by Stephen Kohn
Regardless of the method used to obtain additional supporting information, the whistleblower should carefully document his or her post-complaint activities. This documentation can be used to file supplemental disclosure statements with the government or, in the appropriate circumstances, to amend the complaint.
STEP 10: DETERMINE WHETHER STATE FUNDS ARE INVOLVED
A growing number of states and municipalities now have local versions of the False Claims Act. They include California, the City of Chicago, Colorado, Connecticut, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Mexico, New Jersey, New York City, New York State, North Carolina, Oklahoma, Philadelphia and Allegheny County, Pennsylvania (not the Commowealth of Pennsylvania), Rhode Island, Tennessee, Texas, Vermont, Virginia, and Washington. Some of these laws are mirror images of the federal FCA, while others contain significant differences. A number of states restrict the scope of their local FCA to fraud in Medicaid spending. The number of states adopting local FCA laws continues to expand. This rapid growth is largely due to the success of the law and federal financial inducements given to states that enact these protections.
When federal and state monies are jointly involved, it is very common to include state claims in the federal complaint. The federal FCA has a special provision that establishes federal jurisdiction “over any action brought under the laws of any State for the recovery of funds paid by a State or local government if the action arises from the same transaction or occurrence as an action brought under [the federal False Claims Act].” In 2009 the FCA was amended to make it easier to join states in the federal action. Relators can serve state government officials copies of the federal complaint and disclosure statement, and the court-ordered seal applies to these filings.
The state FCAs are very similar to the federal law, but most have some statutory differences. Just as with the federal law, if you are using a state FCA, meticulous care must be undertaken to comply with the law’s rules and procedures. When including pendent state claims in the federal FCA, it is typical to include a separate count(s) within the complaint for each state and to use this part of the complaint to ensure that any special terms required under state law are met and that additional causes of action are included for states that have more liberal liability or standing procedures than the federal law.
State recoveries can be very large, especially if the defrauded program was a joint federal and state enterprise. A prime example of this is the January 2009 settlement in the Eli Lilly case, where $362 million of the $800 million set aside to compensate for the losses to the Medicare and Medicaid programs was allocated for paying state claims. Joint federal and state settlements such as the Eli Lilly case are common under the FCA.
STEP 11: PREPARE FOR A RETALIATION CASE
If a whistleblower is discriminated against or fired for raising allegations of contract fraud, he or she has the right to include retaliation claims as part of the False Claims Act lawsuit. Subsection (h) of the act prohibits retaliation against employees who engage in protected activities designed to “further” a FCA lawsuit or who engage in “other efforts to stop one or more violations” of the procurement/contracting violations outlawed by the FCA. This law provides for double back pay, reinstatement, special damages, and attorney fees and costs. The statute of limitations for the retaliation claim is three years.
Often subsection (h) retaliation cases are included in the FCA complaint as a “placeholder.” The retaliation case is filed and preserved along with the qui tam rewards-based claim, but a formal decision whether to actually pursue such a case is left for a later date.
The retaliation claim is handled separate from the contractor-fraud case. The United States generally permits the employee to pursue these claims regardless of whether or not the fraud issues are litigated, dropped, or settled. Even if the United States declines to intervene in the fraud case, and even if upon further investigation the fraud claims appear to have no merit, an employee still has the right to pursue retaliation claims based on discrimination in the workplace.
STEP 12: DECIDE WHETHER TO PROCEED WITH A CIVIL CASE
After the government completes its investigation into the confidential complaint, the United States will inform the court whether or not it will “intervene” in some or all of the claims filed by the relator. This can be the most important decision in a FCA case. Based on raw statistics, if the United States intervenes in a case the odds of prevailing are extremely high. But if the United States declines to intervene, the vast majority of cases are dismissed.
If the United States intervenes in the case, as a matter of law, the government takes over primary control of the litigation. Once this happens, the relator plays a secondary role to the government, and courts often defer to the judgment of the United States. After all, it is the government’s money that was defrauded. The FCA defines the role of the government and relator in intervened cases as follows: “If the Government proceeds with the action, it shall have the primary responsibility for prosecuting the action, and shall not be bound by an act of the person bringing the action”; however, the relator “shall have the right to continue as a party to the action.”
This provision does not leave the whistleblower out in the cold. The whistleblower has the right to fully participate in the civil proceeding, conduct discovery, file briefs and motions, question witnesses at trial, and otherwise be fully included in every aspect of the case. The relator also must be informed of any settlement agreement and has an opportunity to oppose court approval of a settlement. By actively participating in an intervened case, the whistleblower can help the government prevail on the merits and at the same time protect his or her interests as the relator. Additionally, the relator is also entitled to a payment of attorney fees and costs from the defendant. Thus, even in cases in which the final recovery may be modest, the relator’s counsel can still be paid by the defendant pursuant to the statutory attorney fee provision contained in the FCA.
If the United States declines to intervene in the case, the whistleblower must make a major decision of either dropping the case or moving forward with it. Under the qui tam provision, the whistleblower is empowered to pursue the case “on behalf of the king.” So even if the United States decides that it will not prosecute the claim, a whistleblower can still go forward and prove the merits of the case. If he or she prevails, the United States still collects the lion’s share of the award, but the whistleblower is entitled to a minimum 25 percent and maximum 30 percent “relator’s share” of any money recovered by the United States, and the whistleblower can also collect a statutory attorney fee.
The FCA contains a section that permits a defendant to seek “reverse attorney fees” from the whistleblower if the United States declines to intervene and the employee-relator continues with the claim. These reverse fees can be awarded only under narrow circumstances: “If the Government does not proceed . . . and the person bringing the action conducts the action, the court may award to the defendant its reasonable attorneys’ fees and expenses if the defendant prevails in the action and the court finds that the claim . . . was clearly frivolous, clearly vexatious, or brought primarily for purposes of harassment.”
Deciding to pursue a claim if the United States declines intervention is a major decision for a whistleblower, as civil proceedings under the False Claims Act are expensive, time-consuming, and aggressively litigated by the defendant. Most cases are either dropped or dismissed if the United States rejects the case. Regardless of whether or not the United States intervenes in the qui tam portion of a case, the whistleblower can pursue his or her retaliation case, if one was filed.
The government’s decision not to intervene should not be held against the whistleblower in subsequent litigation. Despite this, courts are unfortunately more skeptical of the merits of a case for which the United States did not join.
No matter how str
ong you may think your case is, if the United States declines to intervene, it is absolutely imperative that you stop and take a hard look at your claim. You must evaluate why the United States declined to intervene. You must evaluate the costs and risks of going forward. You must evaluate the realistic likelihood of success, especially in light of the controlling case law, how much money is at stake, the facts you actually have at your disposal, whether your complaint can withstand a motion to dismiss, and the various defenses the corporation will aggressively raise.
Despite the complexity of the law, and the numerous procedural and factual hurdles whistleblowers must overcome to file a successful lawsuit, the False Claims Act remains the taxpayer’s “primary civil remedy” stopping fraud in government programs. In December 2016 alone whistleblowers recovered $2.9 billion from fraudsters in health care, national security, food safety, mortgage loans, highway funds, small business contracts, agricultural subsidies, disaster assistance, and import tariffs. The top prosecutor in the Justice Department’s civil division recognized whistleblowers as being “uniquely positioned to expose fraud” and praised them for their “courage.”
PRACTICE TIPS
• Checklist 4 sets forth examples of frauds prosecuted under the False Claims Act. In 2009 and 2010 the definitions of the words claim and obligation covered under the FCA were significantly expanded.
• All state and local FCAs signed into law as of 2017 are listed in Checklist 1.
• The False Claims Act is codified at 31 U.S.C. §§ 3729-32. Its legislative history is contained in Senate Report No. 99-345 (July 28, 1986) and S. Rep. No. 110-507 (September 17, 2008).
• Recent Supreme Court cases interpreting the FCA are KBR v. U.S. ex rel. Carter, 135 S.Ct. 1970 (2015) (clarifying “first to file” rule and statute of limitations); U.S. ex rel. Escobar v. Universal Health Services, 136 S.Ct. 1989 (2016) (recognizing implied certification claims) and State Farm v. U.S. ex rel. Rigsby, 137 S.Ct 436 (2016) (sanctions for violating seal).
RULE 7Get a Reward! Tax Cheats and the IRS Qui Tam
At a breakfast meeting of one hundred senior “wealth management” leaders held on September 12, 2012, top Swiss bankers and their consultants discussed changes in the infamous secret Swiss banking system—a system that had permitted thousands of millionaires and billionaires to hide their wealth in Swiss banks, escaping taxation and detection from their local governments. The exclusive gathering, held at the Hotel President Wilson in Geneva, Switzerland, occurred just one day after former Swiss banker Bradley Birkenfeld sponsored an international press conference at the National Press Club in Washington, DC, publicly revealing that the U.S. Internal Revenue Service had ruled in his favor and awarded him $104 million as a result of his having blown the whistle on the Swiss banking giant UBS.
According to a report from an Agence France-Presse reporter who was able to attend, the mood during this elite meeting was bleak. The attendees were “seething” at Birkenfeld and attacking the whistleblower’s “total lack of morality” for having the audacity to blow the whistle on over nineteen thousand secret bank accounts held by wealthy Americans, resulting in numerous criminal prosecutions and the payment of over $13.7 billion in back taxes, fines, and penalties.
Beyond the hatred directed at the whistleblower, the “scandals” he triggered had “driven a nail into the heart of the once seemingly invincible Swiss bank secrecy” system. The head of the Swiss banking group Reyl & Co, Mr. Francois Reyl, described the new reality: “The storm has swept everything away.” A respected banking consultant was reported as saying, “Banking secrecy is no longer there. That’s gone. It is over.”
Whistleblower Bradley Birkenfeld, a former international banker employed at UBS (at the time, the world’s largest bank), had blown the lid off the entire Swiss banking empire. As described by the U.S. Internal Revenue Service, in its ruling awarding Mr. Birkenfeld the largest single payment ever given to one whistleblower under U.S. laws, Birkenfeld had provided information that “formed the basis for unprecedented actions against UBS, with collateral impact on other enforcement activities.”
The IRS’ serious efforts to combat offshore tax evasion, which had long been a problem, began in 2008 with our efforts to address specific situations brought to our attention in part by whistleblowers.
John Koskinen, Commissioner, IRS
The reward given to Mr. Birkenfeld sent shockwaves throughout the international banking community. The effective use of a tax whistleblower law had changed “everything” with the illegal offshore secret banking systems that were estimated to hold trillions of dollars in U.S. assets. The reason was simple. Under a U.S. tax whistleblower law, anyone with “original information” on tax law violations or underpayments could disclose their evidence to the IRS, and if proven true, could qualify for a large cash reward equaling 15 to 30 percent of the proceeds collected by the IRS as a result of the whistleblower’s disclosure.
Based on this law, every international banker who turned in American clients who held illegal offshore accounts could potentially qualify for a multi-million-dollar reward. When Birkenfeld first stepped forward the IRS rewards law was brand new. In the beginning of his case Birkenfeld met with disaster. Instead of blowing the whistle to the IRS Whistleblower Office (the office designated with the responsibility of receiving whistleblower claims), Birkenfeld walked into the office of a Justice Department prosecutor and with no immunity dumped his documents at their doorstep. The Justice Department, completely ignoring the new whistleblower law, prosecuted Birkenfeld. The international banking community, which watched with glee the destruction of a whistleblower’s career, thought the IRS law was broken and would not work. But when it became public that Mr. Birkenfeld, despite having gone to jail, was still able to file a claim with the IRS, successfully litigate his claim before the agency, and prevail in his request for a $104 million reward, everything changed.
The reality that whistleblowers could effectively report tax fraud and that the U.S. government would follow the law and award whistleblowers (even if the law required payments in the hundreds of millions of dollars) sank in rather quickly to an audience of bankers and private wealth managers. They recognized that any of their colleagues could turn in their institutions and clients and become a multi-millionaires overnight. They also realized that Birkenfeld’s rather simple mistake (i.e., giving information to a prosecutor without immunity, as opposed to the lawfully designated IRS Whistleblower Office) could be easily fixed. They recognized the impact whistleblowers could have on their banks and clients under the new IRS whistleblower law. They lamented that their highly profitable secret banking programs for U.S. taxpayers had been “swept away.”
How We Got Here
In March 1867 Congress passed a rewards law for people who reported tax crimes. The law was enacted years before there was a federal income tax, and unlike the False Claims Act, there was no qui tam provision. Rewards paid to informants were strictly voluntary. The law did not work. Because the IRS was not required to do anything to help would-be whistleblowers, they didn’t. The rewards provision remained mostly unused and ignored for years.
One hundred and forty years later, Iowa Senator Chuck Grassley (the principal sponsor of the False Claims Act amendments in 1986) used his position as chairman of the powerful Senate Finance Committee to rectify this problem. The FCA had proven to be the most successful fraud-detection law in U.S. history, but it excluded false claims related to tax payments. The FCA only covered government contracting, grants, leases, loans, and purchases; it did not cover the IRS and taxes. That was about to change.
In 2006, the inability of the government to detect massive violations of the tax code was reminiscent of the government’s inability to police its contracts twenty years before. Tax frauds were rampant. For example, in illegal offshore accounts alone, it was estimated that over $5 trillion was stashed. For years, millionaires and billionaires had devised sophisticated tax-avoidance schemes, and there was no incentive
whatsoever for bankers, accountants, and insiders to blow the whistle. Far from it. If an accountant blew the whistle on his or her client, that accountant would never work again in the industry.
On December 20, 2006, the Tax Relief and Health Care Act was signed into law. Tucked into that bill was a Grassley-sponsored amendment to the archaic and unused 1867 IRS informants rule. Following the lead of the FCA, a qui tam law was enacted requiring the IRS to pay rewards to whistleblowers who exposed major tax “underpayments,” violations of “internal revenue laws,” or any actions of persons “conniving” to cheat on their taxes. The IRS was required to establish a Whistleblower Office, and if a claim was denied, the employee could appeal that decision to Tax Court. The law is not limited to tax frauds. The ability to obtain rewards for reporting underpayments significantly increases the range of claims whistleblowers can file successfully.
The law was not designed to empower ex-husbands and ex-wives to seek revenge by filing tax fraud claims against their former spouses. Instead, the law was specifically designed to target large tax cheats involved in multimillion-dollar frauds. In order to be covered under the Grassley Amendment, an “individual” taxpayer would have to have had a “gross income” in excess of $200,000 for any of the tax years covered under the whistleblower complaint. The total amount of fraud or underpayment of taxes in dispute would have to “exceed $2 million.” In other words, the law was designed to encourage detection and reporting of corporate tax fraud schemes, large underpayments of taxes, and schemes that benefited millionaires and billionaires.