Monday, July 25, 2011

Mortgage Fraud as the Basis for a Qui Tam (Whistleblower) Lawsuit

Although claims of mortgage fraud are abundant in our daily news stories (and perhaps the personal accounts of our family and friends), not all mortgage fraud forms the basis of a qui tam (whistleblower) lawsuit. In order to bring a qui tam suit in which a relator (the whistleblower) files suit on behalf of the government and may be entitled to a portion of the government’s recovery, there must be evidence of some sort of fraud against the government. Thus, fraudulent conduct by banks against homeowners or an individual against their lender would not necessarily give rise to a successful qui tam action, absent evidence of harm suffered by the government.
A possible example of such fraud is the subject of a lawsuit currently pending against Deutsche Bank AG and its subsidiary MortgageIT Inc. in the U.S. District Court for the Southern District of New York.[1] In that case, brought under the Federal False Claims Act, the United States has alleged, among other things, that Deutsche Bank and MortgageIT falsely certified that they had complied with various HUD (Department of Housing and Urban Development) requirements in order to obtain FHA (Federal Housing Administration) insured loans on behalf of their borrowers. More specific examples of the fraudulent conduct include allegations of failing to conduct due diligence in connection with a gift being used to fund a transaction, failing to assemble a borrower’s credit history, failing to document and verify a borrower’s investment in a property, failing to verify a borrower’s employment, and failing to secure a deposit—all while certifying that such due diligence had been completed. The United States further alleged that in each instance, the borrower subsequently defaulted on the mortgage and, as a result, HUD paid hundreds of millions of dollars in FHA insurance claims.[2]              
If you have witnessed or otherwise have personal knowledge of the government being cheated out of money through the fraudulent conduct of a bank, its members or employees, or any other entity or individual, you may be able to file a qui tam lawsuit to assist the government in recovering that money, and attorneys at Waters & Kraus, LLP will be happy to talk to you about your potential case.

[1] United States v. Deutsche Bank AG, et al., Docket No. 11-CIV-2986 (S.D.N.Y May 9, 2011).
[2] See id.


Melanie Garner is an attorney at Waters & Kraus, LLP, in the firm's Baltimore office. She focuses her practice on toxic tort, product liability, and qui tam (whistleblower) cases.

Monday, July 18, 2011

Can a Government Employee Bring a False Claims Act Case?

In our recent case, U.S. ex rel. Black & Montiel v. Novo Nordisk, which the Department of Justice settled for $25 million, one of the relators was a former Army officer who got some of the information that formed the basis for the lawsuit while he was in the Army. The question that the government and relators’ counsel struggle with in these cases is whether a government employee can be a relator. The Department of Justice generally takes a very strong stance on that issue, and will often tell government employee relators at the beginning of a case that they are not considered proper relators. During recent efforts to amend the False Claims Act, the DOJ supported an amendment that did not make it into any of the final bills that explicitly barred government employees from becoming relators.
For all intents and purposes, the viability of a False Claims Act suit brought by a government employee depends on whether any of the information underlying the complaint has been publicly disclosed. Under the FCA, if there has been a public disclosure, the relator has to qualify as an “original source,” which in turn requires the relator to have “voluntarily” disclosed the information about the fraud to the government. The government has argued that a government employee who is charged with disclosing fraud as part of his job cannot “voluntarily” disclose the information. The government is concerned, in these situations, that government employees who are charged with ferreting out fraud will file qui tam cases instead of doing their job. Several courts, considering these public policy implications, have accepted this argument. See U.S. ex rel. Fine v. Chevron, 72 F.3d 740 (9th Cir. 1996). But other courts have found that under certain circumstances, a government employee can be a relator. For example, if the employee has a job that does not require the reporting of fraud. Thus, while a government auditor may have trouble showing he is a relator, a postal worker, whose job it is to handle mail rather than uncover fraud, has a better chance at qualifying as an original source. See U.S. ex rel. Holmes v. Consumers Ins. Group, 318 F.3d 1199 (10th Cir. 2003). A government employee is also more likely to qualify as a relator where she reports the fraud up her chain of command,  and nothing was done about it, prior to filing suit, since under those circumstances, public policy favors consideration of the employee as an original source.

Loren Jacobson is a partner at Waters & Kraus, LLP, in the firm’s Dallas office. Her practice focuses on qui tam (whistleblower) cases and appellate matters.

Monday, July 11, 2011

California DOJ Announces Two Multimillion Dollar False Claims Act Settlements

Quest Diagnostics Settles for $241 Million; CVS Pharmacy Settles for $1.76 Million
DOJ Affirms its Commitment to Prosecuting Medi-Cal Fraud  

California Attorney General Kamala D. Harris announced a $241 million settlement with Quest Diagnostics on May 19, 2011. Quest is the largest commercial laboratory in California, according to allegations in the complaint. The Attorney General’s Office stated that this settlement is the biggest recovery in the history of California’s False Claims Act. The Quest settlement involved allegations that Quest charged Medi-Cal[1] up to six times more for laboratory services than it charged private companies. By law, Quest was required to charge Medi-Cal no more than it charged any other purchaser of comparable services in comparable circumstances. The complaint also included allegations of an illegal kickback scheme.
Although the settlement involved just Quest, other laboratory companies, including LabCorp, are also named in the same complaint. The Attorney General’s Office stated that trial involving the LabCorp allegations is scheduled for early next year. LabCorp is the second largest provider of laboratory services in the state, according to the complaint. A total of eight laboratory companies, including Quest and LabCorp were named in the complaint. In the press release announcing the Quest settlement, Attorney General Harris stated: "In a time of shrinking budgets, this historic settlement affirms that Medi-Cal exists to help the state's neediest families rather than to illicitly line private pockets." Attorney General Harris also had a strong warning for companies and individuals who would try to defraud Medi-Cal. She stated, “Medi-Cal providers and others who try to cheat the state through false claims and illegal kickbacks should know that my office is watching and will prosecute." 

In addition to the Quest settlement, the California Department of Justice (DOJ) announced on April 22, 2011 that it reached a settlement with CVS Pharmacy, in conjunction with the U.S. Department of Justice and nine other states. California will receive $1.76 million of the total $17.5 million settlement with CVS. The allegations in this complaint were that CVS submitted claims for prescriptions drugs to Medi-Cal for individuals who had health insurance coverage under both Medi-Cal and private insurance. Under law, Medi-Cal is the secondary payer in claims where individuals are covered by both Medi-Cal and private insurance. In other words, if an individual is covered by both Medi-Cal and private insurance, Medi-Cal is only responsible for the co-payment, while the insurance company is responsible for the remainder of the claim. The California DOJ’s announcement in recent months of settlements with Quest and CVS demonstrates its commitment to pursuing legal action against those who make false claims to Medi-Cal.

Press Releases for the Settlements with Quest and with CVS can be found at:

[1] Medi-Cal is the name for California’s Medicaid program, which is jointly funded by California and the federal government.

Jennifer L. McIntosh is an attorney at Waters & Kraus, LLP, in the firm’s West Coast practice Waters, Kraus & Paul. Her practice focuses on class action cases, qui tam (whistleblower), and commercial litigation.

Monday, July 4, 2011

FOIA Requests: A Bar to Federal False Claims Actions?

On May 16, 2011, the U.S. Supreme Court, in a 5-3 opinion delivered by Justice Thomas, held that a federal agency’s response to a request for records under the Freedom of Information Act (FOIA) constitutes a “report” within the meaning of the public disclosure bar of the Federal False Claims Act.  Schindler Elevator Corp. v. U.S., ex. rel. Kirk, 131 S. Ct. 1885, 1889 (2011).         

Under the Federal False Claims Act (FCA), qui tam (or whistleblower) actions are expressly barred if “substantially the same allegations or transactions . . .were publicly disclosed (i) in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party; (ii) in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or (iii) from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.” 31 U.S.C. § 3730(e)(4)(A).

The purpose of the public disclosure bar has been tersely described as a means “to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits.”  Graham County Soil & Water Conservation Dist v. U.S. ex. rel. Wilson, 130 S. Ct. 1396, 1407 (2010). 

In Schindler, the relator (or whistleblower) filed a qui tam action against his former employer, Schindler Elevator Corporation (“Schindler”), alleging that Schindler had submitted hundreds of false claims for payment under government contracts and had violated certain provisions of the Vietnam Era Veterans' Readjustment Assistance Act of 1972 requiring contractors to report certain information to the Department of Labor, including the number of its employees who are qualified veterans under the Act.  Schindler, 131 S.Ct. at 1889-90.  In support of his allegations, the relator pointed to information that his wife had obtained from the Department of Labor in response to three FOIA requests seeking information about Schindler’s veteran reporting.  Id. at 1890.           

Schindler filed a motion to dismiss on a number of grounds, including that the District Court lacked jurisdiction based on the FCA’s public disclosure bar.  Id.  The District Court granted Schindler’s motion concluding, in part, that the relator’s claims were based upon public disclosure of the allegations in a “report” or “investigation.”  Id. (citing U.S. ex. rel. Kirk v. Schindler Elevator Corp., 606 F. Supp. 2d 448 (S.D.N.Y. 2009)).  The Court of Appeals for the Second Circuit vacated, effectively holding that a response to a FOIA request is neither a “report” nor an “investigation” within the meaning of the FCA’s public disclosure bar.  Id. (citing U.S. ex. rel. Kirk v. Schindler Elevator Corp., 601 F.3d 94 (2d Cir. 2010)).           

Because the FCA does not define “report” within the meaning of the public disclosure bar, the Court looked to its ordinary meaning and dictionary definitions, including “something that gives information” or a “notification,” “[a]n official or formal statement of facts or proceedings,” and “[a]n account brought by one person to another.” Id. at 1891 (alterations in original) (citations omitted).     

The Court then concluded that “[a] written agency response to a FOIA request falls within the ordinary meaning of ‘report.’” Id. at 1893.  The Court reasoned that “FOIA requires each agency receiving a request ‘to notify the person making such request of [its] determination and the reasons therefore.”  Id. at 1893 (alteration in original) (citing 5 U.S.C. § 522(a)(6)(A)(i)). The Court also noted that the Department of Labor and other agencies have adopted more detailed regulations for responding to FOIA requests in writing.  Id. (citations omitted).

In addition to concluding that such written responses constitute “reports,” the Court further concluded that the records produced by the agency along with its written response to the three FOIA requests at issue were also reports within the meaning of the FCA’s public disclosure bar.  Id. at 1893, 1896. 

On remand, the Second Circuit is to consider whether the relator’s qui tam suit was “‘based upon . . . allegations or transactions’ disclosed in those reports.”  Id. at 1896.

Of note, the Court left open the possibility that a relator who learns of the information contained in a FOIA request from another source  may not be barred or that the relator may be excepted as an “original source,” id. at 1895, defined by the FCA as “an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section,” 31 U.S.C. § 3730(e)(4)(B). 

Given the Court’s broad definition of “report” as a public disclosure bar under the FCA, one can only imagine how courts might apply the “news media” section of the public disclosure bar in a world of ever-increasing blogging, social networking and “news sites” that can be updated by almost anyone with the click of a mouse. 

Although at least one state false claims act specifically provides that information is not “‘publicly disclosed’ in the ‘news media’ merely because information of allegations or transactions have been posted on the internet or on a computer network,” New York False Claims Act, N.Y. State Fin. Law §190(9)(b)(iii), the FCA does not define the term “news media” or enumerate any exceptions to it. 

Thus, in addition to being mindful of one’s internet reputation, generally, and refraining from disclosing confidential information to others during the pendency of a qui tam action, an individual thinking of filing a false claims action should be mindful of publicly available information on the world wide web as a potential bar to suit.  At the same time, Schindler serves as an important reminder that a qui tam lawsuit must be based on independent knowledge or information of fraud on the government, not on public disclosures.   

Melanie Garner is an attorney at Waters & Kraus, LLP, in the firm's Baltimore office. She focuses her practice on toxic tort, product liability, and qui tam (whistleblower) cases.