Prejudgment Interest in Securities Cases can Substantially Add to a Whistleblower’s Potential Recovery

The Dodd-Frank Act allows whistleblowers who submit information about securities violations to the Securities and Exchange Commission (SEC) to recover from between 10%-30% of any SEC recovery, including civil penalties, disgorgement, and interest. The SEC must recover over $1 million in order for a whistleblower to receive an award for securities violation information. Civil penalties can be up to $150,000 for individuals and $750,000 for entities for each violation. The SEC can also seek disgorgement—which has been defined by the courts as all the profits a defendant derives from his ill-gotten gain. In addition to disgorgement, the SEC can also seek prejudgment interest on disgorgement.

The availability of prejudgment interest is one reason why awards for securities violations can be very large. In most other areas of law only post-judgment interest is available. In other words, the plaintiff only receives interest from the time in which the jury or judge enters judgment until the time that a defendant pays the award. In SEC cases, however, prejudgment on disgorgement may be awarded on a discretionary basis.[1] According to case law, "The time frame for the imposition of prejudgment interest usually begins with the date of the unlawful gain and ends at the entry of judgment."[2] One court explained the theory behind awarding prejudgment interest in saying had the defendant “been able to borrow the millions of dollars he spent that he obtained through his violations, he would have had to have paid significant interest on the loans.”[3] Prejudgment interest can greatly add to the amount the SEC recovers, particularly since there may be years between the time that the defendant commits the fraud and the time a court enters a judgment. For instance, in SEC v. Huff the court awarded $3 million in prejudgment interest on a disgorgement of $10.017 million for one of the defendants in the case.[4] Given the ability of the SEC to recover civil penalties, disgorgement, and prejudgment interest, companies that violate securities laws can expect to face heavy financial consequences for their violations.

    

[1] See S.E.C. v. Huff, 758 F.Supp.2d 1288, 1363 (S.D.Fla. 2010). 

[2] S.E.C. v. Yun, 148 F.Supp.2d 1287 (M.D.Fla. 2001). 

[3] S.E.C. v. Huff, 758 at 1363. 

[4] Id.  at 1366-67. 

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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.

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Sorrell and the Supreme Court’s New Approach to Commercial Speech

Will All Pharmaceutical Regulation Now Be Subject to Heightened Scrutiny?

Early this summer, in Sorrell v. IMS Health, Inc., -- U.S. --, 131 S. Ct. 2653 (2011), the Supreme Court invalidated a Vermont law that prohibited pharmaceutical marketers from using prescriber-identified information, absent the prescriber’s consent, to market drugs to physicians. Because the law did not prohibit other groups—such as research facilities—from using the same information, the Court found that the law imposed both content-based and speaker-based burdens on protected expression. Most notably, the Court expanded the category of what kinds of speech count for the purposes of heightened scrutiny under the First Amendment to include marketing activities, or commercial speech. And, given the application of heightened scrutiny, the Court narrowed the kind of content-based restrictions that might be permissible to curtail commercial speech. The court noted, for example, that the government may have a legitimate interest in protecting consumers from “commercial harms.” Id. at 2672. Specifically, the Court acknowledged that government regulation of commercial speech would be legitimate where the regulations are meant to curtail fraud or the risk of fraud. Id.

As Justice Breyer pointed out in his dissent, this expansion of First Amendment protections to commercial speech (which prior to Sorrell was understood to only be deserving of at most intermediate scrutiny) may undermine many of the regulatory schemes that have been in place for years, including FDA regulation:

The ease with which one can point to actual or hypothetical examples with potentially adverse speech-related effects at least roughly comparable to those at issue here indicates the danger of applying a “heightened” or “intermediate” standard of First Amendment review where typical regulatory actions affect commercial speech.  . . . If the Court means to create constitutional barriers to regulatory rules that might affect the content of a commercial message, it has embarked upon an unprecedented task—a task that threatens significant judicial interference with widely accepted regulatory activity.

Id. at 2676-77, 2678.

Does Sorrell mean that the government cannot put restrictions on off-label marketing? Such restrictions are clearly content-based and speaker-based, since as Justice Breyer points out, the regulatory scheme seeks to regulate the sale of drugs, but not furniture. Id. at 2677. And what about the use of kickbacks? On the one hand, the payment of kickbacks cannot be said to be “speech” and the regulation of kickbacks surely falls within the legitimate interest identified by the Sorrell majority to curtail fraud or the risk of fraud. But one commentator has already suggested that Sorrell means that government cannot interfere with kickbacks that are paid to marketers, since this is content-based interference with speech. How far will the Sorrell case be taken, and how will it affect False Claims Act cases based on off-label and anti-kickback theories? That will remain to be seen. For now, those of us who litigate these cases can only take comfort in the fraud exception laid out by the Sorrell majority, and be willing and able to show that the regulations that underlie the off-label and kickback cases fall within this category of acceptable government regulation.

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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.

$150 Million Settlement Shows that Patients can be Successful Whistleblowers

Oftentimes, whistleblowers are current or former employees, but the recent case of United States ex rel West v. Maxim demonstrates that patients who notice discrepancies in their medical bills can successfully bring large scale fraud to the government’s attention. Mr. Richard West, the whistleblower in this case, received nursing services in his home provided by Maxim and paid for by the Medicaid program. Mr. West, a Vietnam veteran, received home health care for his muscular dystrophy. He kept detailed records of his care, including the hours and times that he received care. Mr. West discovered that Maxim was overbilling for the care they provided him when he received notice from the government that he exceeded the monthly cap for home health care services. Mr. West stated in regards to his fight against Maxim, “I never took any benefits I wasn't qualified for. Then to find out I was losing services I needed to stay in my own home, because the government was being billed for services I never received-- that was not going to happen!” 

In his complaint, Mr. West alleged that such overbilling was a national practice of Maxim. The government conducted both a criminal and civil investigation into Mr. West’s allegations. Several former employees of Maxim entered guilty pleas to criminal charges. Ultimately, Maxim entered into a settlement agreement of over $150 million, including criminal penalties, to resolve Mr. West’s allegations. Mr. West will receive approximately $14.8 million from the settlement. Mr. West said in regards to the successful outcome of his case, “From my wheelchair on a ventilator and oxygen, I have spent the last seven years in this fight. Sometimes the good guys win.”  This inspiring case demonstrates that patients can play an important role in bringing fraud against the government to light.   

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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.