Posted by HL Rogers and Loui Itoh
Although the federal FCA specifically exempts tax fraud, New York is one of over 30 states and four municipalities that have enacted separate FCA laws. These state FCA laws generally follow the federal FCA but vary in certain specifics. For instance, New York’s state FCA law specifically exempted tax fraud, similar to the federal FCA, when it was passed in 2007. However, it was expanded in 2010 by amendments that allowed, among other things, whistleblower claims related to tax fraud. This expanded provision had not been successfully used until this month when New York announced its first FCA tax recovery. The settlement marks the first time that an FCA has been used to penalize tax fraud. Critics and experts will be watching closely to see if this recent recovery will lead to a new national trend.
On March 5, 2013, New York Attorney General Eric T. Schneiderman announced that tailor Mohanbhai “Mohan” Ramchandani and his business corporation, Mohan’s Custom Tailors, Inc., pled guilty to a ten-year tax evasion scheme and agreed to pay a $5.5 million civil settlement for claims filed under New York State’s False Claims Act. The civil claims were first raised by a whistleblower who offered insider information and will receive a $1.1 million award under the New York FCA’s relator award provisions.
The Attorney General’s investigation concluded that since 2002, Mohan and his business had knowingly failed to pay at least $1.7 million in state and local sales taxes, and that Mohan himself owed at least $256,000 in state and local personal income taxes. Mohan confessed to these charges before the New York County Supreme Court, admitting that he and his business had knowingly failed to pay nearly $2 million in taxes. In addition to the civil settlement, Mohan faces up to three years in prison for the felony charges.
Although it specifically exempted tax fraud when it was passed in 2007, New York’s FCA was expanded in 2010 by amendments authored by Attorney General Schneiderman, who was then a state senator. Schneiderman called the newly expanded state FCA, a “False Claims Act on Steroids.” The revised FCA allows a whistleblower to bring a qui tam suit against an individual or business that makes more than $ 1 million net income and defrauds the state by more than $350,000 in taxes. The relator may keep up to 25 to 30 percent of the recovery, depending on whether the government joins the suit. The question remains whether this will become a national trend and another consistent tool in state governments’ arsenals to penalize tax fraud.
The Federal False Claims Act (“FCA”) has undergone significant amendments in recent years, through the Fraud Enforcement and Recovery Act (“FERA”) in 2009 and the Patient Protection and Affordable Care Act (“PPACA”) in 2010. For states to remain eligible to receive a 10% bonus on Medicaid-related false claims recoveries, federal law requires in part that “the [state] law contains provisions that are at least as effective in rewarding and facilitating qui tam actions for false or fraudulent claims” as the FCA. 42 U.S.C. § 1396(h) (2012). On September 29, 2012, California Governor Jerry Brown signed into law Assembly Bill 2492, which aims to further align the California False Claims Act (“CFCA”) with the FCA and thus preserve bonuses for the state in connection with Medicaid-related false claims recoveries.
Among the new key provisions of the amended CFCA are the following:
1. Scope of Potential Whistleblowers: The previous version of the CFCA barred suits by a whistleblower based on publicly disclosed allegations, unless the whistleblower had “direct and independent” knowledge of the allegations and had provided the information that led to the public disclosure. The amended CFCA allows a whistleblower to proceed with a lawsuit based on allegations that had been publicly disclosed if the Attorney General opposes dismissal of the whistleblower’s claims, if the whistleblower had disclosed to the state or relevant political subdivision the information on which the lawsuit is based prior to the public disclosure, or if the whistleblower’s knowledge is independent of and “materially adds” to the public information and he or she voluntarily provided the information to the state or political subdivision before filing suit.
2. Involvement in Wrongful Conduct: The amended CFCA no longer bars recovery for whistleblowers who “actively participated in the fraudulent activity.” Instead, it now provides for a more lenient standard by granting a court discretion to determine whether to reduce recovery and then only for persons who “planned and initiated” the fraudulent conduct. Even a whistleblower who “planned and initiated” the scheme may receive up to 33% or 50% of the recovery, depending on whether the state intervenes in the action. The import of this change is best illustrated (albeit under a different statutory scheme) by Bradley Birkenfeld, a former UBS banker who provided information to the government that led to UBS entering into a deferred prosecution agreement for tax fraud charges and paying $780 million in penalties. As a result, Mr. Birkenfeld received a $104 million award under the IRS whistleblower program despite his participation in the underlying fraudulent conduct. Under the previous version of the CFCA, a whistleblower involved in the fraud would have been barred from any recovery and therefore without any monetary incentive to report fraudulent activity. Now, individuals who are actual participants in fraudulent activity have a considerable incentive to report false claims under the amended CFCA.
3. Enhanced Whistleblower Protections: The amended CFCA now provides for reinstatement of employment as an additional remedy for employees who suffered retaliation by their employers. Moreover, this protection now extends to employees who “engaged in efforts to stop one or more [false claims] violations” in addition to employees who acted “in furtherance” of a false claims action.
4. Increased Penalties: The amended CFCA increases the low and high end of the civil penalty range by $500, i.e. from $5000 – $10,500 to $5,500 – $11,000.
Posted by </sup>gt;Kristin Graham Koehler and Amy Markopoulos
The New York Attorney General’s Office and Compass Group USA, a foodservice management company, reached a settlement in which Compass Group will pay New York $18 million for illegally retaining rebates from food vendors rather than passing those credits on to New York schools for more than seven years.
According to Attorney General Eric Schneiderman, the settlement with Compass Group requires that it repay almost $3 million to the schools for vendor discounts that by law should have been passed on. Compass Group will also have to pay $15 million in damages and penalties under New York’s False Claims Act.
Part of an ongoing investigation by the Attorney General’s Taxpayer Protection Bureau of food management companies and food distributors doing business with the state, it follows last year’s $1.6 million settlement with the Whitsons companies. The settlement also follows the 2010 settlement of a qui tam lawsuit against foodservice management company, Sodexo. Like Compass Group, Sodexo was charged with illegally pocketing vendor discounts, and in July 2010, agreed to pay $20 million to settle charges. After the Sodexo settlement, the New York Attorney General’s office launched an investigation into rebate practices by Compass Group and other foodservice companies. The Sodexo settlement remains the largest non-Medicaid settlement under the New York False Claims Act.
The Taxpayer Protection Bureau was established by Schneiderman last year to help with fraud recoveries from contractors, who collect about $13 billion annually from state taxpayers and billions more in local government contracts.
On June 7, a new Medicaid False Claims Act enacted by Washington State took effect. Washington becomes the 30th state to implement a False Claims Act.
Posted by Matthew D. Krueger and Gordon D. Todd
Last Thursday, New York intervened into a qui tam suit against Sprint under the State’s False Claims Act alleging underpayment of sales taxes. This marks the first such case since New York amended its False Claims Act specifically to allow whistleblowers to file state tax-fraud cases.
The complaint alleges that Sprint knowingly failed to collect and pay $100 million of sales taxes over the past seven years. According to the complaint, in 2005, Sprint began attributing a portion of subscribers’ monthly charges to interstate calls and did not pay New York sales taxes on that portion. The lawsuit also alleges that Sprint concealed its practice from state tax authorities. Under New York’s law, if liable, Sprint would have to pay three times the underpaid taxes—$300 million—plus penalties. The case will be closely watched as it tests the often-murky boundary between tax-management strategies that companies may lawfully pursue and false claims that give rise to hefty liability.
In contrast to New York’s law, the federal False Claims Act does not reach tax fraud. A provision of the Tax Code does, however, reward whistleblowers with 15 to 30 percent of proceeds that they lead the IRS to collect. 26 U.S.C. § 7623.
Georgia has become the latest state to enact a comprehensive counterpart to the federal False Claims Act. The “Georgia Taxpayer Protection False Claims Act” largely mirrors the federal FCA, expanding the scope of Georgia’s existing whistleblower law, which was limited to claims involving the State Medicaid program.
A Wisconsin court recently unsealed a qui tam complaint alleging that several pharmaceutical manufacturers violated Wisconsin’s version of the False Claims Act by publishing false “average wholesale prices” (AWPs) for their drugs, on which the State Medicaid program relied to establish drug reimbursement. This is not the first suit based on allegedly false AWPs. Indeed, AWP litigation has been raging in state and federal courts for the better part of the last decade. But what makes this case unusual is that the qui tam relator is the former Attorney General of Wisconsin, Peggy A. Lautenschlager. As Ms. Lautenschlager notes in the first paragraph of the complaint, it was under her term as Attorney General that the State of Wisconsin sued 38 other drug companies in 2004 for the same alleged conduct. These facts would appear to present obvious problems for the former Attorney General under Wisconsin’s public disclosure bar, but it will be interesting to watch this suit play out.