Recently in Civil Implications of Criminal Statutes Category

February 18, 2013

Notable Recent Decisions Under the False Claims Act--Part 2

knoxville_courthouse1.jpgThis is the second installment of our four part series about notable recent decisions under the False Claims Act. This week's featured decision is United States ex rel. Glenda Martin v. Life Care Centers of America, Inc., 2012 WL 6084626 (E.D. Tenn., Nov. 15, 2012).

This case deals with the extent to which matters under the FCA should remain under seal, both during the pendency of the Government's pre-intervention investigation and thereafter. The specific issues presented were: whether the court should grant the Government's request to maintain several documents under seal after the Government intervened in an action; and whether a local newspaper should be entitled to intervene to oppose the requested seal. The District Court allowed the newspaper to intervene and denied the Government's request to maintain certain documents under seal. While the case involves narrow issues, the District Court's excoriation of the Government for what it believed to be its abuse of the sealing provisions of the FCA is priceless.

This case was filed in October 2008. The Government sought several extensions of the seal. On January 13, 2011, the Court granted the Government's request for an indefinite extension of time in which the Government could make its intervention determination, and it ordered that the case be administratively closed. In support of that request, the Government had filed a status report indicating that it was involved in a "nationwide investigation" of the defendant, that it "continues to devote significant time and resources to this investigation," that its investigation had already involved over 150 witnesses nationwide, that it intended to serve additional subpoenas, that it had made a "lengthy and detailed presentation" to the defendant, and that the defendant had requested time to consider the information presented.

In March 2012, the Government transferred a second qui tam case raising the same issues to the Eastern District of Tennessee and sought to consolidate the two cases. At a status conference held on consolidation request, the Government objected to a reporter's presence and asked that the courtroom be sealed. The Court then asked the parties to brief whether all pleadings in the case should remain sealed and whether the Court should close the courtroom for all future proceedings in the case.

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February 10, 2013

Defrauded Peregrine Investors Seek Relief Against Banks

1237498_untitled.jpgA recent Northern District of Illinois case concerning fraud against investors alleges causes of actions against the financial institutions where the investors' funds were being held. This case poses an interesting question as to whether financial institutions should have a heightened duty to monitor bank accounts that are known to be customer segregated accounts.

In In re: Peregrine Financial Group Customer Litigation, 12-C-5546, the plaintiffs are a class of customers of the Peregrine Financial Group, a futures commissions merchant. Plaintiffs allege a twenty year scheme of fraud and concealment by Russell Wasendorf, Sr., the founder of Peregrine, whereby Wasendorf would take funds from Peregrine's customer accounts located at US Bank and use the funds for his own personal use and gain or to cover Peregrine's business expenses. Funds looted included multi-million dollar transfers from customer segregated accounts at JPMorgan to bank accounts at US Bank. Wasendorf's fraud scheme involved intercepting mail sent to US Bank by his auditors or the National Futures Association ("NFA") and then forging responses to fool his auditors or the NFA. Wasendorf would also forge US Bank statements and other documents that reflected the balances in his U.S. Bank accounts. Using the forgeries, Peregrine convinced the NFA that it had over $200 million dollars in its bank accounts when it in fact had only $5 million.

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October 22, 2012

Purdue Executives Continue Battle Against Broad Application of Medicare Exclusion Statute

1030718_people_2.jpgOn October 15, 2012, three former Purdue Frederick Company executives filed a Petition for Rehearing En Banc before the U.S. Court of Appeals for the District of Columbia Circuit. (Click here to view a copy of the petition: Petition for Rehearing En Banc.pdf). The petition is the latest chapter in the saga of these three former executives who pled guilty to misdemeanor misbranding under the "responsible corporate officer" doctrine in connection with the plea of Purdue to felony misbranding of the drug OxyContin. The Office of Inspector General ("OIG) for the U.S. Department of Health and Human Services subsequently excluded these individuals from participation in all Federal health care programs under its permissive exclusion authority set forth at 42 U.S.C. ยง 1320a-7(b)(1) and (3) for 20 years. During their various challenges to their exclusions, the executives have successfully reduced the length of the exclusion from 20 years to 12 years, which is cold comfort since the exclusion effectively ends all of their careers in the health care arena.

In July, a three-judge D.C. Circuit panel held in Friedman v. Sebelius that section 1320a-7(b)(1) authorizes the OIG to exclude from Federal health care programs an individual convicted of a misdemeanor "if the conduct underlying that conviction is factually related to fraud." The specific statutory section at issue in the case is section 1320a-7(b)(1), which provides that the Secretary of HHS may exclude any individual that has been convicted of a criminal offense consisting of a misdemeanor relating to fraud. The specific issue before the D.C. Circuit was whether the phrase "misdemeanor relating to fraud" in section 1320a-7(b)(1) refers to a generic criminal offense or to the facts underlying the particular defendant's conviction.

Continue reading after the jump.

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August 3, 2012


531240_football.jpgThe former General Counsel of Penn State University, Cynthia Baldwin, has recently become the subject of intense criticism based upon the now public findings of the 267-page report prepared by former FBI Director Louis Freeh. In his report, Mr. Freeh described Ms. Baldwin's representation of the University as "seriously deficient." Mr. Freeh and other critics have cited the following examples of Ms. Baldwin's allegedly deficient performance:

(1) Two members of Penn State's Board of Trustees believed that Ms. Baldwin personally represented each of them when she accompanied them to testify before the criminal grand jury and failed to clarify that she only represented the University. (The grand jury ultimately returned an indictment of both of those Board members.)

(2) Ms. Baldwin failed to retain experienced criminal counsel to represent the University in the criminal investigation and advised the Board of Trustees against conducting an internal investigation.

(3) Ms. Baldwin failed to adequately communicate to the Board the nature and extent of the Attorney General's criminal investigation and the potential civil liability that could result from the criminal allegations.

The headline grabbing Penn State scandal provides an excellent opportunity to remind organizations and their in-house counsel of the importance of recognizing the tremendous risks associated with criminal investigations and how to best mitigate those risks. In-house counsel can avoid catastrophic damage to their organizations by remaining cognizant of a few basic principles when handling such criminal investigations.

This post is the first installment of a three-part series that will outline best practices for in-house counsel faced with criminal investigations that relate in any way to the organization's officers, directors or the organization as a whole. Check the blog next week for the second installment in the series, which will address the potential conflicts of interest that can arise between organizations and board members in criminal investigations and how in-house counsel can avoid such conflicts.

April 9, 2012


764088_shhhh.jpgThe Financial Crimes Enforcement Network (FinCEN) recently issued an Advisory to remind financial institutions and the lawyers that represent them that Suspicious Activity Reports (SARs) must remain confidential. SARs are issued by financial institutions to report suspicious activity to law enforcement. The unauthorized disclosure of a SAR could tip off suspects, deter institutions from filing SARs and jeopardize the institutions that issue the SARs. FinCEN is concerned because private parties are attempting to learn of the existence of SARs in the context of civil litigation. Financial institutions, and people representing them, are forbidden from disclosing the existence of a SAR, or even from disclosing information that would reveal that a SAR may exist. Unauthorized disclosure of a SAR is subject to civil penalties of up to $100,000 per violation or criminal penalties of up to $250,000 and imprisonment of up to 5 years. The disclosing financial institution, moreover, could be subject to penalties for anti-money laundering program deficiencies. FinCEN even requires a financial institution that recieves an unauthorized request for a SAR to immediately contact FinCEN's Office of Chief Counsel. As to SARs, therefore, the best policy is clearly "don't ask, don't tell."