U.S. Securities and Exchange Commission Surpasses $100 Million in Awards Through Whistleblower Program

On August 30, 2016, the U.S. Securities and Exchange Commission (“SEC”) announced that it surpassed the $100 million mark in monetary awards for whistleblowers. Through the enactment of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), Congress established the whistleblower program to incentivize whistleblowers who possess “specific, credible and timely” information about federal securities laws violations to report information to the SEC. At the Sixteenth Annual Taxpayers Against Fraud Conference, held on September 14, 2016, SEC Enforcement Director Andrew Ceresney addressed this recent milestone and how the SEC intends to expand its mandate to prevent and prosecute securities violations through its whistleblower program.

The SEC’s Recent Awards To Whistleblowers

How does the SEC carry out its mandate by incentivizing individuals to come forward with information? Section 922 of the Dodd-Frank Act, codified 15 U.S.C. § 78u-6, encourages individuals to report information regarding securities laws violations by requiring the SEC to pay substantial monetary awards to individuals who provide information that ultimately leads to a successful enforcement action yielding monetary sanctions of over $1 million.

Since the inception of the SEC’s whistleblower program, the SEC has received more than 14,000 tips from whistleblowers in the United States and in 95 foreign countries, and has awarded an estimated $111 million to 34 whistleblowers. In 2016 alone, the SEC awarded over $50,500,000 to whistleblowers.  Just recently, on September 20, 2016, the SEC announced that it awarded $4 million to a whistleblower who provided original information that alerted the SEC to an alleged fraud. In August 2016, the SEC awarded $22.4 million to a company insider, who disclosed alleged accounting fraud at the insider’s company.  In June 2016, the SEC awarded more than $17 million to a former employee, whose detailed tip of key original information advanced the SEC’s investigation into the whistleblower’s former employer.  In May 2016, the SEC awarded a former employee over $5 million for detailed tips that helped the SEC uncover securities violations. In May 2016, the SEC again awarded $3.5 million to a company employee, who provided additional evidence of wrongdoing that strengthened an ongoing investigation of the SEC.  In March 2016, the SEC awarded each of three whistleblowers for coming forward with information, for a total award of $2 million. One whistleblower received $1.8 million of the $2 million award for providing key original information that prompted the SEC to open its investigation, and for continuing to provide information throughout the investigation.  In 2015, the SEC awarded an estimated $5 million to whistleblowers.  In 2014, the SEC awarded more than $30 million, the largest award in the history of the whistleblower program, to a foreign whistleblower who provided key original information regarding an ongoing fraud that led to a successful SEC enforcement action.

In addition to the use of monetary awards, the SEC encourages whistleblowers to come forward by affording a private cause of action against an employer who takes an unlawful retaliatory action against the whistleblower. The SEC has also taken measures to impede the use of confidentiality agreements that discourage individuals from reporting securities laws violations.  (Additional information on these efforts can be found here and here.) The SEC recently announced that it has brought four actions against companies for including such language in confidentiality and severance agreements.

Who Qualifies As A Whistleblower

In his September 14, 2016 speech, SEC Enforcement Director Ceresney suggested that anyone, either an insider or outsider of a company, can potentially be a whistleblower. Section 922 of the Dodd-Frank Act defines a “whistleblower” as any individual, alone or jointly with others, who provides information relating to a violation of the securities laws to the SEC, in the manner established by rule or regulation, or by the SEC. See 15 U.S.C. § 78u-6(a)(6).  Enforcement Director Ceresney acknowledged that company insiders, such as current and former employees, and company outsiders, such as independent industry experts, have proven to be equally valuable whistleblowers.  For example, in January 2016, the SEC awarded more than $700,000 to a company outsider who provided independent data analysis that led to a successful SEC enforcement action. Enforcement Director Ceresney encouraged future whistleblowers to come forward without delay. Mr. Ceresney also encouraged whistleblower counsel to take an active role in the reporting process. Quicker reporting and a more active “whistleblower” bar likely mean more activity to come in this area.

The Jackson Lewis Corporate Governance and Internal Investigations practice represents employers against Sarbanes-Oxley and Dodd-Frank whistleblower claims and conducts internal investigations.

Sometimes a Complaint is Just a Complaint: Eighth Circuit Applies Reasonableness Standard to Reject Employee’s SOX Retaliation Claim

Earlier this summer, in Beacom v. Oracle, the U.S. Court of Appeals for the Eighth Circuit affirmed summary judgment dismissing the SOX and Dodd Frank Act claims of an employee who was fired from his Vice President position after he says that he complained about changes in his employer’s financial forecasting. The Court upheld dismissal of that claim based on the standard that a SOX plaintiff must prove that he “subjectively believe[d] the employer’s conduct violated a law relating to fraud against shareholders, and the employee’s belief must be objectively reasonable” (Emphasis added.) According to the Minnesota District Court that initially heard and dismissed Beacom’s claim and the Court of Appeals that affirmed, the plaintiff in this case could do neither.

The record established that in 2011 Oracle hired a new General Manger, over Beacom, who had served as the interim GM. The new GM revised the method for financial forecasts and sales quotas set for Beacom and the sales force he oversaw. The forecasts required higher results than Beacom (and the Company) had previously achieved. The group did not achieve those results in the initial quarters following these changes. In early 2012, Beacom complained to Human Resources that the new forecasts set unreasonable expectations about what his group could achieve. After another quarter passed without meeting the new forecasts and senior management was concerned about Beacom’s lack of a strategic plan to close a deal, Beacom was fired for poor performance.

Both the lower court and the appeals court cited the two-part reasonableness standard quoted above. On the subjective belief element, the District Court found that Beacom did not produce evidence that he believed at the time that he complained to HR that the higher targets risked fraud on the investors, although he claimed as much in his lawsuit. Ultimately, however, the Court of Appeals relied on its examination of the objective belief prong of the reasonableness test to dismiss Beacom’s claim. That is – whether Beacom proved “that a reasonable person in the same factual circumstances with the same training and experience would believe that the employer violated securities laws.” The courts approached this issue from a few vantage points. First, the analysis considered that Beacom’s group represented just a fraction of Oracle’s overall business and the alleged inflation of forecasts for that small group would not impact the Company’s share price. The courts also examined how closely the targets had been missed, Beacom’s own statements during his employment about how he had planned to achieve them, and the lack of evidence that the targets were unobtainable. Ultimately, although the targets were repeatedly higher than achieved results, they were not disproportionate to conceivable outcomes, industry experience, or the Company’s overall financial results.

This conclusion is an important victory not just for the employer involved, but for all employers, as it offers reassurance that not every complaint is given talismanic affect under SOX. This decision put the burden squarely on the ex-employee to show more than merely a complaint that the sales targets were higher than he believed they should be. Although an employee doesn’t have to use the word “fraud” for a complaint to be considered “protected activity” under SOX, he had to prove that he reasonably believed that the decisions to which he objected were fraudulent. Indeed, the lower court went so far as to say that Beacom could not succeed on his claim “absent evidence that [the new] targets bore no relationship to reality–that they were a material misrepresentation … intended to induce shareholders to rely on it.” (Emphasis added.)

The appeals court ultimately deferred to Oracle’s business decisions to set its own goals and hold its employees to those standards. As a practical matter, employers can take away the message that they can still challenge employees to meet high standards and implement innovative measures and goals. Importantly, however, it remains important to have the processes in place, like Oracle, to ensure Human Resources personnel and others empowered as part of a compliance process, are able to recognize and follow up on complaints that implicate financial responsibility and investor information. Additionally, this case tracks a clear timeline of expectations being set for an employee, his opportunity to achieve them, and employment action taken as a result of the employee’s failure to satisfy such obligations, unrelated to the employee’s complaint to HR. In the complex and evolving world of corporate compliance, those fundamentals of performance management remain as important as ever.

The case is Vincent A. Beacom v. Oracle America, Inc., case number 15-1729, in the U.S. Court of Appeals for the Eighth Circuit.  Jackson Lewis attorneys are available to answer inquiries regarding this case and other questions you may have about the Sarbanes-Oxley Act’s employee protection provisions and other laws relating to whistleblower activity.

Supreme Court Decision Restricts Government Prosecution of Political Corruption

In a unanimous 8-0 decision, the U.S. Supreme Court has vacated the political corruption convictions of former Virginia Governor Robert F. McDonnell for conspiracy to commit honest services fraud and Hobbs Act extortion and making false statements to federal officials. McDonnell v. United States, No. 15-474, 579 U.S. ___ (2016).

McDonnell and his wife, Maureen McDonnell, were convicted for accepting $175,000 in loans, gifts, and other benefits from Virginia businessman Jonnie Williams while McDonnell was Governor. Williams was CEO of a Virginia-based company that had developed a nutritional supplement made from a compound found in tobacco (anatabine). He wanted McDonnell to authorize Virginia’s public universities to conduct scientific research of anatabine and its potential medical benefits.

The government needed to prove that McDonnell committed (or agreed to commit) an “official act” in exchange for the loans and gifts received from Williams. The government alleged McDonnell committed “official acts” by arranging meetings for Williams with Virginia officials to discuss anatabine, hosting events for Star Scientific at the Governor’s Mansion, and contacting other state officials about studying anatabine. McDonnell maintained that setting up meetings, hosting events, or contacting officials about anatabine — without more — does not make an official act because they “are not decisions on matters pending before the government.”

The District Court instructed the jury using the government’s broad interpretation of “official act” and the jury convicted McDonnell on all counts. McDonnell was sentenced to two (2) years in prison, but appealed to the Fourth Circuit Court of Appeals challenging the jury instructions, which, he said, defined “official action” to allow “virtually all of a public servant’s activities” to be construed as official “no matter how minor or innocuous.”  The Fourth Circuit affirmed McDonnell’s convictions. (Maureen McDonnell was convicted of similar charges and sentenced to one year in prison, although her appeal remains pending before the Fourth Circuit.)

Writing for a unanimous Court, Chief Justice John Roberts noted that the federal bribery statute definition of “official act,” 18 U. S. C. §201(a)(3), is “any decision or action on any question, matter, cause, suit, proceeding, or controversy, which may at any time be pending, or which may by law be brought before any public official, in such official’s official capacity, or in such official’s place of trust or profit.”

Significantly, the Court read the statute as “more bounded” than the District Court. Any decision or action on a “question” or “matter” before a public official, the Court found, was a formal exercise of governmental power akin to a “cause, suit, proceeding or controversy” and either was “pending” or by law be “brought before any public official” in his official capacity.

Equating McDonnell’s conduct with, for example, the President hosting championship teams at the White House or a cabinet secretary delivering a policy speech on a pending “question” or “matter,” United States v. Sun Diamond Growers of California, 526 U.S. 398 (1999), the Court found hosting events at the Governor’s mansion, meeting with public officials, or speaking with interested parties, without more, was simply not an “official act.”  McDonnell’s conduct was not a “decision or action” within the meaning of the bribery statute despite the fact that the event, meeting, or speech related to a pending “question” or “matter” involving public financing of anatabine.

Something more is required, said the Court. The bribery statute requires the public official make a decision or take some action on the question or matter before such conduct becomes an “official act.”  Even to agree to act on a “question” or “matter,” said the Court, would constitute an “official act.” Any other interpretation of the statute, said the Court, would make this critical requirement of the statute meaningless.

Finding the trial court’s jury instruction defining “official act” was “significantly over-inclusive,” lacked important qualifications, and failed to comport with the Court’s statutory interpretation, the jury may have convicted McDonnell for conduct that was not unlawful.

Fourth Circuit Upholds Sarbanes-Oxley Whistleblower Retaliation Finding and Substantial Monetary Award

On May 20, 2015, a split Fourth Circuit panel ruled Deltek, Inc., a Virginia-based software and information services provider, must pay a terminated whistleblower four years of front wages and thirty thousand dollars ($30,000) in college tuition. In doing so, two thirds of the panel affirmed the U.S. Department of Labor’s Administrative Review Board’s determination upholding an Administrative Law Judge’s finding the company retaliated against Dinah R. Gunther, a former financial analyst, in violation of the Sarbanes-Oxley Act, holding these decisions were supported by substantial evidence and reached through application of the correct legal standards. The decision is not precedential but is likely to be relied upon by plaintiff’s counsel for its approval of the ARB’s rulings on causation and damages.

Gunther complained to her supervisors, the company’s general counsel, and the United States Security and Exchange Commission that Deltek was committing fraud by systematically disputing invoices for IT services in order to cover up a budget shortfall and the IT department’s poor financial condition. Deltek investigated with Gunther’s assistance but concluded there was no improper activity. Gunther further complained of harassment, eventually went on medical leave for stress and the parties engaged in drawn out settlement negotiations for her to depart the company. Months later, after talks broke down, Gunther was terminated the day after she returned to work for engaging in what the company called “egregious[ly] disruptive and confrontational” behavior during a meeting with HR. However, after what the majority described as a “painstaking” review of the evidence, the ALJ found – and the ARB affirmed – Gunther had established a prima facie case of whistleblower retaliation, the company’s explanation was pretextual, and awarded “make-whole” prospective damages of four-year’s pay and college tuition on the premise that Gunther – who claimed she could not secure a job comparable to the one she held at Deltek because she had no college degree – could obtain a job comparable, and thus be “made whole,” in four years during which she obtained a degree.

Deltek appealed on principal two grounds – that the ALJ and ARB erred first in holding that Gunther engaged in protected activity and then in finding her protected activity was a contributing factor in her termination. As to protected activity, the court easily rejected Deltek’s argument that because Gunther had only a few months of experience and no college degree, she could not form an “objectively reasonable” belief Deltek engaged in fraud. As to causation, the court noted the “rather light burden” given the “broad and forgiving” contributing factor standard, agreed with the ALJ’s ruling that proximity in time is sufficient to raise an inference of causation and approved the ALJ’s finding that Gunther was entitled to this inference because she was terminated “almost immediately after the breakdown of the settlement negotiations precipitated by her OSHA complaint” even though that action was taken six months after her initial protected activity.

Ultimately, the Court was most persuaded by the finding that Deltek’s stated reason for terminating Gunther was pretextual. According to the Court, this wholly precluded Deltek from showing “the kind of exceptional circumstances that would allow [the Court] to set aside the… finding…as affirmed by the Board” under the deferential standard of review for agency decisions and, thus, “Deltek’s arguments on appeal [were] unavailing.”

In his dissent, U.S. Circuit Judge G. Steven Agee disagreed that the determinations of the ALJ and affirmation by the Board were defensible even under the forgiving “substantial evidence” standard because the ALJ’s decision was “premised on nothing more than post hoc ergo propter hoc reasoning.” According to the dissent, the ALJ found Gunther met her burden to prove causation solely based on the sequence of events leading to her termination of employment. Judge Agee would have rejected this finding, and the ARB’s affirmance, as based on a false inference that the timeline of events was in itself sufficient to prove a causal connection and, because Gunther could not establish the elements of her prima facie case, never reached the question of “pretext.”  The dissent also disagreed with the damages award, calling it a speculative windfall and opining that “no law requires Deltek to bear the onerous burden of subsidizing Gunther’s full time, four-year college education, a qualification Gunther didn’t need to obtain her post with Deltek just one year earlier.”
The case is Dinah R. Gunther v. Deltek, Inc., case number 14-2415, in the U.S. Court of Appeals for the Fourth Circuit.  Jackson Lewis attorneys are available to answer inquiries regarding this case and other questions you may have about internal investigations, the Sarbanes-Oxley Act’s employee protection provisions and other laws relating to whistleblower activity.

Post-Luis, Law Enforcement Can Freeze Assets Not Tied to Crimes or Needed to Hire Counsel, Federal Court Rules

On March 30, 2016, the U.S. Supreme Court in Luis v. United States, No. 14-419, held that pretrial restraint of untainted assets needed by a criminal defendant to retain counsel of choice violates a Sixth Amendment right to counsel.  This decision, however, left unresolved the broader question of whether the United States may restrain untainted assets not needed to hire counsel.

In United States v. Chamberlain, No. 5:14-CR-128-2H, the federal District Court for the Eastern District of North Carolina held that Luis does not bar the United States in restraining such assets.  In Chamberlain, the government moved for a post-indictment pretrial restraining order against Chamberlain’s untainted substitute assets pursuant to 21 U.S.C. Section 853(e).  “Substitute assets” are those which are untainted by alleged criminal conduct, but which the government seeks to forfeit to replace exhausted or unreachable tainted assets.  Both the defendant and government agreed that the untainted substitute asset in question, a parcel of land, was not needed by Chamberlain in order to secure criminal defense counsel.

Section 853(e) allows a court to enter a restraining order or injunction to preserve assets that are subject to criminal forfeiture.  Relying on the Supreme Court’s decision in United States v. Monsanto, 491 U.S. 600 (1989), many courts have allowed entry of a pretrial restraining order under Section 853(e) against assets that are not connected to the underlying crime and are not needed to hire counsel.

The defendant in Chamberlain maintained that these court’s decisions based on Monsanto are now incorrect in light of Luis.  The defendant argued that Justice Breyer’s language/analysis in the plurality decision of Luis foreclosed pretrial restraint of any substitute asset under Section 853, thus narrowing the scope of the Monsanto decision.  This new argument, in effect, also would overrule Fourth Circuit precedent that permits pretrial restraint of untainted substitute assets, subject to Sixth Amendment concerns.

Disputing the defendant’s opposition, the government narrowly interpreted the Luis decision and maintained that Luis was inapplicable since Chamberlain raised no Sixth Amendment issue. The District Court ultimately agreed with the government, but expressed some uncertainty in light of the Luis decision.  In fact, the court said while it “agrees that the Supreme Court may in fact interpret Section 853 in this way in the future, it has not yet ruled on this issue and has not upset applicable Fourth Circuit precedents governing the instant question presented before this court.”

The District Court’s Order has been appealed to the Fourth Circuit.  Whether the United States may restrain untainted assets that are not needed to hire counsel remains an open question after Luis.  Jackson Lewis attorneys are experienced in defending white collar and government enforcement matters and are available to advise companies on the scope of law enforcement seizure rights, asset forfeiture, and the Mandatory Victims Restitution Act.

SEC Announces Third-Highest Award Ever to Whistleblower

Written by Richard C. Paul

On May 17, 2016, the Securities and Exchange Commission (SEC) announced that it would award between $5 million and $6 million, the third-highest award ever, to a whistleblower who provided information detailing securities violations committed by the whistleblower’s former employer. Under the so-called “bounty” provision of the Dodd-Frank Act, the SEC is authorized to award between 10% and 30% of monetary sanctions collected to a whistleblower who provides original information which leads to the collection of $1 million or more in sanctions. The SEC noted that “employees are often best positioned to witness wrongdoing” and that it would have been “nearly impossible” for it to have detected the violations without the information provided by the whistleblower.

Since the inception of the whistleblower program in 2011, the SEC has awarded more than $67 million to 29 whistleblowers. In FY 2015 alone, the SEC’s Office of the Whistleblower received 3923 whistleblower tips, an increase of 30% over the last three years.

While the prospect of a huge bounty provides employees with a tremendous incentive to report violations directly to the SEC, employers can mitigate the risk of external reporting by implementing an effective compliance program which creates a culture of compliance that encourages and rewards internal reporting. The U.S. Federal Sentencing Guidelines for Organizations specify that, for a compliance program to be deemed effective, companies must exercise due diligence to prevent and deter criminal conduct, and must promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. The program “shall be reasonably designed, implemented, and enforced so that the program is generally effective in detecting and preventing criminal conduct”

The key is to develop a functional, pro-active compliance program that gives employees confidence that their reports will be taken seriously and that they will not suffer retaliation for speaking out. This takes time, effort, and continual reinforcement, but it is a wise investment.

Companies in Florida Face Difficult Road in Recovering Restitution from Criminal Employees

A company whose employee embezzles money has limited options for recovering its losses. Often, a company must rely on law enforcement to seize the employee’s assets before the employee can dissipate all available funds.  A new law in Florida, however, will make law enforcement’s seizure of assets much more difficult and will likely result in a decrease of available resources for recovery.

On April 1, 2016, Florida Governor Rick Scott signed a bill into law that dramatically reforms the state’s asset forfeiture laws, making it more difficult for law enforcement to seize and forfeit assets of a person suspected of having committed a crime. The new law requires a suspect to be arrested before law enforcement may seize most assets.  Moreover, the law enforcement agency initiating a seizure will have to pay a $1,000 filing fee and post a $1,500 bond.  Lastly, prosecutors will have to prove beyond a reasonable doubt that that property was linked to a crime in order to make forfeiture permanent.

Florida is not the only state to have passed sweeping forfeiture reform. Last year, New Mexico passed a bill that gives the state some of the strongest protections in the country against wrongful seizures.  Furthermore, Florida and New Mexico are not likely the last states to pass asset forfeiture reform laws.  Lawmakers in California, Alaska, Hawaii, Ohio, Nebraska, and Maryland are already considering similar bills that will dramatically change how companies may recover assets taken by their employees.

Jackson Lewis attorneys are experienced in white collar criminal matters, including issues pertaining to asset forfeiture, and are available to advise companies on government forfeiture, seizure of assets, and the Mandatory Victims Restitution Act.

Department of Justice Controversial Asset Forfeiture Program Resumed

On March 28, 2016, the Department of Justice announced it was resuming its contentious “equitable sharing” program that it had suspended only months earlier. The “equitable sharing” program allows liquidated assets seized in asset forfeiture cases to be shared between state and federal law enforcement authorities with local agencies receiving up to 80 percent of the asset value of assets seized under federal law.

On December 21, 2015, the Department of Justice had announced it was suspending a program because of budget cuts included in last year’s spending bill. Department of Justice Spokesman Peter J. Carr explained, “[i]n the months since we made the difficult decision to defer equitable sharing payments because of the $1.2 billion rescinded from the Asset Forfeiture Fund, the financial solvency of the fund has improved to the point where it is no longer necessary to continue deferring equitable sharing payments.” Mr. Carr further clarified “[t]he Asset Forfeiture Fund acts in many ways like a revolving fund. Forfeited proceeds are being deposited throughout the year to replenish the funds that are simultaneously flowing out of the Asset Forfeiture Fund to pay for approved agency expenses.”

A wide-ranging Washington Post investigation in 2014 found that police had seized $2.5 billion in cash alone without warrants or indictments since 2001. In response, former Attorney General Eric Holder announced new restrictions on some federal asset forfeiture practices. These restrictions were meant to limit the ability of state and local law enforcement officials to choose more lenient federal forfeiture guidelines over state law. However, critics maintain that the reforms still leave discretion for local authorities to choose to rely on more permissive federal laws by acting as part of a joint task force with federal authorities.

The resumption of the program will greatly hinder companies who seek restitution from employees who have committed crimes. Rather than allow forfeited assets to be used to make a victimized company whole, law enforcement will likely attempt to keep the assets for itself.

Jackson Lewis attorneys are experienced in white collar criminal matters, including issues pertaining to asset forfeiture, and are available to advise companies on government forfeiture, seizure of assets, and the Mandatory Victims Restitution Act.

Law Enforcement Cannot Freeze Assets Not Tied to Crimes, Supreme Court Rules

The U.S. Supreme Court, in a 5–to-3 decision, has ruled that federal law enforcement may not freeze an accused’s assets needed to pay criminal defense lawyers if the assets are not linked to a crime. Luis v. United States, No. 14-419 (Mar. 30, 2016).

A federal statute provides that a court may freeze before trial certain assets belonging to a defendant accused of violations of specified federal laws, including statutes covering federal health care or banking. Those assets may include (1) property “obtained as a result of” the crime, (2) property “traceable” to the crime, and (3) as relevant in Luis, other “property of equivalent value.” 18 U.S.C. § 1345(a)(2).

The Luis case arose from the prosecution of Sila Luis on charges of Medicare fraud  involving $45 million in charges for unneeded or nonexistent services. The Government alleged that Ms. Luis’s profits from the fraud had been spent by the time the charges were filed. Relying on § 1345(a)(2), law enforcement asked the judge to freeze $2 million of her funds that were not connected to the alleged fraud, saying the money would be used to pay fines and provide restitution if she were convicted. Ms. Luis challenged law enforcement’s request, asserting that she needed the money to pay her attorneys. The trial judge ultimately issued the order and froze Ms. Luis’s assets. An appellate court affirmed.

The U.S. Supreme Court ruled that the judge’s order violated Ms. Luis’s Sixth Amendment right to the assistance of counsel. Justice Stephen G. Breyer, in a plurality opinion also signed by Chief Justice John G. Roberts, Justice Ruth Bader Ginsburg, and Justice Sonia Sotomayor, wrote that the government can seize “a robber’s loot, a drug seller’s cocaine, a burglar’s tools, or other property associated with the planning, implementing, or concealing a crime,” but cannot freeze money or other assets unconnected to the crime. Justice Breyer pointed out that, although the government’s interest in recovering money is important, the right to counsel is a fundamental constitutional guarantee.

Justice Breyer was careful, however, to hold that the Luis ruling did not change the general framework established by United States v. Monsanto, a 1989 decision that said freezing assets was permissible, even if it frustrated the defendant’s ability to hire a lawyer, as long as there was probable cause that a crime had been committed and the assets were linked to the offenses described in the indictment.

Justice Clarence Thomas, providing the fifth vote needed to reverse the lower courts, concurred in the judgment but did not adopt what he called the plurality’s balancing approach. While agreeing with the ultimate result, he wrote that if the right to counsel is a fundamental constitutional guarantee, it cannot be weighed against other interests.

In dissent, Justice Anthony M. Kennedy, joined by Justice Samuel A. Alito, Jr., wrote that the decision by the Court “rewards criminals who hurry, conceal, or launder stolen property.” Justice Kennedy stated that “[t]he true winners today are sophisticated criminals who know how to make criminal proceeds look untainted.”

In a separate dissent, Justice Elena Kagan maintained that she found the Court’s 1989 Monsanto decision troubling, but maintained that it required ruling against Ms. Luis, rather than drawing baseless divisions. Justice Kagan wrote, “The thief who immediately dissipates his ill-gotten gains and thereby preserves his other assets is no more deserving of chosen counsel than the one who spends those two pots of money in reverse order. Yet the plurality would enable only the first defendant, and not the second, to hire the lawyer he wants.” Justice Kagan continued, “I cannot believe the Sixth Amendment draws that irrational line, much as I sympathize with the plurality’s effort to cabin Monsanto.”

Jackson Lewis attorneys specialize in white collar and government enforcement matters and are available to advise companies on the scope of law enforcement seizure rights, asset forfeiture, and the Mandatory Victims Restitution Act.

False Claims Act Particularity Standard Still Unclear But New York & New Jersey Cases Provide Additional Guidance

By Susan M. Corcoran and Peter S. Seltzer

We are seeing a growing number of False Claims Act (“FCA”), 31 U.S.C. §§ 3729 – 3733 cases where defendants test the sufficiency of relators’ pleadings, which is the heightened pleading standard under Rule 9(b). Rule 9(b) acts as a gatekeeping function by requiring that “in alleging fraud” a “party must state with particularity the circumstances constituting fraud.”  In general terms, under Rule 9(b), courts require Relators to plead with particularity the “who, what, when, where and how” of the supposed fraudulent activity. See Kanter v. Barella, 489 F.3d 170, 175 (3d Cir. 2007).  However, the question of what constitutes such “particularity” remains an open question, as courts continue to grapple over whether “particularity” requires a relator to identify specific false claims that were submitted for payment by a federal health care program.

To state a claim under most sections of § 3729(a)(1), a relator must allege that: (1) there was a false or fraudulent claim; (2) defendants knew it was false or fraudulent; and (3) defendants made, presented, or caused to made or presented false claims to the Government for payment or approval. There is currently a deep circuit split as to what constitutes “particularity” under Rule 9(b) in the context of the FCA.

The First, Fourth, Sixth, Eighth, and Eleventh Circuits require that “a plaintiff must plead both the particular details of a fraudulent scheme and details that identify particular false claims for payment that were submitted to the government.” United States ex rel. Noah Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451, 455-56 (4th Cir. 2013), cert. denied, 134 S. Ct. 1759, 188 L. Ed. 2d 592 (2014) (emphasis added); United States ex rel. Bledsoe v. Cmty. Health Sys., Inc., 501 F.3d 493, 510 (6th Cir. 2007); United States ex rel. Joshi v. St. Luke’s Hosp., Inc., 441 F.3d 552, 557 (8th Cir. 2006); United States ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1308, 1312 (11th Cir. 2002).  Comparatively, the Third, Fifth, and Ninth Circuits apply a more relaxed standard that allows a relator to plead “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted,” without pointing to a specific false claim. Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 156 (3d Cir. 2014); see also Ebeid ex rel. U.S. v. Lungwitz, 616 F.3d 993, 998-99 (9th Cir. 2010); United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009).

In June 2014, the Supreme Court declined the opportunity to resolve this issue, in United States ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 134 S. Ct. 1759, 188 L. Ed. 2d 592 (2014), further solidifying the circuit split. This left relators and defendants subject to the patchwork of decisions in each circuit and without clarity as to what sort of pleadings constitute “particularity.”

Consider two recent decisions within the healthcare context which demonstrate particularity within the Second and Third Circuits.

In United States ex rel. Ortiz v. Mount Sinai Hosp., 2015 U.S. Dist. LEXIS 153903 (S.D.N.Y. Nov. 9, 2015), Xiomary Ortiz and Joseph Gaston (the “Ortiz Relators”), who held various billing positions within their organization, alleged violations of the FCA NYS False Claims Act against their employers, Mount Sinai Hospital and related entities (collectively “Mount Sinai”).  The Ortiz Relators alleged a variety of fraudulent acts, including “doctor swapping” “upcoding,” “phantom billing,” and “double billing.”  In their pleadings, the Ortiz Relators identified numerous specific illustrative examples of alleged false claims Mount Sinai submitted to the Government for reimbursement, including details concerning, inter alia, the date of the procedure/treatment, the nature of the procedure/treatment, that the claim was submitted for reimbursement/payment, and why the claim was fraudulent.  These alleged false claims included redacted references to identified patients as part of the details of billing practices.  Moreover, the Ortiz Relators alleged specific facts to support that Mount Sinai had knowledge of the submission of false claims, including an alleged internal acknowledgment that fraud existed.

Mount Sinai sought to dismiss the Complaint on a number of bases, including that “[r]elators do not plead fraud with particularity,” under Rule 9(b), and that the Ortiz Relators failed to “plead sufficient details showing specific false claims.”  Judge Richard Berman of the Southern District of New York denied the motion.  First, Judge Berman opined that the Relators satisfied the FCA pleading requirement that: “A complaint must ‘(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.’” United States ex rel. Ortiz v. Mount Sinai Hosp., 2015 U.S. Dist. LEXIS 153903, at *12-13 (S.D.N.Y. Nov. 9, 2015), quoting United States ex rel. Kester v. Novartis Pharms. Corp., 23 F. Supp. 3d 242, 251-252 (S.D.N.Y. 2014). Judge Berman explained that while “there is no mandatory ‘checklist’ of identifying information that a plaintiff must provide, the complaint must include sufficient details about the false claims such that the defendant can reasonably ‘identify [the] particular false claims for payment’ that are issue.” Id. at *13, quoting Kester, 23 F. Supp. 3d at 256  and U.S. ex rel. Karvelas v. Melrose-Wakefield Hospital, 360 F.3d 220, 232 (1st Cir. 2004). As the Second Circuit has yet to place itself on one side of the Circuit split concerning “particularity” under Rule 9(b), Judge Berman advocated for a case-by-case approach:

“[t]he level of particularity required depends upon the nature of the case, the complexity or simplicity of the transaction or occurrence, the relationship of the parties and the determination of how much circumstantial detail is necessary to give notice to the adverse party and enable him to prepare a responsive pleading.”

Ortiz, 2015 U.S. Dist. LEXIS 153903, at *25-26 (internal citations omitted).

Ortiz does not definitively enumerate the Second Circuit’s standard of particularity moving forward. However, it is instructive because it provides a snapshot of a pleading that definitively clears the Rule 9(b) hurdle by providing: (1) the date of the procedure/treatment; (2) the nature of the procedure/treatment; (3) that the claim was submitted for reimbursement/payment; and (4) why the claim was fraudulent of specific false claims, while also pleading specific facts to support the scienter element of an FCA claim. The Ortiz Relators’ identification of these illustrative examples of alleged false claims was likely sufficient under any reading of Rule 9(b), as relators “may satisfy Rule 9(b) by providing sufficient identifying information about those false claims, or by providing examples of false claims that enable the defendant to identify similar claims.” Id. at *14.

Comparatively, consider Flanagan v. Bahal, 2015 U.S. Dist. LEXIS 171292 (D.N.J. Dec. 22, 2015), in which a former medical assistant and receptionist in Defendants’ medical office alleged that the Defendants engaged in eight different illegal schemes to submit false Medicare claims for reimbursement, including (1) changing the dates of service on claims in order to increase reimbursements; (2) providing medically unnecessary services; and (3) billing for various services requiring physician review or supervision that the physician never examined or did not attend.  In support, Flanagan identified: examples of ultrasounds that did not contain physician interpretation, despite being billed as such; an allegation that she performed tests in the physician’s absence that required the physician’s supervision for reimbursement; patients using monitoring devices that were billed to the Government whose data the physician failed to review; a single instance of a medically unnecessary catheterization; an allegation that the physician prescribed unnecessary medications; and an allegation that the physician ordered medically unnecessary and atypical scans for eleven patients.  Flanagan, 2015 U.S. Dist. LEXIS 171292, at *12-25.

The District Court’s analysis highlights the circuit split on particularity, noting that in the Third Circuit under Rule 9(b), a relator must state the “circumstances constituting fraud or mistake” with particularity, but “[m]alice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.” Flanagan, 2015 U.S. Dist. LEXIS 171292, at *6 (citations omitted).  Similarly, the District Court also explicitly stated that within the Third Circuit, under 9(b) a relator does not need to “identify a specific claim for payment to state a claim for payment to state a claim for relief,” but can survive a motion to dismiss by providing “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Id. at *7-8 (citing Foglia v. Renal Ventures Management, LLC, 754 F.3d 153, 155-56 (3d Cir. 2014)).

The Court determined that under the Third Circuit’s less restrictive 9(b) standard, some of Flanagan’s allegations survived motion to dismiss. For example, although she could not cite a specific example of a false claim concerning improper supervision of testing, the District Court allowed Flanagan’s claim on this issue to proceed because her allegation that she personally administered the tests without physician supervision were “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted.” Where Flanagan identified specific patients whose monitoring data the physician had not reviewed, she easily met the Third Circuit’s pleading standards under Rule 9(b), and likely would have met the standards applied in Ortiz.

By comparison, Flanagan’s allegations concerning medically unnecessary procedures, testing, and prescriptions all failed because she pled their lack of medical necessity in a conclusory manor, and failed to allege sufficient detail about the particular patients to demonstrate that the physician’s cause of action were in fact improper for reimbursement.

Lessons To Be Learned

Based on these decisions, defendants facing an FCA claim should evaluate where their jurisdiction lies on the Rule 9(b) issue. Should the complaint fail to point to a specific false claim submitted for payment, including potentially the date of the procedure/treatment, the nature of the procedure/treatment, that the claim was submitted for reimbursement/payment, and why the claim was fraudulent, attorneys may consider the value of a motion to dismiss for failure to plead with particularity, as Rule 9(b) functions as a gatekeeper against such claims. In the patchwork of standards on Rule 9(b) as well as the continued lack of clarity on the definition of “particularity,” Ortiz and Flanagan are useful guideposts for defense attorneys to understand when a motion to dismiss may be appropriate. In particular, Ortiz stands as a firm marker of how a relator may plead examples of a specific false claim submitted for payment, to withstand a motion pursuant to Rule 9(b). Based on the above, an identification of particular patients, if not specific submitted claims, will meet most Rule 9(b) pleading standard, so long as a relator actually explains why the treatment or claims meet the scienter requirement of the FCA and were “knowingly” false claims submitted for payment.