Whistleblower Protection Blog : Whistleblower Lawyer & Attorney : National Whistleblower Legal Defense and Education Fund : Whistleblower Protection, Fraud Claims : Washington DC

Nobody has filed many purely State False Claims cases. Sure there are a lot of State qui tam laws now. Most of the laws aren’t even five years old.  Even in the states with older laws most of the cases are filed as part of, or the result of a big federal case. Even when  the cases are not Medicare or Medicaid related, most purely state cases look like the same thing as a federal case. The state gets ripped off so somebody files a qui tam action. States are defrauded just like the federal government.
 
We thought the only big difference in filing such a case under state law as opposed to the federal law is the agency you work with to conduct the initial investigation under seal –instead of working with the Federal Department of Justice, you work with the state Attorney General.  We figured there were some technical differences with State qui tam laws, but nothing experienced qui tam attorneys could not handle.

Indeed, in the first part of the seminar the state officials on the dais played to our smugness. Both state officials said, “You may have to work with the local Attorney General’s office to explain how their state qui tam law can work.” Sure we can do that, we thought. We can lecture the highest law enforcement officials of a state as to how their own law can work for them.

In truth, a lack of information is a problem because State False Claims Acts are new. State prosecutors have a lot of experience going after consumer protection cases, but do not yet know much about how to apply the qui tam procedures even to similar facts. Those procedures can be very tricky at every level. We know the procedure. We know the law and we know what can make a good claim in a False Claims case.

So, one lawyer a veteran of many conferences, asked what we all wanted to know, but few figured would elicit such a surprising answer. He asked “What kind of cases do you see being filed in State Court in the future?” When the state official answered “securities fraud” we were a little stunned.

We looked at each other. Maybe this guy is thinking of Sarbanes Oxley or class action cases? Then the penny dropped and we started to see dollar signs. Big dollar signs with lots of zeroes.

Pension funds. States have pension funds. The Federal Government has a printing press--not investments.  

In the federal context the Securities and Exchange Commission handles fraud issues. The federal government does not usually own stocks or bonds.

Some states, like Illinois or California, allow us to sue on behalf of any political subdivision. So, if the city of Santa Monica has a pension fund and there is a securities fraud violation we can sue under the California False Claims Act.

When there is securities fraud usually a state pension fund will have bought the security. The City of New York supposedly has 80 billion dollars in assets in its pension fund alone. The damages for fraud have the potential to be huge and this is a new area of qui tam action.

Three days later a colleague sent me a story on the State of California suing for $200 million in securities violations.  

So, if you have heard of any major securities scam, do what any smart whistleblower should do. Hire a lawyer who knows about qui tam and run to your nearest state court house.

If your state does not have a qui tam provision, maybe they should. After all, why should the pension funds covering workers in Columbus, Ohio not get the same protection as the pension funds for those who work in Richmond, Virginia?

You can see if your state has a qui tam law by clicking here.
 

In 2008, we noted that the funding available to the Department of Justice to investigate these cases was inadequate to handle the many qui tam actions filed. Now both houses of Congress have responded to our concerns with legislation.

The new law provides $165 million a year for two years to investigate and prosecute fraud actions.   This is important because we need more lawyers and more investigators to work on these cases.   The backlog of qui tam cases under seal stood at 900 at last check and it could take the Department four years to investigate a single case with that many still waiting. Keep in mind that the full cost of this legislation could be paid by a couple of successful cases. Many worthy issues can be lost for lack of resources or time to investigate because leads can get stale.  If only a few more good cases get the attention they deserve and survive, that money will have been a great investment.

The bill also includes important provisions to prevent contractors from escaping liability under the False Claims Act.

Significantly, the Supreme Court’s decision in the Allison Engine case is overturned. In that decision, the Court held it was not enough to show subcontractors merely made false statements or certifications, which resulted in their obtaining money. Instead the Court required proof, "   …that the defendant intended that the false record or statement be material to the  government's decision to pay or approve the false claim."

That means the Court requires a demonstration that the sub-contractor made a false statement with specific intent to get the government to pay money. This extremely high burden,  requiring “specific intent” frustrates the whole point of the False Claims Act. Should a sub-contractor making knowingly false statements and defrauding taxpayer be able to escape liability?

Under the old law, the sub-contractor can make a false statement to the prime contractor. The prime contractor can then bill the government and no matter what the government’s specifications were on the product involved, no matter even if the sub-contractor said the product would work when it did not, everybody escapes liability unless the plaintiff can show the sub-contractor intended to defraud the government directly.

Major government contracts have many specifications and sub-contractors make numerous certifications and they know that the ultimate payor of the contract is the government.  However, showing such certifications are false was not enough for the Allison Court.
 
The new law also fixes a related problem created by the Totten v. Bombardier case.  Supreme Court Justice John Roberts was on the DC Court of Appeals when he decided that a bill had to be presented to the government and that government money had to be directly involved in any case under the False Claims Act.  Judge Roberts ruled, “Amtrak is not the government.” While Roberts was technically correct that Amtrak is not a government agency, it does receive almost all of its money from the government.

So, while Amtrak is the nation’s railway it is not a direct agency of the U.S. Government. Roberts did not dispute whether or not Amtrak got defrauded.  What he did decide was if the government gave money to Amtrak and not directly for train products, just as operational or capital funds and THEN Amtrak went got defrauded, the money no longer was government money. So no liability existed as far as a False Claims Act case was concerned.  Roberts decided somebody had to directly present a bill to an officer or employee of the government and without this “presentment” there is no False Claims Act case.

Additionally, the new law, re-defines the term “claim” under the Act. It is now possible to sue when the government provides the money even if the user of the money is not a direct government agency like Amtrak. This will greatly expand the ability of whistleblowers to make new and important cases under the Act.

Back in December of 2007, we reminded everyone that the False Claims Act is at its heart a whistleblower law. Now the law extends true protection to those most likely to be retaliated against for reporting fraud. Under the old law only employees can sue for retaliation under the False Claims Acts section 3730(h).

This means a small contractor or an agent or an independent contractor could not. For example, say a family owned grass seed business has their contract terminated because they contest the way their prime contractor is handling the overall job. Now that sub-contractor would be able to sue for retaliation under the False Claims Act.

Sub-contractors are often small mom and pop operations and they can certainly lose the ability to obtain new business or be fired from a big project if they confront their prime contractor.  Shouldn’t the small business or independent contractor have the same right to sue for retaliation as an employee? Now they will.

These amendments to the False Claims Act are an important first step towards stronger whistleblower protection for all employees.  We look forward to continued improvements in this area.

Chairwoman Schapiro admitted that the whistleblower payment program the SEC already has for insider trading has not been used successfully.  She also admitted that the SEC staff cannot manage the 750,000 to 1.5 million tips and complaints they receive each year.  Chairwoman Schapiro stated that “we need to leverage third parties” to “help us focus on the [cases] where there’s the highest probability that there’s a really big problem that we can tackle.”  A whistleblower rewards program is a step in the right direction for the SEC.  In 2007, the rewards provisions in the federal False Claims Act helped recover over 2 billion taxpayer dollars from dishonest contractors.  For more information on how whistleblowers help protect Americans from fraud please see the National Whistleblowers Center’s new Fighting Fraud page.  Also, if you would like to get more involved in the fight to protect all federal employee whistleblowers please sign the petition.

Minnesota Senator David Tomassoni stated that both former inspectors had similar allegations and received similar treatment when they came forward.  Swanson and Crosby were transferred out of their inspection assignments, relocated to other parts of the state and were eventually forced to quit their jobs last year after filing whistleblower lawsuits in the previous year.

Fortunately, there has recently been some good news in the case.  On Tuesday, the Minnesota Court of Appeals overturned a District Court ruling that dismissed Terry Swanson’s case.   The Appeals Court will hear Doug Crosby’s case on March 23rd.  Hopefully, it will have an equally positive outcome.

The other positive development in the case is that following Swanson and Crosby’s testimony the Minnesota Senate has been pushing OSHA for answers.  Senator Tomassoni, Chair of the Economic Development and Housing Budget Division Committee sent a letter to Michael Connors, Regional Director for the U.S. Department of Labor’s OSHA for clarification on the testimony. 

As acknowledged by Senator Tomassoni, the issues raised by Swanson and Crosby are extremely serious and jeopardize the health and safety of all workers in Minnesota.  Their allegations should be fully investigated and promptly corrected.
 

"Lawsuit claims state Dept. of Labor destroyed files" KSTP TV, March 13, 2009

Audio from Minnesota Senate Testimony on Wednesday Feb. 25th (Economic Development and Housing Budget Division Committee)

"Whistleblowing Former Inspectors testify that MNOSHA alters reports, citations" Labor World, March 4, 2009

"Appeals court supports whistleblower, Sen. Tomassoni asks for feds help" Labor World, March 18, 2009