the consent or confessed judgment was entered, unless the insurer expressly agreed to be bound by the judgment.”7 This is because,

[w]hen dealing with consent judgments, courts must ensure that circumstantial guarantees of trustworthiness exist concerning the genuineness of the underlying judgment. The real concern is that the settlement may not actually represent an arm’s length determination of the worth of the plaintiff’s claim.8

The judiciary’s circumspect approach to consent judgments is especially heightened when the underlying agreement is coupled with a covenant not to execute. A covenant not to execute is an agreement by “which a party who has won a judgment agrees not to enforce it.”9 Such covenants are suspect because they come with perverse incentives. “When the insured actually pays for the settlement of the claim or when the case is fully litigated, the amount of the settlement or judgment can be assumed to be realistic.”10 But when an insured walks away from the agreement with no practical consequences, it has little reason to challenge the amount of the claim, and the accuracy of the judgment becomes questionable.

One potential circumstance is illustrated by Penn-America Insurance Co. v. Osborne, 11 which was decided by the Supreme Court of Appeals of West Virginia in 2017. There, the plaintiff was injured in a timbering accident while conducting work for his employer, H&H Logging Company, on land owned by Heartwood Forestland Fund, IV, Limited Partnership, and leased by Allegheny Wood Products, Inc., for the purpose of harvesting timber.12 The plaintiff sued his employer for deliberate intent and both Heartwood and Allegheny for negligent failure to inspect and/or maintain the land.13 When it came time for the defendants to arrange the defense among their insurers, communications fell apart. H&H requested a defense from its commercial general liability insurer, Penn-America Insurance Company, but Penn-America declined to defend the case against H&H because deliberate intent claims were excluded under the relevant policy.14

For their part, Allegheny and Heartwood requested a defense from Allegheny’s insurer, which accepted coverage. Some time later, Allegheny and Heartwood realized that H&H was contractually obligated to provide them a defense and wrote H&H to demand that it or Penn-America provide a defense. None of the parties ever notified Penn-America that Allegheny and Heartwood had requested a defense against the plaintiff’s allegations. Nonetheless, Allegheny and Heartwood moved for leave to file a third-party complaint for a declaration that Penn-America had wrongfully failed to provide them a defense. The court never ruled on the motion, and the third-party complaint was never filed.15

Thereafter, without providing notice to Penn-America, the parties entered into a settlement agreement, stipulating that Penn-America had damaged Allegheny and Heartwood by breaching its contractual obligation to provide them a defense against the plaintiff’s allegations.16 The key aspects of the agreement are as follows:

Allegheny and Heartwood consented to a $1,000,000.00 judgment for [the plaintiff’s] leg injury, and they agreed to assign to [the plaintiff] any claims they may have had against Penn-America for failing to provide them a defense in the lawsuit. In return, [the plaintiff] covenanted not to execute on the $1,000,000.00 judgment against Allegheny and Heartwood. Instead, he would collect judgment from Penn-America by asserting his assigned claims.17

The plaintiff dismissed his lawsuit against Allegheny and Heartwood and filed a new lawsuit against Penn-America, seeking to recover $1,000,000 as relief for its alleged failure to provide a defense in the plaintiff’s case against Allegheny and Heartwood.18

Ultimately, the Supreme Court of Appeals of West Virginia decided that “the consent judgment [was] not binding on Penn-America, and the assignment of claims to [the plaintiff was] void.”19 As to the enforceability of the consent judgment itself, the court adhered to its prior reasoning that a consent judgment coupled with a covenant not to execute is especially suspect and deserving of scrutiny. It further reasoned that “[n]one of the parties to the pre-trial settlement agreement had any motive to contest liability or an excessive amount of damages.”20 Moreover, the parties valued the claim at $1,000,000 by reference to Penn-America’s coverage, not the plaintiff’s actual injuries. Because “Penn-America was not a party to the lawsuit in which the consent judgment was entered,” the judgment could not be binding on PennAmerica.21

The assignment of bad faith claims by Allegheny and Heartwood fared no better. The Court found that the assignment was based on falsehoods, and that the parties’ agreement bore the hallmark characteristics of fraud and collusion.22 As the Supreme Court of Appeals summarized:

[T]he facts underlying Mr. Osborne’s assigned claims were misrepresented. Moreover, a $1,000,000.00 valuation of a lawsuit for an injured leg, without any cited evidence regarding permanency of the injury, permanent disability, severity, medical expenses, etc., hardly reflects a “serious negotiation on damages.” Lastly, concealment also characterizes the pre-trial settlement agreement because the parties never notified Penn-America of their pre-trial settlement negotiations. Once Penn-America learned after-the-fact of the pre-trial assignment and covenant not to execute, it was prohibited from conducting discovery on the extent of Mr. Osborne’s injuries and damages. Thus, through secretive means, Allegheny and Heartwood awarded Mr. Osborne a $1,000,000.00 windfall for his injured leg with Penn-America’s money.23

In essence, the consent judgment entered by the putative insureds was ineffective to subject the insurer to liability or exposure in a subsequent case brought by the plaintiff.

The reasoning of the Supreme Court of Appeals of West Virginia in Penn-America is the majority approach as to whether a consent or confessed judgment can be binding on a third party.23 For those engaged in settling cases on behalf of their insureds, Penn-America counsels against using the settlement agreement as an instrument to foist liability onto a non-party, especially one that has not been given notice of the negotiations. Moreover, insurers against whom consent judgments are sought to be enforced should bear in mind that the enforcers face a steep uphill battle. The Supreme Court of Appeals of West Virginia, along with the majority of courts, looks askance on enforcing such judgments against non-parties.

1 DeVane v. Kennedy, 205 W. Va. 519, 534, 519 S.E.2d 622, 637 (1999)

2 Syl. Pt. 6, DeVane, 205 W. Va. 519, 519 S.E.2d 622 (quoting Syl. Pt. 1, Sanders v. Roselawn Mem’l Gardens, 152 W. Va. 91, 159 S.E.2d 784 (1968))

3Syl. Pt. 2, Burdette v. Burdette Realty Improvement, Inc., 214 W. Va. 448, 590 S.E.2d 641 (2003) (quoting Syl. Pt. 7, DeVane, 205 W. Va. 519, 519 S.E.2d 622).

4 See, e.g., Burdette, 214 W. Va. 448, 590 S.E.2d 641 (fi nding that a settlement agreement was unenforceable because a party to the agreement had repudiated his signature before the agreement left his attorney’s offi ce, thus resulting in no meeting of the minds)

5 John K. DiMugno, Consent Judgments and Covenants Not To Execute: Good Deals or Too Good to Be True? Part II: Practical Concerns About Collusion and Fraud, 25 No. 1 INS. LITIG. REP. 5 (2003).

6 Id

7 Syl. Pt. 7, Horkulic v. Galloway, 222 W. Va. 450, 665 S.E.2d 284 (2008).

8 Id. at 460, 665 S.E.2d at 294 (quoting Ross v. Old Republic Ins. Co., 134 P.3d 505 (Colo. App. 2006)).

9 Covenant, BLACK’S LAW DICTIONARY (10th ed. 2014).

10 Horkulic, 222 W. Va. at 460-61, 665 S.E.2d at 294-95 (quoting Ross, 134 P.3d 505).

11 238 W. Va. 571, 797 S.E.2d 548 (2017).

12 Id. at 573, 797 S.E.2d at 550.

13 Id

14 Id

15 Id. at 574, 797 S.E.2d at 551.

16 Id

17 Id

18 Id

19 Id. at 575, 797 S.E.2d at 552.

20 Id. at 576, 797 S.E.2d at 553

21 Id. at 578-79, 797 S.E.2d at 555-56; cf. Strahin v. Sullivan, 220 W. Va. 329, 647 S.E.2d 765 (2007) (reasoning that the assignment of a bad faith claim may not be made when the insured enters a covenant not to execute as the insured was never actually exposed to an excess verdict that would support a bad faith claim against his insurer).

22 Penn-America, 238 W. Va. at 579-80, 797 S.E.2d at 556-57

23 LITIGATION & PREVENTION OF INSURER BAD FAITH § 3:50 (3d ed. 2018) (referring to Penn-America as representative of the majority rule “that the consent or confessed judgment is simply not binding where the party from which indemnity is sought was not a party to the previous proceeding”).

 

© Steptoe & Johnson PLLC. All Rights Reserved.
This post was written by James E. McDaniel of Steptoe & Johnson PLLC. 

Two Class Actions Alleging Starbucks Violated FCRA’s Background Report Disclosure Requirements Are Grinding Toward Settlement

Two pending class action lawsuits alleging coffee giant Starbucks violated the Fair Credit Reporting Act (“FCRA”) by relying on flawed background reports to decline employment to over 8,000 job applicants will likely settle in the coming months.  The two suits are being consolidated in the U.S. District Court for the Northern District of Georgia for the purpose of a directing notice to a single nationwide class.

Before taking adverse action against an applicant based on a background report, 15 U.S.C. §1681b(b)(3) requires the employer to provide the applicant with a copy of the report and a written summary of the applicant’s rights under 15 U.S.C. §1681g(c)(1).  The purpose of this requirement is to allow the applicant an opportunity to correct any errors on the report before the adverse action is taken.

In the first suit, pending in the U.S. District Court for the Western District of Washington, the lead plaintiff, Jonathan Santiago Rosario (“Rosario”), alleges that he was denied employment as a Starbucks barista based on an inaccurate background report Starbucks obtained from Accurate Background, Inc. (“Accurate Background”).  Rosario claims he was taken out of consideration for the position based on several criminal charges and convictions that appeared on his report.  Rosario maintains that the report was inaccurate and that Starbucks took the adverse action weeks before he was provided with the report and the written summary of rights.  Rosario argues that he never had a meaningful opportunity to dispute the report and that Starbucks never reconsidered him for the position.

Similarly, the lead plaintiff in the second suit, Kevin Wills (“Wills”) of Georgia, alleges that Starbucks took adverse employment action against him without providing proper notice and a written summary of rights under FCRA.  Starbucks allegedly hired Wills pending the results of his criminal background check.  Starbucks allegedly received a report from Accurate Background stating that “Kevin Willis” of Minnesota had two prior convictions for domestic violence.  As a result of the report, Starbucks informed Wills over the telephone that he could not work for Starbucks.  Days later, Wills received a letter enclosing the background report.

According to an April 17, 2019 order issued by Judge Richard Jones, who presides over the Rosario action, the parties from both cases jointly participated in several sessions with a private mediator and have reached an agreement in principle to settle both cases on a class basis.

On April 24, 2019, Magistrate Judge Catherine M. Salinas issued a report and recommendation in the Wills case recommending that the Clerk in the Northern District of Georgia consolidate the Rosario case into the Wills case.  After fourteen days, if no party objects, the cases will likely be consolidated.

To date, no details about the terms of the settlement have been released.

 

Copyright © 2019 Womble Bond Dickinson (US) LLP All Rights Reserved.
This post was written by Nadia Adams of Womble Bond Dickinson (US) LLP.
Read more on FCRA Litigation on the National Law Review’s Litigation Type of Law page.