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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$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.

Retail Pharmacy Fraud

Pharmacies that fail to perform federally-mandated drug safety screening procedures or falsely certify compliance with federal and state professional standard requirements, may be liable for fraud under the False Claims Act. Pharmacists are not just robots paid to dispense drugs prescribed by doctors. As the only healthcare providers trained to understand the multitude of pharmaceuticals and their potential interactions, pharmacists are also paid to exercise their professional judgment and intervene to prevent potentially fatal drug interactions and allergic reactions by contacting prescribing physicians and/or counseling patients.

Federal and state healthcare programs pay pharmacies not just for a product--the prescription drug--but also for this service, known as drug utilization review or DUR. The pharmacy’s DUR responsibilities include screening of prescriptions for potential problems, maintaining records of patient medical histories and allergies, and offering to counsel patients about new prescriptions.

In billing government healthcare programs, pharmacies are often required to certify compliance with their DUR responsibilities and formulary restrictions on the dispensing of certain drugs. During the billing process, pharmacies also interact with point-of-sale or “POS” software systems developed by many government programs, including the Medicaid programs of most states. Using vast databases containing information about drugs, interactions, allergies and the medical/drug histories of program beneficiaries, these POS systems generate warnings or alerts for pharmacists about potential problems with the drugs that they are attempting to dispense and bill. The pharmacist is required to acknowledge each alert and indicate the action he/she has taken to resolve the problem, including contacting the prescribing physician, counseling the patient or otherwise exercising his/her professional judgment.

Pharmacies that knowingly override DUR alerts without performing the specified services, or falsely certify compliance with formulary restrictions, but nevertheless submit claims to government healthcare programs for payment, can be guilty of fraud or false claims actionable under the federal False Claims Act and its state-law counterparts.

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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.

Government Contractors Who Fail to Pay Davis-Bacon Prevailing Wages are Liable Under the False Claims Act

The Davis-Bacon Act requires that companies with contracts with the federal government pay workers the prevailing wage of the area in which the work is performed. The Department of Labor is responsible for determining the prevailing wage. Federal regulations provide that contractors submit weekly payroll certifications, including certifications for all their subcontractors. Additionally, Davis-Bacon and federal regulations provide that government contractors are responsible for ensuring that subcontractors pay Davis-Bacon wages.  

Cases against contractors have been brought under the False Claims Act. United States ex rel. Wall v. Circle C., 700 F.Supp.2d 926 (M.D.Tenn. 2010) is an important case for both its holdings in regards to subcontractors and for its holding in regards to calculating damages. In this case the defendant, Circle C, was awarded a contract at Fort Campbell, an Army base in Kentucky. An employee who worked for a subcontractor of Circle C alleged that Circle C violated the False Claims Act by submitting false certifications to the government that it complied with Davis-Bacon when the subcontractor was not paying prevailing wages. The employee brought a whistleblower action on behalf of the United States in the Middle District of Tennessee. The United States brought a motion for summary judgment and Circle C moved to dismiss and for a judgment on the record.  

Ultimately, the court ruled in favor of the United States and awarded treble damages. According to the Court, Circle C did not take measures to ensure that its subcontractor, Phase Tech, was paying prevailing wages to its electricians. The Court found that Circle C submitted false payroll certifications by failing to list that Phase Tech had performed the vast majority of the electrical work on the contract. Additionally, Circle C’s certifications did not match Phase Tech records. At the time that Circle C submitted its certifications the prevailing wage for an electrical worker in Kentucky was $19.19 an hour with $3.94 in fringe benefits. Instead of this prevailing wage, Circle C’s subcontractor had paid some of its electrical workers $12-$16 an hour. The United States paid Circle C a total of $553,807.71 for the electrical work on the project that was performed by its subcontractor. Although Circle C argued that its damages should be the difference between the prevailing wage and the wages it subcontractors actually paid, the court refused to discount the damages in this way. The court entered a judgment of $1,661,423.13 against Circle C, which included treble damages but no statutory penalties.  

The decision against Circle C is important for several reasons. It affirms that contractors have a duty to ensure that subcontractors pay Davis-Bacon wages. In its decision the court noted that defendant did not have a contract with their subcontractor that provided that the subcontractor would comply with Davis-Bacon and did not attempt to inform the subcontractor of their duty to comply with Davis-Bacon. The court affirmed that defendants will not escape False Claims Act liability by willfully remaining ignorant of whether their subcontractors comply with Davis-Bacon. Most importantly, it provides that the measure of damages is not just the difference between wages actually paid and prevailing wage. Instead, damages are calculated by the total amount of prevailing wages that should have been paid. This is important because if defendants were not held accountable for the entire amount of their fraud, there would be a greater temptation to risk paying less than Davis-Bacon wages. Given that contractors may also be responsible for paying treble damages and other statutory penalties for their fraud, the False Claims Act is a powerful tool for ensuring that contractors pay Davis-Bacon wages on federal contracts.    

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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.

DOJ Considers Joining Lawsuit Against Home Depot for Violating Buy American Act; Several Companies Settle Similar Allegations

Home Depot confirmed in June of 2011 that the Department of Justice (DOJ) is “taking a closer look” at allegations in a complaint filed in federal court that Home Depot violated the False Claims Act.[1]  The complaint alleges that Home Depot violated federal law by selling products manufactured in China and other countries to the federal government, in violation of the Buy American Act.  The Buy American Act requires that sellers to the federal government provide only products which were made in the United States, or one of the countries which the United States has a trade agreement with.  China does not have a trade agreement with the United States, and so products manufactured in China may not be sold to the United States government under federal law unless the products fall under a recognized exception to the Buy American Act.   Although news that the DOJ may intervene in the suit against Home Depot came recently, the DOJ has been investigating the case since the complaint was first filed in 2008.  Recently, the Judge in this case denied Home Depot’s Motion to Dismiss—a positive sign for the plaintiffs. 

Although the lawsuit against Home Depot has not yet been resolved, Staples, Office Depot, and Office Max have settled similar allegations.  In 2005 Staples entered into a $7.4 million settlement with the Department of Justice regarding its alleged violations of the Buy American Act.[2]  The DOJ also entered into a $9.8 million settlement with Office Max and a $4.75 million settlement with Office Depot regarding their alleged violations which arose under the same complaint.   

Home Depot, Staples, Office Max, and Office Depot are not the only companies that have faced allegations that they violated the Buy American Act.  In January of 2011 the DOJ announced that Fastenal, a Minnesota-based chain of hardware stores, reached a $6.25 million settlement with the DOJ over allegations that it violated the Buy American Act.[3]  Whatever the outcome may be in the pending lawsuit against Home Depot, it is clear that the DOJ is taking a serious stand against companies which falsely certify that products sold to the government were made in the United States. 

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[1]Maxwell Murphy, Justice Dept Considers Joining Home Depot Whistle-Blower Suit, Wall Street Journal, June 27, 2011, http://online.wsj.com/article/BT-CO-20110627-711891.html.

[2] Minnesota-based National Hardware Store Distributor Fastenal to Pay U.S. $6.25 Million to Resolve False Claims Act Allegations, Department of Justice Press Release, January 13, 2011, http://www.justice.gov/opa/pr/2005/October/05_civ_549.html. 

[3] Staples Pays United States $7.4 Million to Resolve False Claims Act Allegations, Department of Justice Press Release, October 18, 2005, http://www.justice.gov/opa/pr/2011/January/11-civ-042.html.

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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.