Tag: Whistleblower

Dodd-Frank Whistleblower Litigation Heating Up

Barnes Thornburg

The past few months have been busy for courts and the SEC dealing with securities whistleblowers. The Supreme Court’s potentially landmark decision in Lawson v. FMR LLC back in March already seems like almost ancient history.  In that decision, the Supreme Court concluded that Sarbanes-Oxley’s whistleblower protection provision (18 U.S.C. §1514A) protected not simply employees of public companies but also employees of private contractors and subcontractors, like law firms, accounting firms, and the like, who worked for public companies. (And according to Justice Sotomayor’s dissent, it might even extend to housekeepers and gardeners of employees of public companies).

Since then, a lot has happened in the world of whistleblowers. Much of the activity has focused on Dodd-Frank’s whistleblower-protection provisions, rather than Sarbanes-Oxley. This may be because Dodd-Frank has greater financial incentives for plaintiffs, or because some courts have concluded that it does not require an employee to report first to an enforcement agency. The following are some interesting developments:

What is a “whistleblower” under Dodd-Frank?

This seemingly straightforward question has generated a number of opinions from courts and the SEC. The Dodd-Frank Act’s whistleblower-protection provision, enacted in 2010, focuses on a potentially different “whistleblower” population than Sarbanes-Oxley does. Sarbanes-Oxley’s provision focuses particularly on whistleblower disclosures regarding certain enumerated activities (securities fraud, bank fraud, mail or wire fraud, or any violation of an SEC rule or regulation), and it protects those who disclose to a person with supervisory authority over the employee, or to the SEC, or to Congress.

On the other hand, Dodd-Frank’s provision (15 U.S.C. §78u-6 or Section 21F) defines a “whistleblower” as “any individual who provides . . . information relating to a violation of the securities laws to the Commission.”  15 U.S.C. §78u-6(a)(6).  It then prohibits, and provides a private cause of action for, adverse employment actions against a whistleblower for acts done by him or her in “provid[ing] information to the Commission,” “initiat[ing], testif[ing] in, or assist[ing] in” any investigation or action of the Commission, or in making disclosures required or protected under Sarbanes-Oxley, the Exchange Act or the Commission’s rules.  15 U.S.C. §78u-6(h)(1). A textual reading of these provisions suggests that a “whistleblower” has to provide information relating to a violation of the securities laws to the SEC.  If the whistleblower does so, an employer cannot discriminate against the whistleblower for engaging in those protected actions.

However, after the passage of Dodd-Frank, the SEC promulgated rules explicating its interpretation of Section 21F. Some of these rules might require providing information to the SEC, but others could be construed more broadly to encompass those who simply report internally or report to some other entity.  Compare Rule 21F-2(a)(1), (b)(1), and (c)(3), 17 C.F.R. §240.21F-2(a)(1), (b)(1), and (c)(3). The SEC’s comments to these rules also said that they apply to “individuals who report to persons or governmental authorities other than the Commission.”

Therefore, one issue beginning to percolate up to the appellate courts is whether Dodd-Frank’s anti-retaliation provisions consider someone who reports alleged misconduct to their employers or other entities, but not the SEC, to be a “whistleblower.” The only circuit court to have squarely addressed the issue (the Fifth Circuit in Asadi v. G.E. Energy (USA) LLC) concluded that Dodd-Frank’s provision only applies to those who actually provide information to the SEC.

In doing so, the Fifth Circuit relied heavily on the “plain language and structure” of the statutory text, concluding that it unambiguously required the employee to provide information to the SEC.  Several district courts, including in Colorado, Florida and the Northern District of California, have concurred with this analysis.

More, however, have concluded that Dodd-Frank is ambiguous on this point and therefore have given Chevrondeference to the SEC’s interpretation as set forth in its own regulations. District courts, including in the Southern District of New York, New Jersey, Massachusetts, Tennessee and Connecticut, have adopted this view. The SEC has also weighed in, arguing (in an amicus brief to the Second Circuit) that whistleblowers should be entitled to protection regardless of whether they disclose to their employers or the SEC.  The agency said that Asadi was wrongly decided and, under its view, employees that report internally should get the same protections that those who report to the SEC receive. The Second Circuit’s decision in that case (Liu v. Siemens AG) did not address this issue at all.

Finally, last week, the Eighth Circuit also decided not to take on this question. It opted not to hear an interlocutory appeal, in Bussing v. COR Securities Holdings Inc., in which an employee at a securities clearing firm provided information about possible FINRA violations to her employer and to FINRA, rather than the SEC, and was allegedly fired for it. The district court concluded that the fact that she failed to report to the SEC did not exclude her from the whistleblower protections under Dodd-Frank. It reasoned that Congress did not intend, in enacting Dodd-Frank, to encourage employees to circumvent internal reporting channels in order to obtain the protections of Dodd-Frank’s whistleblower protection.  In doing so, however, the district court did not conclude that the statute was ambiguous and rely on the SEC’s interpretation.

A related question is what must an employee report to be a “whistleblower” under Dodd-Frank. Thus far, if a whistleblower reports something other than a violation of the securities laws, that is not protected. So, for example, an alleged TILA violation or an alleged violation of certain banking laws have been found to be not protected.

These issues will take time to shake out. While more courts thus far have adopted, or ruled consistently with, the SEC’s interpretation, as the Florida district court stated, “[t]he fact that numerous courts have interpreted the same statutory language differently does not render the statute ambiguous.”

Does Dodd-Frank’s whistleblower protection apply extraterritorially?

In August, the Second Circuit decided Liu. Rather than focus on who can be a whistleblower, the Court concluded that Dodd-Frank’s whistleblower-protection provisions do not apply to conduct occurring exclusively extraterritorially. In Liu, a former Siemens employee alleged that he was terminated for reporting alleged violations of the FCPA at a Siemens subsidiary in China.  The Second Circuit relied extensively on the Supreme Court’s Morrison v. Nat’l Aust. Bank case in reaching its decision. In Morrison, the Court reaffirmed the presumption that federal statutes do not apply extraterritorially absent clear direction from Congress.

The Second Circuit in Liu, despite Liu’s argument that other Dodd-Frank provisions applied extraterritorially and SEC regulations interpreting the whistleblower provisions at least suggested that the bounty provisions applied extraterritorially, disag
reed. The court concluded that it need not defer to the SEC’s interpretation of who can be a whistleblower because it believed that Section 21F was not ambiguous.  It also concluded that the anti-retaliation provisions would be more burdensome if applied outside the country than the bounty provisions, so it did not feel the need to construe the two different aspects of the whistleblower provisions identically.  And finally, the SEC , in its amicus brief, did not address either the extraterritorial reach of the provisions or Morrison, so the Second Circuit apparently felt no need to defer to the agency’s view on extraterritoriality.

Liu involved facts that occurred entirely extraterritorially. He was a foreign worker employed abroad by a foreign corporation, where the alleged wrongdoing, the alleged disclosures, and the alleged discrimination all occurred abroad. Whether adding some domestic connection changes this result remains for future courts to consider.

The SEC’s Use Of The Anti-Retaliation Provision In An Enforcement Action

In June, the SEC filed, and settled, its first Dodd-Frank anti-retaliation enforcement action. The Commission filed an action against Paradigm Capital Management, Inc., and its principal Candace Weir, asserting that they retaliated against a Paradigm employee who reported certain principal transactions, prohibited under the Investment Advisers Act, to the SEC. Notably, that alleged retaliation did not include terminating the whistleblower’s employment or diminishing his compensation; it did, however, include removing him as the firm’s head trader, reconfiguring his job responsibilities and stripping him of supervisory responsibility. Without admitting or denying the SEC’s allegations, both respondents agreed to cease and desist from committing any future Exchange Act violations, retain an independent compliance consultant, and pay $2.2 million in fines and penalties.  This matter marks the first time the Commission has asserted Dodd-Frank’s whistleblower provisions in an enforcement action, rather than a private party doing so in civil litigation.

The SEC Announces Several Interesting Dodd-Frank Bounties

Under Dodd-Frank, whistleblowers who provide the SEC with “high-quality,” “original” information that leads to an enforcement action netting over $1 million in sanctions can receive an award of 10-30 percent of the amount collected. The SEC recently awarded bounties to whistleblowers in circumstances suggesting the agency wants to encourage a broad range of whistleblowers with credible, inside information.

In July, the agency awarded more than $400,000 to a whistleblower who appears not to have provided his information to the SEC voluntarily.  Instead, the whistleblower had attempted to encourage his employer to correct various compliance issues internally. Those efforts apparently resulted in a third-party apprising an SRO of the employer’s issues and the whistleblower’s efforts to correct them. The SEC’s subsequent follow-up on the SRO’s inquiry resulted in the enforcement action. Even though the “whistleblower” did not initiate communication with the SEC about these compliance issues, for his efforts, the agency nonetheless awarded him a bounty.

Then, just recently, the SEC announced its first whistleblower award to a company employee who performed audit and compliance functions. The agency awarded the compliance staffer more than $300,000 after the employee first reported wrongdoing internally, and then, when the company failed to take remedial action after 120 days, reported the activity to the SEC. Compliance personnel, unlike most employees, generally have a waiting period before they can report out, unless they have a reasonable basis to believe investors or the company have a substantial risk of harm.

With a statute as sprawling as Dodd-Frank, and potentially significant bounty awards at stake, opinions interpreting Dodd-Frank’s whistleblower provisions are bound to proliferate. Check back soon for further developments.

 
ARTICLE BY

Brian E. Casey
 
OF 
Barnes & Thornburg LLP

Manufacturer of Spinal Devices and Indiana Spinal Surgeon to Pay U.S. Government $2.6 Million for Violating the False Claims Act

tz logo 2On August 29, 2014, the Department of Justice (DOJ) announced that Omni Surgical L.P. (dba Spine 360), and Dr. Jamie Gottlieb, an Indiana Spinal Surgeon, agreed to pay the U.S. Government $2.6 million to settle allegations that Spine 360 and Dr. Gottlieb knowingly violated the False Claims Act when Dr. Gottlieb accepted kickbacks from Spine 360 for using their medical devices.  In addition, Spine 360 falsified financial documents in order to cover up illegal incentives paid to Dr. Gottlieb in an attempt to avoid suspicion.

The Anti-Kickback Statute, a provision of the False Claims Act, is designed to protect patients and federal health care programs from fraud and abuse by prohibiting the use of money or anything of value that is intended to induce, reward, or influence health care decisions. Therefore, anyone who knowingly and willfully accepts or offers payment or compensation of any kind and in any manner with the intention of influencing medical decisions is in violation of the False Claims Act.  In this case, between 2007 and 2009, Spine 360, located in Austin, Texas, allegedly offered Dr. Gottlieb monetary kickbacks for using their medical devices on his patients.  In doing so, it allegedly influenced Dr. Gottlieb’s medical decisions and possibly compromised the quality care and best interest of his patients.

Medical violations of this kind are not new.  However, the U.S. Government continues to hold those in violation of the False Claims Act accountable for their actions.  For example, in July 2014, the government settled a lawsuit filed against two Infirmary Health System Inc. (IHS) affiliated clinics and Diagnostic Physicians Group P.C. (DPG) for violating the False Claims Act by paying or receiving financial inducements in connection with claims to the Medicare program. In this case, whistleblower, Dr. Christian Heesch, a physician formerly employed by Diagnostic Physicians Group, is entitled to $4.41 million for reporting fraud against government-funded programs.  Furthermore, last month, the government settled allegations that Carondelet Health Network (CHN) and its affiliate hospitals, Carondelet St. Mary’s and Carondelet St. Joseph’s in Tucson, Arizona, knowingly violated the False Claims Act by overcharging the U.S. Government when it submitted false bills to Medicare and other Federal Health Care programs, and whistleblower, Jacqueline Bloink, formerly employed by the CHN, is entitled to a share of the settlement payment for reporting fraud against the government, which amounts to $6 million.

ARTICLE BY

Whistleblower Practice Group
 
OF 
Tycko & Zavareei LLP

Quarterly Whistleblower Award Update – August 21, 2014

Drinker Biddle Law Firm

Since our last quarterly update, the SEC’s Office of the Whistleblower (“OWB”) has issued four denial orders and three award orders. Here are some lessons learned from this activity:

  • The SEC Will Not Award Whistleblowers Who Provide Frivolous Information. The SEC determined that a claimant (who submitted “tips” relating to almost every single Notice of Covered Action”) was ineligible for awards because he/she “has knowingly and willfully made false, fictitious, or fraudulent statements and representations to the Commission over a course of years and continues to do so.” Under Rule 21F-8, persons are not eligible for an award if they “knowingly and willfully make any false, fictitious, or fraudulent statement or representation, or use any false writing or document knowing that it contains any false, fictitious, or fraudulent statement or entry with intent to mislead or otherwise hinder the Commission or another authority.” 17 C.F.R. § 240.21F-8(c)(7). The OWB found that a number of passages submitted by the claimant were patently false or fictitious and that the person had the requisite intent because of the (1) incredible nature of the statements, (2) continued submissions that lack any factual nexus to the overall actions, and (3) refusal to withdraw unsupported claims at the request of the OWB. (May 12, 2104.)

  • The SEC Will Enforce the Time Frames Set Forth in the Statue. The OWB denied two awards because the claimants did not submit an award claim within the 90-day period established by Rule 21F-10(b). The claimants argued that OWB should waive the 90-day period due to extraordinary circumstances. See 17 C.F.R. § 240.21F-8(a). The OWB determined that neither a lack of awareness that the information that the whistleblower had shared would lead to a successful enforcement action nor the lack of awareness that the Commission posted Notices of Covered Actions on its website constitutes an extraordinary circumstance to waive the timing requirement. See SEC Release No. 72178 (May 16, 2014) and SEC Release No. 72659 (July 23, 2014).

  • Whistleblowers are Not Eligible for an Award Unless the Information Leads to a Successful Enforcement Action. The OWB denied an award to a claimant because the provided information did not lead to a “successful enforcement by the Commission of a federal court or administrative action, as required by Rules 21F-3(a)(3) and 21F-4(c) of the Exchange Act.” OWB also noted that the claimant did not submit information in the form and manner required by Rules 21F-2(a)(2), 21F-8(a), and 21F-9(a) & (b) of the Exchange Act. See In the Matter of Harbinger Capital Partners, LLC, File No. 3-14928 (July 4, 2014).

The OWB Can Be Persuaded to Change Its Preliminary Determination. Although the OWB initially denied the whistleblower’s award claim on the basis that the information did not appear to have been voluntarily submitted within Rule 21F-4(a)(ii) because it was submitted in response to a prior inquiry conducted bya self-regulatory organization (“SRO”). In a Final Determination issued on July 31, 2014, however, the OWB determined that claimant was entitled to more than $400,000. OWB noted that a submission is voluntary if it is provided before a request, inquiry, or demand for information by the SEC in connection with an investigation by the Public Company Accounting Oversight Board, any self-regulatory organization, Congress, the federal government, or any state Attorney General.

On the basis of the unique circumstances of this case, the OWB decided to waive the voluntary requirement of Rule 21F-4(a) for this claimant. The SEC noted that the claimant “worked aggressively … to bring the securities law violations to the attention of appropriate personnel,” the SRO inquiry originated from information that in part described claimant’s role, claimant believed that the company had provided the SRO with all the materials that claimant developed during his/her own internal efforts, and claimant promptly reporting to the SEC that the company’s internal efforts as a result of the SRO inquiry would not protect investors from future harm. Sean McKessy, chief of the SEC’s Office of the Whistleblower, remarked that “[t]he whistleblower did everything feasible to correct the issue internally. When it became apparent that the company would not address the issue, the whistleblower came to the SEC in a final effort to correct the fraud and prevent investors from being harmed. This award recognizes the significance of the information that the whistleblower provided us and the balanced efforts made by the whistleblower to protect investors and report the violation internally.”See SEC Release No. 72727 (July 31, 2014); SEC Press Release, “SEC Announces Award for Whistleblower Who Reported Fraud to SEC After Company Failed to Address Issue Internally,” (July 31, 2014).

  • SEC Continues to Make Awards to Qualified Claimants. On June 3, 2014, the SEC awarded two claimants 15% each for a total of 30% percent of the monetary sanctions collected in the covered action. See SEC Release No. 72301 (June 3, 2014). On July 22, 2014, the SEC awarded three claimants 15%, 10%, and 5% respectively (for a total of 30%) of the monetary sanctions collected in the Covered Action. See SEC Release No. 72652 (July 22, 2014).

ARTICLE BY

William L. Carr
Daniel E. Brewer
 
OF
Drinker Biddle & Reath LLP

SEC Settles Charges Against Hedge Fund Adviser for Conducting Prohibited Transactions and Retaliating Against Whistleblower

Vedder Price Law Firm

On June 16, 2014, the SEC settled charges against a hedge fund advisory firm,Paradigm Capital Management, Inc., for engaging in principal transactions with an affiliated broker-dealer without providing effective disclosure to, or obtaining effective consent from, a hedge fund client. The SEC also settled charges against the firm’s owner, Candace Weir, for causing the improper principal transactions.

According to the SEC’s order, Paradigm’s former head trader made a whistleblower submission to the SEC that revealed the principal transactions between Paradigm and the affiliated broker-dealer. The SEC found that, after learning that its head trader had reported potential violations to the SEC, Paradigm engaged in a series of retaliatory actions that ultimately resulted in the head trader’s resignation. This is the first time the SEC has filed a case under its new authority to bring anti-retaliation enforcement actions. According to the SEC, Ms. Weir conducted transactions between Paradigm and an affiliated broker-dealer while trading on behalf of a hedge fund client. The SEC’s order also found that Paradigm failed to provide effective written disclosure to the hedge fund and did not obtain its consent as required prior to the completion of each principal transaction. The SEC’s order stated that Paradigm attempted to satisfy the written disclosure and consent requirements by establishing a conflicts committee to review and approve each of the principal transactions on behalf of the hedge fund. The SEC’s order found that the conflicts committee itself, however, was conflicted, because its two members, Paradigm’s chief financial officer and chief compliance officer, each reported to Ms. Weir and Paradigm’s CFO also served as CFO of the affiliated broker-dealer. The SEC also found that Paradigm’s Form ADV was materially misleading for failing to disclose its CFO’s conflict as a member of the conflicts committee.

The SEC’s order found that Paradigm violated, among other things, Sections 206(3) and 207 of the Advisers Act. The SEC’s order also found that Ms. Weir caused Paradigm’s violations of Section 206(3) of the Advisers Act. Paradigm and Ms. Weir agreed to jointly and severally pay disgorgement of $1.7 million for distribution to current and former investors in the hedge fund, and pay prejudgment interest of $181,771 and a penalty of $300,000. Paradigm also agreed to retain an independent compliance consultant.

Article By:

Investment Services Group
Of:
Vedder Price

Blowing The Whistle On Fraud In The Banking Industry [VIDEO]

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The Department of Justice very actively pursues cases involving fraud in the banking industry, and through a law known as the Financial Institutions Anti-Fraud Enforcement Act, is authorized to pay very substantial rewards to whistleblowers that provide the Department of Justice with information about such fraud.

The law covers both fraud on banks, but also fraud by banks.  It also covers other types of unlawful conduct effecting banking, such as embezzlement of bank funds, or the payment of kickbacks to bank loan officers.

Under this banking whistleblower program, the Department of Justice can pay whistleblower awards of up to 30% of the amounts recovered by the government in banking fraud cases.

The law has a number of very unique procedures that govern how information has to be presented to the Department of Justice, which must be followed by a whistleblower who wishes to preserve his or her right to receive a reward. The whistleblower must also file a sworn statement with the Department of Justice, here in Washington, D.C. at its main headquarters, pursuant to those procedures.  It is also recommended that a qui tam whistleblower under this banking fraud program submit a legal memorandum to the Department of Justice, explaining the legal theories behind the case.

If you have information concerning a potential case involving banking fraud, do not hesitate to take action. It is possible that you might be able to bring your own lawsuit under the Financial Institutions Anti-Fraud Enforcement Act, acting as a whistleblower on behalf of the US government. Before filing your lawsuit, be sure to consult with an attorney familiar with the intricacies of this law, as these attorneys are best equipped to help protect your rights and help you gain your share of any monetary reward from a potential settlement.

Article By:

Whistleblower Practice Group
Of:
Tycko & Zavareei LLP

 

Illinois Whistleblower Awarded $3 Million Following Jury Trial

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In what appears to be an alarming trend for employers, the Chicago Tribune recently reported that a former Chicago State University employee was awarded $3 million after a Cook County, Illinois jury found that the University retaliated against him for reporting alleged misconduct by top university officials in violation of the Illinois State Official and Employees Ethics Act (5 ILCS 430/15-5, et seq.) and the Illinois Whistleblower Act.  Crowley v. Chicago State University, No. 2010-L-012657.

Background

Plaintiff James Crowley (Crowley) was the Senior Legal Counsel for Chicago State University (University).  His responsibilities included reviewing contracts and processing Freedom of Information (FOIA) requests.  During his employment, the University hired a new President, Wayne Watson (Watson).  Watson did not commence his employment immediately due to a retirement benefits regulation; however, Watson allegedly made official University decisions and moved into the Presidential residence during the interim period.  Crowley received several FOIA requests inquiring about whether Watson was working unofficially in contravention of the benefits regulation.

Crowley alleged that Watson urged him to withhold certain documents from the FOIA requests, and threatened him by saying “If you read this my way, you are my friend. If you read it the other way, you are my enemy.”  Crowley refused Watson’s request, and released all documents relevant to the FOIA inquiry.  Crowley reported his concerns about the FOIA requests, as well as concerns about the University’s contracting practices, to the Illinois Attorney General’s Office.  The University subsequently terminated Crowley’s employment.  Crowley filed suit alleging that he was terminated for refusing to withhold documents from the FOIA requests and reporting the University’s alleged misconduct in violation of the Illinois State Official and Employees Ethics Act and the Illinois Whistleblower Act.

Jury Verdict

The jury found in favor of Crowley, and awarded him $480,000 in back pay and an additional $2 million in punitive damages.  The jury also concluded that Crowley should be reinstated to his prior position.  After receiving the jury’s verdict, the presiding judge doubled the jury’s back pay award, as permitted under state law, and also granted Crowley $60,000 in interest.

Implications

Multi-million dollar judgments in state court whistleblower retaliation cases are trending at an alarming rate.  We recently reported on a $6 million whistleblower verdict in California and other large verdicts in Minnesota and New Jersey.   This trend highlights the serious risks employers face under state and federal whistleblower laws, and servers as a wake-up call for employers to carefully review and refine their whistleblower policies and related practices.

© 2014 Proskauer Rose LLP.

Article By:
Steven J Pearlman
Allison Lynn Martin

Of:

JPMorgan Chase Pays $614 Million for Submitting False Claims in Mortgage Loans Case

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The Department of Justice (DOJ) announced last week that JPMorgan Chase, the largest bank and financial institution in the country, will pay a $614 million settlement to the US government to resolve allegations that it approved thousands of unqualified home mortgage loans for government insurance and refinancing. According to the DOJ, JPMorgan knowingly created and guaranteed non-compliant mortgage loans submitted for insurance coverage by the Department of Housing and Urban Development’sFederal Housing Administration (FHA), and the Department of Veterans Affairs (VA), which cost the government millions of dollars when the loans defaulted.

According to the lawsuit, beginning in 2002, JPMorgan falsely claimed that loans it had created and guaranteed were qualified for FHA and VA insurance and coverage.  As a consequence of JPMorgan’s falsifications, both the FHA and the VA incurred huge monetary losses when the unqualified loans failed, due to the fact that the FHA and VA had to cover the associated losses of the loans.

The FHA’s program allows lower income borrowers to purchase homes by insuring qualified loans made by participating lenders, such as JPMorgan, against losses if the loans later default.  However, a participating lender may only submit creditworthy loans to the FHA if they meet certain requirements and they must maintain a quality control program that can prevent and correct any deficiencies in the lender’s financing practices.  The VA’s program is similar in this regard—it provides similar assistance to veterans, service members and spouses.

JPMorgan allegedly approved thousands of loans for government insurance or refinancing that did not meet the requirements of the FHA and VA, and also failed to report hundreds of loans it identified as having been affected by fraud or other defects. The government also alleged that the bank regularly submitted loan data that lacked reliability, due to the fact that they were not based on actual documents or other information the bank should have possessed when its employees submitted the data to the government.

As part of the settlement, JPMorgan admitted that it approved thousands of FHA loans and hundreds of VA loans that were not supposed to be eligible for FHA or VA insurance because they did not meet the applicable agency financing requirements, and that it had been doing so for over a decade.  The bank further admitted that it failed to inform the FHA and the VA when its own internal reviews discovered more than 500 unreliable loans that never should have been submitted for FHA and VA insurance.

This settlement resolves allegations in a complaint filed by a private whistleblower.

If you have information concerning a potential case involving banking fraud, do not hesitate to take action. It is possible that you might be able to bring your own lawsuit under the False Claims Act, acting as a whistleblower on behalf of the US government.

Article by:

Whistleblower Practice Group

Of:

Tycko & Zavareei LLP

The False Claims Act During Times of War: Is There Any Time Limit For Bringing Suit

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A federal appellate court recently ruled that, at least for the moment, claims under the False Claims Act (“FCA”) are not subject to any statute of limitations. The United States Circuit Court for the Fourth Circuit, in U.S. ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), relied on an obscure federal statute, the Wartime Suspension of Limitations Act (“WSLA”), to hold that the FCA’s general six-year statute of limitations, 31 U.S.C. §3287, was tolled due to the ongoing conflict in Iraq. The Fourth Circuit’s decision is ground-breaking, as it is the first federal appellate court to weigh in on this issue and takes a broad view of the tolling question, effectively removing any limitations bar to FCA violations committed during times of war.

The WSLA, originally enacted in 1942 and amended as recently as 2008, generally suspends statutes of limitations in actions related to fraud against the United States until 5 years after the termination of a war. 18 U.S.C. §3287. In Carter, the qui tam whistleblower alleged that his employer, well-known government contractor Kellogg Brown Root Services, Inc. (“KBR”), was defrauding the government by inflating its employees’ work hours on a water purification contract as well as misrepresenting to the United States that it was actually purifying water for servicemen and servicewomen deployed in Iraq. The trial court dismissed Carter’s complaint on the grounds that, among other things, Carter’s case was not tolled by the WSLA because the government did not intervene in the action. Carter, 710 F.3d at 176. The Fourth Circuit reversed, holding that the armed conflict in Iraq suspended the statute of limitations in Carter’s case, regardless of whether the case was being prosecuted by Carter, as the FCA relator, or by the United States. According to the court, “whether the suit is brought by the United States or a relator is irrelevant . . . because the suspension of limitations in the WSLA depends on whether the country is at war and not who brings the case.” Id. at 180.

In addition to explicitly extending the scope of the WSLA to non-intervened cases, the Fourth Circuit made two other important WSLA-related holdings. First, the court ruled that the phrase “at war” in the WSLA is not limited to formally declared wars but, instead, applies to modern military engagements such as the United States’ involvement in Vietnam, Korea, Afghanistan and Iraq. Id. at 179. Although none of these conflicts were formally declared wars, they occupied much of the government’s attention and resources such that the purpose of the WSLA-allowing the government more time to act during the fog of war-would not be served if an unnecessarily formalistic approach were required.

Second, the Fourth Circuit-consistent with several district courts before it-ruled that the WSLA applies to both criminal and civil cases. Id. at 179-180. The question of WSLA’s application to civil matters arose out of the use of the word “offense” in the statute. The original version of the WSLA applied to “offenses involving the defrauding or attempts to defraud the United States . . . and now indictable under any existing statutes.” In 1944, however, the Act was amended, deleting the “now indictable” language. With that change, the court concluded, the “WSLA was then applicable to all actions involving fraud against the United States,” including civil actions. Id.

In light of the Fourth Circuit’s decision in Carter, the limitations period for FCA actions may be indefinitely extended. Indeed, in Carter, the court indicated that it is not clear that the war in Iraq is over for purposes of the WSLA. Tolling under the WSLA ends 5 years after the termination of hostilities “as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.” Wartime Enforcement of Fraud Act, Pub. L. No. 110-417 §855, codified at 18 U.S.C. §3287. According to the Fourth Circuit, because “it is not clear” that President Obama has proclaimed the war in Iraq as over and provided notice of the same to Congress, as required by the WSLA, the limitations period may still be tolled.

Some commentators have argued that the FCA statute of repose, which sets the outside deadline for bringing claims at either “3 years after the date when facts material to the right of action are known or reasonably should have been known” by the government, “but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.” This mandates that the statute of limitations for FCA cases cannot be tolled for more than 10 years. Although Carter did not reach that specific issue, it seems unlikely-based on the Fourth Circuit’s language and analysis-that it would endorse such a position. Indeed, the Fourth Circuit noted, in a footnote, that “tolling will indeed extend indefinitely” absent a formal Presidential proclamation with notice to Congress. Carter, 710 F.3d at n.5.

If the Fourth Circuit’s analysis is adopted by its sister circuits, there will be profound benefits for whistleblowers seeking to expose fraud against the Government. For instance, defendants may be discouraged from proffering hyper-technical, confused or convoluted statute of limitations defenses in order to avoid responsibility for their fraud. It would also open up the possibility of bringing qui tam claims under the FCA for conduct dating farther back in the past.

In Ninth Circuit, Whistleblowers Not Exempt From Confidentiality Agreements

Posted in the National Law Review an article by attorney Anthony Navid Moshirnia of Sheppard, Mullin, Richter & Hampton LLP about blowing the whistle on alleged fraud against the Government does not entitle an employee to loot:

 

Blowing the whistle on alleged fraud against the Government does not entitle an employee to loot and disclose her employer’s records in violation of a confidentiality agreement – at least not in the Ninth Circuit. In an opinion handed down in March of this year, the Ninth Circuit refused to adopt a so-called “public policy exception to confidentiality agreements to protect [qui tam plaintiffs]” who misappropriate documents from their employers ostensibly to buttress claims brought under the federal False Claims Act (“FCA”). U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1061-62 (9th Cir. 2011). Though this opinion has been on the books since Spring, it remains relevant, and worth keeping an eye on, as it provides powerful ammunition against FCA plaintiffs that continue to tout the “public policy” exception as though it were unassailable.

After learning that her job at General Dynamics C4 Systems, Inc. (“General Dynamics”) was going to be terminated, but before leaving her employment, Mary Cafasso “copied almost eleven gigabytes of data from [her employer’s] computers in anticipation of bringing a qui tam action” under the FCA.  When it discovered what Ms. Cafasso had done, General Dynamics filed suit in Arizona state court, seeking return of its purloined documents through a temporary restraining order (“TRO”). Apparently to avoid complying with the TRO, which the state court granted, Ms. Cafasso filed “a conclusory six page complaint . . . alleg[ing] FCA violations and retaliation.” She then used the FCA action to persuade the Arizona court to vacate the TRO and stay General Dynamics’ lawsuit.

When Ms. Cafasso’s FCA complaint was unsealed, General Dynamics counterclaimed alleging, inter alia, breach of contract arising from Ms. Cafasso’s misappropriation of documents in violation of a confidentiality agreement. In opposition to General Dynamics’ motion for summary judgment, Ms. Cafasso argued that General Dynamics had failed to prove contract damages and that, even if it had, her conduct was permissible because “[p]ublic policy grants [a] Relator a privilege in gathering copies of documents as part of an investigation under the FCA and gives [a] Relator immunity from civil liability based on claims against her for so doing.” U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 2009 WL 1457036, *13 (D. Ariz. May 21, 2009).

The trial court dismissed both of Ms. Cafasso’s arguments. It found that damages were established by the stipulated damages clause in the General Dynamics confidentiality agreement. After reviewing the parties’ competing legal arguments, the trial court also found that “public policy does not immunize Cafasso, [who] confuses protecting whistleblowers from retaliation for lawfully reporting fraud with immunizing whistleblowers for wrongful acts made in the course of looking for evidence of fraud.” The court concluded that “[s]tatutory incentives encouraging investigation of possible fraud under the FCA do not establish a public policy in favor of violating an employer’s contractual confidentiality and nondisclosure rights.”

On appeal, Ms. Cafasso did not dispute that her actions violated her confidentiality agreement with General Dynamics, but nonetheless urged the Court to “adopt a public policy exception to enforcement of such contracts that would allow relators to disclose confidential information in furtherance of an FCA action.”  While noting that Ms. Cafasso’s position was not frivolous, and might apply “in particular instances for particular documents,” the Ninth Circuit found that Ms. Cafasso’s data removal was not privileged.

The Ninth Circuit appears to have relied on two factors to reach this conclusion: the scope and volume of the documents Ms. Cafasso took. With respect to scope, the Ninth Circuit faulted Ms. Cafasso’s “indiscriminate appropriation of documents,” referring to it as an “unselective taking [that included] attorney client privileged communications, trade secrets belonging to [General Dynamics] and other contractors, internal research and development information, sensitive government information, and at least one patent application that the Patent Office had placed under a secrecy order.”  The Court was also troubled by the fact that Ms. Cafasso had taken over 11 gigabytes of data, noting that “the need to facilitate valid claims does not justify the wholesale stripping of a company’s confidential documents.” In sum, the Ninth Circuit found that an “exception broad enough to protect the scope of Cafasso’s massive document gather in this case would make all confidentiality agreements unenforceable as long as the employee later files a qui tam action” – an unacceptable result.

While Cafasso stopped short of rejecting the public policy defense to data theft as a matter of law, it certainly provides a new avenue to FCA defendants attempting to prevent qui tam relators from benefitting from extrajudicial discovery.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.