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Takeaways:
- FY 2023 saw the most FCA settlements and judgments ever.
- $2.69B in total recoveries is an uptick from 2022’s down year but still below historical norms.
- New non-qui tam cases surged to the highest in history as the Department of Justice’s pandemic fraud crackdown gains steam.
- Relators continue to see success in non-intervened cases – netting $442mm for taxpayers when they have pursued their claims alone.
On February 22, 2024, the Department of Justice (“DOJ”) published its annual review of cases and recoveries under the False Claims Act. Through the end of fiscal year 2023, total recoveries (across all years) under the False Claims Act have eclipsed $75 billion with over $8.99 billion awarded to relators for their whistleblowing efforts.
Whistleblowers Remain the Bedrock of the FCA
Whistleblower lawsuits gave rise to $1.8 billion of the total $2.3 billion in annual recoveries (i.e., over 86% of the total annual recoveries). And, like prior years, whistleblowers were richly awarded for their efforts with over $349 million awarded to FCA whistleblowers last year.
Curiously, the Number of Recoveries Surges but the Monetary Total Remains Low
The $2.68 billion in settlements and judgments last year reflects a slight increase from FY 2022. FY 2022 was the worst year for FCA recoveries in over a decade. However, the number of recoveries (i.e., settlements and judgments) stood at 543 in FY 2023 – the most in history. That means that DOJ and relators are obtaining more resolutions, but the average FCA recovery is declining. That surely reflects, at least in large part, the jump in Paycheck Protection Program (“PPP”) fraud and related pandemic relief cases which tend to involve relatively modest sums of money. DOJ’s focus on pandemic relief fraud means more, but smaller, FCA cases.
New Non-Qui Tam Cases Jump to Historical Highs as the PPP Fraud Crackdown Rolls On
Over the last decade, DOJ has typically opened between 100 and 200 new non-qui tam FCA matters per year. Last year, we saw that number rise to 305 cases, and this year the number is even higher at 500 cases. This too reflects DOJ’s crackdown on pandemic relief fraud. We should expect to see more pandemic relief cases and more recoveries in those cases for the foreseeable future.
Qui Tam Cases Continue to Rise
FY 2022 saw the most qui tam filings in nearly a decade. Relators filed 712 qui tam complaints last year. This was the most since 2024 and an 8% jump from last year. Yet, the number of healthcare qui tam cases fell to 348 last year, the lowest number since 2009. So, the increase in overall qui tam cases (despite a fall in healthcare cases) no doubt reflects that relators are blowing the whistle on PPP Fraud too.
Healthcare Still Dominate FCA Recoveries – and Medicare Advantage Cases, in Particular, Continue to Bubble Up
Of the $2.68 billion recovered last year, $1.8 billion (67%) arose from healthcare matters. Healthcare is a perennial focus of the FCA given the extent of federal spending on healthcare services.
DOJ’s annual report made sure to highlight key areas of focus. DOJ put particular emphasis on Medicare Advantage fraud. Medicare Advantage allows private insurers to provide health plans funded by the federal government. Today, most (51%) of Medicare beneficiaries use Medicare Advantage. Insurers are paid a capitated rate which, in significant part, reflects the health status of its plan members. DOJ has alleged that some insurers have effectively upcoded diagnostic data in order to reap excessive Medicare Advantage payments. For example, last September Cigna Group agreed to pay $172 million to resolve such allegations. Expect DOJ’s focus on Medicare Advantage to continue.
Kickbacks Cases Remain a Focal Point for FCA Enforcement
Cases involving violations of the Anti-Kickback Statute have been a fixture of the FCA landscape for years. Last year was no different. DOJ highlighted its $85.5 million settlement with a cardiac imaging lab (and related defendants), a $22.9 million settlement involving the alleged use of medical directorship opportunities to induce referrals, and a series of cases involving the alleged use of management service organizations (“MSOs”) as a sluice for channeling kickbacks to providers.
The Road Ahead
PPP fraud cases will continue to demand significant DOJ resources. But whether those cases will lead to substantial recoveries remains to be seen. Unless the government successfully pursues banks or other large institutions that may have facilitated PPP fraud, the government’s broadside against PPP fraud may yield modest monetary results. But the FCA’s import is not purely monetary – by pursuing even relatively small PPP fraud cases, the federal government is sending a message that even “small” fraud will not go unnoticed. That is important as a matter of public policy.
Beyond PPP fraud, expect Medicare Advantage cases to take up an even larger share of DOJ resources and a larger share of FCA recoveries. Medicare Advantage’s share of federal healthcare spending is simply too large to ignore, and it continues to grow each year. Given the nature of the Medicare Advantage system, where both insurers and providers are often financially incentivized to submit higher-reimbursing diagnostic data, Medicare Advantage cases will continue to ensnare insurers and providers alike.
On February 8, 2024, the US Supreme Court issued a unanimous opinion in Murray v. UBS Securities, LLC, No. 22-660 (U.S. 2024) restoring a $900K jury verdict in favor of a whistleblower under the Sarbanes-Oxley Act (SOX) related to publicly-traded businesses and their financial reporting. The whistleblower was awarded damages based on having demonstrated that his adverse employment action followed protected activities. On appeal, the Circuit court reversed, finding that the employee but had not demonstrated retaliatory intent by the employer. The Supreme Court disagreed and ruled unanimously that the former UBS employee who had blown the whistle on UBS, sued, and prevailed before a jury in 2017 was entitled to recover because proof of the employer’s state of mind – retaliatory intent – intent was not required.
UBS had argued that, as a matter of law, a SOX whistleblower must demonstrate retaliatory animus to prove that protected activity (engaging in whistleblowing conduct) was a contributing factor to an adverse employment action. The justices disagreed, stating that retaliatory animus was one way, but not the only way, to prove the connection between protected activity and the unlawful reaction by the employer.
What does this ruling mean for whistleblowers under similar laws aimed at encouraging private citizens to come forward, such as the federal False Claims Act (FCA) by providing protection from reprisal by their employers or contractors? The employee or contractor need only show that their protected activity contributed to the adverse employment action (such as a demotion or firing). The employer then bears the burden to prove that the employment action would have resulted without the protected activity. The Court made clear that the burden of proof (like the relevant statute) “is meant to be plaintiff-friendly.”
Whistleblowers under the FCA (like under the SOX provision) who suffer retaliation, which includes being terminated, harassed, or in any other way discriminated against “because of” their protected activity, need not prove a separate element (the employer’s intent), only a causal link between the two. The SOX provision addressed by the Supreme Court, Section 1514A, contains the exact “because of” language that Congress employed under Section 3730(h) of the FCA. This ruling provides whistleblowers with a powerful tool in the burden-shifting framework in claims for retaliation.
This ruling may allow FCA whistleblowers to meet liability standards to avail themselves of the broad damages of Section 3730(h) – “all relief necessary to make that employee, contractor, or agent whole.” The proof required to prove liability, that the discrimination in the terms or conditions of employment (including harassment, threats, demotion, suspension, or termination) was “because of” the protected activity, does not also require proof of a “retaliatory” mindset. It is to be seen whether the overall similar aim of SOX and FCA (and similar) anti-retaliation provisions, encouraging private citizens to come forward for a larger public good, will lead to “plaintiff-friendly” standards of proof on the whistleblowers’ private causes of action.
Medicare Advantage Organizations have come under increased fire as their parent companies continue to acquire more healthcare practices across the country. Experts suggest that this vertical integration has led to inflated Medicare spending, with providers facing new pressure to diagnosis chronic conditions that fetch more money for Medicare Advantage plans.
These dynamics are on full display in a consolidated False Claims Act action against integrated managed care consortium, Kaiser Permanente, in which the federal government intervened in 2021. Despite failing to dismiss the government’s claims, Kaiser has scored a victory in the Ninth Circuit against two of the qui tam relators.
In non-precedential opinion dated January 10, 2024, a three-judge panel for the Ninth Circuit affirmed the dismissal of one of the FCA complaints against Kaiser under the statute’s first-to-file rule.
The two dismissed relators, Marcia Stein and Rodolfo Bone, had alleged that Kaiser submitted false diagnosis codes to CMS to inflate payments that Kaiser’s health plans received through the Medicare Advantage risk-adjustment system. Three other relators had made similar allegations against Kaiser in earlier filed actions, leading the Northern District of California to dismiss Stein and Bone’s FCA complaint under the first-to-file rule.
Under the FCA, “[w]hen a person brings an action under this subsection, no person other than the Government may intervene or bring a related action based on the facts underlying the pending action.” This bar against subsequent “related” actions is known as the first-to-file rule.[i]
Stein and Bone appealed the dismissal ruling on grounds that their complaints provided new details about Kaiser’s scheme and that the district court had disregarded their proposed amended pleading. The Ninth Circuit rejected both arguments.
Ninth Circuit’s Ruling
The Ninth Circuit acknowledged that Stein and Bone had provided “more details about a few diagnoses.” Still, applying the “material facts test,” the Ninth Circuit held that Stein and Bone’s more detailed allegations related to the same fraudulent scheme alleged in the earlier actions. And because the earlier actions “alerted the government to the essential facts of [the] fraudulent scheme,” the first-to-file rule barred Stein and Bone’s complaint, the Ninth Circuit concluded.
The Ninth Circuit also held that the district court did not abuse its discretion in denying leave to amend, reasoning that “Relators made no showing below—nor on appeal—that any amendment could cure their first-to-file deficiency.”
In a concurring opinion, Judge Danielle J. Forrest urged the Ninth Circuit to overrule en banc its “controlling” decision in United States ex rel. Hartpence v. Kinetic Concepts, Inc., 792 F.3d 1121 (9th Cir. 2015). In Hartpence, the Ninth Circuit held that the first-to-file rule was jurisdictional. But Section 3730(b)(5) “says nothing about the court’s ‘adjudicatory authority,’” Judge Forrest wrote.
“[O]ur en banc court should take the opportunity to bring our precedent regarding the FCA’s first-to-file bar in line with the Supreme Court’s repeated instruction not to make rules jurisdictional absent clear direction from Congress.”
Stein and Bone have 14 days from the ruling to petition the Ninth Circuit for a rehearing en banc.
The case is United States ex rel. Stein, et al. v. Kaiser Foundation Health Plan, Inc., et al., Case No. 3:16-cv-05337-EMC (N.D. Cal.).
Ongoing Litigation Against Kaiser
In 2021, the United States filed a complaint-in-intervention that consolidated the related actions in United States ex rel. Osinek, et al. v. Kaiser Permanente, et al., No. 3:13-cv-03891-EMC (N.D. Cal.).
In June 2023, District Judge Edward Chen cut a novel theory that Kaiser should be liable under the FCA for misusing tax credits through the manipulation of its risk-adjustment data submissions to CMS. The other claims against Kaiser are ongoing.
Increased Scrutiny for Medicare Advantage Organizations
With insurers acquiring more control over providers through practice acquisitions, Medicare Advantage Organizations face increased scrutiny for risk-adjusting diagnosis codes submitted to CMS.
In October 2023, for example, the Department of Justice filed a rare criminal indictment against Kenia Valle Boza, a certified coder and former director of Medicare risk adjustment analytics at HealthSun Health Plans Inc. The DOJ declined to prosecute HealthSun.
A month earlier, in September 2023, DOJ announced a $172 million settlement with Cigna to resolve claims that it submitted false diagnoses for morbid obesity and other risk-adjusting conditions through its “chart review” program.
“Over half of our nation’s Medicare beneficiaries are now enrolled in Medicare Advantage plans, and the government pays private insurers over $450 billion each year to provide for their care,” said Deputy Assistant Attorney General Michael D. Granston of the Justice Department’s Civil Division.[ii] “We will hold accountable those insurers who knowingly seek inflated Medicare payments by manipulating beneficiary diagnoses or any other applicable requirements.”
[i] 31 U.S.C. § 3730(b)(5).
[ii] See Press Release Number: 23-1082, U.S. Dep’t of Just., Cigna Group to Pay $172 Million to Resolve False Claims Act Allegations, (Oct. 5, 2023).
Marc Raspanti and Pamela Coyle Brecht‘s presentation “A Practitioner’s Guide to American Whistleblower Programs” is now available through World Online Lawyers With Excellent Practice (WOLEP). Mr. Raspanti and Ms. Brecht spoke to to WOLEP, an international network lawyers about the complexities of whistleblowing law, providing an overview of the five major United States whistleblower programs, all of which are open to Non-Americans. Their presentation was followed by a lively Q&A session with legal practitioners from across the world.
Click here to read more about the presentation, or watch the full presentation below.
Key Takeaways
- Largest year ever for whistleblower awards (nearly $600 million in total)
- Largest single whistleblower award ever ($279 million to an individual whistleblower)
- Largest year for whistleblower tip volume (over 18,000 tips submitted to the SEC)
- The SEC underscores its whistleblower protection efforts through Rule 21F-17 enforcement
On November 14, 2023, the Securities and Exchange Commission (SEC) issued its annual report on the agency’s twelve-year-old Whistleblower Program. The report shows that the SEC Whistleblower Program is firing on all cylinders.
I. 2023 saw the Largest Total Whistleblower Awards and Largest Single Whistleblower Award Ever
In fiscal year 2023, the SEC paid out nearly $600 million to 68 individual whistleblowers, the most it has ever paid out in a single year. That averages out to about $8.8 million per whistleblower – although there is significant variance in the size of whistleblower awards.
That annual total includes the largest whistleblower award in history (under any whistleblower program, not just the SEC’s program) – a $279 million bounty the SEC issued in May to an individual who provided information relevant to a Foreign Corrupt Practices Act case against Swedish telecom giant Ericsson. The SEC also paid out $104 million to be shared by seven whistleblowers in an unidentified matter (published whistleblower award orders are heavily redacted such that the names of whistleblowers and the underlying subject matter of the case are generally unknowable). That award was the agency’s fourth largest in history. Among the whistleblowers sharing the $104 million award were several foreign nationals, who stand just as eligible as U.S. citizens to receive a whistleblower award.
II. The SEC Continues to be Inundated with Tips
The SEC Whistleblower Program has not just grown in terms of net awards, 2023 saw the largest number of whistleblower tips on record with over 18,000 tips received by the agency. That is an almost 50% jump from last year and a 166% jump from 2020. That volume highlights the success of the program and its snowballing growth.
Yet volume is a double-edged sword. The SEC, like any government agency, is an agency of limited resources, and reviewing 18,000 tips is no easy task even with a motivated, well-staffed office. Given the high volume of tips, meritorious cases will inevitably be passed over. Well-prepared whistleblowers with robust evidence will have the best odds of getting picked from the haystack.
III. Market Manipulation, Fraud, and Crypto-Related Allegations are the Lion’s Share of Tips
The SEC analyzed the subject matter of the over 18,000 tips the agency received in 2023. 56% of those tips alleged market manipulation, offering fraud, or cryptocurrency-related violations. But tip volume and whistleblower success (i.e., issuance and size of an award) are not necessarily related. FCPA cases, for example, amounted to just 1.3% of tips, but as the Ericsson case and the SEC’s enforcement data shows, the SEC has enforced the FCPA very aggressively, often obtaining enormous recoveries for the government and whistleblowers alike. Meanwhile, while market manipulation was the subject of 24% of the whistleblower tips (a plurality) in 2023, only 4% of the SEC’s civil and administrative proceedings that year involved market manipulation.
IV. The SEC Highlights its Enforcement of Rule 21F-17
The SEC’s Rule 21F-17 prohibits any impediment to a potential or actual whistleblower reporting possible securities law violations to the SEC. That means, for example, that employers cannot include clauses in employment agreements barring employees from contacting the SEC to report a securities law violation – or otherwise hamstringing their ability to do so. The SEC’s annual report stressed the agency’s commitment to enforcing Rule 21F-17:
- The SEC fined D.E. Shaw & Co., L.P. $10 million because it allegedly used confidentiality agreements which did not include a carveout for reporting possible securities law violations to the SEC. Put another way, a seemingly standard confidentiality agreement without a clear exception permitting one to report potential malfeasance to the SEC may raise regulatory ire. After all, an employee could reasonably read such an agreement as a wholesale bar on whistleblowing.
- The agency found that CBRE, Inc. contravened Rule 21F-17 by requiring departing employees who wished to receive a severance payment to represent that they had not filed a complaint against CBRE with a federal agency. Such clauses would have the effect of making a severance payment contingent (or seemingly contingent) on not being an SEC whistleblower, while also potentially identifying individuals that have blown the whistle.
- The SEC found that Activision Blizzard, Inc. ran afoul of Rule 21F-17 because its separation agreements required departing employees to inform the company of any request for information he or she received from the SEC. So, under that provision, an ex-employee was permitted to act as an SEC whistleblower but was required to effectively “tip off” his or her former employer of informational requests from the SEC. Such clauses may impede whistleblowing by, for example, flagging a former employee for retaliation (e.g., refusal to provide an employment reference or rehire the employee) and suppressing an individual’s motivation to submit an SEC tip in the first place.
- Lastly, the SEC determined that Monolith Resources, LLC violated Rule 21F-17 by requiring departing employees to waive their rights to monetary whistleblower awards. Such provisions may impede whistleblowing by fundamentally altering the incentive calculus – an individual who will not stand to receive a whistleblower award will be unlikely to blow the whistle in the first place.
The SEC’s staunch enforcement of Rule 21F-17 will surely continue. Yet Rule 21F-17 also creates an incentive for individuals to blow the whistle on employment agreements that somehow encumber an employee’s rights under the SEC whistleblower program. Even an individual who knows of no disclosure fraud, market manipulation, FCPA violation, or similar “classic violation” of the securities laws can submit a tip to the SEC concerning the use of inappropriate employment clauses and apply for a whistleblower award. Employers and potential whistleblowers alike are on notice.
V. The SEC Whistleblower Program is Not Slowing Down
2023 was the SEC Whistleblower Program’s largest year by tip submission volume and amounts awarded. These are not blips on the radar though. The largest three years for tip volume and whistleblower awards were 2021, 2022, and 2023. The SEC’s Whistleblower Program has been a resounding success. The success of any whistleblower program is a positive feedback cycle. There is no better press for the program than large awards. So, more bounties yields more press, more press yields more tips, and more tips yield more awards. 2023 has been a record-breaking year for the program, but these are records that will surely be broken sooner rather than later.
On August 14, 2023, in a rare whistleblower award opinion, the Eleventh Circuit affirmed the Securities and Exchange Commission’s (SEC) denial of a whistleblower award in Granzoti v. Securities and Exchange Commission, 2023 WL 519503 (11th Cir.). The opinion establishes that eligibility for SEC whistleblower awards follows an actual causation standard – i.e., that the SEC must act upon the whistleblower’s tip.
Renato De Miranda Granzoti submitted a tip to the SEC’s whistleblower program concerning a pyramid scheme in 2013. The next year the SEC opened an investigation into the scheme and filed an enforcement action. The SEC subsequently secured a final judgment in its favor, and Granzoti filed his application for a whistleblower award. But the SEC denied him a bounty.
While Granzoti submitted his whistleblower tip before the SEC had even opened an inquiry into the fraud scheme, declarations from the SEC showed that his tip was never relayed to the staffers that investigated and brought the enforcement action. Instead, the SEC received a referral from the Department of Justice (DOJ) and opened its investigation based on the (apparently later) DOJ referral.
Under 17 C.F.R. § 240.21F-4(c) there are three primary ways a whistleblower becomes eligible for an award:
- The whistleblower’s information led to the SEC opening, reopening, or expanding an investigation.
- The whistleblower’s information – while related to an ongoing investigation – “significantly contributed to the success of [an enforcement] action”.
- The whistleblower reported the conduct through a company’s internal whistleblower, legal, or compliance procedures and, inter alia, that information was relayed to the SEC by the company, and the information led to the opening, reopening, or expanding of an investigation or otherwise “significantly contributed to the success of [an enforcement] action”.
In Granzoti’s case, the first standard was at issue. He argued that while his tip may not have caused the SEC to open an investigation, it was detailed enough that it could have caused the SEC to open the investigation. The Eleventh Circuit dispatched the argument by looking to the regulatory and statutory texts, both of which are framed in terms of actual – not theoretical – causation. The statute requires that a tip “led to the successful enforcement [action]” while the regulation requires that the tip is sufficiently robust “to cause the staff” to open, reopen, or expand an investigation. The Eleventh Circuit thus joined the D.C. Circuit and Second Circuit in finding that SEC whistleblower award eligibility turns on an actual causation standard.
The Eleventh Circuit’s opinion is a practical one, but one cannot help but sympathize with Granzoti. He submitted what was, by all accounts, credible information to the SEC. Yet because the information was (for reasons unclear) never sent to relevant investigatory staffers, he could not be credited with the opening of the SEC’s investigation. The opinion suggests that had the SEC acted upon Granzoti’s tip and investigated the investment scheme sooner, he would have met the actual causation standard and remained eligible for an award. And Granzoti had little insight into what happened to his tip – the record of the SEC’s internal actions here was limited to that described in declarations from the agency’s employees. A factual challenge to the inner workings of a black box is a tall order. Granzoti emphasizes that it is critical that whistleblowers not just submit credible information to the SEC but that they do so in a manner that persuades the agency to act.
On July 12, 2023, the Securities and Exchange Commission (SEC) awarded $9 million to a whistleblower who submitted a tip through the SEC’s Whistleblower Program. Per agency policy, the Award Order is heavily redacted and does not reveal the nature of the enforcement action, let alone the whistleblower’s identity. The Award Order is notable, however, as it explains that the whistleblower worked in a compliance or internal audit role (“compliance/audit”), and such individuals are subject to special rules under the SEC Whistleblower Program regulations.
Typically, a whistleblower (be it a corporate insider or outsider) can go directly to the SEC, submit a tip, and remain eligible for an award. Thus, in most cases there is no requirement to report the misconduct internally to obtain an award. But that is not the case for certain designated classes of individuals, including “employee[s] whose principal duties involve compliance or internal audit responsibilities, or [who are] employed by or otherwise associated with a firm retained to perform compliance or internal audit functions for an entity.” 17 C.F.R. § 240.21F-4(b)(4)(iii)(B).
For such compliance/audit personnel to remain eligible for an award, the whistleblower generally must report his or her concerns to the company’s “audit committee, chief legal officer, chief compliance officer (or their equivalents), or his or her supervisor” and then wait 120 days before submitting a tip to the SEC. § 240.21F-4(b)(4)(v) (providing certain other narrow exceptions for compliance/audit personnel as well). This rule provides companies the opportunity to timely self-report violations of federal securities laws to the government while still offering a route for compliance/audit personnel to reap a whistleblower award. In this case, this is precisely what the whistleblower did. The whistleblower reported the information to “[his or her] supervisor and then waited at least 120 days to report the information to the [SEC].”
The Award Order is otherwise remarkable as it emphasizes the significance of the whistleblower’s contribution to the SEC’s investigation and subsequent enforcement action. The Commission recognized that:
- the whistleblower’s tip caused the SEC to open its investigation (i.e., the Commission was not already on the trail);
- the tip included “highly significant and detailed information”;
- the “information b[ore] a close nexus” to the SEC’s charges;
- the whistleblower continued to provide assistance to the government during the investigation;
- the whistleblower repeatedly raised concerns internally; and
- millions of dollars were returned to investors via the underlying enforcement action.
While the Award Order does not set out the percentage of the monetary sanctions awarded to the whistleblower, the laudatory tenor of the order and the above factors suggest that the tipster received a percentage close to the statutory maximum of 30%, if not the 30% maximum itself.
In sum, the July 12th Award Order illustrates the opportunities offered to, and procedural rules governing, whistleblowers who serve in compliance or audit roles while also highlighting key factors that the SEC weighs in determining an award percentage for eligible whistleblowers.
On May 5, 2023, the Securities and Exchange Commission (“SEC”) announced that it had awarded a single whistleblower $279 million. This is the largest award made under the SEC’s Whistleblower Program by a long shot – more than double the now-second highest award, which stands at $114 million. In fact, this award is greater than all of the awards the SEC paid out to whistleblowers in 2022 combined (which totaled $229 million).
I. Three Years of Historic Whistleblower Awards
This recent award is also the largest award in history under any whistleblower program. This makes three years in a row where there has been a new record-breaking whistleblower award. In 2021, the Commodity Futures Trading Commission (“CFTC”) awarded just under $200 million to a single whistleblower who assisted the agency in its sprawling investigation of the LIBOR scandal. At the time, that was the largest whistleblower award in history. In 2022, a whistleblower who filed a False Claims Act lawsuit against biotech giant Biogen earned a $266 million realtor’s share award as part of Biogen’s $900 million settlement in the case, knocking the LIBOR award off the pedestal. This SEC award now dethrones the Biogen award. The high-water mark keeps on rising.
These awards not only reflect the remarkable financial incentives that exist for those that bring to light corporate malfeasance, but they also emphasize the growing breadth of the federal whistleblower programs – each of these nine-figure awards were provided via different whistleblower programs. Meanwhile, whistleblower programs are only expanding in scope. The Department of the Treasury recently launched its own whistleblower program, which is focused on violations of the Bank Secrecy Act and various sanctions laws. Whistleblowing is not slowing down, and it is a matter of when – not if – this $279 million award is eclipsed.
II. Latecomers Can Still Reap Massive Benefits if They Offer Significant Assistance to Regulators
Both the $200 million CFTC award and the $279 million SEC award involved individuals who blew the whistle after the agency had already begun to investigate the misconduct at issue. The SEC award will remind corporate insiders that whistleblowers can be handsomely rewarded for providing information to the government even when the government is already on the trail. Meanwhile, companies must continue to wrangle with the fact that, in the midst of an investigation, their own employees are financially incentivized to submit whistleblower tips to assist regulators.
The SEC’s award order, per agency policy, provided scant details on the underlying enforcement action. But it did provide insight into the rationale for the award figure. The agency explained that while the whistleblower had only come forward mid-investigation, he or she had provided valuable evidence which allowed the agency to expand its investigation, saved the agency time and resources, and provided substantial and ongoing assistance during the investigation. The SEC also recognized that the whistleblower had not provided information on all the misconduct at issue in its enforcement action. Despite all this, the whistleblower was still awarded an eyewatering $279 million. The order does not reveal the percentage of the recovery that the whistleblower was rewarded (that figure is redacted but can fall between 10% and 30% of the eligible recovery). However, the tenor of the order suggests that the whistleblower could have earned a higher percentage and thus an even larger award than $279 million (e.g., had the whistleblower blew the whistle before the investigation began).
III. Sending a Clear Message
As with any record shattering bounty, this award will send a message to companies and potential whistleblowers alike. The award will remind those with valuable information of the existence of the SEC’s increasingly vital and increasingly lucrative whistleblower program. That will lead to more whistleblower tips to the SEC and other agencies and, consequently, more enforcement actions and more headaches for regulated entities.
After a rare False Claims Act (FCA) trial, a St. Paul federal jury has returned a verdict for the government in United States, ex rel. Kipp Fesenmaier v. Cameron-Ehlen Group, Inc., No. 0:13-cv-03003 (D. Minn.).
The jury found that ophthalmic products supplier, Cameron-Ehlen Group, Inc., doing business as Precision Lens, and its owner, Paul Ehlen, are liable for 64,575 false claims and $43,694,641 in single damages. With the FCA’s mandatory treble damages and statutory penalties, the verdict could result in a judgment of more than $841 million.
Perhaps more remarkable is that the relator’s allegations made it to jury. By some estimates, the government intervenes in only 18-20% of FCA litigation. Even fewer cases reach a jury verdict.
The scarcity of FCA trials is likely due to the time, effort, and money that it takes to litigate these complex cases. The $43.6 million verdict against Precision Lens and Ehlen, for example, was the culmination of ten years of litigation.
The Long Road to Trial
Relator Kipp Fesenmaier filed his sealed qui tam complaint in November 2013. After a four-year investigation, the United States elected to intervene and co-litigated the case with Relator’s counsel. The district court lifted the seal in August 2017.
The government accused Precision Lens of violating the Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, by giving illegal kickbacks to ophthalmologists. Tainted by kickbacks, the doctors’ claims for Precision Lens products to Medicare violated the FCA, 31 U.S.C. § 3729(a)(1)(A)-(B). The kickbacks included exotic trips, lavish meals, and entertainment, according to the complaint.
Precision Lens moved to dismiss the case in March 2018, a month after the United States filed its intervenor complaint. The court upheld the FCA claims but dismissed the government’s unjust enrichment and payment by mistake claims. See 2018 WL 11451362 (D. Minn. Oct. 22, 2018). Three years of contentious discovery and motion practice followed the decision.
In 2019, the court granted Precision Lens’ motion to make the government identify every specific false claim before the end of discovery. See 2019 WL 3245003 (D. Minn. July 19, 2019). The court also ordered the government to turn over its witness interview notes, including those prepared by the FBI, which had been investigating Precision Lens before Fesenmaier filed his suit. Id.
Later that year, Precision Lens moved to dismiss the case and disqualify opposing counsel after learning that Fesenmaier—at the FBI’s direction—had secretly recorded conversations with Precision Lens personnel. The recordings were made after Precision Lens had retained counsel, but before the United States had intervened in the case. The district court denied the motion, reasoning that the conduct was lawful because the recordings were made before the government had decided to bring criminal charges or intervene. See 442 F. Supp. 3d 1101 (D. Minn. 2020).
Even as discovery ended, the parties continued to accuse each other of misconduct. In July 2020, for example, United States Magistrate Judge David T. Schultz partly granted two sanction bids: one from Precision Lens and another from the government. See 2020 WL 9209366 (D. Minn. July 10, 2020), aff’d in part, rev’d in part, 2021 WL 101193 (D. Minn. Jan. 12, 2021). The court excluded thousands of false claims that the government had improperly identified after the close of discovery. The court also ruled that Precision Lens had failed to take reasonable steps to preserve relevant text messages.
Three motions for summary judgment followed discovery. Precision Lens filed the first, arguing that Fesenmaier lacked standing to file FCA claims in 2013 after filing for bankruptcy in 2012. The district court denied the motion, holding that “even assuming the FCA claim had been transferred to the bankruptcy estate, it has since been transferred back to Fesenmaier by virtue of the bankruptcy trustee’s express abandonment of the claim[.]” See 2020 WL 4476427 (D. Minn. Aug. 4, 2020).
The parties then cross-moved for summary judgment. The government moved for partial summary judgment on a subset of its FCA claims and to exclude three defense experts. Precision Lens moved for summary judgment on claims and to exclude two government experts.
In January 2021, the district court denied the cross-motions for summary judgment and granted in part the bids to exclude expert testimony. 2021 WL 101193 (D. Minn. Jan. 12, 2021). But with COVID and a myriad of pretrial issues to resolve, another two years passed before a jury was empaneled.
The Seven-Week Trial
The parties began presenting the case to the jury on January 9, 2023. The government’s case-in-chief ended on January 31, 2023. The defense rested two to three weeks later.
After making their case to the jury, the parties cross-moved for judgment as a matter of law. Both sides argued that the evidence at trial was susceptible to one conclusion: judgment in their favor. The district court needed only a few hours to deny each motion.
The jury returned a verdict on February 27, 2023, after deliberating for about six days and losing two days to a snowstorm. The verdict form referred to some 200 trips, meals, and other inducements. For each “transaction,” the jury had to decide whether it “amount[ed] to a kickback that resulted in a violation of the False Claims Act.”
The Verdict and Possible Judgment
In the end, the jury found that the defendants caused 64,575 false claims to be submitted to Medicare between 2006 and 2015, resulting in single damages of $43,694,641. But the final judgment against Precision Lens and Ehlen will be much larger.
Treble damages and civil penalties are mandatory under the FCA, 31 U.S.C. § 3729(a), when a defendant fails to self-disclose and cooperate with the government’s investigation. For that reason, the jury is asked to determine single damages and the number of false claims. The court must then treble the damages and assess a civil monetary penalty for each false claim.
For FCA violations that occurred between September 30, 1999 and November 2, 2015, penalties range from $5,500 to $11,000 per false claim. For later violations, the minimum and maximum amounts are adjusted for inflation each year. As of January 2023, courts must assess a civil penalty of $13,508 to $27,018 per false claim for post-November 2015.
False Claims Act Penalties | |||
Violation Occurred After |
1986 | Sept. 30, 1999 | Nov. 2, 2015 → |
Penalty Assessed After |
– | – | Jan. 30, 2023 |
Minimum Penalty |
$5,000 | $5,500 | $13,508 |
Maximum Penalty |
$10,000 | $11,000 | $27,018 |
Almost all the Precision Lens kickbacks on the verdict form occurred before November 2, 2015. If the court ties the FCA violation to the kickback date, rather than when doctors submitted their Medicare claims, then the $5,500 to $11,000 range would apply to nearly all 64,575 false claims.
On that basis, civil penalties could total between $355 million to $710 million. So with treble and penalties, Precision Lens and Ehlen are facing a final judgment between $486 million and $841 million. That assumes, of course, that the verdict and final judgment withstand posttrial and appellate scrutiny. Even then, the defendants might opt for bankruptcy.
At any rate, Fesenmaier’s ten-year journey as a whistleblower will have earned him a substantial bounty. Under 31 U.S.C. § 3730(d)(1), he stands to receive at least 15% but not more than 25% of what the government collects. His attorneys are also entitled to an award of reasonable attorney’s fees and costs under 31 U.S.C. § 3730(d)(1).
Takeaways:
- The Treasury Whistleblower Program now provides for guaranteed awards of 10% to 30% of the government recovery in covered actions
- The Treasury Whistleblower Program has been expanded to include not just tips concerning anti-money laundering violations but also those regarding various forms of sanctions evasion
- The new law goes hand-in-hand with the government’s aggressive crackdown on Russian sanctions evaders and those that assist them
During the holidays, in a rare bipartisan move, Congress passed the Anti-Money Laundering Whistleblower Improvement Act (“AMLWIA”), an unheralded law with massive implications for domestic and international whistleblowers.
I. The New Law Provides Whistleblowers a Real Incentive
Back in 2020, the government enacted the Anti-Money Laundering Act of 2020 (“AMLA”). AMLA provided certain retaliation protections for whistleblowers reporting violations of the anti-money laundering statutes (i.e., the Bank Secrecy Act). Just as critically, AMLA established that whistleblowers (both U.S. and foreign citizens) could receive monetary awards if they provide original information in reporting anti-money laundering violations to their employers or the government when such tips lead to successful actions by the Department of the Treasury (e.g., via FinCEN) or Department of Justice where the sanctions exceed $1 million.
This program (“the Treasury Whistleblower Program”) looked promising, but it failed to provide a real “carrot” for whistleblowers. While AMLA established that successful whistleblowers could receive up to 30% of any recovery by the government, it never set out a minimum award. So, under AMLA, potential whistleblowers were placed in an unenviable position. They could report anti-money laundering violations, potentially at great risk, but even if they were entitled to a recovery, they could receive a pittance. Needless to say, AMLA’s incentive system had a glaring hole in it. The incentive to come forward was illusory.
AMLWIA remedies the problem and expands the subject matter of the program as well. First, the new law provides that, in line with the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) whistleblower programs, a successful Treasury Whistleblower must receive an award between 10% and 30% of the monetary sanctions collected by the government. AMLWIA also establishes a $300 million Financial Integrity Fund to pay such awards. These are significant changes that will motivate whistleblowers going forward.
II. AMLWIA Expands the Treasury Whistleblower Program to Sanctions Evasion
AMLWIA expanded the Treasury Whistleblower Program to cover tips relating to the evasion of sanctions in violation of the International Emergency Economic Powers Act, the Foreign Narcotics Kingpin Designation Act, and sections 5 and 12 of the Trading with the Enemy Act. In other words, whistleblowers can now report a wide range of sanctions violations to the government and, if successful, obtain an award.
This provision was tailor-made to assist with the government’s ongoing crackdown on Russian sanctions evaders. But the new law is not just focused on Russian assets and those facilitating sanctions evasion for Russian oligarchs and entities. The program covers all violations of the operative anti-money laundering and sanctions laws. For example, given the federal government’s recent full court press on bad actors in the cryptocurrency space, AMLWIA provides yet another tool for whistleblowers in that industry (beyond the SEC and CFTC whistleblower programs) – an industry which has been afflicted by notoriously lax anti-money laundering controls.
III. The Treasury Whistleblower Program Looks to Follow in the Footsteps of the Government’s Earlier, Highly Successful Whistleblower Programs
The Treasury Whistleblower Program should prove to be another successful public-private partnership akin to the False Claims Act and the SEC and CFTC whistleblower programs. Anti-money laundering and sanctions violations can lead to recoveries in the hundreds of millions, and even billions, of dollars. French bank BNP Paribas famously resolved a sanctions violations case involving violations of the International Emergency Economic Powers Act and Trading with the Enemy Act for $8.9 billion, one of the largest recoveries against a financial institution in history. A 10% to 30% award in such high figure cases is a remarkable incentive for whistleblowers.
Money laundering and sanctions violations occur mostly in the dark. Thus, the government remains highly dependent on corporate insiders and others with valuable information to bring such wrongdoing to light. AMLWIA will alter the whistleblowing landscape for the better by providing whistleblowers with a real incentive to blow the whistle while expanding the program to sanctions violations. Like the SEC and CFTC whistleblower programs, it may take several years before we see awards under these programs. But like those programs, we should expect awards under the Treasury Whistleblower Program to start out substantial and grow larger over time as the program gains its footing.