Government Brings FCA Suit Against Deutsche Bank and Its Mortgage Subsidiary
Posted by John Sinatra - 05/12/11 at 12:05:13 pmIn what may be a sign of future whistleblower-driven litigation facing the mortgage industry, the federal government brought a False Claims Act suit on May 3 against Deutsche Bank and a subsidiary it acquired in 2007, MortgageIT, Inc., alleging that they “repeatedly lied to be included in a government program to select mortgages for insurance by the government. Once in that program, they recklessly selected mortgages that violated program rules in blatant disregard of whether borrowers could make mortgage payments.”
The government’s complaint alleges false certifications made to the Department of Housing and Urban Development (HUD) in connection with MortgageIT’s mortgage origination and sponsorship practices. The FHA has paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MortgageIT.
According to the government’s complaint, MortgageIT endorsed tens of thousands of mortgages for Federal Housing Administration (FHA) insurance, totaling more than $5 billion in underlying principal obligations. The mortgages were marketable for resale to investors because they were insured by the full faith and credit of the United States.
Also according to the complaint, MortgageIT made false certifications to HUD to obtain approval of mortgages that MortgageIT underwriters improperly endorsed for FHA insurance. The mortgages were not eligible for FHA insurance. Notwithstanding this ineligibility, underwriters at MortgageIT endorsed the mortgages by falsely certifying that they had conducted the due diligence required by HUD rules. By endorsing ineligible mortgages, and falsely certifying compliance with HUD rules, MortgageIT wrongfully obtained approval of these ineligible mortgages for FHA insurance and put FHA dollars at risk.
In addition, MortgageIT and Deutsche Bank allegedly failed to implement required quality control procedures, and falsely certified that MortgageIT had the procedures in place. And on occasions when HUD discovered alleged quality control violations, MortgageIT allegedly falsely stated that the failures had been corrected.
Among other things, the government seeks treble damages and penalties for the insurance claims paid by HUD, and damages for the amounts the government expects to pay in the future.
Sharing Agreements Beat First-Relator Fights
Posted by Dan Oliverio - 04/19/11 at 05:04:20 pmAs cases become more complex and multiple allegations arise, it is more and more frequently the case that multiple relators will file complaints in different districts covering, at least for the most part, common subject matter. Rarely, however, in these types of cases, can one make a definitive judgment about whether the allegations overlap, either in whole or in part, are identical, or are distinctly separate. U.S. attorneys want to be able to consolidate cases and use all of the allegations in a single False Claims Act prosecution. So what to do about the relators?
In one remarkable case, four relators reached an agreement, with the knowledge of the government, to “share” in any recovery regardless of who might be dismissed by motion as not an original source and regardless of whether the allegations advanced by each separate relator were identical, overlapped, or were disparate.
The relators’ side agreement provided that they would evenly divide the relators’ share no matter who in the group received it from the government. While the government ultimately paid one relator, it used the information provided by each and adopted the allegations of each complaint. The sharing agreement also provided for the cooperation of all relators, even if a relator was dismissed or was found later not to be an original source.
In this case, everyone got the best of both worlds. The government was allowed to take advantage of all of the allegations and cooperation of the relators and none of the relators had to worry about not getting a fair share. It worked!
Will the WikiLeaks Scandal Threaten the Whistleblower Protection Act of 2011?
Posted by Reena Dutta - 04/15/11 at 04:04:47 pmFederal employees may find themselves with greater whistleblower protection, if a new bill passes through Congress. The Whistleblower Protection Enhancement Act of 2011, introduced by a bipartisan group of senators, is aimed at strengthening protection for federal employees who disclose fraud and misconduct. The legislation would protect employees who blow the whistle on “gross waste or mismanagement, fraud, abuse, or illegal activity,” as well as those who disclose censorship of scientific or technical information. It will not protect disclosures of disagreements over policy.
But before federal employees start celebrating, consider that efforts to obtain greater whistleblower protections for federal employees have a rocky history. Last December, despite wide support, an-almost identical whistleblower bill failed to pass. The December bill was the product of a 12-year effort to obtain whistleblower protection for federal employees, and even though it passed unanimously in both houses of Congress, it did not become a law. Instead, a single senator placed a secret hold on the bill in the last days of the legislative session, purportedly at the request of House Republicans, effectively killing this whistleblower bill.
Interestingly, the failure of the December bill may be related to the WikiLeaks scandal, which, according to some, tarnished the image of whistleblowers. And in fact, according to the Project on Government Oversight, in the wake of the WikiLeaks scandal, protections for intelligence community workers and disclosures with respect to national security issues were removed from December bill. But in an interview with NPR, Tom Devine, the legal director of the Government Accountability Project, said that the WikiLeaks scandal was not the result of encouraging whistleblower activity, but was the result of not having adequate protections for whistleblowers. Currently, according to Devine, courts have so narrowly interpreted protection for federal whistleblowers that they have no way of protecting themselves from adverse action. In his words:
It’s easier to take cheap shots at whistleblowers because WikiLeaks has been simplistically given the same kind of label. But WikiLeaks is the opposite approach for someone who witnesses fraud, waste, and abuse. Almost all people who work for the government and see something wrong try to work within the system. If they can’t work within their agencies, they try to go to Congress. If that won’t work, then they try to go to the media. And very seldom is this anonymous. But right now every one of those outlets is inviting retaliation against what you can’t defend yourself. The only thing that’s left is WikiLeaks. If Congress acts rationally, they will provide an alternative to anonymously dumping documents. . . . (emphasis added).
Perhaps now that the WikiLeaks scandal is somewhat removed, the Whistleblower Protection Act of 2011 stands a better chance of passing. What do you think about greater protections for federal whistleblowers? Will it help prevent fraud in the government, or will it lead to more WikiLeaks-like national security breaches? And how do you feel about a single senator killing the December whistleblower bill? Do you think the same thing will happen this time?
Good News for Tax Whistleblowers in New York State
Posted by Bill Comiskey - 04/15/11 at 03:04:26 pmAs reported in my last blog post, tax whistleblowers and those considering becoming whistleblowers recently got some good news regarding both the IRS whistleblower program and New York’s tax whistleblower False Claims Act.
On the state side, potential whistleblowers should be encouraged by the swift-moving developments in the New York Attorney General’s office.
As we have reported in Tax Analysts’ “Noonan’s Notes on Tax Practice,” in August 2010 New York became the first state in the nation to affirmatively authorize private citizens to bring treble damage False Claims Act cases against high-end taxpayers who knowingly engage in substantial tax evasion of their New York state and local tax obligations.[1] This potentially game-changing new law was sponsored by then State Senator Eric Schneiderman, who has repeatedly vowed to use the statute aggressively to pursue serious cases of substantial tax fraud in his new role New York’s attorney general.
Recent developments reflect the attorney general’s resolve to deliver on that promise. Shortly after assuming office, the attorney general created a new bureau in his office, the Taxpayer’s Protection Bureau. In the last few weeks, he appointed veteran litigator Randall Fox to head the bureau. Prior to his recent appointment, Mr. Fox had been handling False Claims Act cases in the attorney general’s Medicaid Fraud Control Unit, and before that he was a partner with a major New York law firm. Mr. Fox is now in the process of building the bureau, and he has reported that he already has a caseload of False Claims Act Cases, including several tax whistleblower cases.
Given the recent success of the IRS whistleblower program, it won’t be a surprise if Mr. Fox’s caseload of tax whistleblower cases grows rapidly in the coming months. Many of the thousands of whistleblowers with pending IRS cases involve delinquent taxpayers who also owe New York State and New York City significant back taxes. Undoubtedly IRS whistleblowers in such cases will be looking closely at the New York program to determine if their case would support a false claims action in New York.
[1] To limit the reach of the false claims tax whistleblower provisions to significant tax evasion by high-end taxpayers, the new law only allows tax whistleblowers to bring cases where the taxpayer has net sales or income of over $1 million in any year subject to the claim and where the tax damages suffered exceed $350,000.
Good News for Tax Whistleblowers at the Federal Level
Posted by Bill Comiskey - 04/15/11 at 03:04:51 pmTax whistleblowers and those considering becoming whistleblowers recently got some good news regarding both the IRS whistleblower program and New York’s tax whistleblower False Claims Act.
On the federal front, news broke late last week that the IRS’s enhanced whistleblower program has finally produced a whistleblower award: $4.5 million paid to an accountant who blew the whistle on a former employer. According to published reports in the Wall Street Journal and elsewhere, the accountant came forward in 2007 after his employer ignored his repeated complaints that the employer was failing to pay federal taxes. Based on the whistleblower’s complaint, the IRS ultimately recovered approximately $20 million in back taxes and interest from the unidentified company, described in some articles as a large financial firm and a Fortune 500 company, and paid the whistleblower 22 percent of the amount recovered.
Finally, after all these years, the IRS has issued its first award under the enhanced whistleblower program, which was created in 2006 to encourage tax whistleblowers to come forward by increasing and making mandatory awards paid to whistleblowers in cases involving tax liabilities exceeding $2 million. While there have been many complaints about the enhanced IRS program, including that it is too slow to act on whistleblower leads and too inflexible in its dealings with whistleblowers, last week’s announcement should be viewed as encouraging news for the thousands of whistleblowers with claims pending with the IRS.
The reports of the case reveal two themes that bear repetition. First, IRS whistleblowers should expect that their identities will likely remain protected if they participate in the federal program. Notwithstanding the substantial public interest that has been generated by this first award under the 2006 IRS program, the identity of the whistleblower has not, to our knowledge, been disclosed. The IRS has not commented on the case, which is consistent with their commitment to protect the confidentiality of whistleblowers to the fullest extent of the law. The news of this whistleblower award only became public when the whistleblower’s attorney reported it, and that attorney has, in the reports I have seen, been scrupulous in protecting his client’s identity.
Second, the case is a good example of the value that whistleblower attorneys bring to tax whistleblower cases. Here, the whistleblower filed his claim pro se (without counsel), but his complaint languished with the IRS for nearly two years without any action. It was not until the whistleblower retained an attorney who pushed his case that the case made progress. Given the fact that the IRS receives thousands of whistleblower reports each year, it only makes sense that claims that are researched, organized, and presented by knowledgeable and experienced advocates have the best chance of producing a good and timely result.
Senators Hatch and Baucus Request Fraud-Fighting Reports From Health and Human Services, Centers for Medicare & Medicaid Services
Posted by John Sinatra - 04/01/11 at 04:04:33 pmOn March 24, Senate Finance Committee leaders Orrin Hatch and Max Baucus sent a letter to the Health and Human Services (HHS) Office of the Inspector General (OIG) and the Centers for Medicare & Medicaid Services (CMS) Deputy Administrator requesting data, benchmarks, and updates on the number of fraud cases and the amount of money recovered. The letter requested quarterly reports on how resources allocated for fighting waste, fraud, and abuse are being used and on the results. These reports are sought to better use additional resources to support fraud-fighting efforts in an HHS-based complement to False Claims Act enforcement.
While Medicare and Medicaid fraud recoveries last year totaled $4 billion, some estimate that the amount of fraud going undetected at HHS is many times higher than this. There is room for improvement through HHS’s own efforts as well as through qui tam whistleblowers.
Among other things, Hatch and Baucus requested that HHS OIG provide each quarter:
• The amount of funds obligated from the overall current budget and the areas these funds have been allocated to (e.g., investigations, audits, evaluations, training)
• The number of investigations opened and closed, and information about the disposition of the investigations
• The number of corporate integrity agreements (CIAs) entered into and closed, and descriptions of any actions taken regarding breaches of CIAs (CIAs often result from False Claims Act liability findings or settlements)
• The number of civil monetary penalty or other administrative actions initiated, and any sanctions or other steps taken related to those actions
They requested that CMS provide, among other things:
• A breakdown by industry segment (e.g., home health, durable medical equipment, physician) for each month showing how many applications were screened, the number of providers/suppliers flagged using the new screening tools, and the number of providers/suppliers denied billing numbers as a result of the process
• The number of suspensions currently in place, any new suspensions initiated, who initiated the suspensions, the number and length of suspensions extended, and any actions taken as a result of suspensions that were lifted
• The total number of administrative actions (e.g., overpayment determinations, sanctions, or civil monetary penalties) imposed by CMS, the duration and/or dollar value of those actions, and the resolution of those actions
Proposed Expansion of the IRS Whistleblower Program
Posted by Michelle Merola - 03/11/11 at 03:03:50 pmUnder Internal Revenue Code Section 7623(a), the IRS shall pay awards to people who provide “specific and credible information” to the IRS if the information results in the collection of taxes, penalties, interest, or other amounts from a noncompliant taxpayer. Guaranteed awards, however, are limited to individuals who provide information about significant tax issues. “Significant” is defined by the IRS as taxes, penalties, and interest owed in excess of $2 million. Thus, to meet the $2 million threshold—including back taxes, interest and penalties—the noncompliant taxpayer should have an annual gross income of more than $200,000. If the IRS successfully obtains a recovery from such a taxpayer, the IRS is required to pay the whistleblower between 15 and 30 percent of the recovery. If the whistleblower is not satisfied with the reward, he or she may appeal to the U.S. Tax Court. In cases involving less than $2 million, payment of an award to the whistleblower is discretionary, with a maximum of 15 percent of the recovery and no right of appeal.
The process of becoming an IRS whistleblower is both easier and more complicated than the process established under the False Claims Act. For example, an IRS whistleblower and counsel file a single form containing all the information that a whistleblower wishes to share as the basis of the potential investigation. The IRS makes a decision about whether to investigate the claim based solely on the information contained in that form. As a result, the content and format of the initial submission are crucial to a successful recovery. Once the form is submitted, the whistleblower does not have access to the status of the government’s case, nor does the whistleblower take part in the investigation of the case as is the practice under the False Claims Act. Although the government will confirm receipt of the submission, it will not provide further information regarding the investigation. Only time will answer the question of whether an award will be paid to the whistleblower. And an award cannot be paid until the noncompliant taxpayer’s appellate rights have expired or been exhausted. That can take years.
These constraints have led to significant concern about the efficacy of the program. In fact, the IRS received approximately 460 informant submissions in fiscal year 2009. These submissions resulted in the identification of 1,941 taxpayers who were accused of avoiding more than $2 million each in taxes, penalties, and interest. Despite what appeared to be an abundance of credible information, to date the IRS has failed to pay a single award to the individuals who were the source of that information.
Congressional supporters of the whistleblower program, including Senator Charles Grassley, are trying to bolster the program. In January, amendments to the law were proposed that would increase the utility and efficacy of the program. Among the proposals is a provision that would allow awards to be paid to whistleblowers if the information they provide results in the denial of a claim for a refund that the IRS would have otherwise paid or reduces an overpayment credit balance. Awards would also be paid for information that a taxpayer tried to claim a fraudulent loss as an offset to tax liability. Thus, the amendments incorporate prospective violations into the tax loss calculation and, thereby, increase the potential awards to whistleblowers.
Commentators have urged Congress to pass these amendments and to further incentivize informants to provide information to the IRS. As government budgets decrease, whistleblower programs may become an even more important part of fraud detection. In the absence of a robust program with real incentives, the whistleblower program will wither on the vine. It appears that lawmakers are addressing these concerns. And, if they do, whistleblowers may have a host of new opportunities.
New York Attorney General Schneiderman Acts Quickly to Target Government Fraud
Posted by Bill Comiskey - 02/20/11 at 11:02:46 amAnd he’s off!
In the short time since he assumed office on January 1, 2011, New York’s Attorney General Eric Schneiderman has made unmistakably clear his commitment to combating fraud against the state.
▪ In announcing the settlement of an $18 million Medicaid whistleblower case on January 18, 2011, he proclaimed that “cracking down on those who try to defraud the taxpayers” will be one of his “top priorities.”
▪ Nine days later, he unveiled his “aggressive plan” to fight government fraud by creating a new Taxpayer Protection Unit, dedicated to cracking down on fraudulent contractors, “pension con-artists,” and “large-scale tax cheats,” and by adding “dozens of new prosecutors, investigators, and auditors” to his Medicaid Fraud Control Unit.
▪ Before the week was over, in comments issued in connection with Governor Andrew Cuomo’s budget proposal, he again observed that, given New York’s budget deficit, his “office will leave no stone unturned in rooting out fraud, corruption, and waste in government.”
▪ In a pair of press releases issued on February 10, the Attorney General repeated the same theme. In one press release, he announced the settlement of three Medicaid fraud cases and observed that his office “will work every day to ensure that those who cheat the taxpayers are caught and forced to pay for their crimes.”
▪ In the second press release issued on February 10, he announced the arrest of a Rochester pharmacist for Medicaid fraud and observed that his office is “committed to recovering every tax dollar stolen as a result of Medicaid fraud and other kinds of theft from the people of this state. In this time of fiscal crisis, we can’t afford to waste a single penny.”
The Attorney General’s focus on government fraud should not come as a surprise for those who followed his election campaign. As state senator, he was instrumental in the adoption of New York’s False Claims Act in 2007, and he was the primary proponent of the historic 2010 amendments to the act that were adopted with the unanimous support of the Legislature. Among other things, these amendments expanded the act to cover cases involving serious tax fraud by high-end cheats, added new protections for whistleblowers, and extended the statute of limitations for whistleblowers to a very generous 10 years.
With the adoption of the tax whistleblower provisions, New York became the first state in the nation to expressly authorize false claims lawsuits based on knowing violations of the tax law.[1] He campaigned on a promise to use New York’s False Claims Act and its new tax whistleblower provisions aggressively and, as evidenced by the flurry of press releases, all indications are that he is intent on delivering on that promise.
The Attorney General’s focus on combating fraud should be welcome news to honest taxpayers, especially in these difficult economic times. It is, after all, honest taxpayers who end up footing the bill when people cheat the state. Whether the fraud involves Medicaid fraud, pension fraud, contractor fraud, or tax fraud, the victim is always the taxpayer.
Some commentators have expressed reservations concerning the new tax whistleblower provisions, fearing that whistleblowers seeking an easy payday will harass legitimate businesses or that the state will be overly aggressive.[2] Given the power of the new laws, such concerns are certainly not to be dismissed. It is incumbent on the Attorney General to make certain that the screening process is rigorous enough to avoid cases that do not merit investigation or prosecution. Likewise, given the breadth of situations that could be viewed as involving “knowingly” false claims under the whistleblower laws, the Attorney General and the Department of Taxation and Finance need to be vigilant to make certain that the asserted false claims are not merely a manifestation of a difference of opinion between the taxpayer and the Department regarding how the tax law ought to be interpreted. But with careful screening of the cases by the Attorney General and, for tax cases, the Tax Department, the risks should be minimal while the potential gain for the state is significant.
Will the new laws work? Will they be successful in curbing fraud and producing the millions in revenue that the Attorney General has predicted? Time will tell, but . . .
Unless potential whistleblowers learn about the law, there is little chance that they will come forward. Right now, notwithstanding the Attorney General’s efforts to promote awareness of his fraud-fighting efforts and New York’s new whistleblower laws, few citizens in the state even know that New York has a whistleblower statute. In just the last few months, I have given presentations to thousands of accountants and tax advisors around the state and without question the overwhelming majority of these professionals were not aware that New York has a new tax whistleblower statute until I told them about it. Until word gets out, whistleblowers will not even know that they have an option to report fraud.
Whistleblowers, of course, are not the only sources of potential False Claims Act cases. Cases can be self-generated by the Attorney General, or they can be based on referrals from state agencies or local governments. But will those agencies and local jurisdictions cooperate with the Attorney General and refer cases for prosecution under the False Claims Act? Will they devote resources to help the Attorney General investigate the cases? The Tax Department supported the adoption of the tax whistleblower statute and, given the current fiscal crisis, it is likely that the Department will be actively reviewing its inventory of audits and investigations for appropriate cases to refer to the Attorney General. It is less clear whether other agencies will follow that lead. If agencies like New York’s Comptroller, or the Office of General Services, Department of Labor, or Insurance Department actively look for cases where contractors or others have swindled the state, the Attorney General’s office should have plenty of leads. My guess is that the Attorney General will be reaching out to establish partnerships with other agencies that can lead to successful False Claims Act prosecutions.
The final question is whether, in this season of budget cuts, the Attorney General will have the resources he will need to investigate and prosecute these cases. Major and often complex false claims investigations are unquestionably labor intensive, and while the Attorney General can look to the federal government for help in staffing his Medicaid Fraud Control Unit, the state’s general fund will have to pay for his newly created Taxpayer Protection Unit. Even though it is clear that investing in fraud detection and prosecution more than pays for itself in both direct recoveries and in increased deterrence,[3] it may be difficult, given the current budget situation, for the Attorney General to secure the level of resources he needs to protect the public fisc. If that is the case, a good argument could be made that the state is being penny wise and pound foolish.
But, as I said before, time will tell.
[1] To limit the reach of the amended False Claims Act to cases involving serious tax violations, the law set financial thresholds for tax whistleblower suits. To qualify, the whistleblower must show that the taxpayer had at least $1 million in net sales or income during at least one year of the period covered by the suit and that the tax damages suffered by the state or local government exceed $350,000 in the aggregate. State Finance Law section 189(4). For more on the new tax whistleblower provisions, see “New York’s New Tax Whistleblower Statute,” Tax Stringer, February 2011, and “Calling All Tax Whistleblowers – New York Wants You,” State Tax Notes, January 31, 2011.
[2] “New York’s Qui Tam Law: Crackpot Justice or Creative Tax Tool,” State Tax Notes, January 10, 2011
[3] The Attorney General’s Medicaid Fraud Control Unit is a prime example. Since 2004, the Unit has repeatedly set records for Medicaid dollars recovered (in fiscal years 2004, 2005, 2006, and 2008), and it has brought in many times more in recoveries than it costs. The Unit’s annual reports, including the 2008 report, are on the Attorney General’s website.
New Government Numbers for False Claims Act Filings
Posted by John Sinatra - 02/08/11 at 01:02:16 pmRecent government tallies reveal a surge in False Claims Act filings. By fall of last year, there were 1,246 qui tam cases under seal at the Department of Justice (i.e., pending investigation into whether the government will intervene). That number has grown by almost 100 cases as of last month. This growing caseload is reflected in the raw number of 2010 qui tam filings—over 500—which represents a dramatic 51 percent jump from the number of whistleblower cases filed just two years earlier.
Additional False Claims Act details have been made available in a joint letter from DOJ and HHS to Senator Charles Grassley. In that letter, the government recounts that 66 percent of the cases it is investigating involve health care fraud allegations. Of these, 180 cases allege fraud in connection with the pricing and marketing of pharmaceuticals. About 80 of these qui tam cases involve hospitals.
The government also reports that so far in fiscal year 2011 there have been 19 settlements and judgments, totaling more than $1.2 billion.
Also noteworthy to potential whistleblowers is that, according to official tallies, the average time a case remains under seal and pending investigation is only thirteen months. In recent years, the government reports that it has intervened in an average of 22 percent of qui tam cases.
CareSource Whistleblower Settlement Shows Emphasis on Health Care Fraud Prevention
Posted by John Sinatra - 02/04/11 at 01:02:37 pmThe Justice Department recently intervened in and settled a False Claims Act case filed by two nurses against their employer, CareSource, an Ohio managed health care company. The settlement resolves allegations that the company caused Medicaid to make payments for assessments and case managements they failed to provide. According to the government’s February 1 press release, as part of the settlement, the whistleblower employees will receive a $3 million share of the federal portion of the $26 million settlement.
The release said, “This settlement will help ensure the provision of crucial services to Medicaid patients, especially children with special health care needs. The cooperation between federal and state agencies, along with assistance from the former employees who brought this issue to the government’s attention, demonstrates the determination necessary to protect the public’s precious health care resources.”
This settlement is part of the government’s emphasis on combating health care fraud and another step for the Health Care Fraud Prevention and Enforcement Action Team (HEAT). HEAT is a partnership between the Justice Department and the Department of Health and Human Services. Together, these two federal agencies have focused efforts to reduce and prevent Medicare and Medicaid fraud through enhanced cooperation.