False Claims Act in 2014: Implementation Issues LIVE Webcast

Speaker Firms and Organization:

Lieff Cabraser Heimann & Bernstein, LLPRobert J. Nelson

Partner and Chair of the False Claims Act Practice Group

BuckleySandler LLPMichelle L. Rogers

Partner

Fried, Frank, Harris, Shriver & Jacobson LLPJennifer M. Wollenberg

Senior Associate

PwCMark Dostal

Director, National Government Contracts Practice

StoneTurn Group, LLPJoseph Cheriathundam

Managing Director

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Partner Firms:

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Lieff Cabraser Heimann & Bernstein, LLP, is a sixty-plus attorney AV-rated law firm with offices in San Francisco, New York, and Nashville. Representing plaintiffs in a wide range of federal False Claims Act and other whistleblower cases, Lieff Cabraser has taken on many of the world's largest corporations, holding them accountable for their behavior. Lieff Cabraser also represents plaintiffs in the fields of personal injury and mass torts, securities and financial fraud, employment discrimination and unlawful employment practices, product defect, antitrust and intellectual property, consumer protection, environmental and toxic exposure, and human rights.

With 150 attorneys in Washington, DC, Los Angeles, New York, and Chicago, BuckleySandler is among the leading financial services law firms in the county. BuckleySandler attorneys have a track record of successfully assisting clients in regulatory, enforcement, litigation, transactional, and public policy matters. Currently, BuckleySandler represents the top 10 largest banks in the United States, nine of the top 10 mortgage lenders, the top 10 mortgage servicers, the top 10 credit card issuers, and numerous community banks and non-bank financial services companies.

Partner Firms:

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From offices located in the world's principal financial centers, Fried, Frank, Harris, Shriver & Jacobson LLP's lawyers provide advice to clients regarding their most critical legal and business needs. Fried Frank's False Claims Act attorneys have extensive experience in every facet of the civil False Claims Act, and have been on the cutting edge of litigation and debate about the FCA's interpretation and scope. The Firm regularly represents financial industry, defense, health care, and other government contractors in high stakes cases. The Firm's False Claims Act practitioners also assist and represent entities not normally associated with federal and state fraud investigations, such as municipal airport authorities, computer manufacturers, private and state universities, academic medical centers, import and export companies, major accounting and consulting firms, magazine publishers, and oil and gas exploration companies.

About PwC US PwC US helps organizations and individuals create the value they're looking for. We're a member of the PwC network of firms in 158 countries with more than 180,000 people. We're committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/US

About PwC's Forensic Services PwC Forensic Services team of experienced professionals is dedicated to meeting the challenges caused by fraud allegations, financial crimes and other irregularities. Our portfolio of services includes: Financial Crime Examinations, Forensic Technology Solutions, Regulatory Compliance Reviews, Fraud Risk Management and Fraud Prevention, Dispute Analysis and Litigation Support. The Forensic Services team also manages the PwC Fraud Forum, an exclusive community where members can gain knowledge, participate in events and share important insights on preventing, detecting and investigating fraud, corruption and economic crime. See www.pwc.com/us/forensics and http://usfraudforum.pwc.com for more information.

Partner Firm:

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StoneTurn is a partnership of experienced accountants, economists, and financial and technology consultants supporting corporate and individual clients and their advisors, engaged in the most challenging and complex business transactions, disputes and financial investigations. Our work ranges from behind-the-scenes advice, to deep financial analysis, to full service dispute resolution support.

Brief Speaker Bios:

Robert J. Nelson

Robert J. Nelson is a partner at Lieff Cabraser and chairs Lieff Cabraser's False Claims Act practice group. Mr. Nelson has been the lead lawyer on numerous whistleblower cases, including a $46 million settlement involving Sutter Health in 2013, as well as a $78.5 million settlement involving the University of Phoenix. Mr. Nelson was recognized in 2010 as California Lawyer magazine's Attorney of the Year for his work on the University of Phoenix case. Mr. Nelson previously achieved the same recognition in 2008 in connection with a verdict he obtained against Chrysler for $54 million, including $50 million in punitive damages. Mr. Nelson has been court-appointed class counsel in more than two dozen class actions in state and federal courts around the country, and is a frequent lecturer on class action and whistleblower issues. He is a 1987 graduate of NYU School of Law, where he was admitted to the Order of the Coif and was an Articles Editor on the NYU Law Review. Following law school, Mr. Nelson served as a judicial clerk to Judge Stephen Reinhardt on the Ninth Circuit Court of Appeals.

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Michelle L. Rogers

Michelle L. Rogers is a partner in the Washington, DC office of BuckleySandler LLP. Ms. Rogers represents institutions in a wide range of litigation matters, including government enforcement actions, class action litigation, regulatory examinations, and corporate internal investigations. She currently is representing several financial institutions in ongoing False Claims Act (FCA) and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) matters. She has also represented clients in matters involving the Program Fraud Civil Remedies Act (PFCRA), Truth in Lending Act, Fair Housing Act, Equal Credit Opportunity Act, Civil Rights Act, and unfair and deceptive trade practices statutes involving the Department of Justice (DOJ), Consumer Financial Protection Bureau (CFPB), Department of Housing and Urban Development (HUD), Federal Housing Finance Agency (FHFA), federal and state bank regulators, and state attorneys general.

Brief Speaker Bios:

Jennifer M. Wollenberg

Jennifer M. Wollenberg is a senior associate at Fried, Frank, Harris, Shriver & Jacobson LLP. Located in Fried Frank’s Washington, D.C. office, she is a member of the Firm's False Claims Act and Qui Tam practice group. Jenny represents corporations in a variety of complex civil litigation matters, with an emphasis on cases arising under the civil FCA and, in particular, cases involving the aerospace, financial, and defense industries. She has been a contributing co-author of FraudMail Alert®, which regularly reports on significant developments in the FCA arena, and has published articles on various aspects of the FCA. Jenny received her JD from Cornell Law School and is admitted to practice in the District of Columbia, New York, various United States Courts of Appeals (Second, Ninth, and District of Columbia Circuits), the United States Court of Federal Claims, and the United States District Court for the District of Columbia.

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Mark Dostal

Mark Dostal is a Director at PwC. He has over 32 years of extensive and diversified experience in government contract accounting and auditing, including 8 years with PwC, 8 years with another Big 4 national government contracting practice, and 16 years with the Defense Contract Audit Agency (DCAA). He specializes in the requirements of the Federal Acquisition Regulation (FAR), Agency FAR Supplements, and Cost Accounting Standards (CAS). Mark began his career conducting DCAA audits, directing field office operations, and managing Agency responsibilities at large and medium sized defense contractors from locations in the Midwest, Southwest, and Agency Headquarters. After leaving Federal service, Mark leveraged his unique experiences and relationships to develop consultative approaches with clients that support compliant, yet practical considerations for meeting government contracting and cost accounting practices. He has also assisted many commercial market-based clients with transitioning to and navigating the FAR/DFARS and CAS requirements when entering the federal marketplace. As a member of defense and space industry associations, he actively promotes open dialogue of perspectives and issues affecting industry and senior government acquisition officials. Mark is a Certified Public Accountant in Illinois and Iowa, and member of the American Institute of Certified Public Accountants, National Defense Industrial Association, and National Contract Management Association.

Brief Speaker Bios:

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► For more information about the speakers, you can visit: http://www.knowledgecongress.org/speakers_2014_False_Claims_Act.html

Joseph Cheriathundam

Joe Cheriathundam, a national forensic data analytics leader with the StoneTurn Group, has over 20 years of experience supporting companies and organizations in matters of conflict, change and regulatory compliance. He has led projects pertaining to the False Claims Act, anti-fraud consulting, anti-money laundering, mergers and acquisitions, investment/trading improprieties, and international business compliance in industries as diverse as finance, retail, life sciences/healthcare, automotive, and real estate. Joe recently earned an Advanced Business Analytics Certification from the Kelley School of Business at Indiana University and has frequently written and spoken on the topic of Forensic Data Analytics.

With record recoveries, the Department of Justice, qui tam whistleblowers, and state Attorneys General have continued to step up their enforcement efforts in False Claims Act cases. Armed with enhanced legislation and stricter enforcement tools, DOJ and others are able to more easily identify and act on fraud. Now, more than ever, government contractors in various industries including defense, aerospace, healthcare, and financial services, must be mindful of this powerful statute and vigilant about compliance or face stiff penalties.

The Knowledge Group has assembled a panel of key thought leaders and practitioners to help business executives, consultants, auditors, and attorneys understand the most significant issues and recent developments with respect to the increased risks associated with the False Claims Act.

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Featured Speakers:

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Moderator:

Robert J. NelsonPartner and Chair of the False Claims Act Practice GroupLieff Cabraser Heimann & Bernstein, LLP

SEGMENT 1:

Michelle L. Rogers PartnerBuckleySandler LLP

SEGMENT 2:

Jennifer M. WollenbergSenior AssociateFried, Frank, Harris, Shriver & Jacobson LLP

SEGMENT 3:

Mark DostalDirector, National Government Contracts PracticePwC

SEGMENT 4:

Joseph CheriathundamManaging DirectorStoneTurn Group, LLP

Introduction

Robert J. Nelson is a partner at Lieff Cabraser and chairs Lieff Cabraser's False Claims Act practice group. Mr. Nelson has been the lead lawyer on numerous whistleblower cases, including a $46 million settlement involving Sutter Health in 2013, as well as a $78.5 million settlement involving the University of Phoenix. Mr. Nelson was recognized in 2010 as California Lawyer magazine's Attorney of the Year for his work on the University of Phoenix case. Mr. Nelson previously achieved the same recognition in 2008 in connection with a verdict he obtained against Chrysler for $54 million, including $50 million in punitive damages. Mr. Nelson has been court-appointed class counsel in more than two dozen class actions in state and federal courts around the country, and is a frequent lecturer on class action and whistleblower issues. He is a 1987 graduate of NYU School of Law, where he was admitted to the Order of the Coif and was an Articles Editor on the NYU Law Review. Following law school, Mr. Nelson served as a judicial clerk to Judge Stephen Reinhardt on the Ninth Circuit Court of Appeals.

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Moderator:


Part I: Overview

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Background

• Signed by President Lincoln during the height of the Civil War to combat rampant profiteering

• “For sugar [the government] often got sand; for coffee, rye; for leather, something no better than brown paper; for sound horses and mules, spavined beasts and dying donkeys[.]” United States ex rel. Newsham v. Lockheed Missiles & Space Co., 722 F. Supp. 607, 609 (N.D. Cal. 1989) (quoting Tomes, Fortunes of War, 29 Harper’s Monthly Mag. 228 (1864)).

• The FCA’s reach has since extended to Medicare, Medicaid, Social Security, and other federal programs

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General Structure

• Private/public partnership

• Cases may be initiated by whistleblowers, and the government has an opportunity to investigate and intervene

• If successful, the whistleblower may recover a portion of the government’s damages

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Moderator:


Why Whistleblowers?

• Congress has long recognized that the government, with limited resources, is overmatched in the fight against fraud. U.S. ex rel. Marcus v. Hess, 317 U.S. 537, 560 (1943) (Jackson, J., dissenting)

• The bill is predicated on the “old-fashioned idea” of “setting a rogue to catch a rogue.” Cong. Globe, 37th Cong., 3d Sess. 955-56 (1863) (remarks of Sen. Howard).

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What is the Whistleblower’s Role?

• Whistleblowers gather evidence and organize the case

• Whistleblowers bring potential fraud cases to the government’s attention

• Cases are filed under seal in order to give the government a chance to investigate (and potentially intervene in the litigation)

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What Is the Government’s Role?

• The government has unique tools to investigate potential claims

• If the government formally joins the litigation by intervening, it bears primary responsibility for prosecuting the action. See 31 U.S.C. § 3730(c)(1).

• The government can also dismiss the action or settle the lawsuit over the whistleblower’s objection. See 31 U.S.C. § 3730(c)(2).

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What Do Parties Stand to Gain?

• The government may recover treble damages and significant statutory penalties

• Whistleblowers may obtain a percentage of the government’s damages

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Part II: Navigating the Statute

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Who is Liable Under the FCA?

• In general, any person who knowingly submits a false claim to the government

• Any person, such as a subcontractor, who causes another to submit a false claim to the government

• Any person who knowingly conceals or avoids an obligation to pay money to the government (“reverse false claims”)

• Individuals who conspire to violate the False Claims Act

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Moderator:


Key Term: “False Claim”

• Any “request or demand, whether under a contract or otherwise, for money or property” that is “presented to an officer, employee, or agent of the United States” or to a contractor working on a government program. See 31 U.S.C. § 3129(b)(2).

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Five Most Common Types of Civil False Claims Act Cases

• The “mischarge” case • “Upcoding”• Double-billing• The “fraud-in-the-inducement” case• Bid rigging• Kickbacks• The “false certification” case• Express and implied• “Materiality” questions• The “substandard product or service” case• Common in procurement, health care cases• The “reverse false claim case”

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Most Common Federal Programs Affected by the FCA

• Medicare• Medicaid• Social Security• Defense Procurement• Federal Loan Guarantees/Mortgage Fraud• Other government programs involving federal grants (e.g., USAID, Department of Education grants,

etc.)

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Key Term: “knowingly”

• Actual knowledge, • Deliberate ignorance of the truth, or • Reckless disregard of the truth. See 31 U.S.C. § 3729(b)(1)(A).• No need to prove specific intent to defraud. See 31 U.S.C. § 3729(b)(1)(B).

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Damages Explained

• Statutory penalties: an automatic fine of $5,500 to $11,000 for each and every false claim• Treble damages: if the government suffers any damages due to the fraud, the amount of damages is

tripled• Recent development: “Gross” or “Net” Trebling? See United States v. Anchor Mortg. Corp., 711 F.3d

745, 748-49 (7th Cir. 2013)

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Calculating the Whistleblower’s Share

• If the government intervenes: 15-25%• If the government chooses not to intervene: 25-30%• The whistleblower’s share may be lowered if the whistleblower participated in the fraud• Recent development: the whistleblower may not recover more than 10% if the suit was primarily

based on a public disclosure

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Key Term: “Public Disclosure Bar”

• Until recently, courts did not have jurisdiction to hear cases that were based on “public disclosures,” which were broadly defined. 31 U.S.C. § 3130(e)(4)(A).

• Recent development: the FCA now defines the term “publicly disclosed” narrowly.• Facts learned during state-court litigation or federal litigation between private parties may now be

used as the basis for a whistleblower suit.• Recent development: dismissal is no longer automatic.

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Key Term: “Original Source”

• Even if a whistleblower suit is based on facts that are publicly available, the lawsuit may proceed if the whistleblower can show that he or she was the “original source” of the information. 31 U.S.C. § 3130(e)(4)(B).

• Recent development: A whistleblower once needed to demonstrate “direct and independent knowledge” of the information underlying the allegations. Now, a whistleblower need only demonstrate “knowledge that is independent of and materially adds to the publicly disclosed” information. Id.

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Moderator:


Key Term: “First to File” Rule

• The False Claims Act provides that “no other person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” 31 U.S.C. § 3730(b)(5).

• This “first-to-file” rule encourages whistleblowers to report fraud as soon as possible• At the same time, whistleblowers must conduct a thorough investigation and put forth detailed factual

allegations, otherwise the case will be dismissed

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Anti-Retaliation Provisions

• It is illegal to discharge, demote, suspend, threaten, harass, or in any other manner discriminate against employees because of their lawful efforts to bring a whistleblower claim. See 31 U.S.C. § 3130(h).

• An employee’s remedies include reinstatement, double back pay (plus interest), and compensation for any “special damages” (including attorneys’ fees). Id.

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Moderator:


Part III: Recent Amendments

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Fraud Enforcement and Recovery Act of 2009 (“FERA”):

• Broadens the definition of a “false claim”• Lowers the threshold for proving intent• Strengthens the FCA’s anti-retaliation provisions• Increases the Department of Justice’s power to investigate fraud

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Elimination of “Presentment” Requirement

• Expands the scope of potential FCA liability by eliminating the “presentment” requirement (overruling the Supreme Court’s opinion in Allison Engine Co. v. United States ex rel. Sanders, 128 S. Ct. 2123 (2008)).

• Now, a subcontractor may be liable for defrauding a contractor using federal funds; there is no need to show a subcontractor’s intent to defraud the government

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Moderator:


FERA: Intent Redefined

• No longer necessary to prove intent to defraud• Plaintiffs are only required to show that the false claim was “material,” meaning that it was capable of

influencing payment on a claim. 31 U.S.C. § 3129(b)(4).

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Moderator:


FERA: Anti-Retaliation Provisions

• Now, in addition to employees, contractors and agents are protected from retaliation for lawful efforts to initiate or investigate whistleblower claims. 31 U.S.C. § 3130(h).

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Moderator:


FERA: Civil Investigative Demands

• A subpoena duces tecum may compel production of documents, but a CID is broader• A CID may require the recipient to answer interrogatories (formal questions) or to give oral testimony

under oath• The government may issue a CID whenever there is “reason to believe that any person may be in

possession, custody, or control of documentary material or information relevant to a false claims law investigation.” 31 U.S.C. § 3733.

• Authority delegated to each of 93 U.S. Attorney’s Offices; Attorney General’s approval no longer necessary

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Moderator:


The Patient Protection and Affordable Care Act of 2010 (“PPACA”)

• Narrows Public Disclosure Bar • Broadens Original Source Requirement • Statutory Anti-Kickback Liability• Includes Overpayments• Health Care Exchanges

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PPACA: Narrower Public Disclosure Bar

• Dismissal is no longer mandatory• No longer bars a lawsuit based on facts discovered during state court litigation • No longer bars a lawsuit based on facts discovered during federal litigation between private parties

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PPACA: Original Source Expanded

• Previously, an original source must have had “direct and independent knowledge of the information on which the allegations are based.”

• Now, an original source is one who has “knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions.” See 31 U.S.C. 3730(e)(4)(B).

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Moderator:


PPACA: Overpayments

• The FCA now imposes liability on health care providers who receive Medicare/Medicaid overpayments (accidentally or otherwise) and fail to return the money to the government within 60 days

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PPACA: Anti-Kickback Statute

• The Anti-Kickback statute prohibits anyone from knowingly or willfully paying or receiving remuneration in exchange for referrals or the purchase of any item or service that may be paid for by a federal health care program.

• A claim to the government is now automatically rendered “false” for purposes of the FCA if the medical services or items were furnished in violation of the Anti-Kickback Statute. 42 U.S.C. § 1320a-7b(g).

• Even unintentional violations of the statute can give rise to liability.

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Part IV: The View From 10,000 Feet

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Statistics – Overview of Qui Tam Actions

Total Qui Tam Actions from 1987 – 2013 = 9,244Total Qui Tam Actions in 2013 = 753

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Total Qui Tam Settlements and Judgments from 1987–2013 = $27,201,587,782Total Settlements and Judgments in 2013 = $2,979,370,977

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Amount that has been paid to Whistleblowers

Total Amount Paid to Relators from 1987 – 2013 = $4,272,156,638Total Amount Paid to Relators in 2013 = $387,825,711

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Total Settlements for HHS from 1987–2013 = $20,941,742,791Total Settlements for HHS in 2008 = $969,313,659

Total Settlements for HHS in 2013 = $2,615,643,504

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Total Settlements for DOD from 1987–2013 = $2,717,816,264

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Total Settlements for Non-DOD, Non-HHS from 1987–2013 = $3,542,028,797

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Recent Trends

• “Mini-FCAs”: At least 32 states have passed statutes mirroring the Federal False Claims Act • The SEC, IRS, and CFTC have also created whistleblower programs

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Recent Trends: Off-Label Marketing

• Off-label marketing consisted several of the largest cases of 2013:• Johnson & Johnson (Risperdal) – $2.2 Billion• Amgen (Aranesp) – $762 Million• Wyeth (Rapamune) – $491 Million• Nevertheless, the Second Circuit recently held that the First Amendment protected off-label

marketing. See United States v. Cariona, 09-cr-5006 (2d Cir. 2012).• GlaxoSmithKline recently banned the practice of paying physicians to promote its drugs.

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Recent Trends: Mortgage Insurance Fraud

• The 50-state, $25 billion mortgage settlement relating to mortgage fraud contained claims for relief under the False Claims Act; six whistleblowers collectively recovered over $225 million

• United States v. Bank of America/Countrywide (E.D.N.Y.): Bank of America agreed to pay $1 billion as part of the 50-state global settlement

• United States v. Deutsche Bank & MortgageIt (S.D.N.Y.): Settled for $202.5 million• United States v. CitiMortgage, Inc. (S.D.N.Y.): Settled for $158.3 million• United States v. Flagstar Bank (S.D.N.Y.): Settled for $132.8 million

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Recent Trends: Implied Certification

• Implied Certification: when an entity falsely certifies that it has complied with a statute, regulation, or contractual term that is a prerequisite for payment

• FERA imposed a new “materiality” standard, but courts are divided as to its implementation• Question of law?• Question of fact?

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Future Trends: the False Claims Act and State Health Care Exchanges

• The Affordable Care Act creates state-run health care exchanges intended to provide a marketplace for individuals to compare insurance policies.

• Section 1313 of the Affordable Care Act specifies that any payments made “by, through, or in connection with” a state insurance exchange are subject to the FCA if they fail to comply with federal regulations. See 42 U.S.C. § 18033(a)(6)(A).

• Any damages may be multiplied by six. See 42 U.S.C. § 18033(a)(6)(B). • In sum: Health insurers that participate in state insurance exchanges will be subject to close scrutiny

for potential violations of the False Claims Act.

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Conclusion: Whither the FCA?

• Last year, the DOJ recovered $2,979,370,977 in whistleblower cases under the False Claims Act.• The DOJ also recovered $829,912,477 in non-whistleblower claims brought under the False Claims

Act.• What new developments will 2014 bring?

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Introduction

Michelle L. Rogers is a partner in the Washington, DC office of BuckleySandler LLP. Ms. Rogers represents institutions in a wide range of litigation matters, including government enforcement actions, class action litigation, regulatory examinations, and corporate internal investigations. She currently is representing several financial institutions in ongoing False Claims Act (FCA) and Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) matters. She has also represented clients in matters involving the Program Fraud Civil Remedies Act (PFCRA), Truth in Lending Act, Fair Housing Act, Equal Credit Opportunity Act, Civil Rights Act, and unfair and deceptive trade practices statutes involving the Department of Justice (DOJ), Consumer Financial Protection Bureau (CFPB), Department of Housing and Urban Development (HUD), Federal Housing Finance Agency (FHFA), federal and state bank regulators, and state attorneys general.

Ms. Rogers is a frequent author and speaker about matters involving the financial fraud enforcement statutes, including the False Claims Act.

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SEGMENT 1:


Financial Fraud Redefined: How the Government Is Using the False Claims Act To Target Financial Services Providers

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SEGMENT 1:


Overview

Context: Financial Fraud as Government Priority Financial Fraud FCA Enforcement Evolution of FCA Cases Trends and Predictions Mitigating Risk

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SEGMENT 1:


Financial Fraud as DOJ Priority

During FY 2012, DOJ secured more than $1 billion in settlements from 5 financial institution settlements

– Excluding the $25 billion mortgage servicer settlement from February 2012, which also included FCA claims

For FY 2014, DOJ sought a $55 million budget increase “to support the Department’s investigation and prosecution of the broad range of illegal conduct that fall under the definition of financial fraud. . .”

– This increase includes a request for 184 additional attorneys

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Financial Fraud as Government Priority

Est. 2009, the FFETF coordinates activities between DOJ, SEC, the states, OIGs, and regulators

Includes fraud working groups for RMBS, Mortgage, and Securities and Commodities

Actively seeking whistleblowers:

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Financial Fraud FCA Enforcement: Brief Background

Imposes civil liability for knowingly presenting a false claim to the government, or making a false record/statement material to a false claim

– Broadly defines “knowingly” to include deliberate ignorance and reckless disregard for the truth or falsity

– Statute of limitations: Generally 6 years, up to 10 years; subject to the Wartime Suspension of Limitations Act (WSLA)

Discussion to come.

– Treble damages and civil penalties of $5,500 to $11,000 for each claim; subject to the decision in U.S. v. Anchor Mortgage Corp.

Discussion to come.

– Whistleblower recovery: 15-30%, depending on whether US intervenes

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Financial Fraud FCA Enforcement: Brief History

FCA actions of 2011 and early 2012 relied on a recklessness standard based on compliance failures Recent expansion includes use of FCA to target long-time program participants for less egregious

conduct and conventional loan sales to the GSEs by relying on the Fraud Enforcement and Recovery Act’s (FERA) FCA amendments

– Allows FCA liability for indirect receipt of government funds– Expands potential “reverse” FCA exposure by:

Imposing liability when one “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government”

Adding a broad definition of “obligation” to retention of any overpayment

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Evolution of Financial FCA Cases

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Trends and Predictions

Increased suits against corporate officers and employees Increased filing of qui tam suits More filings in the SDNY to take advantage of the large FCA

settlements and fast intervention decisions Increased likelihood of DOJ settlements including admissions of

misconduct Increased number of suits with non-governmental victims Increased coordinated initiatives

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Mitigating Risk

Knowledge is power.

– Employees

– Business

– Customers Culture is key. Policies and procedures matter.

– Internal reporting

– Protections for whistleblowers Think strategically when issues arise.

– Independence and speed are both important Self report when appropriate.

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For More Information, Contact:

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Michelle L. [email protected]

BuckleySandler LLP1250 24th Street NW, Suite 700

Washington, DC 20037www.buckleysandler.comwww.infobytesblog.com

Introduction

Jennifer M. Wollenberg is a senior associate at Fried, Frank, Harris, Shriver & Jacobson LLP. Located in Fried Frank’s Washington, D.C. office, she is a member of the Firm's False Claims Act and Qui Tam practice group. Jenny represents corporations in a variety of complex civil litigation matters, with an emphasis on cases arising under the civil FCA and, in particular, cases involving the aerospace, financial, and defense industries. She has been a contributing co-author of FraudMail Alert®, which regularly reports on significant developments in the FCA arena, and has published articles on various aspects of the FCA. Jenny received her JD from Cornell Law School and is admitted to practice in the District of Columbia, New York, various United States Courts of Appeals (Second, Ninth, and District of Columbia Circuits), the United States Court of Federal Claims, and the United States District Court for the District of Columbia.

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SEGMENT 2:


False Claims Act Exposure: Recent Developments Regarding Statute of Limitations, Damages, and Penalties

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Overview

1.The Wartime Suspension of Limitations Act Threatens the FCA's Statute of Limitations

2.The Seventh Circuit Takes On the Overreaching “Gross Trebling” Approach to FCA Damages

3. Constitutional “Excessive Fines” Analysis May No Longer Offer the Same Penalties Protection

• Language of the FCA:

§ 3731. False claims procedure

(b) A civil action under section 3730 may not be brought—

(1) more than 6 years after the date on which the violation of section 3729 is committed, or

(2) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the official of the United States charged with responsibility to act in the circumstances, but in no event more than 10 years after the date on which the violation is committed, whichever occurs last.

• Six-Year Statute of Limitations and Ten-Year Statute of Repose

• Recent Development: DOJ and Relators Attempt to Invoke Wartime Suspension of Limitations Act

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FCA Statute of Limitations / Statute of Repose

• Brief History of the WSLA

• Current Language of the WSLA (18 U.S.C. § 3287):

When the United States is at war or Congress has enacted a specific authorization for the use of the Armed Forces, as described in section 5(b) of the War Powers Resolution . . ., the running

of any statute of limitations applicable to any offense (1) involving fraud or attempted fraud against the United States or any agency thereof in any manner, whether by conspiracy or not, or (2) committed in connection with the acquisition, care, handling, custody, control or disposition of any real or personal property of the United States, or (3) committed in connection with the negotiation, procurement, award, performance, payment for, interim financing, cancelation, or other termination or settlement, of any contract, subcontract, or purchase order which is

connected with or related to the prosecution of the war or directly connected with or related to the authorized use of the Armed Forces, or with any disposition of termination inventory by any war contractor or Government agency, shall be suspended until 5 years after the termination of hostilities as proclaimed by a Presidential proclamation, with notice to Congress, or by a concurrent resolution of Congress.

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SEGMENT 2:


Wartime Suspension of Limitations Act (“WSLA”)

• WSLA-FCA Application Concerns

o Full Defenses Against Application:

Only applies to Title 18 “offenses”

Not all modern-FCA violations require “fraud”

o Partial Defenses Against Application:

Statute should be limited to conduct involving wartime contracting/fraud

Meant for the Government, not relators

Statute of repose

• Other Concerns with WSLA Application (not limited to FCA context)

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SEGMENT 2:


Concerns with Application of the WSLA

• Important, Recent WSLA-FCA Decisions

o BNP Paribas SA

o Halliburton/KBR

o Wells Fargo

• Ramifications of Current Holdings

o Effectively eviscerate the FCA’s statute of limitations, and potentially also the statute of repose

o Would affect a wide-range of FCA claims, beyond wartime contracting and the defense industry

o Could spur increased litigation, including by relators

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SEGMENT 2:


WSLA and the FCA

Damages Under the FCA

• Language of the FCA:

o 31 U.S.C. § 3729(a)(1)

o “[A]ny person who [violates the FCA] is liable to the United States Government for…3 times the amount of damages which the Government sustains because of the act of that person.”

• Treble Damages are a Key Feature of the FCA

o Important to DOJ, relators, and defendants

o Trebling required if liability found, absent timely voluntary disclosure (then doubling)

o Multiplier a component of any FCA settlement

• Recent Development: Question of Which “Damages” – Net or Gross – are Multiplied Revisited

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“Gross Trebling” Approach

• Prevailing Method: “Gross Trebling”

o First trebling the claim amount and only then deducting the value of goods or services provided

• Advocated and Employed by DOJ, Relators, and Courts

o In a variety of contexts

o Relying primarily on Supreme Court decision in United States v. Bornstein (1976)

“[D]amages should be [multiplied] before any compensatory payments are deducted, because that method of computation most faithfully conforms to the language and purpose of the Act.”

• Key Concern with “Gross Trebling” Approach

o Distorts Government’s actual damages because severely diminishes the value of any benefit obtained by the Government

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Recent “Net Trebling” Decision

• United States v. Anchor Mortgage Corporation (7th Cir. 2013)

o Found proper approach to be “net trebling”

Accounts for benefit to the Government prior to multiplying

o Ruled DOJ’s position unsupported by statutory language or policy

o Found DOJ’s position based on misreading of Bornstein

Bornstein footnote re contract measure of loss

Third party settlement payments should be subtracted after applying the multiplier

o Relied on several post-Bornstein appellate decisions

• Potential Circuit Split: United States v. Eghbal (9th Cir. 2008)

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SEGMENT 2:


Practical Differences Between “Gross Trebling” and “Net Trebling”

• In Anchor Mortgage example, Government paid $131,643.05 on the guaranty of loan and recovered $68,200 on the subsequent sale of the mortgaged property

• Gross trebling approach rejected by the Seventh Circuit resulted in $136,400 greater FCA damages

• Just a single example—imagine difference when applied across all claims in a case

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Gross Trebling Approach Net Trebling Approach

Treble the Payment $131,643.05 x 3 = $394,929.15 Subtract the Credit $131,643.05 - $68,200 = $63,443.05

Subtract the Credit $394,929.15 - $68,200 = $326,729.15 Treble the Balance $63,443.05 x 3 = $190,329.15

Trebled Damages $326,729.15 Trebled Damages $190,329.15

Penalties under the FCA

• FCA Penalties

o Between $5,500 and $11,000 for each false claim (31 U.S.C. § 3729(a)(1))

• Excessive Fines Analysis

o Generally understood that the total penalty assessment has been subject to the Eighth Amendment’s Excessive Fines Clause

o FCA cases have borrowed “grossly disproportionate” test from 1998 Supreme Court forfeiture case

o Key component of test has been economic comparison

Need for some correlation between total penalties and damages

• Recent Development: Appellate Court Decision Granting $24MM Penalties Where No FCA Damages

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Recent FCA Penalties Decision

• United States ex rel. Bunk v. Gosselin World Wide Moving, N.V. (4th Cir. 2013)

o District Court decision

o Fourth Circuit decision

• Fourth Circuit Missed Opportunity

o Potential tie to economic factors but focus on subjective “deterrence” factor

o No repeatable methodology for “grossly disproportionate” analysis

• Primary Concern With Fourth Circuit Decision

o FCA not intended to be a penalty-only statute

See United States v. McNinch, 356 U.S. 595 (1958); Marcus v. Hess, 317 U.S. 537 (1943)

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Other Concerns With Fourth Circuit’s Penalty Decision

• Raises Additional Issues

o Could lead to a groundswell of penalties-only qui tam cases

Already an extraordinary amount of qui tam complaints filed every year

o Would enabling relators in this way be prudent or viable?

In penalties-only FCA world, relator and Government interests diverge

Article III standing question when vindicating “public rights” rather than proprietary injury

Article II Appointments and Take Care clauses

Fourth Circuit gave this issue little attention

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SEGMENT 2:


FCA Exposure Recent Developments: Lay of the Land and What to Watch

• Statute of Limitations

o Application of WSLA

o Halliburton/KBR case

• Damages

o “Net Trebling” methodology

o Potential circuit split

• Penalties

o Not “excessive fines” violation even where no damages o Impact of Fourth Circuit’s decision

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SEGMENT 2:


Introduction

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SEGMENT 3:


Mark Dostal is a Director at PwC. He has over 32 years of extensive and diversified experience in government contract accounting and auditing, including 8 years with PwC, 8 years with another Big 4 national government contracting practice, and 16 years with the Defense Contract Audit Agency (DCAA). He specializes in the requirements of the Federal Acquisition Regulation (FAR), Agency FAR Supplements, and Cost Accounting Standards (CAS). Mark began his career conducting DCAA audits, directing field office operations, and managing Agency responsibilities at large and medium sized defense contractors from locations in the Midwest, Southwest, and Agency Headquarters. After leaving Federal service, Mark leveraged his unique experiences and relationships to develop consultative approaches with clients that support compliant, yet practical considerations for meeting government contracting and cost accounting practices. He has also assisted many commercial market-based clients with transitioning to and navigating the FAR/DFARS and CAS requirements when entering the federal marketplace. As a member of defense and space industry associations, he actively promotes open dialogue of perspectives and issues affecting industry and senior government acquisition officials. Mark is a Certified Public Accountant in Illinois and Iowa, and member of the American Institute of Certified Public Accountants, National Defense Industrial Association, and National Contract Management Association.

Discussion Topics

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SEGMENT 3:


Compliance with primary business systems and processes - a defense to limit FCA exposure

Areas of potential violations that are commonly alleged by qui tam realtors

Understanding your threats and risks to potentially resolve allegations before it becomes a FCA case

Challenges in successfully defending against allegations

.

Business Systems, Controls, and Processes

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Contractor business systems and internal controls - the first line of defense against waste, fraud, & abuse

Weak control systems increase the risk of unallowable and unreasonable costs on Government contracts

− Proposal Estimating and Contract Management

− Cost Accounting, Labor Timekeeping, and Billing

− Others depending upon nature of business (e.g., Material Management/Accounting, Purchasing, Property)

Compliance management to provide reasonable assurance that controls are working and can be relied upon:

− Establish processes that are carried out and executed by knowledgeable employees

− Develop appropriate management review and approval at prescribed levels within the Company

− Verify/monitor controls over processes and formally remediate findings

− Conduct periodic Internal Audit evaluations, follow-ups, and reporting; follow through with corrective actions

− Provide regular employee training; emphasize individual ethics and compliance responsibilities

Sources of FCA Allegations Allegations can surface from many sources, but most are from qui tam relators

− Labor Charging, Material Transfers

− Overbillings / Billing Errors

− Truth in Negotiations Act (Defective Pricing); Certification of Cost or Pricing Data at price agreement

− Proposal Certifications – Pricings, Requests for Equitable Adjustments, Incurred Costs, Termination Settlements

− Failure to Perform Work / Defective Workmanship

− GSA Schedule Contracts and Price Reduction Clause

Look to issues likely being affected by management influence and disgruntled employees

Consider possible motivation behind the allegation to uncover evidence and information about the issue

Determine “appearance” or perception that Company is “ripping off” the government

Manage FCA risk by identifying exposures to supplement business systems controls

.

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SEGMENT 3:


Sources of FCA Allegations

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• Overbillings– Knowledge of a false claim or reckless disregard of the truth will give rise to an FCA violation. No specific intent

to defraud is required (see U.S. v. TDC Management Corp., Inc., U.S. Court of Appeals, District of Columbia Circuit, 39 CCF ¶76,670, No. 92-5369, June 3, 1994, 24 F3d 292).

– Negligent recordkeeping that leads to overbilling can be construed as a false claim (see Miller v. U.S., 23 CCF ¶81,036, 213 CtCl 59, 550 F.2d 17, 1977).

• Violations of Truth in Negotiations Act (Defective Pricing)– P.L. 87-653 - “A prime contractor or any subcontractor shall be required to submit cost or pricing data … and

shall be required to certify that, to the best of his knowledge and belief, the cost or pricing data he submitted was accurate, complete and current.”

• Requests for Equitable Adjustment– False certifications in a request for equitable adjustment give rise to a cause of action under the FCA (see U.S.,

ex rel. Patrick Wilkins v. North American Construction Corp., el al., U.S. District Court, S.D. Texas, 44 CCF ¶77,656, No. H-95-5614, June 13, 2000, 101 F.Supp.2d 500)

• Failure to Perform / Defective Work – Submission of cross-sections and quantity surveys that did not accurately reflect work actually performed was a

false statement under the False Claims Act (see Commercial Contractors, Inc. v. United States, 42 CCF ¶77,374, U.S. Court of Appeals, Federal Circuit, No. 97-5005, September 4, 1998, 154 F.3d 1357)

.

FCA Damages “Would Have Paid” Model

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• Applies to cases involving overcharges

• Base damages = Amount paid less the amount that would have been paid absent the overcharges– FCA damages for a defective military helicopter were the difference between the market value of the unit

as promised and the market value as delivered (see United States, ex rel. Brett Roby v. Boeing Co., 46 CCF ¶77,962, U.S. Court of Appeals, Sixth Circuit, No. 00-4157, September 12, 2002, 302 F.3d. 637)

• Key issues– Amount paid vs. price offered – Use of original pricing assumptions vs. most current actual information– Extent of re-pricing (limited to fraudulent assertions vs. all pricing factors)

.

Recognizing and Mitigating Threats of FCA Violations

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SEGMENT 3:


Seek appropriate counsel and other professional help and advice

Consider nature of the industry and applicable government regulations (i.e., A&D, Healthcare, Pharma, Non-profits)

– Maturity of Company – traditional vs. nontraditional government contractor– Contract types, solicitation process, and negotiation/award circumstances– Funding levels, billing terms, withholdings, rescinding invoices, provisional payments

Determine supporting documentation requirements, quality, and availability

Understand which government organizations may be involved (e.g., Contracting Officer, Agency investigative services or divisions, government auditors, FBI, DOJ)

Consider potential for offsets to mitigate cost impact/harm to government:

– Underestimating, errors and omissions, negotiation concessions– Discounts, repayments, billing adjustments, undercharging on other contracts

.

Challenges in Defending against Allegations

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Assemble Company documentation supporting its understanding of compliance with the RFP/Solicitation, proposal response, negotiation results, required contract clauses, and terms/conditions

− Determine operational and administrative understanding of the meaning of solicitation and SOW, contractor response to the solicitation and described work scope, and acceptance of contract clauses

Support appropriate context around cost accounting data and records:

− Determine compliance with internal cost accounting and contract administration polices and procedures, including supplemental email correspondence; develop key information that refutes or supports the allegation

− Perform comparisons of proposal with actual contract performance and contract administration records

− Perform reconciliations of recorded job cost data to General Ledger and disclosed cost accounting practices for charging costs to government contracts

Document contract interpretations; FAR 31.201 reasonableness and prudent person definition is subjective

− Contractor’s motion to dismiss a qui tam False Claims Act action was denied in part because the relator’s allegations supported an inference the contractor acted with at least reckless disregard or willful ignorance of whether its interpretation of a contract clause was correct (see United States, ex rel. Karen Chilcott v. KBR, Inc., et al., 57 CCF ¶80,187. U.S. District Court, C.D. Illinois, No. 09-cv-4018, October 25, 2013)

• Objective reviewers and investigatory resources are essential

Introduction

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SEGMENT 4:


Joe Cheriathundam, a national forensic data analytics leader with the StoneTurn Group, has over 20 years of experience supporting companies and organizations in matters of conflict, change and regulatory compliance. He has led projects pertaining to the False Claims Act, anti-fraud consulting, anti-money laundering, mergers and acquisitions, investment/trading improprieties, and international business compliance in industries as diverse as finance, retail, life sciences/healthcare, automotive and real estate. Joe recently earned an Advanced Business Analytics Certification from the Kelley School of Business at Indiana University and has frequently written and spoken on the topic of Forensic Data Analytics.

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January 27, 2014

Joe Cheriathundam

Data Analytics in the Life-Cycle of False Claims Act

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Number of New Matters by Year

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Settlement and Judgment Amounts by Year

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SEGMENT 4:


Data Analytics in the Life-Cycle of the False Claims Act

• Question: A company is seeking a General Services Administration (GSA) contract to sell to government customers. When should they start involving their Data Analytics Team?

a) When they begin negotiating

b) When they win the contract

c) When they begin selling via the contract

d) When the government performs an audit

e) When an FCA issue is identified

f) What is Data Analytics?

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• Data and Auditability – Examples of things to consider during negotiations Do your technology systems capture all of the data necessary to retroactively confirm the

appropriate pricing of product?

a) If contract based on agreed upon discounts, are you capturing the standard prices from which discounts are applied?

b) If pricing is based on an Most Favored Customer (“MFC”) provision, are there mechanisms in place to ensure that the prices to government customers are not surpassed by other customers?

c) If Commercial Sales Practices Format (“CSPF”) presents exceptions, concessions, discounts to pricing plan, can the data systems track these occurrences?

d) Can you easily identify purchases made under the GSA schedule? (e.g., some government entities will not purchase from the GSA schedule, but rather will negotiate their own deal)

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• Data Analytics during contract activity Do your technology policies and procedures maintain the auditability and test for anomalies of

the contract?

a) When making new technology implementations, are the required data in the legacy system maintained?

b) Do you store the relevant data throughout the term of the FCA statute of limitations?

c) As changes occur to relevant data (e.g., billing rates or list prices), can these changes be recreated across time as opposed to being replaced in the system.

d) If there is a Basis Of Award (“BOA”) customer, can you periodically/continuously test their purchasing activity against government customers

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• Data Analytics during an issue Are your technology teams equipped to handle an audit/investigation/conflict?

a) Do you have internal teams who are familiar with the relevant data systems?

b) When do you use Internal vs External Teams for Analysis?

1. Privilege

2. Bandwidth

3. Capability

4. Experience

5. Industry

6. Legal Understanding

7. Cost

8. Data access

c) How do you make decisions on when to use complete data versus sampling/extrapolation?

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type

your question in the box that appears and click send.

► Questions will be answered in the order they are received.

Q&A:

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