The Dodd-Frank Act Expands the Ability to Pay Higher Whistleblower Awards

July 29th, 2010

One small provision tucked into the Dodd-Frank Wall Street Reform and Consumer Protection Act may have very significant and costly consequences for corporations.  Though it hasn’t received as much public attention and discussion as higher profile provisions of the Act, the Act includes a whistleblower provision that rewards individuals who assist the Securities and Exchange Commission (SEC) in uncovering securities violations, including violations of the Foreign Corrupt Practices Act (FCPA).  Whistleblowers who provide information regarding any type of violation of Federal securities laws that would lead to an SEC enforcement action of greater than a million dollars are entitled to recovery.  For a whistleblower, the payoff is an award of at least 10 percent and up to 30 percent of the fines collected worldwide as a result of violations of FCPA based upon a number of criteria, including the significance of the information provided, the degree of assistance provided, the “programmatic interest” of the SEC in deterring violations of the securities laws by making awards and such additional relevant factors as the SEC may establish by rule or regulation.  Such a remuneration would mean that in cases that result in a $100 million payoff, the whistleblower receives at least $10 million and perhaps as much as $30 million.  There is the potential now for whistleblowers to be enticed by lucrative fees they will receive for providing information to the government. 

 

Excluded from participation in the program is any whistleblower who, at the time the whistleblower acquired the original information submitted to the SEC, was a member, officer, or employee of a specifically indicated regulatory agency, the Department of Justice, a self-regulating organization, the Public Company Accounting Oversight Board, or a law enforcement agency.  Further, a whistleblower is not eligible to be compensated under certain defined circumstances.


The new legislation has broad implications across the financial and corporate sectors and gives increased power and reach to the SEC.  The SEC and the Department of Justice in the past few years have been active in the area of Foreign Corrupt Practices Act matters.  As of the signing of the bill, the SEC has greater ability to extract information from employees of corporations and others involved with those employees.  Congress believes, based on prior enforcement actions, that some of the best evidence and information the SEC can use in enforcement action is from those knowledgeable employees tucked inside a company. 

 

In major accounting fraud cases such as WorldCom and AIG, the total sanctions in those enforcement actions were in the hundreds of millions of dollars.  In cases such as this, the corporate insider whistleblower would have a very large reward at the end of the process.  The types of cases and the potential recoveries involved have actually greatly expended and increased as a result of the Dodd-Frank Act whistleblower provisions.

 

Since there are over 500 public companies and over 1,500 financial sector companies headquartered in Texas, this new movement by the SEC may mean such businesses need to re-evaluate and improve their internal compliance structure to prevent any violations of federal and state securities laws.

 

Whistleblowers are allowed to anonymously provide information through counsel, but must identify themselves prior to receiving any award.

 

It should be noted that this Dodd-Frank Act also creates a private right of action for whistleblowers against employers who discharge, suspend, threaten, harass, or discriminate against a whistleblower, and makes favorable changes regarding whistleblower laws under the Sarbanes Oxley Act Section 1514a, such as extending the limitation period and providing for a jury trial in federal court. 

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The Whistleblower – Pharmaceutical Fraud

October 19th, 2009

In September of 2007, Bristol-Myers Squibb Company and its wholly owned subsidiary, Apothecon, Inc. agreed to pay over $515 million to resolve a broad array of civil allegations involving their drug marketing and pricing practices.  In December 2007 the Corporate Crime Reporter reported Merick to pay $670 million to settle federal and state charges that it violated the False Claims Act by engaging in nominal pricing fraud.  In 1986, more than $20 billion was paid out in fraud lawsuits brought by whistleblowers.

 

Pharmaceutical fraud cases represent the largest percentage of False Claims Act recoveries by the United, and qui tam relator whistleblower lawsuits.  The False Claims Act Is a federal whistleblower law which has its roots in the civil war era and allows private citizens to file actions against federal contractors and corporations who conduct fraud against the government and the public.  It is the United States’ most powerful tool for rooting out fraudulent government contracts.  With the advent of the Medicare prescription plan, even more federal tax dollars will flow into the pockets of large ruling companies illegally and in violation of current law.  In an industry with great power and profitability, there are lots of pressures upon companies to ignore federal laws designed to prevent fraud and curb costs.

 

Pharmaceutical fraud can take a variety of forms and involve complex issues.  The following are some example:

 

  • Charging the government for drugs not used and returned to pharmacy providers;
  • Marketing, promoting, and selling drugs for use other than those approved by the FDA;
  • Paying kickbacks and inducements to physicians, hospitals and pharmacists to prescribe or otherwise favor a drug;
  • Engaging in off-label marketing; and
  • Providing false data to the FDA or withholding negative data from FDA about the efficacy of a pharmaceutical drug or medical device in clinical research trials to get approval to sell and market the pharmaceutical drug or medical device.

Currently, the United States Government, along with the governments of 15 states and the District of Columbia, have joined with two whistleblowers who allege that drug manufacturer Wyeth defrauded U.S. taxpayers out of hundreds of millions of dollars.  According to the Wall Street Journal, Wyeth is accused of overcharging Medicare and Medicaid programs nationwide for purchases of it’s acid-reflux drug Protonix.  Under federal law, drug companies are required to offer prescriptions to federal aid programs at the lowest possible price.  The Wyeth suit alleges that Wyeth was offering Protonix at a 90% discount to a private hospital, while charging the federal government much higher rates.

 

Other drug companies that have settled qui tam lawsuits include Pfizer, TAP Pharmaceuticals, Bayer, and Schering-Plough Corp.  A federal official recently said the government has approximately 150 pharmaceutical fraud cases pending involving over 500 different drugs.

 

Pharmacy benefits management companies have also come under increasing scrutiny as a result of the False Claims Act.  In one of the most prominent whistleblower cases reported, Phillips & Cohen represented two whistleblowers whose qui tam lawsuits resulted in a settlement of $875 million to settle the lawsuits and related criminal charges.

 

If you believe you have discovered fraud, you should try to assess the magnitude of the fraud and gather whatever documentary or electronic evidence is lawfully available.  Be sure you do not violate the law or the terms of your employment agreement.  Write down the details of any meetings or events where fraud was discussed, who was present and what documents may exist that memorialize the event.  This documentation should be given to your attorney.

 

Keep in mind, you cannot recover in a qui tam action if another whistleblower has already filed an action based on the same documentation and information.

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Whistleblower: The False Claims Act and The Fraud Enforcement and Recovery Act of 2009 – Part I

September 28th, 2009

In 2003, John Kopchinski was earning $125,000 a year selling the drug Bextra for Pfizer.  He had a baby son, and his wife was pregnant with twins.  The Gulf War veteran says that, “In the Army, I was expected to protect people at all costs.”  At Pfizer, though, he was expected to sell Bextra, even though it raised the risk of heart attacks and strokes.  After Kopchinski expressed his concerns about Bextra’s safety, Pfizer fired him.  He eventually got a new job paying $40,000 a year.

Kopchinski hired attorney Erika Kelton of Phillips & Cohen.  In 2005, Pfizer withdrew Bextra from the market.  Now Pfizer is pleading guilty to felony charges of promoting Bextra for unapproved uses.  Pfizer will pay penalties of $2.3 billion, and Kopchinski will get a $51.5 million share for filing the “qui tam” lawsuit under the False Claims Act (FCA) that helped the government collect these penalties.  Kopchinski is one of five whistleblowers sharing in the settlement.  He says that he does not expect his life to change much now, according to a news account of this settlement available from Reuters.

Crutial court decisions such as the one in the Pfizer case have assisted whistleblowers in coming forward.  In 2008, there has been rapid legislative response in the enforcement arena.  On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 (FERA).  This act authorizes substantial new funding to the Department of Justice and other federal enforcement agencies for the investigation and prosecution of offenses.  FERA amends the False Claims Act (FCA) in a manner that may increase the exposure of every company that does business with the federal government and every person or entity that supplies goods or services that are reimbursed by federal government dollars.

 

The FCA provides for recovery of civil penalties and treble damages from any person who knowingly submits or causes the submission of false or fraudulent claims to the United States for money or property.  Under the most commonly-enforced provisions of the statute, a person is liable for “knowingly” (1) presenting or causing the presentment of a claim for payment or approval; (2) making a “false record or statement to get a false or fraudulent claim paid or approved by the Government;” or (3) conspiring to defraud the government “by getting a false or fraudulent claim allowed or paid.”  The FCA also penalizes so-called “reverse false claims, “ in which a person “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the Government.”  The FCA defines “knowingly” as having “actual knowledge” of falsity or acting in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information.  “No proof of specific intent to defraud is required.”  31 U.S.C. §3729(b).

 

The FCA’s qui tam provisions empower private individuals to file litigation in federal court on behalf of the government and to share in any subsequent recovery.  The FCA’s qui tam provisions provide enormous incentives for qui tam Realtors (whistleblowers) to expose fraud against the government, awarding 15-30% of settlement or judgment proceeds to Realtors, who may also be entitled to reasonable attorney fees’ and costs, which may be substantial.

 

FCA civil damages and penalties can be severe.  Defendants may be held liable for up to three times actual damages plus penalties between $5,500 and $11,000 per claim.  Depending on the method in which the “claims” are calculated, civil penalties may far exceed the actual damages the government sustained. 

 

FERA amends the definition of “claim” in a significant way.  The new definition of “claim” is:

 

(A)   any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that –(i) is presented to an officer, employee, or agent of the United States; or (ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government –

 

(I)             provides or has provided any portion of the money or property requested or demanded; or

(II)            will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded. 

 

FCA liability may now be triggered by any false claim made to any recipient of federal money so long as the money is used to “advance a Government program or interest.” FCA realtors and the Department of Justice will now be able to push to give this provision the broadest possible interpretation.

 

The old FCA penalized a person who “knowingly makes, uses, or causes to be made or used, a false record or statement to conceal, avoid or decrease an obligation to pay or transmit money or property to the Government.”  31 U.S.C §3729(a)(7). FERA now defines “obligation” to include the retention of any overpayment, which opens new avenues of exposure against federal contractors or grantees for knowingly retaining government “overpayments.” 

 

In the past, the FCA afforded protection to “any employee who is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment by his or her employer because of lawful acts done by the employee on behalf of the employee.”  31 U.S.C. § 3730(h).  FERA extends whistleblower protections beyond “employees” to a “contractor or agent” and no longer requires any prohibited retaliatory action be taken by an employer.  The FERA now reads “any employee, contractor, or agent shall be entitled to all relief necessary to make that employee, contractor or agent whole, if that employee, contractor, or agent is discharged, demoted, suspended, threatened, harassed, or in any other manner discriminated against in the terms and conditions of employment.  31 U.S.C. § 3730(h).

 

An FCA action must be brought within six years of the date on which a violation was committed, or within three years of the date on which the government knew or should have known that a violation was committed, and in no event more than 10 years after the date on which the violation was committed.

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