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This is Part 5 of 6 of a recently updated article about the qui tam whistleblower statutes, the federal False Claims Act and the new state False Claims Acts. This is an updated version of a previously published article by whistleblower lawyer blog author Michael A. Sulliva.

This Part 5 discusses the striking success of the False Claims Act since its 1986 Amendments, as it has recovered more than $27 billion in taxpayers’ money wrongfully obtained by fraud and false claims.

IV. The Trend of Recent Recoveries Under the False Claims Act

Over the past twenty-four years since the modern False Claims Act was established through the 1986 Amendments, the federal government’s recoveries of dollars have grown astronomically, especially in health care cases. The Department of Justice (“DOJ”) statistics tell the story:

In 1987, the government’s recoveries in qui tam cases totaled zero, presumably because the 1986 Amendments had just taken effect; and total recoveries under the False Claims Act were just $86 million. The following year, qui tam and other False Claims Act settlements and judgments began a steady climb upward, exceeding $200 million by 1989, and $300 million by 1991. By 1994, the government’s recoveries broke the $1 billion mark for the first time, with $380 million of that amount attributable to qui tam case recoveries alone.

In 2000, the government recovered more than $1.5 billion, of which $1.2 billion was derived from qui tam actions. In 2001, the government recovered more than $1.7 billion, with almost $1.2 billion of that amount from qui tam cases. With the exception of 2004, in each year since 2000 the government has recovered more than a billion dollars per year under the False Claims Act, and qui tam actions were responsible for the lion’s share of those recoveries. For example, in 2003, government recoveries exceeded $2.2 billion, of which $1.4 billion came from qui tam cases. Similarly, in 2005, of the government’s total recovery of $1.4 billion, $1.1 billion of that amount came from qui tam cases.

In 2006, the Justice Department recovered a record of more than $3.1 billion in settlements and judgments for fraud and false claims. Of this record $3.1 billion in recoveries, 72% came from the health care field; 20% from defense; and 8% from other sources. In that record year, health care alone accounted for $2.2 billion in settlements and judgments, which included a $920 million settlement with Tenet Healthcare Corporation, the country’s second-largest hospital chain. Defense procurement fraud amounted to $609 million in recoveries, which included a $565 million settlement with the Boeing Company.

In 2010, DOJ set a record for health care fraud recoveries of $2.5 billion, out of a total of $3 billion recovered from civil fraud claims. $2.3 billion of that $3 billion resulted from qui tam cases. DOJ also set a two-year record for recoveries of $5.4 billion in 2009-2010, most as a result of qui tam cases.
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This Part 6 is the final installment of an article explaining why the major qui tam whistleblower statute, the federal False Claims Act, has led to a wave of new state False Claims Acts. It is an updated version of part of a previously published article by whistleblower lawyer blog author Michael A. Sullivan.

V. States’ Experiences With Their Own False Claims Acts

As noted, at least twenty-eight states now have a False Claims statute, and many other states are considering similar laws. The financial incentives of the Deficit Reduction Act of 2005 have not only prompted states that lacked False Claims statutes to enact them, but also have caused many states wishing to qualify for the additional funds to amend their existing False Claims statutes.

In essence, while states may enact “tougher” or more comprehensive laws than the federal False Claims Act, states with “weaker” or less effective laws-as judged by the standards of the Deficit Reduction Act-will not qualify for the additional funds.

Seven of the first ten states whose statutes were scrutinized by the Office of Inspector General (OIG) quickly learned this lesson when OIG disapproved their state statutes. These included California (which lacked a minimum penalty), Florida (which omitted “fraudulent” from its definition of claims), Indiana (which did not make defendants liable for “deliberate ignorance” and “reckless disregard”), Louisiana (which did not permit the state to intervene in cases, set too low a percentage for whistleblowers to recover, and set no minimum penalty), Michigan (which omitted penalties and liability for decreasing or avoiding an obligation to pay the government, i.e., a “reverse false claim”), Nevada (which had a statute of limitations too short and a minimum penalty too low), and Texas (which did not permit the whistleblower to litigate the case if the state did not, and which provided for lower percentage shares to whistleblowers and lower penalties). Most of these states have gone back to the drawing board to correct these deficiencies.

In sum, the Deficit Reduction Act has set minimum standards for state False Claims Acts for states wishing to receive these additional funds. In plain English, the state laws must protect at least Medicaid funds, and they must be at least as effective as the federal False Claims Act, especially in rewarding and facilitating qui tam actions for false or fraudulent claims, with damages and penalties no less than those under the federal Act.
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Yesterday’s Wall Street Journal reports a “sweeping” insider trading investigation, with civil and criminal charges soon to follow, involving “consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation.”

While the details remain to be seen, the unending series of fraud cases that continue–despite Sarbanes-Oxley–proves why Wall Street must not be allowed to neuter the first potentially meaningful SEC whistleblower program, mandated by the Dodd-Frank financial reform law.

How is it that the hallowed “compliance programs” born from Sarbanes-Oxley have utterly failed to stop the breathtaking frauds of Madoff, Stanford, and other recent post-SOX scandals?

As many honest employees encountering fraud discover, too often “compliance programs” mask efforts to identify employees who object to wrongdoing, so the wrongdoers can then gut their careers.

How well did compliance programs work at the many Madoff-abetting feeder funds that made scores of millions, as Madoff’s scheme spread to snare more victims? Read Harry Markopolis’ book to see how many of those firms’ “compliance” efforts worked, as Madoff’s enablers ignored glaring warning signs that multiplied over the life of the scheme.

SEC Chair Mary Schapiro and Director of Enforcement Robert Khuzami seem dedicated to invigorating the SEC’s enforcement efforts. While the new proposed SEC whistleblower rules show considerable thought, they threaten the program’s effectiveness by bowing too far to industry concerns, and excluding many potential whistleblowers such as accountants, who may be the best position to stop the next Madoff.

Wall Street would have the SEC create a labyrinth of further exceptions to who can participate in the new SEC Whistleblower program. One lethal industry proposal is to require potential whistleblowers first to run the gauntlet of firms’ “compliance” programs–a concept wholly inconsistent with Congress’ intent that whistleblowers must be allowed to report violations anonymously.

The initial screening of SEC whistleblower claims should not be outsourced to the very firms alleged to have violated the law, which is what mandatory internal reporting effectively would do. The SEC–like the Department of Justice and IRS–should be the first to screen SEC whistleblower claims. With any SEC whistleblower claim large enough to pursue, by definition the culpable firm has typically approved the violation, or at least looked the other way.

Otherwise, who in a position to expose significant fraud would come forward, if required first to reveal their objections to the fraud to those who may have approved it? And if the fraud stays concealed–as it too often has despite “compliance” programs–the public loses.

Excerpts from the WSJ article by SUSAN PULLIAM, MICHAEL ROTHFELD,JENNY STRASBURG and GREGORY ZUCKERMAN are below:
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We have been awaiting the SEC’s proposed rules for its new SEC Whistleblower Program, released yesterday. Even before the announcement, however, those who oppose this first potentially meaningful SEC Whistleblower Program have begun efforts to undermine it.

The SEC’s website already includes some firms’ suggestions to impose extreme restrictions on SEC whistleblowers–contrary to how other successful whistleblower programs operate.

Designing any new whistleblower program should begin with studying more than two decades of successes of the nation’s major whistleblower law, the False Claims Act. The False Claims Act has been so effective in uncovering and penalizing fraud against the government since 1986 that it has inspired Congress and the states to enact a wave of new whistleblower statutes–including the Dodd-Frank whistleblower mandate in section 922.

Unless the SEC seeks to create an ineffective program, it makes no sense to impose restrictions on whistleblowers that do not exist in False Claims Act cases.

One such damaging restriction would be requiring whistleblowers first to report within the company violations of the law, before going to the SEC. Past experience with the False Claims Act shows that warning violators of the law (who know their own violations) invites destruction of evidence by those who engineered the lawbreaking, and destroys the whistleblower’s career.

Other deceptive suggestions are that the SEC follow the “approach” of the promising new IRS Whistleblower Program–but with far greater restrictions on whistleblowing.

For example, one representative of future defendants urges what are actually variations on the “one-bite” and “no-bite” rules of the IRS, which historically have restricted the IRS’s receipt of certain information, or information from certain whistleblowers.

In fact, the IRS trend appears to be the opposite. In a March 2010 IRS Notice and in June 2010 changes to the Internal Revenue Manual, the “one-bite” rule appears to be giving way to the more sensible approach of allowing whistleblowers more than “one bite” at submitting information that may be useful to the IRS.

Likewise, a suggestion that the SEC adopt a variation the “no-bite” rule would expand it far beyond the IRS concept of not accepting information from the “taxpayer’s representative” before the IRS. This suggestion would go much further and prohibit submissions to the SEC by anyone who has a “fiduciary” duty to a public company–which arguably could be most or all employees.

We will comment further on the specifics of yesterday’s proposed rules, but the basic principles above should guide the SEC in what it finally decides.

The SEC’s announcement yesterday is reprinted below:
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Our whistleblower lawyer blog has followed closely the development of the first potentially meaningful SEC Whistleblower and Commodities Whistleblower Programs. That link provides regular updates.

Based on our firm’s long experience in representing whistleblowers, we were asked by the Senate Banking Committee staff for input in how the new SEC and CFTC whistleblower provisions of the July 2010 Dodd-Frank Financial Reform Act should work. We urged that the Senate change the tepid House version, which provided no meaningful rewards to whistleblowers, in favor of an enforceable right for SEC and CFTC whistleblowers to a significant reward.

Fortunately, that approach is now the law. We are currently working on select Dodd-Frank whistleblower matters involving SEC whistleblowers and Commodities whistleblowers, as well as our False Claims Act and IRS Whistleblower cases. Those cases include a growing area of enforcement, bribery of foreign government officials and other violations of the Foreign Corrupt Practices Act (FCPA).

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One of the most interesting twists to the new SEC Whistleblower Program will be how many commercial bribes and kickbacks paid to foreign government officials will now come to light. As we have written about previously, the SEC shares jurisdiction with the Justice Department over such cases that violate the Foreign Corrupt Practices Act (FCPA).

An example of why whistleblowers will come forward is this afternoon’s announcement of the SEC’s $39 million settlement with ABB Ltd (“ABB”), a Swiss company that provides power and automation products and services.

The SEC alleged that ABB made more than $2.7 million in bribes and kickbacks to obtain more than $100 million in contracts. The payments allegedly were made to “government officials in Mexico to obtain business with government owned power companies,” and to the “former regime in Iraq to obtain contracts under the United Nations Oil for Food Program.”

According to the SEC, some of the kickbacks were made through bank guarantees and cash payments. As is common in disguising unlawful payments, the kickbacks were recorded on the company’s books as legitimate payments–here, for “after sales services,” “consultation costs,” and “commissions.”

ABB, without admitting or denying the allegations in the complaint, agreed not only to pay disgorgement and penalties totalling more than $39 million, but also agreed to pay a criminal fine of $30,420,000, according to the SEC. The company also agreed to be bound by certain “undertakings” concerning its FCPA compliance program.

As to how an FCPA whistleblower might fare who reports similar FCPA violations of bribery of foreign government officials, the new SEC Whistleblower Program pays 10% to 30% of monetary sanctions collected–approximately $4 million to $12 million under similar facts.

The SEC’s announcement is reprinted in full below, and the SEC’s Complaint is linked here:
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At the annual Fraud and Compliance Forum in Baltimore that runs through Tuesday, the nation’s top health care lawyers will be paying close attention to recent changes to the nation’s primary whistleblower law, the False Claims Act. The “qui tam” provisions of the False Claims Act allow private citizen whistleblowers (“relators”) to share in the government’s recovery of damages.

As a former defense attorney who now represents whistleblowers, I have been asked to present a program at this conference with Rick Shackelford of King & Spalding, to discuss these major amendments to the False Claims Act–the first since 1986. Congress acted decisively in three recent major bills to restore the False Claims Act to its intended strength, in the face of court decisions that created obstacles to its use.

The recent amendments were part of the Fraud Enforcement and Recovery Act of 2009, Pub. L. No. 111-21, 123 Stat. 1617 (“FERA”); the Patient Protection and Affordable Care Act, Pub. L. 111-148, 124 Stat. 119 (“PPACA”); and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (the “Dodd-Frank Financial Reform Act”).

This week’s forum is sponsored by the American Health Lawyers Association and Health Care Compliance Association.

An updated discussion of the False Claims Act after these 2009 and 2010 changes will appear soon on this Whistleblower Lawyer Blog. A brief summary of those important changes to the Act is below:
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Smart and effective state Attorneys General have fought fraud against their citizens through encouraging greater use of the country’s major whistleblower law, the False Claims Act, and state versions of that law.

Texas AG Greg Abbott, for example, has a staff that has long distinguished itself for recovering millions of stolen taxpayer funds in health care fraud cases, under the leadership of Pat O’Connell and, more recently, Ray Winter.

Following this tradition, Indiana AG Greg Zoeller is urging employees of pharmaceutical companies and heath care entities to help stop health care fraud, and possibly share in the recovery as qui tam whistleblowers under the state and federal False Claims Acts.

While we have discussed in detail how the False Claims Act operates, AG Zoeller’s announcement gives a succinct summary. We have reprinted it below, and applaud his efforts.
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When IRS whistleblowers save U.S taxpayers money, they deserve the rewards that lawmakers such as Sen. Chuck Grassley fought to establish. In 2006 his efforts resulted in the first meaningful IRS Whistleblower program ever, which is attracting many tax whistleblowers with significant evidence.

We have discussed previously the many positive aspects of the long-awaited IRS Whistleblower procedures published in June–and one illogical, self-defeating feature. Some in the IRS–and apparently not the IRS Whistleblower Office–thought whistleblowers should not be rewarded when they report tax violations that prevent a tax refund, or reduce a credit balance. (See, e.g., IRM 25.2.2.1(7)). The Washington Post’s David Hilzenrath has reported on this anomaly.

Sen. Grassley acted swiftly to protect the IRS Whistleblower program. In a June 21, 2010 letter to Treasury Secretary Tim Geitner, Grassley forcefully urged that a more sensible rule replace this new IRM oddity:

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When Pharma manufacturers are targeted by the Department of Justice, qui tam whistleblower cases under the False Claims Act are often the reason.

Now, whistleblowers may also receive rewards for reporting violations of the Foreign Corrupt Practices Act (FCPA), thanks to the new whistleblower provisions of the Wall Street financial reform law. Announcements like Merck’s recent SEC filing that it is now the subject an FCPA investigation involving other Pharma companies should become common, as corruption will now be increasingly exposed in a new wave of SEC Whistleblower cases.

The recent 10-Q filing of Merck & Co., Inc. stated in part:

The Company has received letters from the DOJ and the SEC that seek information about activities in a number of countries and reference the Foreign Corrupt Practices Act. The Company is cooperating with the agencies in their requests and believes that this inquiry is part of a broader review of pharmaceutical industry practices in foreign countries.

As we have followed through its development, the Dodd-Frank financial reform law created the new SEC Whistleblower and CFTC Whistleblower programs, which will include FCPA cases.

The FCPA, as we have discussed previously, prohibits bribery of foreign government officials in international business transactions, and false entries in books and records of those companies within the statute. Whistleblowers who assist the SEC recover monetary sanctions in FCPA cases now have an enforceable right to a monetary award of 10-30%.

Pharma’s exposure for any bribes and kickbacks abroad are a ripe subject for FCPA enforcement.
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