Proposed Changes Threaten Integrity of Dodd-Frank Act

In 2010, the U.S. Government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) in response to the economic meltdown caused by the financial sector. The industry, namely big banks and corporate giants, literally needed an "overhaul." The Dodd-Frank Act's Section 922(a) amended the Securities Exchange Act of 1934 by adding a new section 21F entitled "Securities Whistleblower Incentives and Protection." The Dodd-Frank Act was passed to protect, encourage, and incentivize whistleblowers to come forward, a tactic that may have spared the economy's failure had it been in place prior to 2010.

Similar to the outlines of the False Claims Act, whistleblowers under the Dodd-Frank Act who voluntarily provide original information about potential securities law violations that lead to sanctions of $1 million or more could be eligible for awards of 10 to 30 percent. The new Section 21F also prohibits employers from discharging, demoting, suspending, threatening, harassing (directly or indirectly), or otherwise discriminating against an employee who attempts to report the fraud.

Key Factor in Passing Dodd-Frank

Perhaps the key factor in the passage of the Dodd-Frank Act was whistleblower Harry Markopolos, who uncovered Bernie Madoff's Ponzi scheme some 10 years before the rest of the world learned of the biggest financial crime in history. Mr. Madoff was a prominent Wall Street figure and the former chairman of NASDAQ who was cheating thousands of individuals out of their savings and investments. During the course of many years, Mr. Markopolos worked tirelessly to get the Securities and Exchange Commission (SEC) to do something about Mr. Madoff by providing them, not only with information, but with countless supporting documents. Unfortunately, by the time the SEC decided to act, millions of dollars were already long gone.

Even though the Dodd-Frank Act has been passed, procedural rules have not been finalized and powerhouse financial organizations have been lobbying to delay finalization of the law and to hollow out key provisions. Big banks and companies claim that the Dodd-Frank Act will significantly heighten the risks that employers already face and complicate internal procedures. Politicians aligned with big business aim to chip away at the Dodd-Frank Act by proposed regulatory subversion.

Proposed Changes

One of the proposed changes would require individuals alleging corporate wrongdoing to first inform their employers, by following internal compliance programs, before reporting information to the SEC. Another proposed change would give the SEC greater leeway to deny rewards to people who otherwise meet the program's requirements. For example, awards would be banned for people who participated in wrongdoing even if they were not convicted of a crime. In another effort to discourage whistleblowers from coming forward, the big business lobby wants to ban attorneys representing whistleblowers from working on a contingency-fee basis.

The Risks

The current proposals defer too much to big business and violate the intent of the Dodd-Frank Act that established serious consequences for Wall Street and corporate misbehavior. The SEC's job is to protect investors and individuals, not corporations, from potential harm caused by fraud and abuse of the financial system. The SEC came under fire for failing to catch Bernard Madoff's massive Ponzi scheme and dismissing whistleblowers complaints about him. By entertaining limitations to the Dodd-Frank Act proposed by those who stand to benefit from their passage, the SEC is again placing the economy at risk.


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Joanna A. Hojdus is an attorney in Dallas, Texas. Joanna focuses her practice on qui tam (whistleblower) cases and is licensed to practice law in Florida and Texas.

Does a General Release Bar Your Case?

Are you a potential whistleblower who has signed a general release as part of a severance agreement? Or perhaps you are contemplating settling a wrongful termination case and don’t know what the effect of signing a general release as part of the settlement will be? The general consensus is that what matters is not whether you sign such a release, but when. As we shall see, in ascertaining the enforceability of a release, courts will look especially at whether the government had knowledge of the fraud prior to the signing of the release. 

Could a General Release That Does Not Specifically Mention Qui Tam Claims Nevertheless Bar Them?

The first question courts generally consider in these cases is whether the language of the release encompasses qui tam claims. Most courts have held that they do.  In U.S. ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010), for example, the Fourth Circuit considered a general release that stated, in relevant part, that whistleblower released his employer from “all liability to Employee for . . . claims . . . which Employee . . . ever had, may now have or hereafter can, shall or may have . . . as of the date of the execution of this Agreement.” 

The whistleblower argued that this language did not encompass the qui tam claims because those claims belonged to the government, not the whistleblower. The Fourth Circuit rejected this argument, holding that once the government suffered injury and the whistleblower became aware of the fraud causing the injury, the whistleblower “had a statutory claim, and the necessary legal standing as partial assignee, to file a qui tam lawsuit.” Thus, he “had ‘an interest in the lawsuit’ regardless of when he opted to vindicate it.” The Tenth Circuit in U.S. ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161, 1167 (10th Cir. 2009), has come to the same conclusion. 

Can a Whistleblower Release His Qui Tam Claims?

Assuming, then, that a whistleblower’s qui tam claims are considered to be contemplated by a general release, the next question is whether the whistleblower has the power to release the qui tam claims without government consent. In U.S. ex rel. Longhi v. Lithium Power Technologies, Inc., 575 F.3d 458 (5th Cir. 2009), the court noted that the clear language of the False Claims Act prevents a whistleblower from releasing qui tam claims post-filing, since the Attorney General must consent to such release.[1] Specifically, 31 U.S.C. § 3730(b)(1) provides that an FCA action “may be dismissed only if the court and the Attorney General give written consent to the dismissal and their reasons for consenting.” Thus, if a whistleblower signs a release after filing a qui tam case (or the release goes into effect after the filing), and the government is unaware of and does not consent to the release, the release may be considered invalid.[2]  This may be particularly true if the release is signed during the period during which the government is investigating the case.[3]  Thus, if a release is signed during the 60-day investigative period (or if a seal extension has been requested, during the duration of the seal extension) without the government’s knowledge and consent, it is not enforceable because it explicitly violates section 3730(b)(1).


Conversely, the courts have held that if the release is signed prior to the qui tam filing, the release will be considered binding unless, as explained below, it is considered to violate public policy.[4]

When Does a Pre-Filing Release Violate Public Policy?

Even if a release is binding, courts will refuse to enforce it if it violates public policy. In U.S. ex rel. Green v. Northrop Corp., 59 F.3d 953 (9th Cir. 1995), the whistleblower filed a qui tam case after settling a state-law suit against his employer and signing a general release. The court ruled that a pre-filing release signed before the government has any knowledge of the fraud allegations is unenforceable because it violates several public policies underlying the FCA. The Court concluded that “permitting a prefiling release when the government has neither been informed of, nor consented to, the release would undermine this incentive, and therefore, frustrate one of the central objectives of the Act.”[5]

Thus, under Green, a release that is signed before you file your case and before the government is informed of the fraud is contrary to public policy and will not be enforced. But what if the government is already aware of the fraud when the whistleblower signs the release? Are the same public policies implicated?

1.      Signing the Release Prior to Filing—Government Knows of and Has Investigated Allegations

In U.S. ex rel. Hall v. Teledyne Wah Chang Albany, 104 F.3d 230 (9th Cir. 1997), the Ninth Circuit held that if the government is informed of the fraud allegations and has investigated them at the time the whistleblower signs the pre-filing release, the public policies underlying the FCA are vindicated the release will be enforced to bar the whistleblower’s claims. 

Hall therefore suggests that where the government is not only informed of the fraud, but completes its investigation prior to the signing of the release, the public policy concerns raised in Green are not implicated. Thus, if you have already filed your qui tam case and the government has investigated your claims, signing a release will release your claims. But what if the government is apprised of the fraud and has not yet conducted an investigation? Unfortunately, two recent decisions by the Fourth and Tenth circuits have extended the Hall exception to enforce releases and bar qui tam suits under these circumstances as well.

2.      Signing the Release Prior to Filing—Government Knowledge, but Investigation Not Complete

In U.S. ex rel. Ritchie v. Lockheed Martin Corp., 558 F.3d 1161 (10th Cir. 2009), the whistleblower initially brought her concerns about the defendant’s fraudulent conduct to the defendant. Based on her complaints, the defendant self-reported to the government, which thereafter conducted an audit. The defendant made the whistleblower available to the government and she assisted the government with its audit. In the meantime, the whistleblower, believing she was the subject of retaliation due to her whistleblowing activities, initiated proceedings that eventually led to mediation and a settlement with the defendant. As part of the settlement, the whistleblower signed a general release. Ten days after signing the release, the whistleblower filed her FCA case. The government ultimately declined intervention. Weighing the public policy interests in the case, the Tenth Circuit held that because the government already knew about the allegations and was in the midst of an investigation when the whistleblower filed suit, the most important public policy considerations had been vindicated and therefore the release was enforceable. 

In U.S. ex rel. Radcliffe v. Purdue Pharma L.P., 600 F.3d 319 (4th Cir. 2010), the whistleblower signed a release upon termination in order to get an enhanced benefits package to which he would not otherwise have been entitled. Approximately two months after signing the release, he filed his qui tam suit. Unbeknown to him, however, the government had been investigating the allegations made in his qui tam suit, and had met with attorneys representing defendants some six weeks prior to his execution of the release. The court held that because the government had knowledge of the allegations, the public policy concerns were vindicated. Since the whistleblower signed the release after this disclosure occurred, the Fourth Circuit concluded that there were no public policy interests favoring non-enforcement of the release.

 

The opinions in Ritchie and Radcliffe mean that if you file a qui tam suit after signing a pre-filing release and you later find out that the government had begun to investigate your claims prior to filing, you can no longer argue that the release is unenforceable.

           

So Where Does that Leave You?

If you sign a release before the government knows of the fraud you will allege in your qui tam case, the release will not bar the case. Conversely, if the government knows of the fraud because of your qui tam case, and the release is signed during the period of the government’s investigation without the government’s knowledge or consent, the release also arguably will not bar the case. It is the period between the time the government learns of the fraud and the qui tam case is filed that is treacherous, since signing a release after the government learns of the fraud will likely bar your case.

[1] See also Radcliffe, 600 F.3d at 27-28; U.S. ex rel. Ritchie, 558 F.3d at 1168.

[2] Longhi, 575 F.3d at 474. 

[3]U.S. ex rel. El-Amin v. The George Washington Univ., No. 95-2000(JGP), 2007 WL 1302597 (D.D.C. May 2, 2007) (holding that a release that went into effect during the 60-day period provided to the government by the FCA to investigate and decide whether to intervene in a case was not valid).

[4]Radcliffe, 600 F.3d at 27-28; U.S. ex rel. Ritchie, 558 F.3d at 1168.

[5]Id. at 965. 

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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.

Recent Ruling Could Mean Rise in Reverse False Claims Actions

When the False Claims Act was first passed, the most common cases involved companies that submitted false claims to the government in order to receive money from the government that they did not earn. For example, a common False Claims Act case is when a doctor submits a bill to Medicaid for services he did not perform. However, a growing number of cases are brought against companies who do not pay money that they owe the government. These claims are often referred to as “reverse false claims.” 

An example of a reverse false claim is when a company is overpaid by the government and makes a false statement to hide the fact that the company was overpaid. The Fraud Enforcement and Recovery Act passed in 2009 clarified that a company’s failure to repay the government when the government has made an overpayment violates the False Claims Act. Failures to report overpayments are a common problem with companies that accept Medicaid or Medicare payments.  Importantly, under the Patient Protection and Affordable Care Act, passed in March 2010, health care providers have just 60 days to report any overpayments from Medicaid or Medicare to the government.  

Another example of a reverse false claim is when a health insurance company rejects a claim in order to get Medicaid to pay it. Some people have both private health insurance and Medicaid coverage. Medicaid only pays claims, however, when there is no private insurance coverage. If a person is covered by both Medicaid and private insurance, then the private insurance company must pay the claim. Insurance companies are not allowed to deny claims just because an insurance policyholder is also covered by Medicaid. In February 2011, the Fifth Circuit Court of Appeals in United States v. Caremark held that an insurance company’s denial of a claim for the purpose of having Medicaid pay the claim instead is a violation of the False Claims Act. Due to such recent developments, reverse false claims are very likely to be a growing area of law. 


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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.

Drug Marketing Masquerading as Research

In her 2005 New York Times Business Bestseller "The Truth About the Drug Companies — How They Deceive Us and What to Do About It," Marcia Angell, M.D., the former editor in chief of the New England Journal of Medicine, coined the phrase "drug marketing masquerading as research" to describe several common practices by which pharmaceutical manufacturers use corrupt or biased research to promote drugs.

Common Practices

These practices include paying contract research organizations ("CROs") and private doctors to conduct flimsy Phase IV or "post-marketing" research studies, ghostwriting of journal articles supposedly authored by prominent academics, and paying academic experts to put their names on biased journal articles.

Off-Label Marketing

Several whistleblowers have taken issue with such practices in qui tam actions filed under the False Claims Act, often in the context of off-label marketing of drugs for uses not yet approved by the FDA. It is a criminal violation of the Food, Drug and Cosmetics Act for drug companies to promote the use of their drugs for indications not listed on the FDA-approved labeling. Several recent settlements of off-label marketing cases have resulted in criminal fines and civil settlements ranging in value from hundreds of millions to more than a billion dollars.

Payment of Kickbacks

It is also a criminal violation of the federal Anti-Kickback Statute for drug companies to offer or pay any remuneration to induce a doctor or medical researcher to recommend the ordering of any drug for which payment may be made by a federal healthcare program such as Medicare or Medicaid. When a drug company uses consulting fees and other forms of financial remuneration to lure academics into authoring flimsy research studies that promote their drugs, civil and criminal violations of the Anti-Kickback Statute may be implicated.

Beyond Off-Label Marketing

Although issues of these sorts are often raised in the context of off-label marketing of drugs for unapproved uses, off-label marketing is not an essential ingredient of the fraud that is actionable under the False Claims Act in a qui tam action filed by a whistleblower. The real heart of the whistleblower's claims under the False Claims Act is that drug marketing has been permitted to masquerade as legitimate scientific research due to kickbacks and other conflicts of interest that have impaired the judgment of medical researchers. Such fraudulent conduct increases claims against government healthcare programs for drugs that may be only marginally safe and effective, whether FDA-approved or not.

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WM. Paul Lawrence, II serves as of counsel to Waters & Kraus, LLP. His practice focuses on appellate, class action, and qui tam (whistleblower) litigation under the False Claims Act.

Whistleblowers Helping the IRS Fight Fraud May be Subjected to Unannounced Inspections

Tight security issues surround tax return information. And rightfully so; a tax return contains some of the most private information disclosed to the government by individuals and businesses each year. But the IRS needs help in uncovering tax fraud, especially in these economic times, and whistleblowers are often the best tool in the detection, uncovering, and reporting of tax cheats. The question is, how hard should it be for whistleblowers and their attorneys to help the IRS?


In analyzing and investigating information provided by a whistleblower, the IRS may determine that it requires the assistance of the whistleblower and his/her attorney. As the law stands, if the IRS wants help, it must enter into a written contract with the whistleblower and his/her attorney for services relating to the detection of violations of the internal revenue laws or related statutes. (26 U.S.C. §§ 7623 et seq.; See also The Tax Relief and Health Care Act of 2006, Section 406, Public Law 109-432 (120 Stat. 2958)). Only in connection with the written contract for help in uncovering tax fraud may the IRS disclose the suspect individual or entity's tax return information to the whistleblower and his/her lawyer. The IRS has the discretion to determine whether to enter into a written contract with the whistleblower for fraud-detecting services, and can also limit the amount of information provided in the disclosure. The whistleblower and his/her attorney must additionally agree to protect the confidentiality of the return information and prevent any disclosure or inspection of the return information in a manner not authorized. A breach of the contract could mean serious consequences, including denial of any reward to the whistleblower for his/her efforts.

The federal False Claims Act, dubbed "Lincoln's Law," after the celebrated former president, is often seen as the cornerstone of whistleblower laws. 31 U.S.C. §§ 3729 et seq. The federal False Claims Act has never required formal contracts to be entered into by whistleblowers in order to aid in fraud prosecution.

Nonetheless, in 2008, additional regulations under section 301.6103(n) of the Tax Code were published in Federal Register (73 FR 15668) describing the circumstances under which the IRS may disclose return information to whistleblowers and their counsel in connection with written contracts for services relating to the detection of violations of the internal revenue laws or related statues.

Pursuant to any written contract the IRS may enter into with a whistleblower, the newly enacted sections require the IRS to conduct an inspection of the whistleblower and his/her counsel's premises to make sure the area is secure for the receipt and containment of disclosed return information. This may require the whistleblower to purchase a safe in order to secure disclosed return information pursuant to the contract to help unravel a tax fraud scheme. Unannounced inspections of the premises by IRS agents could always be a possibility. The IRS could also request the whistleblower and his/her attorney to maintain a very specific log detailing the dates and times tax return materials were moved to and from the secure location. Once the documents are no longer needed, they may need to be returned or destroyed, with the destruction process detailed and note on the log. This requirement makes tax return information akin to "top secret" documents.

Earnest whistleblowers are hard to come by. And once the decision to come forward is made, these individuals work tirelessly and make sacrifices in order to help the government uncover fraud. They often offer on-going expertise and technical assistance to governmental agencies for years, and even at the outset of a case, whistleblowers' counsel do their best to break down fraudulent schemes in initial disclosures so that the government can have a clear roadmap of approach. The proverbial forest may just be lost for the trees with burdensome requirements being imposed on those individuals wanting and willing to help the IRS fight fraud.

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Joanna A. Hojdus is an attorney in Dallas, Texas. Joanna focuses her practice on qui tam (whistleblower) cases and is licensed to practice law in Florida and Texas.