By

Scott Stein

21 February 2012

CitiMortgage Reaches $158 Million Settlement of FCA Claims

Posted by Robert J. Conlan and Scott D. Stein

On February 15, 2012, the U.S. Attorney’s Office for the Southern District of New York announced that CitiMortgage, Inc., a subsidiary of Citibank N.A., settled a suit asserting violations of the FCA and Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) arising out of allegations that CitiMortgage failed to comply with certain HUD-FHA requirements with respect to certain loans and submitted certifications to HUD-FHA stating that certain loans were eligible for FHA mortgage insurance when in fact they were not. As part of the settlement, CitiMortgage has agreed to pay $158.3 million in damages to the United States and a relator under the FCA.

The settlement has generated significant press coverage. An article in the American Lawyer notes that the settlement reflects the third case in less than a year in which DOJ has asserted FCA claims against a major financial institution for conduct relating to mortgage loans. Business Week reports on the settlement in an article titled “More Financial Whistleblowing Is On The Way.” And Reuters has an interesting article on the genesis of the suit, including an interview with the whistleblower, who remains an employee of CitiGroup.

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24 January 2012

New Report Reinforces The Role Effective Internal Reporting Policies Play In Preventing Whistleblower Suits

A recent survey of employee attitudes toward whistleblowing reinforces the importance of an effective compliance program in mitigating FCA suits. The Ethics Resource Center recently published its bi-annual National Business Ethics Survey (NBES), a longitudinal study of employee attitudes that seeks to provide a “barometer of workplace ethics.” The survey, a copy of which can be downloaded here, finds that employees perceive “historically low levels of current misconduct in the American workplace.” Specifically,

* The percentage of employees who witnessed misconduct at work fell to a new low of 45 percent. That compares to 49 percent in 2009 and is well down from the record high of 55 percent in 2007.

* Those who reported the bad behavior they saw reached a record high of 65 percent, up from 63 percent two years earlier and 12 percentage points higher than the record low of 53 percent in 2005.

However, the NBES notes that this positive trend is accompanied by “ominous warning signs of a potentially significant ethics decline ahead”:

* Employees who reported misconduct and who reported experiencing some form of retaliation rose to 22 percent, up from 15 percent in 2009 and 12 percent in 2007.

* The percentage of employees who perceived pressure to compromise standards in order to do their jobs climbed five points to 13 percent, just shy of the all-time high of 14 percent in 2000.

* The share of companies perceived as having a weak ethics culture climbed to near record levels at 42 percent, up from 35 percent in 2009.

The NBES also examined the impact of the new Dodd-Frank whistleblower provisions on employee attitudes regarding reporting of employer misconduct. According to the survey, employees say they are far more motivated by the nature of the misconduct and its potential harm than by financial reward. Only three percent of employees who actually reported misconduct said they went outside the company as their first resort. About half (49 percent) said that they would consider reporting to federal authorities under certain circumstances, even if it might cost them their job. An additional five percent said they would report to the federal government, but “only if there was a chance for a substantial financial reward.”

As the study notes, despite the addition of new incentives under Dodd-Frank for whistleblowers to report wrongdoing to the federal government, employees say that they prefer to first report their concerns internally to their employers. The study recognizes that while “[a]s whistleblower protections become more widely known these behaviors may change,” for now, “financial rewards from government agencies do not seem to be enough of a motivator to cause employees to circumvent their employers.” However, the self-reported nature of the survey merits some caution in interpreting these results.

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13 January 2012

Relator Attempting to Avoid The Scope of A Release Pleads Himself Out of Court

Posted by Brad Robertson and Scott Stein

A recent decision explains how one relator, in an effort to plead around a release of FCA claims in favor of his former employer, managed to plead himself right out of court. U.S. ex rel. McNulty v. Reddy Ice Holdings, Inc., No. 08-cv-12728 (E.D. Mich.), December 7, 2011 Slip Op. The relator alleged that his former employer, Arctic Glacier, and two other manufacturers of packaged ice, overcharged the government. These same companies are also currently defending a series of antitrust lawsuits alleging that they conspired to allocate markets. The increased prices resulting from the alleged market allocation form the basis of the relator’s FCA claims in this action.

The plaintiff alleged that he discovered the market allocation conspiracy while employed with Arctic Glacier, and that he was terminated after refusing to participate in the conspiracy. As part of his severance package, he signed a broad release waiving any and all claims against the company for the time period prior to the release.

The defendants moved to dismiss on public disclosure/original source grounds and for failure to plead with sufficient particularity. The relator filed a cross-motion to dismiss Arctic Glacier’s counterclaim that he breached his release agreement. In an attempt to plead around the scope of release, the relator alleged that he learned that the alleged market allocation scheme resulted in overcharges to the United States government from a discussion with a former co-worker only after his termination from Arctic Glacier and after signing the release. Accordingly, he contended that his FCA claims were outside the scope of the release. Ruling on the defendants’ motion to dismiss, the court found the allegations of the discussion with his former co-worker particularly crucial to its 12(b)(6) analysis, as “the only allegations that relate in any way to the FCA claim itself” as opposed to the market allocation conspiracy. The court dismissed the complaint, finding that the allegations of market allocation had been publicly disclosed through the antitrust lawsuits, and that the relator was not an original source of the FCA allegations, as he “was no longer employed by Arctic Glacier at the time and could not possibly have ‘observed’ or ‘learned’ this information firsthand.”

Adding insult to the relator’s injury, the court then proceeded to declare the release that the relator had been attempting to plead around unenforceable, dismissing Arctic Glacier’s counterclaim. Without evidence that the government knew of the claims prior to the execution of the release, the court held, public policy concerns barred enforcement of the agreement as to the FCA claims.

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10 January 2012

District Court Dismisses False Certification Claim For Failure to Adequately Plead “Condition of Payment”

By Scott Stein and Erik Ives

In the first in-depth application of the Third Circuit’s decision in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011)adopting the implied certification theory of liability, the United States District Court for the District of New Jersey dismissed at the pleading stage a relator’s claims under the federal False Claims Act (FCA) for failure adequately to plead that the defendant had violated a condition of payment. See Foglia v. Renal Ventures Management, LLC, No. 09-1552, Slip Op. (D.N.J. Nov. 23, 2011).

The Relator alleged that the Defendant (a dialysis care services company) failed to comply with New Jersey regulations concerning quality of patient care and facility staffing, and Center for Disease Control (CDC) standards concerning reuse of vials of the drug Zemplar. The Relator contended that these violations rendered each claim for payment of the drug legally false under a theory of express and/or implied false certification. The United States declined to intervene in the matter, and after the case was unsealed the defendant filed a motion for partial judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c).

The Court began its analysis by describing the false certification theory, as recently outlined by the Third Circuit in United States ex rel. Wilkins v. United Health Group, Inc., No. 10-2747, 2011 WL 2573390 (3d Cir. June 30, 2011). In doing so, the Court focused on the Third Circuit’s holding that:

‘[T]o plead a claim upon which relief could be granted under a false certification theory, either express or implied, a plaintiff must show that compliance with the regulation which the defendant allegedly violated was a condition of payment from the Government.”

<em&ggt;Foglia, Slip Op. at 24-25 (quoting Wilkins, 2011 WL 2573390 at *11). Applying this condition of payment requirement to Relator’s pleadings under Fed. R. Civ. P. 8(a)(2) (requiring a “short and plain statement” of the claim entitling pleader to relief) and Fed. R. Civ. P. 9(b) (establishing heightened pleading requirements for claims implicating fraud), the Court held that Relator’s “merely conclusory” assertion that compliance with the federal and state regulations in question was a precondition of payment was legally insufficient. The Court explained that Relator’s failure to “cite any rule, regulation, contract, or other facts to demonstrate” this contention required dismissal of Relator’s claim on the pleadings. Foglia, Slip Op. at 25-29.

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19 December 2011

DOJ Announces Record FCA Recoveries in 2011

On December 19, the Department of Justice announced that during the fiscal year ended September 30, 2011, it obtained over $3 billion in settlements and judgments under the False Claims Act. A few items of note:

  • Over 90% of the amount recovered resulted from whistleblower suits. According to DOJ, a record 638 qui tam suits were filed in FY2011.
  • 80% of the total recoveries involved alleged healthcare fraud, with the bulk ($2.2 billion) directed toward the pharmaceutical industry.
  • DOJ obtained $358 million from “non-war related procurement and consumer-related financial fraud” cases, a category that includes grant, housing and mortgage fraud that emerged in the wake of the financial crisis.
  • In addition to FCA recoveries, DOJ secured $1.3 billion in criminal fines, forfeitures, restitution, and disgorgement under the federal Food, Drug and Cosmetic Act (FDCA).
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12 December 2011

Tennessee Prosecutors Ramping Up FCA Enforcement

A December 3 article in the Daily News Journal (Murfreesboro, TN) reporting on the recent indictment of the owners of an ambulance company for Medicare fraud discusses the increasing focus on healthcare fraud cases by the U.S. Attorney’s Office in the Middle District of Tennessee. According to the article, Jerry Martin, the current U.S. Attorney, said in a recent speech that his office is “absolutely looking for [FCA} business,” and recently has doubled the number of prosecutors working on FCA cases. While the U.S. Attorney’s Office for the Middle District of Tennessee is not as well-known as its counterparts in other locales (such as Boston and Philadelphia) for its FCA work, it has announced a number of healthcare FCA verdicts or settlements in 2011 relating to medical devices, diagnostic testing, and nursing homes.

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10 December 2011

DOJ Intervenes in FCA Suit Against Hospice Company

Posted by Scott Stein and Allison Reimann

On December 6, 2011, the Department of Justice intervened in an FCA suit against AseraCare Hospice, a hospice provider with facilities in nineteen states. The lawsuit, filed in 2009 by two former AseraCare employees, alleges that AseraCare knowingly filed false claims to Medicare for hospice care for patients who were not terminally ill. The DOJ’s complaint alleges that AseraCare, by pressuring employees to reach aggressive Medicare targets, admitted and retained individuals who were ineligible for Medicare hospice benefits—even after being alerted to problems by an internal auditor.

The case is United States ex rel. Richardson v. Golden Gate Ancillary LLC d/b/a AseraCare Hospice, No. 09-CV-00627, and is pending before Judge Abdul Kallon in the Northern District of Alabama. As reported by Bloomberg News, the DOJ’s complaint in intervention is part of a wider federal crackdown of suspected fraud by hospice providers.

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07 December 2011

Court Holds Relator’s Settlement and Release of FCA Claims Unenforceable

In a recent decision that exemplifies the difficulties in settling a qui tam in which the United States has declined to intervene, a federal district court in Florida recently held that a settlement agreement in which a relator falsely represented that she had not filed any action against the Defendant, and released her qui tam claim, was unenforceable. U.S. ex rel. Scott v Cancio, No. 8:10-cv-50-T-30TGW (M.D. Fla.), November 28, 2011 Slip Op. The plaintiff sued her former employer, a medical practice, for discrimination and retaliation. While the employment case was still pending, the plaintiff filed a qui tam under the False Claims Act (“FCA”) against the same defendant. Three weeks after filing the qui tam under seal, the plaintiff and defendant executed a settlement agreement in connection with the employment case in which the employee represented that she had not filed any “complaint, claim or charge” against the Defendant in any “state or federal court.” The agreement also contained a broad release of any and all claims the plaintiff had against the defendant.

After the qui tam was unsealed and the United States declined to intervene, the defendant moved to dismiss on the ground that the plaintiff was barred by the settlement agreement from pursuing the case. Notably, the United States took no position on the Defendant’s motion to dismiss the case. Yet the court denied the motion to dismiss and held the release unenforceable. The court noted that while in a “typical case, the release would preclude” the qui tam, the FCA provides an “action” under the FCA “may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting,” quoting 31 U.S.C. 3730(b)(1). Acknowledging that several cases have held that pre-filing releases of qui tam actions may be enforceable, the court distinguished those cases on the ground that when the release precedes the filing of a qui tam, there is no “action,” and therefore section 3730(b)(1) is not implicated.

The defendant noted that it was seeking dismissal only of the plaintiff’s relator interest, and not any claims that could be asserted by the United States – which, as noted above, did not oppose the motion to dismiss. But the court held that “the plain language of section 3730(b)(1) requires the Attorney General’s written consent to a qui tam action’s dismissal and does not make a distinction based on whether the dismissal is without prejudice to the Government’s interest.” The court concluded with a bit of cold comfort, noting that the defendant was free to “seek appropriate relief in the separate employment action to set aside the Settlement Agreement it entered into with Scott based on any misrepresentations or fraud on the part of Scott.”

While the Cancio decision is consistent with other cases that have drawn the “pre-filing/post-filing” distinction in evaluating the enforceability of releases of FCA claims, it is a good example of why that distinction reflects both bad law and bad policy. While the statute states that the consent of the Attorney General is required for dismissal of a qui tam, when the government takes no position on – i.e., has not opposed – the motion to dismiss, it is difficult to see why such silence should not be interpreted as consent. Moreover, there are no compelling public policy reasons for linking enforcement of the release to the timing of its execution. Courts that have enforced pre-filing releases of qui tams have done so in situations in which they have emphasized that the United States was otherwise aware of the relator’s allegations, so that enforcement of the release would not raise a concern that evidence of the defendant’s alleged wrongdoing might never come to light. See, e.g., U.S. ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010); U.S. ex rel. Richie v. Lockheed Martin Corp., 558 F.3d 1161 (10th Cir. 2009). Yet when a relator releases a qui tam claim after filing, he already will have apprised the United States of both the specific allegations and the “material evidence” supporting them. 31 U.S.C. 3730(b)(2). Accordingly, the same public policy reasons that support enforcement of settlement agreements and releases in the pre-filing context are equally as strong, if not stronger, in the post-filing context.

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