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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

Notable Recent Decisions Under the False Claims Act

718988_whistle.jpgEach week for the next four weeks, we will provide a summary of a notable recent decision under the False Claims Act. The first in this series is United States v. Kernan Hospital, 2012 WL 5879133 (D.Md., Nov. 20, 2012). Read the decision here: United States v. Kernan Hospital Memorandum Opinion.pdf

This case involves a motion to set aside a civil investigative demand ("CID") issued by the United States Attorney's Office for the District of Maryland, seeking documents from Kernan Hospital. The Government had already filed a False Claims Act suit against Kernan Hospital but the District Court dismissed it without prejudice pursuant to F.R.C.P. 9(b). After dismissal, the Government issued its CID. The District Court set aside the CID, holding that the False Claims Act expressly limits the Government's use of CID's to the period "before commencing a civil proceeding."

The Government alleged that Kernan devised a scheme to increase its Medicare, Medicaid, and Tri-Care reimbursement by systematically "upcoding" secondary diagnoses concerning malnutrition. Before filing its complaint against Kernan, the Government investigated the matter for three years. Specifically, pre-complaint proceedings included the issuance of an Office of Inspector General subpoena, the production by Kernan of 100 specifically identified medical records (15,686 pages of materials), the production by Kernan of the coding summary sheets corresponding to the 100 medical records, Kernan's production of an additional 3,000 pages of documents, the issuance of a September 7, 2011 CID seeking deposition testimony from Kernan's Director of Health Information Management, followed by her testimony two weeks later. The Government filed its FCA complaint in October 2011. The District Court dismissed the complaint under Rule 9(b) and, on August 23, 2012, the Government issued yet another CID on Kernan seeking many of the same documents that it had already sought and obtained.

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January 15, 2013

As HIPAA Audit Pilot Program Ends, Providers Should Brace for More of the Same in 2013

1370555_lots_of_files_2.jpgThe Health Information Technology for Economic and Clinical Health (HITECH) Act requires the Department of Health and Human Services (HHS) to provide for periodic audits to ensure that covered entities and business associates are complying with the HIPAA privacy and security rules and the HITECH Act's breach notification standards. To implement this mandate, the HHS Office for Civil Rights (OCR) piloted a program to conduct 115 audits of covered entities to assess privacy and security compliance. Audits conducted under OCR's pilot program began in November 2011 and ended in December 2012.

As part of the audit pilot program, OCR established an audit protocol that contains the requirements assessed during OCR's performance audits. The entire audit protocol is organized around modules, representing separate elements of privacy, security, and breach notification. (The protocol is available for public review at: For example, with respect to the HITECH Act's breach notification standards, auditors checked, among other things, whether:

  • a process exists for notifying individuals within the required time period of a breach of unsecured protected health information (PHI);
  • if any breaches occurred, that individuals were notified within 60 days;
  • if there is a standard template or form letter for breach notification; and
  • if any breaches occurred, the notification to the individuals included the required elements set forth at 45 C.F.R. ยง 164.404(c).

In other words, the protocol provides a useful checklist for providers to ensure that they are complying with the HIPAA privacy and security rules and the HITECH Act's breach notification standards.

OCR has previously stated that the results of the initial audits will inform how audits will be conducted moving forward from the pilot program. It remains unclear how the initial audits will affect the existing audit protocol and whether OCR will revise the protocol. Until OCR provides notice that it is revising the existing protocol standards, providers would be well-served by continuing to compare their existing policies and procedures against the protocol's standards.

January 15, 2013

SEC Reports Whistleblower Program Gathered Steam in 2012

994161_steam.jpgFollowing the SEC's payment of its first Whistleblower award in the amount of $50,000, the SEC reports that its Whistleblower Program generated a total of 3001 tips through fiscal year 2012. Read the report here: SEC Annual Report on the Dodd-Frank Whistleblower Program 2012.pdf. Big payouts and many more cases are expected. The SEC also reported that whistleblower tips identified over half of all fraud schemes uncovered in public companies, while outsiders, including the SEC, only identified about 5% of such schemes.

As preciously discussed on this blog, the SEC's Whistleblower Program provides regulatory authority for the SEC to pay 10-30% bounties to whistleblowers whose tips lead to a SEC enforcement action with cummulative penalties of over $1,000,000. Fines, disgorgement and interest paid all count toward the $1,000,000 threshold. The determination of the actual percentage and amount of the award is within the discretion of the SEC which is to consider the significance of the tip, the degree of assistance provided and the "programmatic interest " of the SEC in the particular action.

Skeptics continue to voice concerns that some employees will "blow the whistle" only to get the substantial reward rather than pursue internal company procedures to avoid or limit improper conduct. Despite these reasonable concerns, the SEC Whistleblower Program and similar measures are unquestionably the trend in compliance legislation and hold great public appeal. Companies subject to SEC jurisdiction should govern themselves accordingly.

November 16, 2012

Financial Advisor Convicted of Insider Trading for Trading on Info Received at AA Meeting

952313_gavel.jpgHere is an update to our October 8, 2012 post about an insider trading case involving information received at an Alcoholics Anonymous ("AA") meeting.

On November 15, 2012, a jury in the Eastern District of Pennsylvania found Timothy McGee guilty of insider trading based on his use of information he received from a fellow member of his AA group. McGhee was a financial adviser for Ameriprise Financial Services Inc. As you may recall, a corporate executive of Philadelphia Consolidated Holding Corporation ("PHYL") who was also a member of McGhee's AA group spoke to McGhee about his struggles arising out of the stress created by the pending acquisition of PHYL. McGee used that knowledge to purchase PHYL stock in advance of the acquisition transaction, netting almost $300,000 after the company went public. In less than four hours, a jury determined that McGee was guilty of acting on insider information. Sentencing has been scheduled for February 20, 2013 and McGee could face up to 25 years in prison. In addition, McGee also faces a civil suit, which had been stayed pending the outcome of the criminal trial, based on the $1.5 million that others netted from his disclosure of the information.

November 8, 2012

Internal Investigations and Attorney-Client Privilege: CAVEAT SPEAKER

592542_businessman_walking.jpgJoseph M. Elles, Carter's Inc.'s former Vice President of Sales, is facing federal criminal charges alleging that he aided Carter's in misstating its income in various Securities and Exchange Commission filings. The case is United States v. Elles, No. 1:11-CR-445 (N.D. Ga). Elles has objected to the government's attempts to introduce into evidence statements that he made to attorneys conducting an internal investigation for Carter's. (See U.S. v. Elles Response in Opposition to Motion to Admit Defendant's Statements.pdf) The government contends that Elles admitted his guilt during the course of a seven hour interview with counsel that conducted the internal investigation. Elles disagrees, arguing that his statements are "a far cry from the elements necessary to prove guilt beyond a reasonable doubt as alleged."

Elles raises several arguments why his statements should not be admitted. First, he claims that his cooperation with the internal investigation was coerced because Carter's said it would withhold his severance payments if he did not participate. He also attacked counsel's motives, calling them "former SEC and AUSA attorneys [who] were working hand in glove with prosecutors." As proof of this collusion, Elles pointed out that Carter's immediately waived privilege and turned over his interview to the FBI and the United States Attorney's Office the day after the interview was conducted. Elles also argues that if the portion of the interview that the government seeks to introduce is allowed, that he should be allowed to introduce other portions of his interview (which was summarized by counsel in a 33 page memorandum) and to cross examine the attorneys who conducted the interview to explain the context of his statements and to demonstrate that, as Vice President of Sales, he was not responsible for deciding how "accounting issues" were to be reported on financial statements.

Mr. Elles' co-defendant, Carter's former President, Joseph Pacifica, has similarly objected to the admission of statements he made to counsel during Carter's internal investigation.

This case highlights a critical dynamic concerning internal corporate investigations. Corporate employees who cooperate in such investigations do so at their own peril. The corporation will ultimately decide whether to assert or to waive privilege. And where, as here, the corporation decides to waive privilege, an individual employee who is incriminated by information over which privilege is waived has little recourse or ability to stop the damage. Our rule, therefore, for corporate employees deciding whether to participate in an internal investigation is caveat speaker.

October 7, 2012

A Day on Health Law: False Claims Act Update

Wednesday, October 10, 2012

1153096_man_with_microphone.jpgThe CLE Conference Center
Wanamaker Building, 10th Floor, Suite 1010, Philadelphia

Hosted by the Pennsylvania Bar Institute, this full day program addresses the latest hot topics in health law. David M. Lagaie, Dilworth Paxson Partner and Chair of the firm's White Collar practice will join a panel discussion of the most notable False Claims Act cases from the past year.

For additional information and to register, click here Simulcast available throughout the state. CLE Credits will be offered!

September 14, 2012

Recent Ninth Circuit Decision Further Muddles Treatment of AWCs

by Robert Vaughan Cornish, Jr.

836705_wallstreetbroadway.jpgEntities and individuals subject to discipline or review by the SEC, CFTC or self-regulatory organizations such as FINRA or the NFA are sometimes faced with the classic Hobson's Choice of settling allegations of misconduct under what is called an "Acceptance Waiver & Consent" or AWC. Notwithstanding one's desire to settle such matters and the truth regarding such allegations, AWCs often recite the facts as they were originally pled or recited by the regulatory body in its original submission that commenced the proceedings. These AWCs tend to find their way into related civil litigation, whether in court, arbitration or before other administrative bodies, for a variety of purposes. AWCs have been submitted as evidence of prior conduct, knowledge of prior conduct or the proclivity to engage in similar conduct.

A recent decision by the United States Court of Appeals for the Ninth Circuit, United States v. Bailey, No. 11-50132 (9th Cir., August 27, 2012), addressed the admissibility of AWCs in criminal proceedings and determined that AWCs are not admissible to demonstrate intent and knowledge of wrongful conduct. In Bailey, the SEC sought to introduce an AWC concerning violations of federal securities laws as evidence of knowledge of the defendant's criminal conduct. The District Court below permitted the AWC to be admitted into evidence at the defendant's trial for criminal violations of federal securities laws. The defendant was convicted and subsequently appealed, arguing that the admission of the AWC was prejudicial. The Ninth Circuit agreed. Of particular importance was the Court's recitation as to why AWCs should generally not be admitted as evidence of knowledge of wrongful conduct:

A defendant may settle a case for a variety of reasons. He may have committed the conduct alleged in the complaint [upon which the AWC is based] or he may not have - but having settled the claim, there is no way to know. Admitting prior conduct charged but settled with no admission of liability is not probative of whether defendant committed the prior conduct, much less whether he committed the conduct in question. There is no logical relevancy to admitting this type of evidence.

This post continues after the jump.

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August 23, 2012

SEC Pays its First Whistleblower

718988_whistle.jpgThe Dodd-Frank Act authorized the SEC to make awards to whistleblowers who provide information that leads to an enforcement action resulting in $1 million or more in sanctions. The SEC whistleblower program began operating in August 2011. The SEC, through its Chairwoman Mary L. Schapiro, was a staunch advocate for the creation of the program.

The SEC has recently announced its first whistleblower award. And by awarding a maximum 30% share of its recovery, the SEC has certainly "put its money where its mouth is." According to the SEC's press release, the whistleblower (whose identity is protected by law) "provided documents and other significant information that allowed the SEC's investigation to move at an accelerated pace and prevented the fraud from ensnaring additional victims." In the enforcement action resulting form the whistleblower's information (which is not identified) a court has ordered more than $1 million in sanctions and may enter future awards against additional parties. The whistleblower will receive 30% of the sanctions paid to the SEC. To date, the SEC has been paid $150,000 and the whistleblower will therefore initially receive $50,000. The SEC denied recovery to a second whistleblower in the enforcement action because the information that person provided "did not lead to or significantly contribute to the SEC's enforcement action."

The relatively small $50,000 award to this first whistleblower should not obscure the fact that the whistleblower program will lead to many future enforcement actions. The SEC is currently receiving eight whistleblower tips a day. That the first whistleblower award was made within a year of the program's start suggests that the SEC is aggressively following up on these whistleblower tips. We should expect to see many more whistleblower awards in the near future.

April 27, 2012


351746_pinocchio_nose.jpgEven little lies can have big consequences. 18 U.S.C. 1001 criminalizes knowingly engaging in a falsehood in any matter within the jurisdiction of the United States. Prosecutions under 1001 usually involve a false statement to a federal agent, although false statements to anyone can trigger liability where the false statement both interferes with a federal function and is "material." Section 1001 is frequently used to obtain a conviction when more substantive charges would be difficult to prove. For example, Martha Stewart was convicted of a 1001 violation even though insider trading charges would have been very difficult to prove. The Wall Street Journal recently described the absurd reach of 1001. It reported on a situation where the owner of a whale watch boat denied that one of her captains whistled at a humpback whale in an attempt to lure the animal closer for her customers to get a better view. While prosecutors did not pursue prosecution under the Marine Mammal Protection Act of 1972, they did embark on a five year investigation - including executing a search warrant with twelve gun wielding agents - and charged the boat owner with four federal crimes. The defendant, a marine biologist and world renowned expert on killer whales, has spent more than $100,000 in attorney fees; she faces a potential twenty years in prison. This is not an isolated instance. As a practical matter, anyone approached by the government for an interview who is tempted in the least to shade the truth, omit facts or do anything less than tell the complete truth should refuse the interview and consult with their attorney. In that way, they might avoid being the subject of a similar horror story.

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."